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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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(Mark One)



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



For the fiscal year ended October 1, 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 No. 000-25393



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VARIAN, INC.

(Exact Name of Registrant as Specified in its Charter)



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|                                                              |  |                                  
|------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                      |  | 77-0501995                       
|(State or Other Jurisdiction ofIncorporation or Organization) |  | (IRS Employer Identification No.)
|                                                              | 
|3120 Hansen Way, Palo Alto, California                        |  | 94304-1030                       
|(Address of principal executive offices)                      |  | (Zip Code)                       



(650)
213-8000

(Telephone number)



Securities registered pursuant to Section 12(b) of the Act:



|                      |  |                                            
|--------------------- |  | -------------------------------------------
|(Title of each class) |  | (Name of each exchange on which registered)
|None                  |  | None                                       



Securities
registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value

Preferred Stock Purchase Rights



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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x



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



The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant based upon the closing sale price of the Common Stock on April 2, 2004, as reported by the Nasdaq National Market, was approximately
$1,452,044,000.



The number of shares of the registrants
common stock outstanding as of December 3, 2004 was 35,050,025.



Documents Incorporated by Reference:



|                                                                                                                                                            |  |          
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------
|Document Description                                                                                                                                        |  | 10-K Part
|Certain sections, identified by caption, of the definitive Proxy Statement for the registrants 2004 Annual Meeting of
Stockholders (the Proxy Statement) |  | III      



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An index of exhibits filed with this Form 10-K is located on page 41.



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VARIAN, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED OCTOBER 1, 2004



TABLE OF CONTENTS



|         |  |                                                                                                              |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|         |  |                                                                                                              |  | Page
|PART I   |  |                                                                                                              |  |     
|Item 1.  |  | Business                                                                                                     |  | 3   
|Item 2.  |  | Properties                                                                                                   |  | 11  
|Item 3.  |  | Legal Proceedings                                                                                            |  | 11  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 11  
|         |  |                                                                                                             
|PART II  |  |                                                                                                              |  |     
|Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 12  
|Item 6.  |  | Selected Financial Data                                                                                      |  | 13  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 13  
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 34  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 35  
|Item 9.  |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                         |  | 35  
|Item 9A. |  | Controls and Procedures                                                                                      |  | 35  
|Item 9B. |  | Other Information                                                                                            |  | 35  
|         |  |                                                                                                             
|PART III |  |                                                                                                              |  |     
|Item 10. |  | Directors and Executive Officers of the Registrant                                                           |  | 36  
|Item 11. |  | Executive Compensation                                                                                       |  | 36  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                                               |  | 36  
|Item 13. |  | Certain Relationships and Related Transactions                                                               |  | 36  
|Item 14. |  | Principal Accounting Fees and Services                                                                       |  | 36  
|         |  |                                                                                                             
|PART IV  |  |                                                                                                              |  |     
|Item 15. |  | Exhibits, Financial Statement Schedules                                                                      |  | 37  



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PART I



Caution Regarding Forward-Looking
Statements



Throughout this Report, and particularly in
Item 1Business and Item 7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 on 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, or other similar terms. These forward-looking
statements include those relating to the timing and amount of anticipated restructuring costs and related cost savings, whether and when backlog will result in actual sales, our current expectations relating to our effective income tax rate,
anticipated capital expenditures, and anticipated Sarbanes-Oxley Act Section 404 compliance costs in fiscal year 2005.



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 7Managements Discussion and Analysis of Financial Condition and Results of OperationsCertain Subsequent
EventsandRisk Factors. We encourage you to read those sections carefully.



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



Item 1. Business



GENERAL



Overview and History



Varian, Inc., together with its subsidiaries (collectively, the
Company or the Registrant), is a technology company engaged in the design, development, manufacture, sale, and service of scientific instruments (including related consumable products) and vacuum products, and in contract
electronics manufacturing. The Companys operations are grouped into three corresponding segments: Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing. These segments, their products, and the markets they serve are
described below.



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



Business Segments and Products



The Companys products and services can be classified into the following three categories, which correspond to the Companys three business
segments: Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing.



Scientific Instruments



The Companys Scientific Instruments business designs, develops, manufactures, sells, and services chromatography, optical spectroscopy, mass spectroscopy, dissolution testing, nuclear magnetic resonance equipment, and consumable
products for a broad range of life science and chemical analysis applications requiring identification, quantification, and analysis of the elemental, molecular, physical, or biological composition or structure of liquids, solids, or gases.



Chromatography is a technique for separating, identifying, and
quantifying the individual chemical components of substances based on the physical and chemical characteristics specific to each component. The Companys chromatography instruments include gas chromatographs (GCs), high-performance
liquid chromatographs (HPLCs), sample automation products, and data analysis systems. For certain applications, mass spectrometers are sold as a detector for GC or HPLC systems. In addition to these instruments, the Company also offers
related accessories and consumable products.



Optical
spectroscopy is a technique for analyzing the individual chemical components of substances based on the absorption or emission of electromagnetic radiation of a specific wavelength of light. The Companys optical spectroscopy instruments
include atomic absorption (AA) spectrometers, inductively coupled plasma-optical emissions spectrometers, inductively coupled plasma-mass spectrometers (ICP-MS), fluorescence spectrophotometers, ultraviolet-visible
(UV-Vis), Fourier Transform infrared (FT-IR) imaging and near-infrared spectrophotometers, Raman spectrometers, sample automation products, and data analysis systems. The Company also offers related accessories and consumable
products.



Mass spectrometry is a technique for analyzing the
individual chemical components of substances by breaking molecules into multiple electrically charged ions that are then sorted for analysis according to their mass-to-charge ratios. The Company combines mass spectrometers with other instruments to
create high-performance instruments such as liquid chromatograph/mass spectrometers, liquid chromatograph-nuclear magnetic resonance/mass spectrometers, gas chromatograph/mass spectrometers, and inductively coupled plasma-mass spectrometers, and
offers related accessories and consumable products.



Dissolution testing is a technique for in-vitro analysis of the rate of release of a drug under controlled conditions. The Companys dissolution testing products include systems for analyzing the rate of release and equipment for
testing the physical characteristics of different dosage forms.



NMR is a non-destructive instrumental technique that uses electromagnetic fields to interact with the magnetic property of atomic nuclei in order to determine and analyze the molecular content and structure



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of liquids and solids. NMR spectroscopy is used in the study of liquids containing chemical substances including proteins, nucleic acids (DNA and RNA),
carbohydrates, membranes, and solid materials such as crystals, plastics, rubbers, ceramics, and polymers. NMR imaging systems are used to obtain non-invasive images of, primarily, biological materials and to probe the chemical processes within
these materials. The Companys NMR systems include NMR spectrometers and liquid chromatograph-NMR/mass spectrometers. The Companys MR imaging systems include human and other imaging systems used in research. The Company also offers probes
and console upgrades to customers seeking to enhance NMR and MR imaging performance.



On November 3, 2004, the Company acquired Magnex Scientific Limited (Magnex). Magnex designs, develops, manufactures, sells, and services superconducting magnets for human and other MR imaging, NMR, and
Fourier Transform mass spectroscopy (FTMS), and gradients for MR microscopy. These magnets are used in the Companys NMR and MR imaging systems, and are also sold to original equipment manufacturers (OEMs) and end-users.



Consumable products are used in many laboratory applications
and include sample preparation consumables used to clean up and extract complex samples, like biological and environmental specimens, for further analysis; solid phase extraction (SPE) and filtration products used in tube formats for
toxicology and environmental extractions, and in 96-well plate formats for drug discovery and clinical research applications; micro volume SPE pipette tips used in protein research; HPLC and GC stationary phase chemistries used to separate target
analytes prior to UV detection or mass spectrometry analysis; HPLC columns used in health science applications for the analysis of thermally labile compounds; GC columns used in industrial applications for the analysis of thermally stabile
compounds; and other HPLC and GC stationary phase chemistries and column dimensions for a wide range of life science and industrial science applications. Consumable products also include scientific instrument parts and supplies such as filters and
fittings for GC and HPLC systems; xenon lamps and cuvettes for UV-Vis-NIR, fluorescence, FT-IR, and Raman spectroscopy instruments; and graphite furnace tubes, hollow cathode lamps, and specialized sample introduction glassware for AA, ICP, and
ICP-MS spectroscopy instruments. Other consumable products include on-site screening and laboratory-based kits for drugs of abuse testing from urine or saliva samples, such as in pre-employment screening, criminal justice, and toxicology testing.



Scientific Instruments chromatography, optical
spectroscopy, mass spectrometry, dissolution testing, NMR, and consumable products can be generally categorized as either those used principally in life science applications or those used principally in chemical analysis applications (although many
products are used in both applications). Life science applications include the study of biological processes, the testing of biological materials, and the diagnosis, treatment, or development of treatments of diseases. In fiscal years 2004, 2003 and
2002, Scientific Instruments sales into life science applications accounted for nearly half of the segments total sales (these are estimates based on assumptions of how the Companys products are likely to be used by customers, and are
provided only as an indication of a historical trend).



All of
the products described above are or can be used in life science applications, such as by pharmaceutical companies in drug development, manufacturing, and quality control; by biotechnology and biopharmaceutical companies in studying biomolecules and
the prevention, diagnosis, and treatment of diseases; by government and private laboratories, employers, and law enforcement and correctional agencies in drug testing; and by research hospitals and universities in basic chemistry, biological,
biochemistry, and health care research. Life science customers include branded and generic pharmaceutical companies, biotechnology and toxicology companies, governmental agencies, and numerous academic institutions and research hospitals.



All of the products described above are or can also be used in
chemical analysis applications, such as by environmental laboratories in testing water, soil, air, solids, and food products; by petroleum and natural gas companies in refining and quality control; by petroleum, agriculture, chemical, mining and
metallurgy, and food and beverage processing companies in research and quality control; and by other industrial, governmental, and academic research laboratories in forensic analysis, materials science, and general research.



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Vacuum Technologies



The Companys Vacuum Technologies business designs, develops, manufactures, sells, and services a broad range of
products used to create, control, measure, and test vacuum environments in life science, industrial, research, semiconductor, and scientific applications where ultra-clean, high-vacuum environments are needed. Vacuum Technologies customers are
typically OEMs that manufacture equipment for these applications. Products include a wide range of high and ultra-high vacuum pumps (diffusion, turbomolecular, and ion getter), intermediate vacuum pumps (rotary vane, sorption, and dry scroll),
vacuum instrumentation (vacuum control instruments, sensor gauges, and meters), and vacuum components (valves, flanges, and other mechanical hardware). Its products also include helium mass spectrometry and helium-sensing leak detection equipment
for use in identifying and measuring leaks in hermetic or vacuum environments. In addition to product sales, the Company also offers a wide range of services including assistance with the design and integration of vacuum systems, a pump exchange and
repair program, applications support, and training in basic and advanced vacuum technology.



Vacuum Technologies products are or can be used in a broad range of life science applications, such as in mass spectrometers for mass analysis; and in linear accelerators for cancer therapy.



Vacuum Technologies products are or can also be used in a broad range of
industrial applications, such as in the manufacture of flat-panel displays, television tubes, decorative coating, architectural glass, optical lenses, light bulbs, and automobile components; in food packaging; in the testing of aircraft components,
automobile airbags, refrigeration components, and industrial processing equipment; in high-energy physics research; and in the manufacture of semiconductors, and fabrication and metrology equipment.



Electronics Manufacturing



The Companys Electronics Manufacturing business is a contract
manufacturer of electronic assemblies and subsystems such as printed circuit boards for OEMs. For some customers, the business provides total manufacturing services including design support, prototype assembly, product test development, customized
manufacturing (such as just-in-time and inventory management), and post-manufacturing services (such as direct end-user shipping and repair depots).



The Electronics Manufacturing business serves customers in a wide range of industries, including life science products (which includes medical equipment),
aerospace equipment and communications equipment (e.g., satellite, networking, telephony, and voice and data transfer), and general industrial products. The business focuses on customers in these industries who have low- to medium-volume, high-mix
manufacturing needs. The business also supplies products to the Companys Scientific Instruments and Vacuum Technologies businesses.



For financial information about industry segments including foreign and domestic operations and export sales, see Note 18 of the Notes to the Consolidated
Financial Statements.



Marketing and Sales



In the United States, the Company markets the largest portion of its
products directly through its own sales and distribution organizations, although a few products and services are marketed through independent distributors and sales representatives. Sales to major markets outside the United States are generally made
by the Companys foreign-based sales and service staff, although some export sales are made directly from the United States to foreign customers. In addition, in certain foreign countries, sales are made through various representative and
distributorship arrangements. The Company maintains sales and service offices in strategic regional locations in the United States and, through its sales subsidiaries, in key foreign locations.



The markets in which the Company competes are, for the most part, global.
Sales outside of North America accounted for 46%, 44%, and 39% of sales for fiscal years 2004, 2003, and 2002, respectively. As a result, the Companys customers increasingly require service and support on a worldwide basis. In addition to the
United States, the Company has sales and service offices located throughout Europe, Asia, and Latin America. The Company has invested substantial financial and management resources to develop an international infrastructure to meet the needs of its
customers worldwide.



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Demand for the Companys products depends on many factors, including the level of capital
expenditures of the Companys customers, the rate of economic growth in the Companys major markets, and competitive considerations. No single customer accounted for 10% or more of the Companys sales in fiscal year 2004, 2003, or
2002.



The Company experiences some cyclical patterns in sales
of its products. Generally, sales and earnings in the first quarter of the Companys fiscal year are lower when compared to the preceding fourth fiscal quarter, primarily because there are fewer working days in the first fiscal quarter (October
to December) and many customers defer December deliveries until the next calendar year, the Companys second fiscal quarter. The Companys 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.



The Company believes that it differentiates its
products from those of its competitors by its responsiveness to customer requirements, as determined through market research. Although specific customer requirements can vary depending on applications, customers generally demand superior
performance, high quality, high productivity, and low cost of ownership. The Company has responded to these customer demands by introducing new products focused on these requirements in the markets it serves. For example, customers of Scientific
Instruments products have demanded higher levels of analytical throughput to support their research programs aimed at drug discovery and advanced life sciences. The Company has responded to these needs by introducing products with higher levels of
automation and computerized data analysis routines.



Backlog



The Companys recorded backlog (including deferred revenue included
in the Consolidated Balance Sheet) was $222 million at October 1, 2004, $206 million at October 3, 2003, and $234 million at September 27, 2002. Backlog increased from October 3, 2003 to October 1, 2004 primarily due to the receipt of a large amount
of longer lead time orders by the Electronics Manufacturing segment late in fiscal year 2004. Backlog decreased from September 27, 2002 to October 3, 2003 primarily due to the recognition of revenue during fiscal year 2003 on several leading-edge
NMR and MR imaging systems and accessories that were previously deferred pending delivery and/or customer acceptance.



The Company includes in backlog purchase orders or production releases under blanket purchase orders that have firm delivery dates. Recorded backlog in
U.S. dollars is impacted by foreign currency fluctuations. In addition, recorded backlog might not result in sales because of cancellations or other factors. Most of the Companys products are shipped soon after they are ordered by customers,
with the time between order receipt and shipment being as short as a few days for some products and less than a fiscal quarter for most others. However, certain other products, in particular leading-edge NMR and MR imaging systems, can have
significantly longer lead times, sometimes in excess of one year. Significant shipments often occur in the last month of each quarter, in part because of how customers place orders and schedule shipments.



The Company believes that over 95% of orders included in the backlog at
October 1, 2004 will result in revenue before the end of fiscal year 2005. However, this percentage should not be taken as an indicator for orders received after October 1, 2004 because of the longer lead times associated with the magnets now
supplied by the Company as a result of the Magnex acquisition.



Competition



Competition in markets served by the Scientific
Instruments and Vacuum Technologies segments is primarily based upon the performance capabilities of products, technical support, and after-market service, the manufacturers reputation as a technological leader, and product pricing. The
Company believes that performance capabilities are the most important of these criteria.



With respect to markets served by the Electronics Manufacturing segment, competition is primarily based upon assembly and test capabilities, technical expertise and support, flexibility and responsiveness of



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logistics management capabilities, the manufacturers financial stability, and product pricing. The Company believes that technical expertise and
support are the most important of these criteria.



The markets
in which the Company competes are highly competitive and are characterized by the application of advanced technology. There are numerous companies that specialize in, and a number of larger companies that devote a significant portion of their
resources to, the development, manufacture, sale, and service of products that compete with those manufactured, sold, or serviced by the Company. Many of the Companys competitors are well-known manufacturers with a high degree of technical
proficiency. In addition, competition is intensified by the ever-changing nature of the technologies in the industries in which the Company is engaged. The markets for the Companys products are characterized by specialized manufacturers that
often have strength in narrow segments of these markets. While the absence of reliable statistics makes it difficult to determine the Companys relative market position in its industry segments, the Company is one of the principal manufacturers
in its primary fields.



Each of the Companys major
business segments competes with many companies that address the same markets. The Companys Scientific Instruments business competes with Agilent Technologies; Bruker; JEOL; PerkinElmer; Shimadzu; Thermo Electron; Waters; and other smaller
suppliers. The Companys Vacuum Technologies business competes with Adixen (Alcatel); BOC Edwards High Vacuum; Inficon; Leybold Vacuum; Pfeiffer Vacuum Technology; Ulvac; and other smaller suppliers. The Companys Electronics Manufacturing
business competes with numerous other companies that provide high-mix, low-volume contract manufacturing services, including Pemstar; PLEXUS; Sigmatron International; Suntron; and privately-owned regional and off-shore manufacturers.



Manufacturing



The Companys principal manufacturing activities consist of precision assembly, test, calibration, and certain
specialized machining activities. The Company subcontracts a portion of its assembly and machining. All other assembly, test, and calibration functions are performed by the Company.



The Company believes that the ability to manufacture reliable products in a cost-effective manner is critical to meeting the
just-in-time delivery and other demanding requirements of its OEM and end-user customers. The Company monitors and analyzes product lead times, warranty data, process yields, supplier performance, field data on mean time between
failures, inventory turns, repair response time, and other indicators so that it can continuously improve its manufacturing processes.



As of October 1, 2004, the Company operated 14 significant manufacturing facilities located throughout the world. Scientific Instruments had manufacturing
facilities in Palo Alto, California; Walnut Creek, California; Lake Forest, California; Harbor City, California; Ft. Collins, Colorado; Cary, North Carolina; Melbourne, Australia; Middelburg, Netherlands; and Grenoble, France. Vacuum Technologies
had manufacturing facilities in Lexington, Massachusetts, and Turin, Italy. Electronics Manufacturing had manufacturing facilities in Tempe, Arizona; Poway, California; and Rocklin, California.



All of the Companys significant manufacturing facilities, other than
Lake Forest, California, and Grenoble, France, have been certified as complying with the International Organization for Standardization Series 9000 Quality Standards (ISO 9000).



Subsequent to October 1, 2004, the Company acquired Magnex, which operates a
manufacturing facility in Oxford, United Kingdom.



Raw Materials



There are no specialized raw materials that are
particularly essential to the operation of the Companys business. The Companys manufacturing operations require a wide variety of raw materials, electronic and mechanical components, chemical and biochemical materials, and other
supplies, some of which are occasionally in short supply. In addition, use of certain of the Companys products requires reliable and cost-effective supply of certain raw materials. For example, end-users of the Companys NMR and MR
imaging systems and superconducting magnets require helium to operate those systems; shortages



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of helium could result in higher helium prices, and thus higher operating costs for NMR and MR imaging systems and superconducting magnets, which could
impact demand for those products.



Some components used in the
Companys products are manufactured by the Company. Other components, including certain superconducting magnets and electronic components, are purchased from other manufacturers. Most of the raw materials, components, and supplies purchased by
the Company are available from a number of different suppliers; however, a number of itemsin particular, certain superconducting magnets for NMR systems and wire used in superconducting magnetsare purchased from limited or single sources
of supply, and disruption of these sources could cause delays or reductions in shipment of our products or increases in our costs, which could have an adverse effect on the Companys financial condition or results of operations.



Research and Development



The Company is actively engaged in basic and applied research, development,
and engineering programs designed to develop new products and to improve existing products. During fiscal years 2004, 2003, and 2002, the Company spent $48.7 million, $45.7 million, and $39.9 million, respectively, on research, development, and
engineering activities. Over this period, the focus of the Companys research and development activities has been shifting more toward products that serve life science applications. The Company intends to continue to conduct extensive research
and development activities, with a continued emphasis on NMR and MR imaging, mass spectroscopy, and consumable products, with a bias toward life science applications. There can be no assurance that it will be able to develop and market new products
on a cost-effective and timely basis, that such products will compete favorably with products developed by others, or that the Companys existing technology will not be superseded by new discoveries or developments.



Customer Support and Service



The Company believes that its customer service and support are an integral
part of its competitive strategy. As part of its support services, the Companys technical support staff provides individual assistance in solving analysis problems, integrating vacuum components, designing circuit boards, etc., depending on
the business. The Company offers training courses and periodically sends its customers information on applications development. The Companys products generally include a 90-day to one-year warranty. Service contracts may be purchased by
customers to cover equipment no longer under warranty. Service work not performed under warranty or service contract is generally performed on a time-and-materials basis. The Company installs and services its products primarily through its own field
service organization, although certain distributors and sales representatives are capable of performing some field services.



Patent and Other Intellectual Property Rights



The Company has a policy of seeking patent, copyright, trademark, and trade secret protection in the United States and other countries for developments,
improvements, and inventions originating within its organization that are incorporated in the Companys products or that fall within its fields of interest. As of October 1, 2004, the Company owned approximately 293 patents in the United States
and approximately 471 patents throughout the world, and had numerous patent applications on file with various patent agencies worldwide. The Company intends to continue to file patent applications, as it deems appropriate.



The Company relies on a combination of copyright, trade secret, and other
legal, as well as contractual, restrictions on disclosure, copying, and transferring title to protect its proprietary rights. The Company has trademarks, both registered and unregistered, that are maintained and enforced to provide customer
recognition for its products in the marketplace. The Company also has agreements with third parties that provide for licensing of patented or proprietary technology. These agreements include royalty-bearing licenses and technology cross-licenses.



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.



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These regulations increase the costs and potential liabilities of the Companys operations. However, the Companys compliance with these
regulations is not expected to have a material effect upon the Companys capital expenditures, earnings, or competitive position. For additional information on environmental matters, see Item 7Managements Discussion and Analysis
of Financial Condition and Results of OperationsRisk FactorsCertain Subsequent EventsandEnvironmental Matters.



Employees



At October 1, 2004, the Company had approximately 4,400 full-time and temporary employees and contract laborers worldwideapproximately 2,700 in
North America, 900 in Europe, 300 in Asia, 400 in Australia, and 100 in Latin America.



Risk Factors



For additional information on
risks relating to the Company and its business, see Caution Regarding Forward-Looking Statements at the beginning of Part I and Item 7Managements Discussion and Analysis of Financial Condition and Results of OperationsCertain
Subsequent EventsRisk Factors.



Executive Officers



The following table sets forth the names and ages of the Companys
executive officers, together with positions and offices held within the last five years by such executive officers.



|                   |  |     |  |                                                                                    |  |             
|------------------ |  | --- |  | ---------------------------------------------------------------------------------- |  | ------------
|Name               |  | Age |  | Position (Business Experience)                                                     |  | Period      
|Garry W. Rogerson  |  | 52  |  | President and Chief Executive Officer                                              |  | 2004-Present
|                   |  |     |  | President and Chief Operating Officer                                              |  | 2002-2004   
|                   |  |     |  | Senior Vice President, Scientific Instruments                                      |  | 2001-2002   
|                   |  |     |  | Vice President, Analytical Instruments                                             |  | 1999-2001   
|                   |  |     | 
|G. Edward McClammy |  | 55  |  | Senior Vice President, Chief Financial Officer and Treasurer                       |  | 2002-Present
|                   |  |     |  | Vice President, Chief Financial Officer and Treasurer                              |  | 2001-2002   
|                   |  |     |  | Vice President and Chief Financial Officer                                         |  | 1999-2001   
|                   |  |     | 
|A. W. Homan        |  | 45  |  | Vice President, General Counsel and Secretary                                      |  | 1999-Present
|                   |  |     | 
|Martin ODonoghue  |  | 46  |  | Vice President, Scientific Instruments                                             |  | 2003-Present
|                   |  |     |  | Vice President, Analytical Instruments                                             |  | 2002-2003   
|                   |  |     |  | Vice President and General Manager, Chromatography Systems and Analytical Supplies |  | 2000-2002   
|                   |  |     |  | Engineering Manager, Chromatography Systems                                        |  | 1999-2000   
|                   |  |     | 
|Sergio Piras       |  | 55  |  | Vice President, Vacuum Technologies                                                |  | 2000-Present
|                   |  |     |  | Vice President and General Manager, Vacuum TechnologiesTorino                     |  | 1999-2000   
|                   |  |     | 
|C. Wilson Rudd     |  | 53  |  | Vice President, Electronics Manufacturing                                          |  | 2000-Present
|                   |  |     |  | Vice President and General Manager, Electronics Manufacturing                      |  | 1999-2000   
|                   |  |     | 
|Sean M. Wirtjes    |  | 35  |  | Controller                                                                         |  | 2004-Present
|                   |  |     |  | Assistant Controller                                                               |  | 2002-2004   
|                   |  |     |  | Corporate Controller, Quova, Inc.                                                  |  | 2000-2002   
|                   |  |     |  | Senior Manager, PricewaterhouseCoopers LLP                                         |  | 1999-2000   



Investor Information



Financial and other information relating to the Company
can be accessed on its Investor Relations website. This can be reached from the Companys main Internet website (http://www.varianinc.com) by clicking on Investors. On its Investor Relations website, the Company makes available,
free of charge,



10



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##### Table of Contents

copies of its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.



Item 2. Properties



The Company
has manufacturing, warehouse, research and development, sales, service, and administrative facilities that have an aggregate floor space of approximately 989,000 and 652,000 square feet in the United States and abroad, respectively, for a total of
approximately 1,641,000 square feet worldwide. Of these facilities, aggregate floor space of approximately 573,000 square feet is leased, and the Company owns the remainder. The Company believes that its facilities and equipment generally are well
maintained, in good operating condition, suitable for the Companys purposes, and adequate for current operations.



As of October 1, 2004, the Company owned or leased 14 significant manufacturing facilities located throughout the world. Scientific Instruments had
manufacturing facilities in Palo Alto, California; Walnut Creek, California; Lake Forest, California; Harbor City, California; Ft. Collins, Colorado; Cary, North Carolina; Melbourne, Australia; Middelburg, Netherlands; and Grenoble, France. Vacuum
Technologies had manufacturing facilities in Lexington, Massachusetts; and Turin, Italy. Electronics Manufacturing had manufacturing facilities in Tempe, Arizona; Poway, California; and Rocklin, California. The Company owns or leases 47 sales and
service facilities located throughout the world, 42 of which are located outside the United States, including in Argentina, Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, Korea, Mexico, Netherlands, Russia, Spain, Sweden,
Switzerland, Taiwan, and the United Kingdom.



Subsequent to
October 1, 2004, the Company acquired Magnex and assumed leases relating to its manufacturing facility in Oxford, United Kingdom.



Item 3. 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 and other 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.



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



None.



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##### Table of Contents

PART II



| | Item 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
| | ------- | -------------------------------------------------------------------------------------------------------------



(a) The Companys high and low common stock selling prices in each of
the four quarters of fiscal year 2004 and 2003 follow:



|     |  |                                              |       |               |   |              |  |               |       |  |   |      
|---- |  | -------------------------------------------- | ----- | ------------- | - | ------------ |  | ------------- | ----- |  | - | -----
|     |  | Fiscal Year 2004 Common Stock Selling Prices
|     |  | FirstQuarter                                 |       | SecondQuarter |   | ThirdQuarter |  | FourthQuarter
|High |  | $                                            | 42.40 |               | $ | 46.50        |  | $             | 44.90 |  | $ | 41.55
|Low  |  | $                                            | 33.50 |               | $ | 36.43        |  | $             | 38.53 |  | $ | 34.21
|     | 
|     |  | Fiscal Year 2003 Common Stock Selling Prices
|     |  | FirstQuarter                                 |       | SecondQuarter |   | ThirdQuarter |  | FourthQuarter
|High |  | $                                            | 32.46 |               | $ | 30.87        |  | $             | 36.03 |  | $ | 36.51
|Low  |  | $                                            | 25.30 |               | $ | 26.11        |  | $             | 28.05 |  | $ | 30.97



The Companys
common stock is traded on the Nasdaq National Market under the trading symbol VARI.



The Company has never paid cash dividends on its capital stock. The Company currently intends to retain any earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future.



There were 3,301 holders of record of the Companys
common stock on December 3, 2004.



(b) Not applicable.



(c) The following tables summarize information relating to
stock repurchases by the Company under our stock repurchase plans during the fiscal quarter ended October 1, 2004.



November 2001 Stock Repurchase Plan.



|                                |  |                   |  |                        |       |                                                         |       |                                                                |      
|------------------------------- |  | ----------------- |  | ---------------------- | ----- | ------------------------------------------------------- | ----- | -------------------------------------------------------------- | -----
|Fiscal Month                    |  | SharesRepurchased |  | Average PricePer Share |       | Shares Repurchased asPart of PubliclyAnnounced Plan (1) |       | Maximum Number ofShares that May Yet BePurchased Under thePlan
|BalanceJuly 2, 2004            |  |                   |  |                        |       |                                                         |       |                                                                | 7,897
|July 3, 2004July 30, 2004      |  |                  |  | $                      |      |                                                         |      |                                                                | 7,897
|July 31, 2004August 27, 2004   |  | 7,897             |  |                        | 39.32 |                                                         | 7,897 |                                                                |     
|August 28, 2004October 1, 2004 |  |                  |  |                        |      |                                                         |      |                                                                |     
|                                |  |                   |  |                        |       |                                                         |       |                                                                |      
|Total shares repurchased        |  | 7,897             |  | $                      | 39.32 |                                                         | 7,897 |                                                                |      
|                                |  |                   |  |                        |       |                                                         |       |                                                                |      



May 2004 Stock
Repurchase Plan.



|                                |  |                   |  |                        |       |                                                         |         |                                                                |          
|------------------------------- |  | ----------------- |  | ---------------------- | ----- | ------------------------------------------------------- | ------- | -------------------------------------------------------------- | ---------
|Fiscal Month                    |  | SharesRepurchased |  | Average PricePer Share |       | Shares Repurchased asPart of PubliclyAnnounced Plan (2) |         | Maximum Number ofShares that May Yet BePurchased Under thePlan
|BalanceJuly 2, 2004            |  |                   |  |                        |       |                                                         |         |                                                                | 1,000,000
|July 3, 2004July 30, 2004      |  |                  |  | $                      |      |                                                         |        |                                                                | 1,000,000
|July 31, 2004August 27, 2004   |  | 192,103           |  |                        | 38.85 |                                                         | 192,103 |                                                                | 807,897  
|August 28, 2004October 1, 2004 |  |                  |  |                        |       |                                                         |        |                                                                | 807,897  
|                                |  |                   |  |                        |       |                                                         |         |                                                                |          
|Total shares repurchased        |  | 192,103           |  | $                      | 38.85 |                                                         | 192,103 |                                                                |          
|                                |  |                   |  |                        |       |                                                         |         |                                                                |          

---

|(1) |  | In November 2001, 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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | In May 2004, the Companys Board of Directors authorized the Company to repurchase up to 1,000,000 shares of its common stock until September 30, 2007.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Item 6. Selected Financial Data



|                                                                                     |  |                 |       |             |   |               |  |               |       |  |               |       |   |  |   |      
|------------------------------------------------------------------------------------ |  | --------------- | ----- | ----------- | - | ------------- |  | ------------- | ----- |  | ------------- | ----- | - |  | - | -----
|                                                                                     |  | Fiscal Year    
|                                                                                     |  | Oct. 1,2004     |       | Oct. 3,2003 |   | Sept. 27,2002 |  | Sept. 28,2001 |       |  | Sept. 29,2000
|(in millions, except per share amounts)                                              |  |                 |       |             |   |               |  |               |       |  |              
|Statement of Earnings Data                                                           |  |                 |       |             |   |               |  |               |       |  |               |       |   |  |   |      
|Sales                                                                                |  | $               | 916.0 |             | $ | 847.7         |  | $             | 779.9 |  | $             | 749.2 |   |  | $ | 704.4
|Earnings before income taxes and cumulative effect of change in accounting principle |  | $               | 91.6  |             | $ | 75.6          |  | $             | 81.2  |  | $             | 72.6  |   |  | $ | 70.8 
|Income tax expense                                                                   |  | $               | 32.1  |             | $ | 26.5          |  | $             | 29.6  |  | $             | 28.3  |   |  | $ | 28.0 
|Earnings before cumulative effect of change in accounting principle                  |  | $               | 59.5  |             | $ | 49.1          |  | $             | 51.6  |  | $             | 44.3  |   |  | $ | 42.8 
|Cumulative effect of change in accounting principle, net of tax                      |  | $               |      |             | $ |              |  | $             |      |  | $             | (7.5  | ) |  | $ |     
|Net earnings                                                                         |  | $               | 59.5  |             | $ | 49.1          |  | $             | 51.6  |  | $             | 36.8  |   |  | $ | 42.8 
|Net earnings per share:                                                              |  |                 |       |             |   |               |  |               |       |  |               |       |   |  |   |      
|Before cumulative effect of change in accounting principle                           |  |                 |       |             |   |               |  |               |       |  |               |       |   |  |   |      
|Basic                                                                                |  | $               | 1.72  |             | $ | 1.45          |  | $             | 1.54  |  | $             | 1.34  |   |  | $ | 1.35 
|Diluted                                                                              |  | $               | 1.66  |             | $ | 1.40          |  | $             | 1.48  |  | $             | 1.29  |   |  | $ | 1.26 
|Cumulative effect of change in accounting principle                                  |  |                 |       |             |   |               |  |               |       |  |               |       |   |  |   |      
|Basic                                                                                |  | $               |      |             | $ |              |  | $             |      |  | $             | (0.22 | ) |  | $ |     
|Diluted                                                                              |  | $               |      |             | $ |              |  | $             |      |  | $             | (0.22 | ) |  | $ |     
|After cumulative effect of change in accounting principle                            |  |                 |       |             |   |               |  |               |       |  |               |       |   |  |   |      
|Basic                                                                                |  | $               | 1.72  |             | $ | 1.45          |  | $             | 1.54  |  | $             | 1.12  |   |  | $ | 1.35 
|Diluted                                                                              |  | $               | 1.66  |             | $ | 1.40          |  | $             | 1.48  |  | $             | 1.07  |   |  | $ | 1.26 
|                                                                                     | 
|                                                                                     |  | Fiscal Year End
|                                                                                     |  | Oct. 1,2004     |       | Oct. 3,2003 |   | Sept. 27,2002 |  | Sept. 28,2001 |       |  | Sept. 29,2000
|Balance Sheet Data                                                                   |  |                 |       |             |   |               |  |               |       |  |               |       |   |  |   |      
|Total assets                                                                         |  | $               | 830.7 |             | $ | 737.1         |  | $             | 634.6 |  | $             | 559.3 |   |  | $ | 512.3
|Long-term debt                                                                       |  | $               | 30.0  |             | $ | 36.3          |  | $             | 37.6  |  | $             | 39.7  |   |  | $ | 45.5 



Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations



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



The Companys fiscal years reported are the 52- or 53-week periods that ended on the Friday nearest September 30. Fiscal year 2004 comprised the
52-week period ended on October 1, 2004. Fiscal year 2003 comprised the 53-week period ended on October 3, 2003. Fiscal year 2002 comprised the 52-week period ended on September 27, 2002.



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##### Table of Contents

Results of Operations



Fiscal Year 2004 Compared to 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 three segments and in total for fiscal years 2004 and 2003:



|                               |  |                   |       |   |                 |      |   |                    |   |       |           |  |      |   |  |   |      |  |       |  
|------------------------------ |  | ----------------- | ----- | - | --------------- | ---- | - | ------------------ | - | ----- | --------- |  | ---- | - |  | - | ---- |  | ----- | -
|                               |  | Fiscal Year Ended |       |   |                 |     
|                               |  | October 1, 2004   |       |   | October 3, 2003 |      |   | Increase(Decrease) |  
|                               |  | $                 |       |   | % ofSales       |      |   | $                  |   |       | % ofSales |  |      | $ |  | % |     
|(dollars in millions)          |  |                   |       |   |                 |      |   |                    |   |       |           |  |      |   |  |   |      |  |       |  
|Sales by Segment:              |  |                   |       |   |                 |      |   |                    |   |       |           |  |      |   |  |   |      |  |       |  
|Scientific Instruments         |  | $                 | 584.9 |   |                 |      |   |                    | $ | 552.0 |           |  |      |   |  | $ | 32.9 |  | 6.0   | %
|Vacuum Technologies            |  |                   | 139.6 |   |                 |      |   |                    |   | 116.8 |           |  |      |   |  |   | 22.8 |  | 19.5  |  
|Electronics Manufacturing      |  |                   | 191.5 |   |                 |      |   |                    |   | 178.9 |           |  |      |   |  |   | 12.6 |  | 7.0   |  
|                               |  |                   |       |   |                 |      |   |                    |   |       |           |  |      |   |  |   |      |  |       |  
|Total company                  |  | $                 | 916.0 |   |                 |      |   |                    | $ | 847.7 |           |  |      |   |  | $ | 68.3 |  | 8.0   | %
|                               |  |                   |       |   |                 |      |   |                    |   |       |           |  |      |   |  |   |      |  |       |  
|                               |  |                   |       |   |                 |     
|Operating Earnings by Segment: |  |                   |       |   |                 |      |   |                    |   |       |           |  |      |   |  |   |      |  |       |  
|Scientific Instruments         |  | $                 | 54.0  |   |                 | 9.2  | % |                    | $ | 51.7  |           |  | 9.4  | % |  | $ | 2.3  |  | 4.4   | %
|Vacuum Technologies            |  |                   | 23.5  |   |                 | 16.9 |   |                    |   | 13.0  |           |  | 11.2 |   |  |   | 10.5 |  | 80.5  |  
|Electronics Manufacturing      |  |                   | 20.8  |   |                 | 10.8 |   |                    |   | 20.8  |           |  | 11.6 |   |  |   |     |  |      |  
|                               |  |                   |       |   |                 |      |   |                    |   |       |           |  |      |   |  |   |      |  |       |  
|Total segments                 |  |                   | 98.3  |   |                 | 10.7 |   |                    |   | 85.5  |           |  | 10.1 |   |  |   | 12.8 |  | 14.9  |  
|General corporate              |  |                   | (7.4  | ) |                 | (0.8 | ) |                    |   | (8.9  | )         |  | (1.1 | ) |  |   | 1.5  |  | (17.5 | )
|                               |  |                   |       |   |                 |      |   |                    |   |       |           |  |      |   |  |   |      |  |       |  
|Total company                  |  | $                 | 90.9  |   |                 | 9.9  | % |                    | $ | 76.6  |           |  | 9.0  | % |  | $ | 14.3 |  | 18.7  | %
|                               |  |                   |       |   |                 |      |   |                    |   |       |           |  |      |   |  |   |      |  |       |  



Scientific
Instruments.    The increase in Scientific Instruments sales was primarily attributable to higher volume, particularly in Europe. 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 $4.5 million and $5.7
million in 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.



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 in fiscal year 2004 was primarily attributable to higher gross profit margins due to sales volume leverage and a mix shift toward higher margin products as well as approximately $1.1 million in a patent suit settlement and approximately $0.8
million of pretax restructuring costs that were incurred in fiscal year 2003. Vacuum Technologies operating costs were also lower as a percentage of sales in fiscal year 2004, primarily due to sales volume leverage.



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##### Table of Contents

Electronics Manufacturing.    The increase in Electronics Manufacturing sales
was primarily due to higher volume from industrial customers as well as approximately $4.2 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 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 fiscal year 2004, partially offset by the impact of approximately $0.5 million in pretax transition costs associated with the acquisition completed in fiscal year 2003.



Consolidated Results



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



|                                              |  |                   |       |   |                 |       |   |                    |   |       |           |  |       |   |  |   |      |   |  |       |  
|--------------------------------------------- |  | ----------------- | ----- | - | --------------- | ----- | - | ------------------ | - | ----- | --------- |  | ----- | - |  | - | ---- | - |  | ----- | -
|                                              |  | Fiscal Year Ended |       |   |                 |      
|                                              |  | October 1, 2004   |       |   | October 3, 2003 |       |   | Increase(Decrease) |  
|                                              |  | $                 |       |   | % ofSales       |       |   | $                  |   |       | % ofSales |  |       | $ |  |   | %    |  
|(dollars in millions, except per share data)  |  |                   |       |   |                 |       |   |                    |   |       |           |  |       |   |  |   |      |  
|Sales                                         |  | $                 | 916.0 |   |                 | 100.0 | % |                    | $ | 847.7 |           |  | 100.0 | % |  | $ | 68.3 |   |  | 8.1   | %
|                                              |  |                   |       |   |                 |       |   |                    |   |       |           |  |       |   |  |   |      |   |  |       |  
|Gross profit                                  |  | $                 | 347.2 |   |                 | 37.9  |   |                    | $ | 321.8 |           |  | 38.0  |   |  | $ | 25.4 |   |  | 7.9   |  
|                                              |  |                   |       |   |                 |       |   |                    |   |       |           |  |       |   |  |   |      |   |  |       |  
|Operating expenses:                           |  |                   |       |   |                 |       |   |                    |   |       |           |  |       |   |  |   |      |   |  |       |  
|Sales and marketing                           |  |                   | 157.3 |   |                 | 17.2  |   |                    |   | 144.1 |           |  | 17.0  |   |  |   | 13.2 |   |  | 9.2   |  
|Research and development                      |  |                   | 48.8  |   |                 | 5.3   |   |                    |   | 45.6  |           |  | 5.4   |   |  |   | 3.2  |   |  | 6.7   |  
|General and administrative                    |  |                   | 50.1  |   |                 | 5.5   |   |                    |   | 55.5  |           |  | 6.6   |   |  |   | (5.4 | ) |  | (9.7  | )
|Purchased in-process research and development |  |                   | 0.1   |   |                 |      |   |                    |   |      |           |  |      |   |  |   | 0.1  |   |  | 100.0 |  
|                                              |  |                   |       |   |                 |       |   |                    |   |       |           |  |       |   |  |   |      |   |  |       |  
|Total operating expenses                      |  |                   | 256.3 |   |                 | 28.0  |   |                    |   | 245.2 |           |  | 29.0  |   |  |   | 11.1 |   |  | 4.5   |  
|                                              |  |                   |       |   |                 |       |   |                    |   |       |           |  |       |   |  |   |      |   |  |       |  
|Operating earnings                            |  |                   | 90.9  |   |                 | 9.9   |   |                    |   | 76.6  |           |  | 9.0   |   |  |   | 14.3 |   |  | 18.7  |  
|Interest income                               |  |                   | 3.1   |   |                 | 0.3   |   |                    |   | 1.5   |           |  | 0.2   |   |  |   | 1.6  |   |  | 104.4 |  
|Interest expense                              |  |                   | (2.4  | ) |                 | (0.2  | ) |                    |   | (2.5  | )         |  | (0.3  | ) |  |   | 0.1  |   |  | (3.8  | )
|Income tax expense                            |  |                   | (32.1 | ) |                 | (3.5  | ) |                    |   | (26.5 | )         |  | (3.1  | ) |  |   | (5.6 | ) |  | 21.1  |  
|                                              |  |                   |       |   |                 |       |   |                    |   |       |           |  |       |   |  |   |      |   |  |       |  
|Net earnings                                  |  | $                 | 59.5  |   |                 | 6.5   | % |                    | $ | 49.1  |           |  | 5.8   | % |  | $ | 10.4 |   |  | 21.1  | %
|                                              |  |                   |       |   |                 |       |   |                    |   |       |           |  |       |   |  |   |      |   |  |       |  
|Net earnings per diluted share                |  | $                 | 1.66  |   |                 |       |   |                    | $ | 1.40  |           |  |       |   |  | $ | 0.26 |   |  |       |  
|                                              |  |                   |       |   |                 |       |   |                    |   |       |           |  |       |   |  |   |      |   |  |       |  



Sales.    As shown above, fiscal year 2004 sales by the Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing segments increased by 6.0%, 19.5%, and 7.0%, respectively, compared to fiscal year
2003 sales. The improvement in sales was primarily attributable to general economic improvement and continued acceptance of our newer products, which was partially offset by the shorter fiscal year 2004 (which comprised 52 weeks) compared to fiscal
year 2003 (which comprised 53 weeks).



Geographically, sales in
North America of $498.5 million, Europe of $272.7 million, and the rest of the world of $144.8 million in fiscal year 2004 represented increases of 5.2%, 16.1%, and 4.1%, respectively, compared to 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 North America, which were flat, and the Pacific Rim, which were lower. The decrease in sales in the Pacific Rim in fiscal year 2004
was primarily due to lower sales of high-field NMR systems into that region as compared to 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 overall increase in North America sales was primarily due to higher demand for products from the Vacuum Technologies and Electronics Manufacturing 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 fiscal year 2004.



Gross Profit.    Gross profit as a percentage of sales was basically flat. Higher start-up costs
relating to new business from existing customers and a mix shift toward some lower margin industrial equipment



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##### Table of Contents

products in the Electronics Manufacturing segment reduced the gross profit percentage by approximately one-half of one percent. In the Scientific Instruments
segment, 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 was only partially offset by the impact of stronger sales of higher margin mass spectrometry
products and application-based consumable products in fiscal year 2004; the net impact of these factors was a reduction in the overall gross profit percentage of around one-half of one percent. These decreases were substantially offset by a higher
gross profit percentage in the Vacuum Technologies segment, primarily as a result of sales volume leverage and a mix shift toward higher margin products.



Sales and Marketing.    The slight increase in sales and marketing expenses as a percentage of sales was due primarily to the
weaker U.S. dollar, which increased costs for most non-U.S. operations, and higher order-based commissions.



Research and Development.    Research and development spending was relatively constant as a percentage of sales, as the Company
increased its investment in research and development, particularly in the areas of NMR and MR imaging, mass spectroscopy, and consumable products, with a bias toward life science applications.



General and Administrative.    General and
administrative expenses in fiscal year 2004 included approximately $4.6 million in pretax restructuring and other related costs as well as pretax gains of approximately $1.5 million relating to the curtailment of defined benefit pension plans in
Australia and the Netherlands (these curtailment gains were offset by a related defined benefit plan settlement loss of approximately $1.5 million in the first quarter of fiscal year 2005). In comparison, general and administrative expenses in
fiscal year 2003 included approximately $6.9 million in pretax restructuring costs and a pretax patent suit settlement of $1.1 million. Excluding the impact of these items, general and administrative expenses as a percentage of sales decreased in
fiscal year 2004 primarily as a result of lower administrative costs in the Electronics Manufacturing segment.



We currently anticipate that general and administrative expenses will be adversely impacted in fiscal year 2005 by the cost of complying with the
requirements of Section 404 of the Sarbanes-Oxley Act.



Restructuring Activities.



Fiscal Year 2004
Plans.    During fiscal year 2004, we undertook certain restructuring actions to reorganize the management structure in our Scientific Instruments factories in Australia and the Netherlands. These actions were undertaken to
narrow the strategic and operational focus of these factories and involved the termination of three senior managers. These actions were initiated in the fourth quarter of fiscal year 2004. All severance and other employee-related costs relating to
this restructuring plan were recorded and included in general and administrative expenses in the fourth quarter of fiscal year 2004 and are currently expected to be settled by the end of fiscal year 2005. This restructuring plan did not involve any
non-cash components. The following table sets forth changes in the Companys liability relating to the foregoing restructuring plan during fiscal year 2004:



|                           |  |                  |       |   |                    |   |       |  |   |       |  
|-------------------------- |  | ---------------- | ----- | - | ------------------ | - | ----- |  | - | ----- | -
|                           |  | Fiscal Year 2004 |      
|                           |  | Employee-Related |       |   | Facilities-Related |   | Total | 
|(in thousands)             |  |                  |       |   |                    |   |       | 
|Balance at October 3, 2003 |  | $                |      |   |                    | $ |      |  | $ |      |  
|Charges to expense         |  |                  | 1,024 |   |                    |   |      |  |   | 1,024 |  
|Cash payments              |  |                  | (359  | ) |                    |   |      |  |   | (359  | )
|                           |  |                  |       |   |                    |   |       |  |   |       |  
|Balance at October 1, 2004 |  | $                | 665   |   |                    | $ |      |  | $ | 665   |  
|                           |  |                  |       |   |                    |   |       |  |   |       |  



Also during fiscal
year 2004, we committed to a separate plan to reorganize our Scientific Instruments and corporate marketing organizations and to consolidate certain Scientific Instruments administrative functions in North America. This plan, which involves the
termination of approximately 20 employees, was undertaken to more closely align the strategic and operational focus of these organizations across different product lines and to improve efficiency and reduce operating costs. These actions were
initiated in



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the fourth quarter of fiscal year 2004 and are expected to be completed by the end of the second quarter of fiscal year 2005. All severance and other
employee-related costs relating to this restructuring plan were recorded and included in general and administrative expenses in the fourth quarter of fiscal year 2004 and are currently expected to be settled during the first half of fiscal year
2005. This restructuring plan did not involve any non-cash components. The following table sets forth changes in the Companys liability relating to the foregoing restructuring plan during fiscal year 2004:



|                           |  |                  |     |                    |   |       |  |   |    
|-------------------------- |  | ---------------- | --- | ------------------ | - | ----- |  | - | ---
|                           |  | Fiscal Year 2004
|                           |  | Employee-Related |     | Facilities-Related |   | Total
|(in thousands)             |  |                  |     |                    |   |      
|Balance at October 3, 2003 |  | $                |    |                    | $ |      |  | $ |   
|                           |  |                  |    
|Charges to expense         |  |                  | 859 |                    |   |      |  |   | 859
|                           |  |                  |     |                    |   |       |  |   |    
|Balance at October 1, 2004 |  | $                | 859 |                    | $ |      |  | $ | 859
|                           |  |                  |     |                    |   |       |  |   |    



Fiscal Year 2003
Plan.    During fiscal year 2003, we undertook certain restructuring actions to improve efficiency and more closely align employee skill sets and other resources with our evolving product mix as a result of our continued
emphasis on NMR, mass spectroscopy, and consumable products, with a bias toward life science applications. In addition, actions were undertaken to create a more efficient consumable products operation. These actions primarily impacted the Scientific
Instruments segment and involved the termination of approximately 160 employees (principally in 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 expected to be substantially completed in the first quarter of fiscal year 2005. Costs relating to these
restructuring activities have been included in general and administrative expenses. The following table sets forth changes in the Companys liability relating to the foregoing restructuring plan during fiscal years 2003 and 2004:



|                                               |  |                            |        |   |                    |   |       |       |  |   |        |  
|---------------------------------------------- |  | -------------------------- | ------ | - | ------------------ | - | ----- | ----- |  | - | ------ | -
|                                               |  | Fiscal Years 2003 and 2004 |       
|                                               |  | Employee-Related           |        |   | Facilities-Related |   |       | Total | 
|(in thousands)                                 |  |                            |        |   |                    |   |       |       | 
|Balance at September 27, 2002                  |  | $                          |       |   |                    | $ | 392   |       |  | $ | 392    |  
|                                               |  |                            |       
|Charges to expense                             |  |                            | 5,242  |   |                    |   | 1,729 |       |  |   | 6,971  |  
|Cash payments                                  |  |                            | (4,043 | ) |                    |   | (387  | )     |  |   | (4,430 | )
|Foreign currency impacts and other adjustments |  |                            | (27    | ) |                    |   | (537  | )     |  |   | (564   | )
|                                               |  |                            |        |   |                    |   |       |       |  |   |        |  
|Balance at October 3, 2003                     |  |                            | 1,172  |   |                    |   | 1,197 |       |  |   | 2,369  |  
|                                               |  |                            |       
|Charges to expense, net of reversals of $216   |  |                            | 558    |   |                    |   | (22   | )     |  |   | 536    |  
|Cash payments                                  |  |                            | (1,750 | ) |                    |   | (338  | )     |  |   | (2,088 | )
|Foreign currency impacts and other adjustments |  |                            | 169    |   |                    |   | (7    | )     |  |   | 162    |  
|                                               |  |                            |        |   |                    |   |       |       |  |   |        |  
|Balance at October 1, 2004                     |  | $                          | 149    |   |                    | $ | 830   |       |  | $ | 979    |  
|                                               |  |                            |        |   |                    |   |       |       |  |   |        |  



We expect to settle
all employee-related balances by the end of fiscal year 2006, while facility-related payments are currently expected to run through fiscal year 2010. The non-cash portion of restructuring costs recorded in the fiscal years 2004 and 2003 was not
significant, either in the aggregate or for any single period presented.



During fiscal year 2004, we incurred approximately $2.2 million in other costs relating directly to the Southern California facility consolidation that were in addition to the restructuring costs described above.
These costs included approximately $1.7 million of non-cash charges for accelerated depreciation of assets to be disposed of upon the closure of facilities, approximately $0.1 million in facility relocation costs, and approximately $0.4 million in
employee retention and relocation costs.



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##### Table of Contents

We currently anticipate that general and administrative expenses for the first quarter of fiscal year
2005 will include approximately $0.5 million in pretax restructuring costs and approximately $0.3 million in other related costs (comprised of anticipated non-cash charges for accelerated depreciation of assets to be disposed) in connection with the
completion of the Southern California facility consolidation.



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



|                                                                                                                                      |  |                              
|------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------
|Restructuring Plan                                                                                                                    |  | Estimated Annual Cost Savings
|Fiscal Year 2003 Plan                                                                                                                 |  | $9.0 million - $11.0 million 
|Fiscal Year 2004 Plan (Scientific Instruments factory management)                                                                     |  | $0.6 million -   $0.8 million
|Fiscal Year 2004 Plan (Scientific Instruments and corporate marketing organizations; Scientific Instruments administrative
functions) |  | $1.0 million -   $1.5 million



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



Purchased
In-Process Research and Development.    In connection with the acquisition of certain assets of Digilab, LLC (the Digilab Business) in September 2004, the Company recorded a one-time pretax charge of $0.1 million
for purchased in-process research and development relating to several new Digilab Business products that were in process at the time of the acquisition. No such charges were recorded during fiscal year 2003.



Interest Income.    Interest income was $3.1
million (representing 0.3% of sales) in fiscal year 2004, compared to $1.5 million (representing 0.2% of sales) in fiscal year 2003. The increase in interest income in fiscal year 2004 resulted primarily from higher levels of invested cash and some
increase in interest rates on invested cash.



Income Tax
Expense.    The effective income tax rate was 35.0% in both fiscal year 2004 and fiscal year 2003, and the estimated annual effective income tax rate is expected to remain at 35.0% in fiscal year 2005 excluding any discrete
items. However, the Company currently anticipates recording a discrete, one-time reduction in income tax expense during the first quarter of fiscal year 2005 as a result of a change in the treatment of foreign tax credits under new U.S. law enacted
during the quarter. The amount of this reduction cannot currently be estimated, but could be significant.



Net Earnings.    Net earnings in fiscal year 2004 reflect the impact of approximately $4.6 million in pretax restructuring and
other related costs and pretax gains of approximately $1.5 million relating to the curtailment of defined benefit pension plans in Australia and the Netherlands (these curtailment gains were offset by a related defined benefit plan settlement loss
of approximately $1.5 million in the first quarter of fiscal year 2005). Net earnings in fiscal year 2003 included approximately $6.9 million in pretax restructuring costs. Excluding the impact of these items, the increase in net earnings resulted
primarily from increased sales.



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##### Table of Contents

Fiscal Year 2003 Compared to Fiscal Year 2002



Segment Results



The following table presents comparisons of our sales and operating earnings
for each of our three segments and in total for fiscal years 2003 and 2002:



|                               |  |                   |       |   |                   |      |   |                    |   |       |           |  |      |   |  |   |      |   |  |       |   
|------------------------------ |  | ----------------- | ----- | - | ----------------- | ---- | - | ------------------ | - | ----- | --------- |  | ---- | - |  | - | ---- | - |  | ----- | --
|                               |  | Fiscal Year Ended |       |   |                   |     
|                               |  | October 3, 2003   |       |   | September 27,2002 |      |   | Increase(Decrease) |  
|                               |  | $                 |       |   | % ofSales         |      |   | $                  |   |       | % ofSales |  |      | $ |  |   | %    |  
|(dollars in millions)          |  |                   |       |   |                   |      |   |                    |   |       |           |  |      |   |  |   |      |   |  |       |   
|Sales by Segment:              |  |                   |       |   |                   |      |   |                    |   |       |           |  |      |   |  |   |      |   |  |       |   
|Scientific Instruments         |  | $                 | 552.0 |   |                   |      |   |                    | $ | 493.9 |           |  |      |   |  | $ | 58.1 |   |  | 11.8  | % 
|Vacuum Technologies            |  |                   | 116.8 |   |                   |      |   |                    |   | 111.1 |           |  |      |   |  |   | 5.7  |   |  | 5.1   |   
|Electronics Manufacturing      |  |                   | 178.9 |   |                   |      |   |                    |   | 174.9 |           |  |      |   |  |   | 4.0  |   |  | 2.3   |   
|                               |  |                   |       |   |                   |      |   |                    |   |       |           |  |      |   |  |   |      |   |  |       |   
|Total company                  |  | $                 | 847.7 |   |                   |      |   |                    | $ | 779.9 |           |  |      |   |  | $ | 67.8 |   |  | 8.7   | % 
|                               |  |                   |       |   |                   |      |   |                    |   |       |           |  |      |   |  |   |      |   |  |       |   
|                               |  |                   |       |   |                   |     
|Operating Earnings by Segment: |  |                   |       |   |                   |      |   |                    |   |       |           |  |      |   |  |   |      |   |  |       |   
|Scientific Instruments         |  | $                 | 51.7  |   |                   | 9.4  | % |                    | $ | 54.4  |           |  | 11.0 | % |  | $ | (2.7 | ) |  | (5.0  | )%
|Vacuum Technologies            |  |                   | 13.0  |   |                   | 11.2 |   |                    |   | 16.8  |           |  | 15.1 |   |  |   | (3.8 | ) |  | (22.4 | ) 
|Electronics Manufacturing      |  |                   | 20.8  |   |                   | 11.6 |   |                    |   | 17.8  |           |  | 10.2 |   |  |   | 3.0  |   |  | 16.6  |   
|                               |  |                   |       |   |                   |      |   |                    |   |       |           |  |      |   |  |   |      |   |  |       |   
|Total segments                 |  |                   | 85.5  |   |                   | 10.1 |   |                    |   | 89.0  |           |  | 11.4 |   |  |   | (3.5 | ) |  | (4.0  | ) 
|General corporate              |  |                   | (8.9  | ) |                   | (1.1 | ) |                    |   | (5.9  | )         |  | (0.7 | ) |  |   | (3.0 | ) |  | 49.3  |   
|                               |  |                   |       |   |                   |      |   |                    |   |       |           |  |      |   |  |   |      |   |  |       |   
|Total company                  |  | $                 | 76.6  |   |                   | 9.0  | % |                    | $ | 83.1  |           |  | 10.7 | % |  | $ | (6.5 | ) |  | (7.8  | )%
|                               |  |                   |       |   |                   |      |   |                    |   |       |           |  |      |   |  |   |      |   |  |       |   



Scientific
Instruments.    The revenue growth in Scientific Instruments was primarily driven by increased sales of chromatography, spectroscopy, and high-end NMR systems into life science applications, the impact of a stronger Euro, and
the acquisition of ANSYS Technologies, Inc. (ANSYS) in February 2002 and the non-clinical, drugs of abuse testing business (the DAT Business) from Roche Diagnostics Corporation in January 2003. Earnings from operations
include $5.7 million of pretax restructuring costs in fiscal year 2003 and a one-time pretax charge of $0.9 million for purchased in-process research and development relating to the acquisition of ANSYS in fiscal year 2002. In addition, amortization
of acquisition-related intangible assets relating to the Scientific Instruments segment increased to $2.6 million, compared to $1.5 million in fiscal year 2002, as a result of the ANSYS and DAT Business acquisitions. Excluding the impact of these
costs, the decrease in operating earnings as a percentage of sales resulted primarily from lower gross profit margins and increased general and administrative expenses.



Vacuum Technologies.    Vacuum Technologies sales increased primarily as a result of higher sales
of products into life science applications in fiscal year 2003. Vacuum Technologies operating earnings for fiscal year 2003 include pretax restructuring costs of $0.8 million and a pretax patent suit settlement of $1.1 million. Excluding the impact
of these costs, the decrease in operating earnings as a percentage of sales in fiscal year 2003 resulted primarily from increased spending on research and development, legal expenses relating to the patent suit, and some impact of a weaker U.S.
dollar.



Electronics
Manufacturing.    The increase in Electronics Manufacturing sales in fiscal year 2003 was due primarily to approximately $5 million in revenue from new customers obtained through an acquisition completed during the third
quarter of fiscal year 2003 and increased sales to industrial customers. Operating earnings for fiscal year 2003 reflect $0.5 million in pretax acquisition-related transition costs. Excluding the impact of these costs, the increase in operating
earnings as a percentage of sales in fiscal year 2003 was due to improved operational efficiencies in fiscal year 2003.



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##### Table of Contents

Consolidated Results



The following table presents comparisons of our sales and other selected consolidated financial results for fiscal years
2003 and 2002:



|                                              |  |                   |       |   |                    |       |   |                     |   |       |           |  |       |   |  |   |       |   |  |        |   
|--------------------------------------------- |  | ----------------- | ----- | - | ------------------ | ----- | - | ------------------- | - | ----- | --------- |  | ----- | - |  | - | ----- | - |  | ------ | --
|                                              |  | Fiscal Year Ended |       |   |                    |      
|                                              |  | October 3, 2003   |       |   | September 27, 2002 |       |   | Increase (Decrease) |  
|                                              |  | $                 |       |   | % ofSales          |       |   | $                   |   |       | % ofSales |  |       | $ |  |   | %     |  
|(dollars in millions, except per share data)  |  |                   |       |   |                    |       |   |                     |   |       |           |  |       |   |  |   |       |   |  |        |   
|Sales                                         |  | $                 | 847.7 |   |                    | 100.0 | % |                     | $ | 779.9 |           |  | 100.0 | % |  | $ | 67.8  |   |  | 8.7    | % 
|                                              |  |                   |       |   |                    |       |   |                     |   |       |           |  |       |   |  |   |       |   |  |        |   
|Gross profit                                  |  | $                 | 321.8 |   |                    | 38.0  |   |                     | $ | 295.7 |           |  | 37.9  |   |  | $ | 26.2  |   |  | 8.8    |   
|                                              |  |                   |       |   |                    |       |   |                     |   |       |           |  |       |   |  |   |       |   |  |        |   
|Operating expenses:                           |  |                   |       |   |                    |       |   |                     |   |       |           |  |       |   |  |   |       |   |  |        |   
|Sales and marketing                           |  |                   | 144.1 |   |                    | 17.0  |   |                     |   | 132.3 |           |  | 17.0  |   |  |   | 11.8  |   |  | 8.9    |   
|Research and development                      |  |                   | 45.6  |   |                    | 5.4   |   |                     |   | 39.9  |           |  | 5.1   |   |  |   | 5.7   |   |  | 14.4   |   
|General and administrative                    |  |                   | 55.5  |   |                    | 6.6   |   |                     |   | 39.5  |           |  | 5.1   |   |  |   | 16.0  |   |  | 40.5   |   
|Purchased in-process research and development |  |                   |      |   |                    |      |   |                     |   | 0.9   |           |  | 0.1   |   |  |   | (0.9  | ) |  | (100.0 | ) 
|                                              |  |                   |       |   |                    |       |   |                     |   |       |           |  |       |   |  |   |       |   |  |        |   
|Total operating expenses                      |  |                   | 245.2 |   |                    | 29.0  |   |                     |   | 212.6 |           |  | 27.3  |   |  |   | 32.6  |   |  | 15.3   |   
|                                              |  |                   |       |   |                    |       |   |                     |   |       |           |  |       |   |  |   |       |   |  |        |   
|Operating earnings                            |  |                   | 76.6  |   |                    | 9.0   |   |                     |   | 83.1  |           |  | 10.6  |   |  |   | (6.4  | ) |  | (7.8   | ) 
|Interest income                               |  |                   | 1.5   |   |                    | 0.2   |   |                     |   | 1.0   |           |  | 0.1   |   |  |   | 0.5   |   |  | 50.7   |   
|Interest expense                              |  |                   | (2.5  | ) |                    | (0.3  | ) |                     |   | (2.9  | )         |  | (0.3  | ) |  |   | 0.4   |   |  | (14.1  | ) 
|Income tax expense                            |  |                   | (26.5 | ) |                    | (3.1  | ) |                     |   | (29.5 | )         |  | (3.8  | ) |  |   | 3.0   |   |  | (10.4  | ) 
|                                              |  |                   |       |   |                    |       |   |                     |   |       |           |  |       |   |  |   |       |   |  |        |   
|Net earnings                                  |  | $                 | 49.1  |   |                    | 5.8   | % |                     | $ | 51.7  |           |  | 6.6   | % |  | $ | (2.5  | ) |  | (4.8   | )%
|                                              |  |                   |       |   |                    |       |   |                     |   |       |           |  |       |   |  |   |       |   |  |        |   
|Net earnings per diluted share                |  | $                 | 1.40  |   |                    |       |   |                     | $ | 1.48  |           |  |       |   |  | $ | (0.08 | ) |  |        |   
|                                              |  |                   |       |   |                    |       |   |                     |   |       |           |  |       |   |  |   |       |   |  |        |   



Sales.    As shown above, fiscal year 2003 sales by the Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing segments increased by 11.8%, 5.1%, and 2.3%, respectively, compared to fiscal year
2002. These increases were partially attributable to the longer fiscal year 2003 (which comprised 53 weeks) compared to fiscal year 2002 (which comprised 52 weeks).



Geographically, sales in North America of $473.8 million, Europe of $234.8 million, and the rest of the world of $139.1
million in fiscal year 2003 represented increases (decreases) of (0.3%), 18.7%, and 30.0%, respectively, as compared to fiscal year 2002. The decrease in North America resulted primarily from a shift in NMR system sales from North America to Europe
and the Pacific Rim. This decrease was partially offset by higher sales in North America by the rest of the Scientific Instruments segment. The increase in Europe was primarily the result of stronger Scientific Instruments sales, due in part to the
stronger Euro. The increase in the rest of the world was primarily driven by continued growth in Scientific Instrument sales into the Pacific Rim.



Gross Profit.    The slight increase in gross profit percentage (from 37.9% in fiscal year 2002 to 38.0% in fiscal year 2003)
was driven primarily by an increase in the gross profit margin for Electronics Manufacturing due to improved operational efficiencies. This increase was partially offset by increased sales of newer leading-edge Scientific Instruments products, which
had lower margins due to higher installation and warranty costs.



Sales and Marketing.    Sales and marketing expenses were 17.0% of sales in both fiscal year 2003 and fiscal year 2002. The increase in sales and marketing expenses in absolute dollars resulted primarily from the
acquisition of ANSYS in February 2002 and the DAT Business in January 2003. The increase was also attributable to costs associated with higher revenues as well as the weaker U.S. dollar, which increased costs for most sales and marketing resources
based in non-U.S. locations.



Research and
Development.    Research and development expenses were 5.4% of sales in fiscal year 2003, compared to 5.1% of sales in fiscal year 2002. Research and development expenses increased as a percentage of sales primarily because
the Company continued to increase its focus within the Scientific Instruments and Vacuum Technologies segments on new product development with an emphasis on life



20



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##### Table of Contents

science applications. The weaker U.S. dollar also contributed to the increase, as costs relating to certain non-U.S. based research and development resources
were higher.



General and
Administrative.    General and administrative expenses increased in fiscal year 2003 primarily as a result of higher expenses related to acquired businesses, higher insurance and corporate compliance costs, pretax
restructuring costs of $6.9 million, and a pretax patent suit settlement of $1.1 million. In addition, amortization of acquisition-related intangible assets increased to $2.7 million in fiscal year 2003, compared to $1.6 million in the prior year,
as a result of the ANSYS and DAT Business acquisitions.



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 NMR, mass spectroscopy, and consumable products, with a bias toward life science applications. In addition, actions were undertaken to create a more efficient consumable products operation. These actions
primarily impacted the Scientific Instruments segment and involved the termination of approximately 160 employees (principally in 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 expected to be completed in the first quarter of fiscal year 2005. Costs relating
to these restructuring activities have been included in general and administrative expenses. The following tables set forth changes in the Companys liability relating to the foregoing restructuring plan during fiscal year 2003:



|                                               |  |                                   |        |   |                    |   |       |       |  |   |        |  
|---------------------------------------------- |  | --------------------------------- | ------ | - | ------------------ | - | ----- | ----- |  | - | ------ | -
|                                               |  | Fiscal Year Ended October 3, 2003 |       
|                                               |  | Employee-Related                  |        |   | Facilities-Related |   |       | Total | 
|(in thousands)                                 |  |                                   |        |   |                    |   |       |       | 
|Balance at September 27, 2002                  |  | $                                 |       |   |                    | $ | 392   |       |  | $ | 392    |  
|Charges to expense                             |  |                                   | 5,242  |   |                    |   | 1,729 |       |  |   | 6,971  |  
|Cash payments                                  |  |                                   | (4,043 | ) |                    |   | (387  | )     |  |   | (4,430 | )
|Foreign currency impacts and other adjustments |  |                                   | (27    | ) |                    |   | (537  | )     |  |   | (564   | )
|                                               |  |                                   |        |   |                    |   |       |       |  |   |        |  
|Balance at October 3, 2003                     |  | $                                 | 1,172  |   |                    | $ | 1,197 |       |  | $ | 2,369  |  
|                                               |  |                                   |        |   |                    |   |       |       |  |   |        |  



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



Income Tax Expense.    The effective income tax rate was 35.0% for fiscal year 2003, compared to 36.4% (36.0% excluding the
impact of the purchased in-process research and development charge) for fiscal year 2002. The fiscal year 2003 rate was lower than the fiscal year 2002 rate due mainly to a reduction in tax rates and higher tax credits in certain foreign
jurisdictions.



Net Earnings.    Net
earnings for fiscal year 2003 reflect the impact of pretax restructuring costs of $6.9 million and a pretax patent suit settlement of $1.1 million, while net earnings for fiscal year 2002 include the impact of a one-time pretax charge of $0.9
million for purchased in-process research and development relating to the ANSYS acquisition. Excluding the effect of these costs, the increase in net earnings in fiscal year 2003 was primarily the result of increased profitability in the Scientific
Instruments and Electronics Manufacturing segments, partially offset by lower profitability in the Vacuum Technologies segment and higher corporate costs.



Certain Subsequent Events



Acquisition of Magnex Scientific Limited.    On November 3, 2004, we acquired Magnex Scientific Limited
(Magnex) for approximately $31.8 million in cash and assumed net debt, subject to certain net



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asset adjustments. The transaction also includes an opportunity for additional purchase price payments of up to $6.0 million over a three-year period,
depending on the performance of the Magnex business relative to certain financial targets. Magnex designs, develops, manufactures, sells, and services superconducting magnets for human and other magnetic resonance (MR) imaging, nuclear
magnetic resonance (NMR), and Fourier Transform mass spectroscopy (FTMS), and gradients for MR microscopy. These magnets are used in our NMR and MR imaging systems, and are also sold to original equipment manufacturers
(OEMs) and end-users. Through the Magnex acquisition, we gained control of the production of certain magnets used in our existing NMR and MR imaging systems, which is expected to help reduce the cost of these systems in the future. In
addition, we expect to be able to better coordinate the design and development of new NMR and MR imaging products with the design and the development of magnets for those products.



While the Magnex business presents these opportunities, it will also present us with new challenges. These challenges
include ensuring that we maintain sources of supply of specialized superconducting wire, which is available from a limited number of external suppliers. In addition, superconducting magnets are complex, can be difficult to manufacture, are often
intended for use in leading-edge research applications, and can only be tested after being manufactured. Manufacturing of these magnets also involves long lead-times, and customer acceptance can be dependent upon specific acceptance criteria, which
can make it difficult for us to forecast shipment, installation, and acceptance of, and installation and warranty costs on, superconducting magnets and our NMR and MR imaging systems that use those magnets. This can in turn make it difficult for us
to forecast the timing of revenue recognition and the achieved gross profit margin on these magnets and our systems in which they are used.



The Magnex business became part of our Scientific Instruments segment. We will complete our allocation of the purchase price paid for Magnex following the
completion of the closing balance sheet, a valuation of acquired intangible assets, and certain other matters. This is currently expected to occur by the end of the fiscal quarter ending December 31, 2004.



U.K. Field Support Administration
Restructuring.    In October 2004, in connection with our announcement of the definitive agreement to acquire Magnex, we committed to a plan to rationalize our field support administration in the United Kingdom. The
objective of the plan is to achieve operational efficiencies and eliminate redundant costs resulting from the Magnex acquisition. The plan will involve the termination of approximately 20 employees, the consolidation of certain field support
administrative functions currently located in our Walton, U.K. location to Magnexs location in Oxford, U.K., and the closure of the Walton facility.



We expect the plan to result in pretax restructuring charges of approximately $1.7 million to $1.9 million. These amounts are comprised of approximately
$300,000 to $400,000 relating primarily to employee terminations and approximately $1.4 million to $1.5 million relating primarily to lease termination costs associated with the planned closure of the Walton, U.K. facility. These amounts include
approximately $100,000 in non-cash charges. We anticipate that all restructuring charges will be recorded by the end of the second quarter of fiscal year 2005 and will be settled between the first quarter of fiscal year 2005 and the fourth quarter
of fiscal year 2006. All actions under the plan are expected to be completed by the end of the second quarter of fiscal year 2005.



In addition to the restructuring charges outlined above, we also expect to incur other one-time pretax costs of approximately $300,000 to $400,000
relating to the plan. These amounts are primarily comprised of anticipated facility and personnel relocation costs. Including these other restructuring-related costs, we anticipate that total future expenditures related to the plan will be
approximately $2.0 million to $2.3 million. Once completed, the estimated annual cost savings realized as a result of this restructuring plan (before any reinvestment of those savings) are expected to be between $0.8 million and $1.2 million.



Critical Accounting Policies



The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America requires us to exercise certain judgments in selecting and applying accounting policies and methods. Following is a summary of what we consider to be our most



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critical accounting policiesthose that are most important to the portrayal of our financial condition and results of operations and that require our
most difficult, subjective, or complex judgmentsthe effects of those accounting policies applied, and the judgments made in their application.



Revenue Recognition.    We derive revenues from three primary sources: product sales, accessory sales, and services. We
recognize revenue on product sales and accessory sales when persuasive evidence of an arrangement exists, the contract price is fixed or determinable, the product or accessory has been delivered, title and risk of loss have passed to the customer,
and collection of the resulting receivable is reasonably assured. Our sales are typically not subject to rights of return and, historically, actual sales returns have not been significant. Product sales that do not involve unique customer acceptance
terms or new specifications or technology with customer acceptance provisions, but that do involve installation services, are accounted for as multiple-element arrangements, where the larger of the contractual billing holdback or the fair value of
the installation service is deferred when the product is delivered and subsequently recognized when the installation is complete. For certain other product sales that do involve unique customer acceptance terms or new specifications or technology
with customer acceptance provisions, all revenue is deferred until all contractually required customer acceptance provisions and product specifications have been satisfied. Revenue related to service contracts is recognized ratably over the term of
the contracts. Unearned maintenance and service contract revenue is included in accrued liabilities on the accompanying Consolidated Balance Sheet. Revenue related to incident-based paid service and training services is recognized when the related
services are provided to the customer.



In all cases, the fair
value of undelivered elements is deferred until those items are delivered to the customer. Sales arrangements involving undelivered elements are primarily confined to the Scientific Instruments segment and involve product accessories, installation
services, and/or training services that are delivered after the related product has been delivered. Product accessories generally enhance the functionality of the product but are not essential to the functionality of the product. In determining
relative fair values for product accessories and training services, we utilize published price list values as the basis for allocating the overall arrangement consideration. List prices are representative of fair value, as stand-alone sales of
products, product accessories, and training have occurred at list price. The fair value of installation services is calculated by applying standard service billing rates to the estimate of the number of hours to install a specific product based on
historical experience. Estimates of installation hours have historically been accurate.



In limited cases, product accessories ordered by customers may not have an established list price, as the item may be a new or slightly modified accessory with no prior sales history. In these limited cases, we
consider whether a comparable or substitute accessory that provides similar functionality exists for which fair value has been established and then use that comparable or substitute accessorys list price in estimating the fair value of the
undelivered elements. If such conditions do not exist, all arrangement revenue is deferred until the undelivered element is delivered; however, such cases are infrequent and arise from a significant technological advance that creates products or
product accessories without a suitable comparable or substitute accessory from which to derive fair value.



We determine when and how much revenue may be recognized on a particular transaction in a particular period based on our best estimates of the fair value
of undelivered elements and our judgment of when our performance obligations have been met as outlined above. These judgments and estimates impact reported revenues.



Allowances for Doubtful Accounts Receivable.    We sell our products and extend trade credit to a
large number of customers. These customers are dispersed across many different industries and geographies and, historically, no single customer has accounted for 10% or more of our total revenues. We perform ongoing credit evaluations of our
customers and generally do not require collateral from them. Although bad debt write-offs have historically been insignificant, allowances are established for amounts that are considered to be uncollectible. These allowances represent our best
estimates and are based on our judgment after considering a number of factors including third-party credit reports, actual payment history, customer-specific financial information, and broader market and economic trends and conditions. In the event
that actual uncollectible amounts differ from these best estimates, changes in allowances for doubtful accounts might become necessary.



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Inventory Valuation.    Inventories are stated at the lower of cost or market,
with cost being computed on an average-cost basis. Provisions are made to write down potentially excess, obsolete, or slow-moving inventories to their net realizable value. These provisions are based on our best estimates after considering
historical demand, projected future demand (including current backlog), inventory purchase commitments, industry and market trends and conditions, and other factors. In the event that actual excess, obsolete, or slow-moving inventories differ from
these best estimates, changes to inventory reserves might become necessary.



Product Warranty.    Our products are generally subject to warranties, and liabilities are therefore established for the estimated future costs of repair or replacement through charges to
cost of sales at the time the related sale is recognized. These liabilities are adjusted based on our best estimates of future warranty costs after considering historical and projected product failure rates and product repair costs. In the event
that actual experience differs from these best estimates, changes in our warranty liabilities might become necessary.



Environmental Liabilities.    As discussed more fully below under the heading Risk FactorsEnvironmental Matters,
under the terms of the Distribution, we and VSEA are each obligated to indemnify VMS for one-third of certain environmental investigation, monitoring, and/or remediation costs (after adjusting for any insurance proceeds and tax benefits recognized
or realized by VMS for such costs). The liabilities recorded by us relating to these matters are based on our best estimates after considering currently available information regarding the cost and timing of remediation efforts, related legal
matters, insurance recoveries, and other environmental-related events. As additional information becomes available, these amounts are adjusted accordingly. Should the cost or timing of remediation efforts, legal matters, insurance recoveries, or
other environmental-related events (including any which may be currently unidentified) differ from our current expectations and best estimates, changes to our reserves for environmental matters might become necessary.



Income Taxes.    We are subject to income taxes in
both the United States and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our income tax expense. During the ordinary course of business, there are many transactions and calculations
for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on our best estimates of whether, and the extent to which, additional taxes and interest will be due. These reserves are established
when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are likely to be challenged and may not be sustained on review by tax authorities. These reserves are adjusted in light of changing facts
and circumstances. Our income tax expense includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest.



Our effective income tax rate differs from the federal statutory income tax rate primarily due to state and local taxes and
the tax impact of foreign operations. In the future, effective tax rates could be adversely affected by earnings being lower than anticipated in countries having lower statutory rates and higher than anticipated in countries having higher statutory
rates, by changes in the valuation of deferred tax assets or liabilities, or by changes in tax laws or interpretations thereof. In addition, we are subject to examination of our income tax returns by the U.S. Internal Revenue Service and other tax
authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our income tax expense.



Liquidity and Capital Resources



The Company generated $92.9 million of cash from operating activities in fiscal year 2004, which compares to $121.6 million in fiscal year 2003. The
decrease in cash from operating activities resulted primarily from the relative changes in accounts receivable ($26.9 million) and inventories ($7.1 million), partially offset by higher net earnings ($10.4 million). Cash flows from tax benefits from
nonqualified stock option exercises and higher income tax-related accrued liabilities were substantially offset by those from increases in net deferred tax assets in fiscal year 2004. Cash usage relating to accounts receivable in fiscal year 2004 of
$9.3 million was primarily attributable to higher sales volume and an increase in the average number of days accounts receivable were outstanding during the fourth quarter of fiscal year 2004



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compared to the same quarter of the prior fiscal year. This increase primarily resulted from the fact that the fourth quarter of fiscal year 2004 comprised
thirteen weeks, compared to fourteen weeks in the fourth quarter of fiscal year 2003. Cash generated from accounts receivable in fiscal year 2003 of $17.6 million was primarily due to a significant improvement in the average number of days accounts
receivable were outstanding during the fourth quarter of fiscal year 2003, primarily as a result of the extra week included in that period when compared to the fourth quarter of fiscal year 2002. The relative increase in inventory in 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 and MR imaging systems. Inventory turnover for the two
periods was relatively constant.



The Company used $34.7
million of cash for investing activities in fiscal year 2004, which compares to usage of $51.1 million in fiscal year 2003. The decrease in cash used for investing activities was primarily due to a decrease in payments made relating to acquisitions
during fiscal year 2004 as compared to the prior fiscal year. In particular, amounts paid in fiscal 2003 for the acquisition of the DAT Business from Roche Diagnostics Corporation exceeded amounts paid in fiscal 2004 for the acquisition of the
Digilab Business by approximately $10.3 million. Lower net purchases of property, plant, and equipment also contributed to the decrease in cash used for investing activities in fiscal year 2004.



The Company used $12.5 million of cash for financing activities in fiscal
year 2004, which compares to usage of $4.8 million in fiscal year 2003. The increase in cash used for financing activities in fiscal year 2004 was primarily due to higher cash expenditures to repurchase and retire common stock. The increased level
of stock repurchases in fiscal year 2004 was the result of an effort to utilize excess cash to offset increases in our outstanding common shares due to higher stock option exercise volume. The impact of these stock repurchases on our cash balance
was partially offset by higher 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 borrowed under this credit facility. 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. 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, we established a short-term bank credit facility in
Japan in the amount of 300 million yen (approximately $2.7 million at October 1, 2004). The credit facility is available to our wholly owned Japanese subsidiary for working capital purposes. As of October 1, 2004, no amounts were outstanding under
this credit facility and 300 million yen (approximately $2.7 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 October
1, 2004.



In addition to these bank credit facilities, as of
October 1, 2004, we had a total of $76.1 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 October 1, 2004. All of these credit facilities contain certain customary conditions and events of default, with which we were in compliance at October 1, 2004. Of the $76.1 million in uncommitted and unsecured credit facilities, a
total of $41.6 million was limited for use by, or in favor of, certain subsidiaries at October 1, 2004, and a total of $16.4 million of this $41.6 million was being utilized in the form of bank guarantees or short-term standby letters of credit.
These guarantees and letters of credit related primarily to advance payments or deposits made to our subsidiaries by customers for which separate liabilities were recorded in the Consolidated Financial Statements at October 1, 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 October 1, 2004, we had $32.5 million in term loans outstanding compared to $35.0 million at October 3, 2003. As of both October 1, 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 October 1, 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



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results. We were in compliance with all restrictive covenants of the term loan agreements at October 1, 2004. We also had other long-term notes payable of
$4.2 million as of October 1, 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%.



In connection with the acquisition of the Digilab Business, we have accrued but not yet paid a portion of the purchase price
amount that has been retained to secure the sellers indemnification obligations. This retained amount, which is due to be paid during fiscal year 2005 (net of any indemnification claims), totaled approximately $2.1 million at October 1, 2004.
In addition to this retained payment, we are, from time to time, obligated to pay additional cash purchase price amounts in the event that certain financial or operational milestones are met by the acquired businesses. As of October 1, 2004, up to a
maximum of $19.5 million could be payable through fiscal year 2006 under these contingent consideration arrangements. Of this maximum amount, a total of $10.0 million relates to the Digilab Business acquisition and can be earned if acquired product
lines reach specific financial performance targets through fiscal year 2005. The remaining $9.5 million relates to the acquisition of Bear Instruments, Inc. in fiscal year 2001 and can be earned if acquired product lines reach specific financial
performance targets through fiscal year 2006. Any contingent payments made will be recorded as additional goodwill at the time they are earned. See also the discussion above under the heading Certain Subsequent Events, which describes our
acquisition of Magnex after October 1, 2004.



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



As of October 1, 2004, we had cancelable commitments to a contractor for
capital expenditures totaling approximately $1.7 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 October 1, 2004. In the aggregate, we currently anticipate
that our capital expenditures will be between $28 million and $32 million during fiscal year 2005.



Our liquidity is affected by many other factors, some based on the normal ongoing operations of the business and others related to the uncertainties of
the industry 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 October 1, 2004:



|                                           |  |             |        |      |   |       |  |      |       |      |   |            |  |       |       |  |   |        |  |   |       
|------------------------------------------ |  | ----------- | ------ | ---- | - | ----- |  | ---- | ----- | ---- | - | ---------- |  | ----- | ----- |  | - | ------ |  | - | ------
|                                           |  | Fiscal Year
|                                           |  | 2005        |        | 2006 |   | 2007  |  | 2008 |       | 2009 |   | Thereafter |  | Total
|(in thousands)                             |  |             |        |      |   |       |  |      |       |      |   |            |  |      
|Operating leases                           |  | $           | 7,414  |      | $ | 4,225 |  | $    | 2,850 |      | $ | 2,185      |  | $     | 1,957 |  | $ | 25,461 |  | $ | 44,092
|Long-term debt (including current portion) |  |             | 6,673  |      |   | 2,500 |  |      | 2,500 |      |   | 6,250      |  |       |      |  |   | 18,750 |  |   | 36,673
|                                           |  |             |        |      |   |       |  |      |       |      |   |            |  |       |       |  |   |        |  |   |       
|Total contractual cash obligations         |  | $           | 14,087 |      | $ | 6,725 |  | $    | 5,350 |      | $ | 8,435      |  | $     | 1,957 |  | $ | 44,211 |  | $ | 80,765
|                                           |  |             |        |      |   |       |  |      |       |      |   |            |  |       |       |  |   |        |  |   |       



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In addition to the above, the Company had cancelable commitments to purchase certain superconducting
magnets intended for use with leading-edge NMR and MR imaging systems totaling approximately $25.1 million, net of deposits paid, as of October 1, 2004. In the event that these commitments are canceled for reasons other than the suppliers
default, the Company would be responsible for reimbursement of actual costs incurred by the supplier.



As of October 1, 2004, the Company did not have any off-balance sheet commercial commitments that could result in a significant cash outflow upon the
occurrence of some contingent event, except for contingent payments of up to a maximum of $19.5 million related to acquisitions as discussed under Liquidity and Capital Resources above, the specific timing and amounts of which are not
currently determinable.



Recent Accounting Pronouncements



In December 2003, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. (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 fiscal years ending after December 15, 2003, in 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 becomes 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. The adoption of FSP 106-2, which occurred in the fourth quarter of fiscal year 2004, did not have a material impact on our financial condition or results of operations.



In December 2003, the FASB issued a proposed amendment to SFAS 128, Earnings per Share, to make it consistent with
International Accounting Standard 33, Earningsper Share, so as to make earnings per share computations comparable on a global basis. As currently drafted, the amendment would require companies to use the year-to-date average stock
price to compute the number of treasury shares that could theoretically be purchased with the proceeds from exercise of share contracts such as options or warrants. The current method of calculating earnings per share requires companies to calculate
an average of the potential incremental common shares computed for each quarter when computing year-to-date incremental shares. The proposed amendment would also change other aspects of SFAS 128 that would not impact our earnings per share
calculations. The amended standard is expected to be issued by December 31, 2004 and



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would be effective for all periods ending after December 15, 2004. Should the proposed statement be finalized in its current form (including the proposed
effective date), its adoption is not expected to have a material impact on our financial condition or results of operations.



In March 2004, the FASB issued a proposed standard, Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95, which addresses the
accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of that company or liabilities that are based on the fair value of that companys equity instruments, or
that may be settled by the issuance of such equity instruments. The proposed standard would eliminate companies ability to account for share-based compensation transactions using the intrinsic value method as prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and generally would require that such transactions be accounted for using a fair value-based method and recognized as expense in our Consolidated Statement of
Earnings. In its current form, the proposed standard would require companies to assess the most appropriate model to calculate the value of the options. We currently use the Black-Scholes option-pricing model to value options for financial statement
disclosure purposes. However, we may deem an alternative model to be the most appropriate under the standard when it is issued in final form. The use of a different model to value options may result in a different fair value than the use of the
Black-Scholes option-pricing model. In addition, there are a number of other requirements under the proposed standard that would result in different accounting treatment than currently required, should the proposed standard be implemented in its
current form. These differences include, but are not limited to, the accounting for the tax benefit on employee stock options and for stock issued under our employee stock purchase plan. As currently proposed, the standard would be effective for
fiscal periods beginning after June 15, 2005. Should the proposed statement be finalized in its current form, its adoption would have a material impact on our results of operations since we would be required to expense the fair value of stock
options granted under our Omnibus Stock Plan and stock purchases under our Employee Stock Purchase Plan.



Risk Factors



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



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



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



Variability of Operating
Results.    We experience some cyclical patterns in sales of our products. Generally, sales and earnings in the first quarter of our fiscal year are lower when compared to the preceding fourth fiscal quarter, primarily
because there are fewer working days in our first fiscal quarter (October to December) and many customers defer December deliveries until the next calendar year, our



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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, new product introductions, and products requiring long manufacturing and installation lead times (such as NMR and MR imaging systems and superconducting magnets). Consequently, our results of operations may fluctuate significantly from
quarter to quarter.



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



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



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



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



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



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



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 will need to be renewed in April 2006. A work stoppage, strike, or other
labor action at this or other of our facilities could have an adverse effect on our financial condition or results of operations.



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



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



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



Restructuring Activities.    We have undertaken restructuring activities, and may undertake restructuring activities in the
future, that we expect to result in certain costs and eventual cost savings.



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



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



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



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



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



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



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



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assumptions each year in response to corresponding changes in the underlying market conditions. Changes in these market conditions result in corresponding
changes in our defined benefit pension plan assumptions and costs. These changes could have an adverse effect on our financial condition or results of operations.



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



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



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 October 1, 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 $2.6 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and
facility, ranging up to approximately 13 years as of October 1, 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 October 1, 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 October 1, 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 $4.8 million to $15.9 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 October 1, 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 $7.0 million at October 1, 2004. We
therefore had an accrual of $4.6 million as of October 1, 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.



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At October 1, 2004, our reserve for environmental-related costs, based upon future environmental-related
costs estimated by us as of that date, was calculated as follows:



|                                          |  |                |      |                      |   |                              |  |   |     | 
|----------------------------------------- |  | -------------- | ---- | -------------------- | - | ---------------------------- |  | - | --- | 
|                                          |  | RecurringCosts |      | Non- Recurring Costs |   | TotalAnticipatedFuture Costs | 
|(in millions)                             |  |                |      |                      |   |                              | 
|Fiscal Year                               |  |                |      |                      |   |                              |  |   |     | 
|2005                                      |  | $              | 0.3  |                      | $ | 0.6                          |  | $ | 0.9 | 
|2006                                      |  |                | 0.3  |                      |   | 0.4                          |  |   | 0.7 | 
|2007                                      |  |                | 0.3  |                      |   | 0.4                          |  |   | 0.7 | 
|2008                                      |  |                | 0.3  |                      |   | 0.2                          |  |   | 0.5 | 
|2009                                      |  |                | 0.3  |                      |   | 0.1                          |  |   | 0.4 | 
|Thereafter                                |  |                | 4.5  |                      |   | 0.7                          |  |   | 5.2 | 
|                                          |  |                |      |                      |   |                              |  |   |     | 
|Total costs                               |  | $              | 6.0  |                      | $ | 2.4                          |  |   | 8.4 | 
|                                          |  |                |      |                      |   |                              |  |   |     | 
|Less imputed interest                     |  |                | (2.4 | )                   
|                                          |  |                |      |                     
|Reserve amount                            |  |                | 6.0  |                     
|Less current portion                      |  |                | (0.5 | )                   
|                                          |  |                |      |                     
|Long-term (included in Other liabilities) |  | $              | 5.5  |                     
|                                          |  |                |      |                     



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 $1.2 million receivable in other assets as of October 1, 2004 for our share of such recovery. We have not reduced any
environmental-related liability in anticipation of recoveries from third parties.



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



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



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Item 7A. 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 October 1, 2004, there were no outstanding forward
contracts designated as cash flow hedges of forecasted transactions. During the fiscal year ended October 1, 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 October 1, 2004 follows:



|                  |  |                   |        |                        |   |       
|----------------- |  | ----------------- | ------ | ---------------------- | - | ------
|                  |  | NotionalValueSold |        | NotionalValuePurchased
|(in thousands)    |  |                   |        |                       
|Euro              |  | $                 |       |                        | $ | 45,525
|Australian dollar |  |                   |       |                        |   | 13,610
|Japanese yen      |  |                   | 9,415  |                        |   |      
|Canadian dollar   |  |                   | 4,945  |                        |   |      
|British pound     |  |                   |       |                        |   | 3,295 
|Swedish krona     |  |                   | 792    |                        |   |      
|                  |  |                   |        |                        |   |       
|Total             |  | $                 | 15,152 |                        | $ | 62,430
|                  |  |                   |        |                        |   |       



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 October 1, 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 operating leases for our facilities are tied to market indices, we are not exposed to
material interest rate risk associated with our operating leases.



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



|                                           |  |             |       |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |   |       |  |   |        |   |  |   |        |  
|------------------------------------------ |  | ----------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | ----- | - | ---------- | - | - | ----- |  | - | ------ | - |  | - | ------ | -
|                                           |  | Fiscal Year |      
|                                           |  | 2005        |       |   | 2006 |   |       | 2007 |  |   | 2008  |   |  | 2009 |       |   | Thereafter |   |   | Total | 
|(dollars in thousands)                     |  |             |       |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |   |       |  |   |        |   |  |   |        |  
|Long-term debt (including current portion) |  | $           | 6,673 |   |      | $ | 2,500 |      |  | $ | 2,500 |   |  | $    | 6,250 |   |            | $ |  |       |  | $ | 18,750 |   |  | $ | 36,673 |  
|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 pension plans in certain foreign countries. Our obligations under
these defined benefit plans will ultimately be settled in the future and are therefore subject to estimation. Defined benefit pension accounting under SFAS 87, Employers Accounting



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for Pensions, is intended to reflect the recognition of future benefit costs over the employees estimated service periods based on the terms of
the pension plans and the investment and funding decisions made by us.



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



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



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



Item 8. Financial Statements and Supplementary Data



The response to this Item is submitted as a separate section to this Report. See Item 15Exhibits, Financial Statement Schedules.



Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure



None.



Item 9A. 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 Annual Report on Form 10-K. 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 Securities and Exchange Commission
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 fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.



Item 9B. Other Information



None.



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PART III



Item 10. Directors and Executive Officers of the Registrant



The information required by this Item with respect to the Companys executive officers is incorporated herein by reference from the information contained in Item 1 of Part I of this Report under the caption
Executive Officers. The information required by this Item with respect to the Companys directors and nominees for director is incorporated herein by reference from the information provided under the heading Proposal OneElection
of Directors of the Companys Proxy Statement. The information required by this Item with respect to the Companys audit committee financial expert is incorporated herein by reference from the information provided under the heading
Audit Committee Financial Expert of the Companys Proxy Statement. The information required by Item 405 of Regulation S-K is incorporated herein by reference from the information provided under the heading Section 16(a) Beneficial
Ownership Reporting Compliance of the Companys Proxy Statement.



The Company has adopted a code of ethics that applies to its Chief Executive Officer, Chief Financial Officer, and Controller. This code of ethics, which is included in the Companys Code of Business Conduct and
Ethics that applies to officers, directors, and employees, is posted on the Companys website. The Internet address for our main website is http://www.varianinc.com, and the Code of Business Conduct and Ethics may be found as follows:



| | 1. |  | From our main Web page, click on Investors.
| | -- |  | ---------------------------------------------



| | 2. |  | Next, click on Corporate Governance.
| | -- |  | --------------------------------------



| | 3. |  | Finally, click on Code of Business Conduct and Ethics.
| | -- |  | --------------------------------------------------------



The Company intends to satisfy the disclosure requirement under Item 10 of Form 8-K, regarding an amendment to, or waiver from, a provision of this Code
of Business Conduct and Ethics with respect to directors and executive officers, by posting such information on its website, at the address and location specified above.



Item 11. Executive Compensation



The information required by this Item is incorporated herein by reference from the information provided under the heading Executive Compensation Information of the Companys Proxy Statement.



|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- |  | ----------------------------------------------------------------------------------------------



The information required by this Item is incorporated herein by reference from the information provided under the headings
Equity Compensation Plan Information and Stock Ownership of Certain Beneficial Owners of the Companys Proxy Statement.



Item 13. Certain Relationships and Related Transactions



None.



Item 14. Principal Accounting Fees and Services



The information required by this Item with respect to the Companys principal accountant is incorporated herein by reference from the information provided under the heading Independent Registered Public
Accounting Firm of the Companys Proxy Statement.



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PART IV



Item 15. Exhibits, Financial Statement Schedules



| | (a) |  | (1)   Consolidated Financial Statements: (see Index on page F-1 of this Report)
| | --- |  | -------------------------------------------------------------------------------



| |  | Report of Independent Registered Public Accounting Firm
| | - | -------------------------------------------------------



| |  | Consolidated Statement of Earnings for fiscal years 2004, 2003, and 2002
| | - | ------------------------------------------------------------------------



| |  | Consolidated Balance Sheet at fiscal year end 2004 and 2003
| | - | -----------------------------------------------------------



| |  | Consolidated Statement of Stockholders Equity for fiscal years 2004, 2003, and 2002
| | - | ------------------------------------------------------------------------------------



| |  | Consolidated Statement of Cash Flows for fiscal years 2004, 2003, and 2002
| | - | --------------------------------------------------------------------------



| |  | Notes to the Consolidated Financial Statements
| | - | ----------------------------------------------



| | (2) |  | Consolidated Financial Statement Schedule: (see Index on page F-1 of this Report)
| | --- |  | ---------------------------------------------------------------------------------



The following Financial Statement Schedule of the Company and its subsidiaries for fiscal years 2004, 2003, and 2002 is
filed as a part of this Report and should be read in conjunction with the Companys Consolidated Financial Statements.



|         |  |                                   
|-------- |  | ----------------------------------
|Schedule |  |                                   
|II       |  | Valuation and Qualifying Accounts.



All other required
schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the Consolidated Financial Statements or the Notes thereto.



| | (3) |  | Exhibits
| | --- |  | --------



|           |  |                                                                                                                                                                            |  |                           |  |                   |  |                   |  |               
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ----------------- |  | ----------------- |  | --------------
|           |  |                                                                                                                                                                            |  | Incorporated by Reference |  |                  
|ExhibitNo. |  | Exhibit Description                                                                                                                                                        |  | Form                      |  | Date              |  | Exhibit Number(s) |  | Filed Herewith
|2.1        |  | Amended and Restated Distribution Agreement, dated as of January 14, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. |  | 10-Q                      |  | April 2, 1999     |  | 2.1               |  |               
|           |  |                                                                                                                                                                            |  |                           | 
|3.1        |  | Restated Certificate of Incorporation (as amended) of Varian, Inc.                                                                                                         |  | 10-Q                      |  | April 2, 1999     |  | 3.1, 3.2          |  |               
|           |  |                                                                                                                                                                            |  |                           | 
|3.2        |  | By-Laws of Varian, Inc.                                                                                                                                                    |  | 10-Q                      |  | April 2, 1999     |  | 3.3               |  |               
|           |  |                                                                                                                                                                            |  |                           | 
|4.1        |  | Specimen Common Stock certificate.                                                                                                                                         |  | 10/A                      |  | March 8, 1999     |  | 4.1               |  |               
|           |  |                                                                                                                                                                            |  |                           | 
|4.2        |  | Rights Agreement, dated as of February 18, 1999, between Varian, Inc. and First Chicago Trust Company of New York.                                                         |  | 10/A                      |  | March 8, 1999     |  | 4.2               |  |               
|           |  |                                                                                                                                                                            |  |                           | 
|4.3        |  | First Amendment to Rights Agreement, dated as of November 2, 2001, between Varian, Inc. and First Chicago Trust Company of New York.                                       |  | 8-A/A                     |  | November 21, 2001 |  | 2                 |  |               
|           |  |                                                                                                                                                                            |  |                           | 
|4.4        |  | Second Amendment to Rights Agreement, dated as of May 12, 2004, between Varian, Inc. and EquiServe Trust Company, N.A.                                                     |  | 10-Q                      |  | May 17, 2004      |  | 4.4               |  |               
|           |  |                                                                                                                                                                            |  |                           | 
|10.1       |  | Employee Benefits Allocation Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.         |  | 10-Q                      |  | April 2, 1999     |  | 10.1              |  |               



37



---

##### Table of Contents

|           |  |                                                                                                                                                                                                                          |  |                           |  |                   |  |                   |  |               
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- |  | ----------------- |  | ----------------- |  | --------------
|           |  |                                                                                                                                                                                                                          |  | Incorporated by Reference |  |                  
|ExhibitNo. |  | Exhibit Description                                                                                                                                                                                                      |  | Form                      |  | Date              |  | Exhibit Number(s) |  | Filed Herewith
|10.2       |  | Intellectual Property Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.                                                              |  | 10-Q                      |  | April 2, 1999     |  | 10.2              |  |               
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.3       |  | Tax Sharing Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.                                                                        |  | 10-Q                      |  | April 2, 1999     |  | 10.3              |  |               
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.4       |  | Varian, Inc. Amended and Restated Note Purchase and Private Shelf Agreement and Assumption dated as of April 2, 1999.                                                                                                    |  | 10-Q                      |  | April 2, 1999     |  | 10.6              |  |               
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.5       |  | Form of Amended and Restated Indemnity Agreement between Varian, Inc. and its Directors and Officers.                                                                                                                    |  |                           |  |                   |  |                   |  | X             
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.6*      |  | Varian, Inc. Omnibus Stock Plan.                                                                                                                                                                                         |  | 10                        |  | February 12, 1999 |  | 10.9              |  |               
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.7*      |  | First Amendment to Varian, Inc. Omnibus Stock Plan.                                                                                                                                                                      |  | 10-Q                      |  | December 28, 2001 |  | 10.19             |  |               
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.8*      |  | Varian, Inc. Amended and Restated Management Incentive Plan.                                                                                                                                                             |  | 10-Q                      |  | February 11, 2004 |  | 10.7              |  |               
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.9*      |  | Amended and Restated Varian, Inc. Supplemental Retirement Plan dated as of November 11, 2004.                                                                                                                            |  |                           |  |                   |  |                   |  | X             
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.10*     |  | Varian, Inc. Employee Stock Purchase Plan.                                                                                                                                                                               |  | 10-Q                      |  | March 31, 2000    |  | 10.1              |  |               
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.11*     |  | Form of Nonqualified Stock Option Agreement between Varian, Inc. and Executive Officers.                                                                                                                                 |  | 8-K                       |  | November 12, 2004 |  | 9.01 (c)1         |  |               
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.12*     |  | Form of Nonqualified Stock Option Agreement between Varian, Inc. and Non-Employee Directors.                                                                                                                             |  |                           |  |                   |  |                   |  | X             
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.13*     |  | Form of Restricted Stock Agreement.                                                                                                                                                                                      |  | 8-K                       |  | November 12, 2004 |  | 9.01 (c)2         |  |               
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.14*     |  | Amended and Restated Change in Control Agreement, dated as of February 7, 2003, and Amendment to Amended and Restated Change in Control Agreement, dated as of May 7, 2003, between Varian,
Inc. and G. Edward McClammy. |  | 10-Q                      |  | March 28, 2003    |  | 10.12             |  |               
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.15*     |  | Amended and Restated Change in Control Agreement, dated as of February 7, 2003, between Varian, Inc. and Sergio Piras.                                                                                                   |  | 10-Q                      |  | March 28, 2003    |  | 10.13             |  |               
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.16*     |  | Amended and Restated Change in Control Agreement, dated as of February 7, 2003, between Varian, Inc. and C. Wilson Rudd.                                                                                                 |  | 10-Q                      |  | March 28, 2003    |  | 10.14             |  |               
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.17*     |  | Amended and Restated Change in Control Agreement, dated as of February 7, 2003, between Varian, Inc. and Arthur W. Homan.                                                                                                |  | 10-Q                      |  | March 28, 2003    |  | 10.15             |  |               



38



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##### Table of Contents

|           |  |                                                                                                                              |  |                           |  |                    |  |                   |  |               
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ------------------ |  | ----------------- |  | --------------
|           |  |                                                                                                                              |  | Incorporated by Reference |  |                   
|ExhibitNo. |  | Exhibit Description                                                                                                          |  | Form                      |  | Date               |  | Exhibit Number(s) |  | Filed Herewith
|10.18*     |  | Amended and Restated Change in Control Agreement, dated as of December 31, 2003, between Varian, Inc. and Garry W. Rogerson. |  | 10-Q                      |  | February 11, 2004  |  | 10.16             |  |               
|           |  |                                                                                                                              |  |                           | 
|10.19*     |  | Amended and Restated Change in Control Agreement, dated as of February 7, 2003, between Varian, Inc. and Martin ODonoghue.  |  | 10-Q                      |  | March 28, 2003     |  | 10.19             |  |               
|           |  |                                                                                                                              |  |                           | 
|10.20*     |  | Change in Control Agreement, dated as of July 1, 2004, between Varian, Inc and Sean M. Wirtjes.                              |  | 10-Q                      |  | July 2, 2004       |  | 10.20             |  |               
|           |  |                                                                                                                              |  |                           | 
|10.21*     |  | Description of Compensatory Arrangements Between Varian, Inc. and Non-Employee Directors.                                    |  |                           |  |                    |  |                   |  | X             
|           |  |                                                                                                                              |  |                           | 
|10.22*     |  | Description of Certain Compensatory Arrangements Between Varian, Inc. and Executive Officers.                                |  | 10-K                      |  | September 28, 2001 |  | 10.17             |  |               
|           |  |                                                                                                                              |  |                           | 
|18.1       |  | Preferability letter regarding inventory accounting principle change.                                                        |  | 10-K                      |  | September 29, 2000 |  | 18.1              |  |               
|           |  |                                                                                                                              |  |                           | 
|21         |  | Subsidiaries of the Registrant.                                                                                              |  |                           |  |                    |  |                   |  | X             
|           |  |                                                                                                                              |  |                           | 
|23         |  | Consent of Independent Registered Public Accounting Firm.                                                                    |  |                           |  |                    |  |                   |  | X             
|           |  |                                                                                                                              |  |                           | 
|31.1       |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                          |  |                           |  |                    |  |                   |  | X             
|           |  |                                                                                                                              |  |                           | 
|31.2       |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                          |  |                           |  |                    |  |                   |  | X             
|           |  |                                                                                                                              |  |                           | 
|32.1       |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                          |  |                           |  |                    |  |                   |  |               
|           |  |                                                                                                                              |  |                           | 
|32.2       |  | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                          |  |                           |  |                    |  |                   |  |               

---

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



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



The Company furnished a Current Report on Form 8-K on July 28, 2004 for its press release reporting the results for the third quarter of its fiscal year
2004.



39



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##### Table of Contents

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.



|                        |  |                           |  |                                                                                
|----------------------- |  | ------------------------- |  | -------------------------------------------------------------------------------
|                        |  | VARIAN, INC. (Registrant)
|                        |  |                          
|Dated: December 9, 2004 |  | By:                       |  | /s/ G. EDWARD MCCLAMMY                                                         
|                        |  |                           |  | G. Edward McClammy Senior Vice President, Chief Financial Officer and Treasurer



Pursuant to the
requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|                                                 |  |                                                                                            |  |                 
|------------------------------------------------ |  | ------------------------------------------------------------------------------------------ |  | ----------------
|Signature                                        |  | Title                                                                                      |  | Date            
|                                                 |  |                                                                                           
|/s/ GARRY W. ROGERSONGarry W. Rogerson           |  | President and Chief Executive Officer (Principal Executive Officer)                        |  | December 9, 2004
|                                                 |  |                                                                                           
|/s/ G. EDWARD MCCLAMMYG. Edward McClammy         |  | Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) |  | December 9, 2004
|                                                 |  |                                                                                           
|/s/ SEAN M. WIRTJESSean M. Wirtjes               |  | Controller (Principal Accounting Officer)                                                  |  | December 9, 2004
|                                                 |  |                                                                                           
|/s/ ALLEN J. LAUERAllen J. Lauer                 |  | Chairman of the Board                                                                      |  | December 9, 2004
|                                                 |  |                                                                                           
|/s/ RICHARD U. DE SCHUTTERRichard U. De Schutter |  | Director                                                                                   |  | December 9, 2004
|                                                 |  |                                                                                           
|/s/ CONRAD W. HEWITTConrad W. Hewitt             |  | Director                                                                                   |  | December 9, 2004
|                                                 |  |                                                                                           
|/s/ JOHN G. MCDONALDJohn G. McDonald             |  | Director                                                                                   |  | December 9, 2004
|                                                 |  |                                                                                           
|/s/ WAYNE R. MOONWayne R. Moon                   |  | Director                                                                                   |  | December 9, 2004
|                                                 |  |                                                                                           
|/s/ ELIZABETH E. TALLETTElizabeth E. Tallett     |  | Director                                                                                   |  | December 9, 2004



40



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##### Table of Contents

EXHIBIT INDEX



|           |  |                                                                                                                                                                            |  |                           |  |                   |  |                  |  |              
|---------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ----------------- |  | ---------------- |  | -------------
|           |  |                                                                                                                                                                            |  | Incorporated by Reference |  |                  
|ExhibitNo. |  | Exhibit Description                                                                                                                                                        |  | Form                      |  | Date              |  | ExhibitNumber(s) |  | FiledHerewith
|2.1        |  | Amended and Restated Distribution Agreement, dated as of January 14, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. |  | 10-Q                      |  | April 2, 1999     |  | 2.1              |  |              
|           |  |                                                                                                                                                                            |  |                           | 
|3.1        |  | Restated Certificate of Incorporation (as amended) of Varian, Inc.                                                                                                         |  | 10-Q                      |  | April 2, 1999     |  | 3.1, 3.2         |  |              
|           |  |                                                                                                                                                                            |  |                           | 
|3.2        |  | By-Laws of Varian, Inc.                                                                                                                                                    |  | 10-Q                      |  | April 2, 1999     |  | 3.3              |  |              
|           |  |                                                                                                                                                                            |  |                           | 
|4.1        |  | Specimen Common Stock certificate.                                                                                                                                         |  | 10/A                      |  | March 8, 1999     |  | 4.1              |  |              
|           |  |                                                                                                                                                                            |  |                           | 
|4.2        |  | Rights Agreement, dated as of February 18, 1999, between Varian, Inc. and First Chicago Trust Company of New York.                                                         |  | 10/A                      |  | March 8, 1999     |  | 4.2              |  |              
|           |  |                                                                                                                                                                            |  |                           | 
|4.3        |  | First Amendment to Rights Agreement, dated as of November 2, 2001, between Varian, Inc. and First Chicago Trust Company of New York.                                       |  | 8-A/A                     |  | November 21, 2001 |  | 2                |  |              
|           |  |                                                                                                                                                                            |  |                           | 
|4.4        |  | Second Amendment to Rights Agreement, dated as of May 12, 2004, between Varian, Inc. and EquiServe Trust Company, N.A.                                                     |  | 10-Q                      |  | May 17, 2004      |  | 4.4              |  |              
|           |  |                                                                                                                                                                            |  |                           | 
|10.1       |  | Employee Benefits Allocation Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.         |  | 10-Q                      |  | April 2, 1999     |  | 10.1             |  |              
|           |  |                                                                                                                                                                            |  |                           | 
|10.2       |  | Intellectual Property Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.                |  | 10-Q                      |  | April 2, 1999     |  | 10.2             |  |              
|           |  |                                                                                                                                                                            |  |                           | 
|10.3       |  | Tax Sharing Agreement, dated as of April 2, 1999, among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.                          |  | 10-Q                      |  | April 2, 1999     |  | 10.3             |  |              
|           |  |                                                                                                                                                                            |  |                           | 
|10.4       |  | Varian, Inc. Amended and Restated Note Purchase and Private Shelf Agreement and Assumption dated as of April 2, 1999.                                                      |  | 10-Q                      |  | April 2, 1999     |  | 10.6             |  |              
|           |  |                                                                                                                                                                            |  |                           | 
|10.5       |  | Form of Amended and Restated Indemnity Agreement between Varian, Inc. and its Directors and Officers.                                                                      |  |                           |  |                   |  |                  |  | X            
|           |  |                                                                                                                                                                            |  |                           | 
|10.6*      |  | Varian, Inc. Omnibus Stock Plan.                                                                                                                                           |  | 10                        |  | February 12, 1999 |  | 10.9             |  |              
|           |  |                                                                                                                                                                            |  |                           | 
|10.7*      |  | First Amendment to Varian, Inc. Omnibus Stock Plan.                                                                                                                        |  | 10-Q                      |  | December 28, 2001 |  | 10.19            |  |              
|           |  |                                                                                                                                                                            |  |                           | 
|10.8*      |  | Varian, Inc. Amended and Restated Management Incentive Plan.                                                                                                               |  | 10-Q                      |  | February 11, 2004 |  | 10.7             |  |              
|           |  |                                                                                                                                                                            |  |                           | 
|10.9*      |  | Amended and Restated Varian, Inc. Supplemental Retirement Plan dated as of November 11, 2004.                                                                              |  |                           |  |                   |  |                  |  | X            
|           |  |                                                                                                                                                                            |  |                           | 
|10.10*     |  | Varian, Inc. Employee Stock Purchase Plan.                                                                                                                                 |  | 10-Q                      |  | March 31, 2000    |  | 10.1             |  |              
|           |  |                                                                                                                                                                            |  |                           | 
|10.11*     |  | Form of Nonqualified Stock Option Agreement between Varian, Inc. and Executive Officers.                                                                                   |  | 8-K                       |  | November 12, 2004 |  | 9.01 (c)1        |  |              
|           |  |                                                                                                                                                                            |  |                           | 
|10.12*     |  | Form of Nonqualified Stock Option Agreement between Varian, Inc. and Non-Employee Directors.                                                                               |  |                           |  |                   |  |                  |  | X            



41



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##### Table of Contents

|           |  |                                                                                                                                                                                                                          |  |                           |  |                    |  |                  |  |              
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- |  | ------------------ |  | ---------------- |  | -------------
|           |  |                                                                                                                                                                                                                          |  | Incorporated by Reference |  |                   
|ExhibitNo. |  | Exhibit Description                                                                                                                                                                                                      |  | Form                      |  | Date               |  | ExhibitNumber(s) |  | FiledHerewith
|10.13*     |  | Form of Restricted Stock Agreement.                                                                                                                                                                                      |  | 8-K                       |  | November 12, 2004  |  | 9.01 (c)2        |  |              
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.14*     |  | Amended and Restated Change in Control Agreement, dated as of February 7, 2003, and Amendment to Amended and Restated Change in Control Agreement, dated as of May 7, 2003, between Varian,
Inc. and G. Edward McClammy. |  | 10-Q                      |  | March 28, 2003     |  | 10.12            |  |              
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.15*     |  | Amended and Restated Change in Control Agreement, dated as of February 7, 2003, between Varian, Inc. and Sergio Piras.                                                                                                   |  | 10-Q                      |  | March 28, 2003     |  | 10.13            |  |              
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.16*     |  | Amended and Restated Change in Control Agreement, dated as of February 7, 2003, between Varian, Inc. and C. Wilson Rudd.                                                                                                 |  | 10-Q                      |  | March 28, 2003     |  | 10.14            |  |              
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.17*     |  | Amended and Restated Change in Control Agreement, dated as of February 7, 2003, between Varian, Inc. and Arthur W. Homan.                                                                                                |  | 10-Q                      |  | March 28, 2003     |  | 10.15            |  |              
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.18*     |  | Amended and Restated Change in Control Agreement, dated as of December 31, 2003, between Varian, Inc. and Garry W. Rogerson.                                                                                             |  | 10-Q                      |  | February 11, 2004  |  | 10.16            |  |              
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.19*     |  | Amended and Restated Change in Control Agreement, dated as of February 7, 2003, between Varian, Inc. and Martin ODonoghue.                                                                                              |  | 10-Q                      |  | March 28, 2003     |  | 10.19            |  |              
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.20*     |  | Change in Control Agreement, dated as of July 1, 2004, between Varian, Inc and Sean M. Wirtjes.                                                                                                                          |  | 10-Q                      |  | July 2, 2004       |  | 10.20            |  |              
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.21*     |  | Description of Compensatory Arrangements Between Varian, Inc. and Non-Employee Directors.                                                                                                                                |  |                           |  |                    |  |                  |  | X            
|           |  |                                                                                                                                                                                                                          |  |                           | 
|10.22*     |  | Description of Certain Compensatory Arrangements Between Varian, Inc. and Executive Officers.                                                                                                                            |  | 10-K                      |  | September 28, 2001 |  | 10.17            |  |              
|           |  |                                                                                                                                                                                                                          |  |                           | 
|18.1       |  | Preferability letter regarding inventory accounting principle change.                                                                                                                                                    |  | 10-K                      |  | September 29, 2000 |  | 18.1             |  |              
|           |  |                                                                                                                                                                                                                          |  |                           | 
|21         |  | Subsidiaries of the Registrant.                                                                                                                                                                                          |  |                           |  |                    |  |                  |  | X            
|           |  |                                                                                                                                                                                                                          |  |                           | 
|23         |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                |  |                           |  |                    |  |                  |  | X            
|           |  |                                                                                                                                                                                                                          |  |                           | 
|31.1       |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                      |  |                           |  |                    |  |                  |  | X            
|           |  |                                                                                                                                                                                                                          |  |                           | 
|31.2       |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                      |  |                           |  |                    |  |                  |  | X            
|           |  |                                                                                                                                                                                                                          |  |                           | 
|32.1       |  | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                      |  |                           |  |                    |  |                  |  |              
|           |  |                                                                                                                                                                                                                          |  |                           | 
|32.2       |  | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                      |  |                           |  |                    |  |                  |  |              

---

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



42



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



ANNUAL REPORT ON FORM 10-K



INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE



The
following Consolidated Financial Statements of the Registrant and its subsidiaries are required to be included in Item 8:



|                                                                                     |  |     
|------------------------------------------------------------------------------------ |  | ----
|                                                                                     |  | Page
|Report of Independent Registered Public Accounting Firm                              |  | F-2 
|                                                                                     | 
|Consolidated Statement of Earnings for fiscal years 2004, 2003, and 2002             |  | F-3 
|                                                                                     | 
|Consolidated Balance Sheet at fiscal year end 2004 and 2003                          |  | F-4 
|                                                                                     | 
|Consolidated Statement of Stockholders Equity for fiscal years 2004, 2003, and 2002 |  | F-5 
|                                                                                     | 
|Consolidated Statement of Cash Flows for fiscal years 2004, 2003, and 2002           |  | F-6 
|                                                                                     | 
|Notes to the Consolidated Financial Statements                                       |  | F-7 



The following
Consolidated Financial Statement Schedule of the Registrant and its subsidiaries for fiscal years 2004, 2003, and 2002 is filed as a part of this Report as required to be included in Item 15(a) and should be read in conjunction with the Consolidated
Financial Statements of the Registrant and its subsidiaries:



|         |  |                                   |  |     
|-------- |  | --------------------------------- |  | ----
|Schedule |  |                                   |  | Page
|II       |  | Valuation and Qualifying Accounts |  | F-33



All other required
schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the Consolidated Financial Statements or the Notes thereto.



F-1



---

##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and
Stockholders of Varian, Inc.:



In our opinion, the
consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Varian, Inc. and its subsidiaries at October 1, 2004 and October 3, 2003, and the results of their operations and
their cash flows for each of the three years in the period ended October 1, 2004 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.



|                              
|------------------------------
|/s/ PRICEWATERHOUSECOOPERS LLP
|PricewaterhouseCoopers LLP    



San
Jose, California

December 8, 2004



F-2



---

##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



CONSOLIDATED STATEMENT OF EARNINGS

(In thousands, except per share amounts)



|                                              |  |                   |         |   |             |   |         |               |  |   |         |  
|--------------------------------------------- |  | ----------------- | ------- | - | ----------- | - | ------- | ------------- |  | - | ------- | -
|                                              |  | Fiscal Year Ended |        
|                                              |  | Oct. 1,2004       |         |   | Oct. 3,2003 |   |         | Sept. 27,2002 | 
|Sales                                         |  | $                 | 915,963 |   |             | $ | 847,739 |               |  | $ | 779,893 |  
|Cost of sales                                 |  |                   | 568,746 |   |             |   | 525,893 |               |  |   | 484,200 |  
|                                              |  |                   |         |   |             |   |         |               |  |   |         |  
|Gross profit                                  |  |                   | 347,217 |   |             |   | 321,846 |               |  |   | 295,693 |  
|                                              |  |                   |         |   |             |   |         |               |  |   |         |  
|Operating expenses                            |  |                   |         |   |             |   |         |               |  |   |         |  
|Sales and marketing                           |  |                   | 157,323 |   |             |   | 144,089 |               |  |   | 132,304 |  
|Research and development                      |  |                   | 48,731  |   |             |   | 45,653  |               |  |   | 39,918  |  
|General and administrative                    |  |                   | 50,139  |   |             |   | 55,499  |               |  |   | 39,509  |  
|Purchased in-process research and development |  |                   | 101     |   |             |   |        |               |  |   | 890     |  
|                                              |  |                   |         |   |             |   |         |               |  |   |         |  
|Total operating expenses                      |  |                   | 256,294 |   |             |   | 245,241 |               |  |   | 212,621 |  
|                                              |  |                   |         |   |             |   |         |               |  |   |         |  
|Operating earnings                            |  |                   | 90,923  |   |             |   | 76,605  |               |  |   | 83,072  |  
|Interest income (expense)                     |  |                   |         |   |             |   |         |               |  |   |         |  
|Interest income                               |  |                   | 3,055   |   |             |   | 1,495   |               |  |   | 992     |  
|Interest expense                              |  |                   | (2,393  | ) |             |   | (2,490  | )             |  |   | (2,897  | )
|                                              |  |                   |         |   |             |   |         |               |  |   |         |  
|Total interest income (expense), net          |  |                   | 662     |   |             |   | (995    | )             |  |   | (1,905  | )
|                                              |  |                   |         |   |             |   |         |               |  |   |         |  
|Earnings before income taxes                  |  |                   | 91,585  |   |             |   | 75,610  |               |  |   | 81,167  |  
|Income tax expense                            |  |                   | 32,055  |   |             |   | 26,463  |               |  |   | 29,540  |  
|                                              |  |                   |         |   |             |   |         |               |  |   |         |  
|Net earnings                                  |  | $                 | 59,530  |   |             | $ | 49,147  |               |  | $ | 51,627  |  
|                                              |  |                   |         |   |             |   |         |               |  |   |         |  
|Net earnings per share:                       |  |                   |         |   |             |   |         |               |  |   |         |  
|Basic                                         |  | $                 | 1.72    |   |             | $ | 1.45    |               |  | $ | 1.54    |  
|                                              |  |                   |         |   |             |   |         |               |  |   |         |  
|Diluted                                       |  | $                 | 1.66    |   |             | $ | 1.40    |               |  | $ | 1.48    |  
|                                              |  |                   |         |   |             |   |         |               |  |   |         |  
|Shares used in per share calculations:        |  |                   |         |   |             |   |         |               |  |   |         |  
|Basic                                         |  |                   | 34,640  |   |             |   | 33,929  |               |  |   | 33,578  |  
|                                              |  |                   |         |   |             |   |         |               |  |   |         |  
|Diluted                                       |  |                   | 35,773  |   |             |   | 35,057  |               |  |   | 34,928  |  
|                                              |  |                   |         |   |             |   |         |               |  |   |         |  



See accompanying Notes
to the Consolidated Financial Statements.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



CONSOLIDATED BALANCE SHEET

(In thousands, except par value amounts)



|                                                                                                                                                       |  |                 |         |             |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------- | ------- | ----------- | - | -------
|                                                                                                                                                       |  | Fiscal Year End
|                                                                                                                                                       |  | Oct. 1,2004     |         | Oct. 3,2003
|ASSETS                                                                                                                                                 |  |                 |         |             |   |        
|                                                                                                                                                       |  |                
|Current assets                                                                                                                                         |  |                 |         |             |   |        
|Cash and cash equivalents                                                                                                                              |  | $               | 184,982 |             | $ | 135,791
|Accounts receivable, net                                                                                                                               |  |                 | 182,843 |             |   | 165,049
|Inventories                                                                                                                                            |  |                 | 135,344 |             |   | 125,649
|Deferred taxes                                                                                                                                         |  |                 | 30,008  |             |   | 26,464 
|Other current assets                                                                                                                                   |  |                 | 18,986  |             |   | 17,788 
|                                                                                                                                                       |  |                 |         |             |   |        
|Total current assets                                                                                                                                   |  |                 | 552,163 |             |   | 470,741
|Property, plant, and equipment, net                                                                                                                    |  |                 | 120,239 |             |   | 120,088
|Goodwill                                                                                                                                               |  |                 | 131,441 |             |   | 126,411
|Intangible assets, net                                                                                                                                 |  |                 | 21,279  |             |   | 16,762 
|Other assets                                                                                                                                           |  |                 | 5,543   |             |   | 3,050  
|                                                                                                                                                       |  |                 |         |             |   |        
|Total assets                                                                                                                                           |  | $               | 830,665 |             | $ | 737,052
|                                                                                                                                                       |  |                 |         |             |   |        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                   |  |                 |         |             |   |        
|                                                                                                                                                       |  |                
|Current liabilities                                                                                                                                    |  |                 |         |             |   |        
|Current portion of long-term debt                                                                                                                      |  | $               | 6,673   |             | $ | 2,811  
|Accounts payable                                                                                                                                       |  |                 | 70,667  |             |   | 61,209 
|Deferred profit                                                                                                                                        |  |                 | 11,306  |             |   | 14,385 
|Accrued liabilities                                                                                                                                    |  |                 | 160,710 |             |   | 141,938
|                                                                                                                                                       |  |                 |         |             |   |        
|Total current liabilities                                                                                                                              |  |                 | 249,356 |             |   | 220,343
|Long-term debt                                                                                                                                         |  |                 | 30,000  |             |   | 36,273 
|Deferred taxes                                                                                                                                         |  |                 | 9,411   |             |   | 12,454 
|Other liabilities                                                                                                                                      |  |                 | 14,687  |             |   | 10,413 
|                                                                                                                                                       |  |                 |         |             |   |        
|Total liabilities                                                                                                                                      |  |                 | 303,454 |             |   | 279,483
|                                                                                                                                                       |  |                 |         |             |   |        
|Commitments and contingencies (Notes 6, 8, 9, 12, and 17)                                                                                              |  |                 |         |             |   |        
|                                                                                                                                                       |  |                
|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  34,838 shares at October 1, 2004 and 34,181
shares at October 3, 2003 |  |                 | 257,083 |             |   | 252,630
|Retained earnings                                                                                                                                      |  |                 | 253,096 |             |   | 193,566
|Accumulated other comprehensive income                                                                                                                 |  |                 | 17,032  |             |   | 11,373 
|                                                                                                                                                       |  |                 |         |             |   |        
|Total stockholders equity                                                                                                                             |  |                 | 527,211 |             |   | 457,569
|                                                                                                                                                       |  |                 |         |             |   |        
|Total liabilities and stockholders equity                                                                                                             |  | $               | 830,665 |             | $ | 737,052
|                                                                                                                                                       |  |                 |         |             |   |        



See accompanying Notes
to the Consolidated Financial Statements.



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY

(In thousands)



|                                                |  |              |   |  |                   |         |                       |  |   |                                             |  |   |         |   |  |   |         |   |  |   |         |  
|----------------------------------------------- |  | ------------ | - |  | ----------------- | ------- | --------------------- |  | - | ------------------------------------------- |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                |  | Common Stock |   |  | Retained Earnings |         | TreasuryStock at Cost |  |   | AccumulatedOtherComprehensive Income (Loss) |  |   | Total   |  
|                                                |  | Shares       |   |  | Amount            |         |                       |  |   |                                            
|Balance, fiscal year end 2001                   |  | 33,224       |   |  | $                 | 236,660 |                       |  | $ | 92,792                                      |  | $ |        |   |  | $ | (24,181 | ) |  | $ | 305,271 |  
|Issuance of common stock                        |  | 777          |   |  |                   | 10,739  |                       |  |   |                                            |  |   |        |   |  |   |        |   |  |   | 10,739  |  
|Tax benefits from stock option exercises        |  |             |   |  |                   | 6,086   |                       |  |   |                                            |  |   |        |   |  |   |        |   |  |   | 6,086   |  
|Repurchase of common stock                      |  |             |   |  |                   |        |                       |  |   |                                            |  |   | (1,581  | ) |  |   |        |   |  |   | (1,581  | )
|Retirement of treasury stock                    |  | (50          | ) |  |                   | (1,581  | )                     |  |   |                                            |  |   | 1,581   |   |  |   |        |   |  |   |        |  
|Currency translation adjustment                 |  |             |   |  |                   |        |                       |  |   |                                            |  |   |        |   |  |   | 7,810   |   |  |   | 7,810   |  
|Cash flow hedge fair value adjustments          |  |             |   |  |                   |        |                       |  |   |                                            |  |   |        |   |  |   | (231    | ) |  |   | (231    | )
|Net earnings                                    |  |             |   |  |                   |        |                       |  |   | 51,627                                      |  |   |        |   |  |   |        |   |  |   | 51,627  |  
|                                                |  |              |   |  |                   |         |                       |  |   |                                             |  |   |         |   |  |   |         |   |  |   |         |  
|Balance, fiscal year end 2002                   |  | 33,951       |   |  |                   | 251,904 |                       |  |   | 144,419                                     |  |   |        |   |  |   | (16,602 | ) |  |   | 379,721 |  
|Issuance of common stock                        |  | 583          |   |  |                   | 9,184   |                       |  |   |                                            |  |   |        |   |  |   |        |   |  |   | 9,184   |  
|Tax benefits from stock option exercises        |  |             |   |  |                   | 1,910   |                       |  |   |                                            |  |   |        |   |  |   |        |   |  |   | 1,910   |  
|Repurchase of common stock                      |  |             |   |  |                   |        |                       |  |   |                                            |  |   | (10,368 | ) |  |   |        |   |  |   | (10,368 | )
|Retirement of treasury stock                    |  | (353         | ) |  |                   | (10,368 | )                     |  |   |                                            |  |   | 10,368  |   |  |   |        |   |  |   |        |  
|Currency translation adjustment                 |  |             |   |  |                   |        |                       |  |   |                                            |  |   |        |   |  |   | 27,744  |   |  |   | 27,744  |  
|Cash flow hedge fair value adjustments          |  |             |   |  |                   |        |                       |  |   |                                            |  |   |        |   |  |   | 231     |   |  |   | 231     |  
|Net earnings                                    |  |             |   |  |                   |        |                       |  |   | 49,147                                      |  |   |        |   |  |   |        |   |  |   | 49,147  |  
|                                                |  |              |   |  |                   |         |                       |  |   |                                             |  |   |         |   |  |   |         |   |  |   |         |  
|Balance, fiscal year end 2003                   |  | 34,181       |   |  |                   | 252,630 |                       |  |   | 193,566                                     |  |   |        |   |  |   | 11,373  |   |  |   | 457,569 |  
|Issuance of common stock                        |  | 1,446        |   |  |                   | 22,855  |                       |  |   |                                            |  |   |        |   |  |   |        |   |  |   | 22,855  |  
|Tax benefits from stock option exercises        |  |             |   |  |                   | 13,266  |                       |  |   |                                            |  |   |        |   |  |   |        |   |  |   | 13,266  |  
|Repurchase of common stock                      |  |             |   |  |                   |        |                       |  |   |                                            |  |   | (31,668 | ) |  |   |        |   |  |   | (31,668 | )
|Retirement of treasury stock                    |  | (789         | ) |  |                   | (31,668 | )                     |  |   |                                            |  |   | 31,668  |   |  |   |        |   |  |   |        |  
|Currency translation adjustment                 |  |             |   |  |                   |        |                       |  |   |                                            |  |   |        |   |  |   | 9,297   |   |  |   | 9,297   |  
|Minimum pension liability, net of tax of $1,559 |  |             |   |  |                   |        |                       |  |   |                                            |  |   |        |   |  |   | (3,638  | ) |  |   | (3,638  | )
|Net earnings                                    |  |             |   |  |                   |        |                       |  |   | 59,530                                      |  |   |        |   |  |   |        |   |  |   | 59,530  |  
|                                                |  |              |   |  |                   |         |                       |  |   |                                             |  |   |         |   |  |   |         |   |  |   |         |  
|Balance, fiscal year end 2004                   |  | 34,838       |   |  | $                 | 257,083 |                       |  | $ | 253,096                                     |  | $ |        |   |  | $ | 17,032  |   |  | $ | 527,211 |  
|                                                |  |              |   |  |                   |         |                       |  |   |                                             |  |   |         |   |  |   |         |   |  |   |         |  





See accompanying Notes to the Consolidated Financial Statements.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)



|                                                                                   |  |              |         |   |              |   |         |                |  |   |         |  
|---------------------------------------------------------------------------------- |  | ------------ | ------- | - | ------------ | - | ------- | -------------- |  | - | ------- | -
|                                                                                   |  | Fiscal Year  |        
|                                                                                   |  | Oct. 1, 2004 |         |   | Oct. 3, 2003 |   |         | Sept. 27, 2002 | 
|Cash flows from operating activities                                               |  |              |         |   |              |   |         |                |  |   |         |  
|Net earnings                                                                       |  | $            | 59,530  |   |              | $ | 49,147  |                |  | $ | 51,627  |  
|Adjustments to reconcile net earnings to net cash provided by operating activities |  |              |         |   |              |   |         |                |  |   |         |  
|Depreciation and amortization                                                      |  |              | 25,481  |   |              |   | 24,082  |                |  |   | 21,331  |  
|(Gain) loss on disposition of property, plant, and equipment                       |  |              | (163    | ) |              |   | (93     | )              |  |   | 307     |  
|Purchased in-process research and development                                      |  |              | 101     |   |              |   |        |                |  |   | 890     |  
|Tax benefit from stock option exercises                                            |  |              | 13,266  |   |              |   | 1,910   |                |  |   | 6,086   |  
|Deferred taxes                                                                     |  |              | (12,573 | ) |              |   | 8,735   |                |  |   | (1,554  | )
|Changes in assets and liabilities, excluding effects of acquisitions               |  |              |         |   |              |   |         |                |  |   |         |  
|Accounts receivable, net                                                           |  |              | (9,271  | ) |              |   | 17,628  |                |  |   | (2,783  | )
|Inventories                                                                        |  |              | (5,800  | ) |              |   | 1,332   |                |  |   | 8,190   |  
|Other current assets                                                               |  |              | 643     |   |              |   | 6,595   |                |  |   | (2,594  | )
|Other assets                                                                       |  |              | (589    | ) |              |   | 677     |                |  |   | 1,517   |  
|Accounts payable                                                                   |  |              | 6,287   |   |              |   | 5,351   |                |  |   | 869     |  
|Deferred profit                                                                    |  |              | (3,130  | ) |              |   | (6,715  | )              |  |   | (752    | )
|Accrued liabilities                                                                |  |              | 19,066  |   |              |   | 12,630  |                |  |   | (2,540  | )
|Other liabilities                                                                  |  |              | 72      |   |              |   | 318     |                |  |   | (25     | )
|                                                                                   |  |              |         |   |              |   |         |                |  |   |         |  
|Net cash provided by operating activities                                          |  |              | 92,920  |   |              |   | 121,597 |                |  |   | 80,569  |  
|                                                                                   |  |              |         |   |              |   |         |                |  |   |         |  
|Cash flows from investing activities                                               |  |              |         |   |              |   |         |                |  |   |         |  
|Proceeds from sale of property, plant, and equipment                               |  |              | 2,551   |   |              |   | 588     |                |  |   | 463     |  
|Purchase of property, plant, and equipment                                         |  |              | (22,968 | ) |              |   | (26,656 | )              |  |   | (21,598 | )
|Purchase of businesses, net of cash acquired                                       |  |              | (12,968 | ) |              |   | (25,013 | )              |  |   | (55,438 | )
|Private company equity investments                                                 |  |              | (1,318  | ) |              |   |        |                |  |   |        |  
|                                                                                   |  |              |         |   |              |   |         |                |  |   |         |  
|Net cash used in investing activities                                              |  |              | (34,703 | ) |              |   | (51,081 | )              |  |   | (76,573 | )
|                                                                                   |  |              |         |   |              |   |         |                |  |   |         |  
|Cash flows from financing activities                                               |  |              |         |   |              |   |         |                |  |   |         |  
|Repayment of debt                                                                  |  |              | (4,602  | ) |              |   | (5,905  | )              |  |   | (6,765  | )
|Issuance of debt                                                                   |  |              | 2,037   |   |              |   | 3,198   |                |  |   | 746     |  
|Repurchase of common stock                                                         |  |              | (31,668 | ) |              |   | (10,368 | )              |  |   | (1,581  | )
|Issuance of common stock                                                           |  |              | 22,855  |   |              |   | 9,184   |                |  |   | 10,739  |  
|Transfers to Varian Medical Systems, Inc.                                          |  |              | (1,110  | ) |              |   | (901    | )              |  |   | (2,882  | )
|                                                                                   |  |              |         |   |              |   |         |                |  |   |         |  
|Net cash (used in) provided by financing activities                                |  |              | (12,488 | ) |              |   | (4,792  | )              |  |   | 257     |  
|                                                                                   |  |              |         |   |              |   |         |                |  |   |         |  
|Effects of exchange rate changes on cash and cash equivalents                      |  |              | 3,462   |   |              |   | 4,922   |                |  |   | 1,013   |  
|                                                                                   |  |              |         |   |              |   |         |                |  |   |         |  
|Net increase in cash and cash equivalents                                          |  |              | 49,191  |   |              |   | 70,646  |                |  |   | 5,266   |  
|Cash and cash equivalents at beginning of period                                   |  |              | 135,791 |   |              |   | 65,145  |                |  |   | 59,879  |  
|                                                                                   |  |              |         |   |              |   |         |                |  |   |         |  
|Cash and cash equivalents at end of period                                         |  | $            | 184,982 |   |              | $ | 135,791 |                |  | $ | 65,145  |  
|                                                                                   |  |              |         |   |              |   |         |                |  |   |         |  
|Supplemental cash flow information                                                 |  |              |         |   |              |   |         |                |  |   |         |  
|Income taxes paid, net of refunds received                                         |  | $            | 16,029  |   |              | $ | 14,717  |                |  | $ | 27,915  |  
|                                                                                   |  |              |         |   |              |   |         |                |  |   |         |  
|Interest paid                                                                      |  | $            | 2,330   |   |              | $ | 2,485   |                |  | $ | 2,857   |  
|                                                                                   |  |              |         |   |              |   |         |                |  |   |         |  



See accompanying Notes
to the Consolidated Financial Statements.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



Note 1.
Description of Business and Basis of Presentation



Varian,
Inc., together with its subsidiaries (collectively, the Company), is a major supplier of scientific instruments and consumable products, vacuum products and services, and electronics manufacturing services. These businesses primarily
serve life science, industrial, academic, and research customers.



Until April 2, 1999, the business of the Company was operated as the Instruments business of Varian Associates, Inc. (VAI). The Instruments business included the business units that designed, developed, manufactured, sold, and
serviced scientific instruments and vacuum technologies, and a business unit that provided contract electronics manufacturing services. 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 common stock outstanding on April 2, 1999 (the
Distribution). VAI retained its Health Care Systems business and changed its name to Varian Medical Systems, Inc. (VMS). These transactions were accomplished under the terms of an Amended and Restated Distribution Agreement
dated as of January 14, 1999 by and among the Company, VAI, and VSEA (the Distribution Agreement). For purposes of providing an orderly transition and to define certain ongoing relationships between and among the Company, VMS, and VSEA
after the Distribution, the Company, VMS, and VSEA also entered into certain other agreements which include an Employee Benefits Allocation Agreement, an Intellectual Property Agreement, and a Tax Sharing Agreement. Transfers made to VMS pursuant to
these agreements are reflected as financing activities in the Consolidated Statement of Cash Flows.



Note 2. Summary of Significant Accounting Policies



Fiscal Year.    The Companys fiscal years reported are the 52- or 53-week periods that ended on the Friday nearest September 30. Fiscal year 2004 comprised the 52-week period ended
October 1, 2004. Fiscal year 2003 comprised the 53-week period ended on October 3, 2003. Fiscal year 2002 comprised the 52-week period ended on September 27, 2002.



Principles of Consolidation.    The Consolidated Financial Statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.



Use of Estimates.    The preparation of the Consolidated Financial Statements in conformity with accounting principles
generally accepted in the United State of America 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. Significant estimates in these Consolidated Financial Statements include allowances for doubtful accounts receivable, inventory valuation reserves, product
warranty reserves, and environmental liabilities. Actual results could differ from these estimates.



Revenue Recognition.    The Company accounts for its revenue recognition in accordance with the provisions of Securities and
Exchange Commission (the SEC) Staff Accounting Bulletin No. (SAB) 104, Revenue Recognition. The Companys revenues are derived from three primary sourcesproduct sales, accessory sales, and service. For
product sales and accessory sales, revenue is recognized when persuasive evidence of an arrangement exists, the contract price is fixed or determinable, the product or accessory has been delivered, title and risk of loss have passed to the customer,
and collection of the resulting receivable is reasonably assured. Product sales that do not involve unique customer acceptance terms or new specifications or technology with customer acceptance provisions, but that do involve installation services,
are accounted for as multiple-element arrangements, where the larger of the contractual billing hold back or the fair value of the installation service is deferred when the product is delivered and subsequently recognized when the installation is
complete. For certain other product sales



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VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



that do involve unique customer acceptance terms or new specifications or technology with customer acceptance provisions, all revenue is deferred until all
contractually required customer acceptance provisions and product specifications have been satisfied. In all cases, the fair value of undelivered elements, such as accessories or services purchased by customers in connection with a product sale, is
deferred until the related items are delivered to the customer. Revenue related to service contracts is recognized ratably over the term of the contracts. Unearned maintenance and service contract revenue is included in accrued liabilities on the
accompanying Consolidated Balance Sheet. Revenue related to incident-based paid service and training services is recognized when the related services are provided to the customer. Service revenues were less than 10% of revenues in all periods
presented.



Deferred profit on the accompanying Consolidated
Balance Sheet is comprised of the profit (revenue less related cost of sales) on certain transactions that has been deferred under the Companys revenue recognition policy. Deferred profit relates to transactions in the Companys
Scientific Instruments segment that typically fit one of the following descriptions:



| |  |  | A product has been delivered to a customer but revenue cannot yet be recognized, typically due to non-standard specifications or acceptance requirements that have not yet been
demonstrated. In these cases, the revenue and related cost of sale that would ordinarily be recorded in the income statement at the time of delivery are instead recorded to deferred profit. This accounting is reversed and the revenue and related
cost of sales are recorded in the income statement once the non-standard specifications or acceptance requirements have been demonstrated and all other revenue recognition criteria have been met.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A product has been delivered and 100% of the contract value is billable per the terms of the arrangement but post-delivery obligations (e.g., installation) remain. In these cases,
revenue equal to the fair value of the post-delivery obligations is deferred and included in deferred profit when the product is delivered. Once the post-delivery obligations have been met, the deferred revenue is reversed out of deferred profit and
recorded as revenue in the income statement. Since installation costs are typically not significant relative to total product costs and the time to complete an installation is usually very short, we rarely need to defer installation costs associated
with deferred installation revenue.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In certain
other cases, products are delivered but post-delivery obligations (e.g., installation) remain, and a portion of the contract value is not billable until such obligations have been met (the holdback). In these cases, recognition of
revenue equal to the greater of the holdback or the fair value of the undelivered service element is deferred. However, since holdbacks are not billable until the related undelivered element (typically installation) has been delivered, no invoice is
issued and no receivable is recorded for the holdback amount and the related revenue is not recorded. Accordingly, deferred revenue relating to holdbacks is not recorded and does not otherwise impact the accompanying Consolidated Balance Sheet.



The Company sells products and accessories predominantly
through its direct sales force. As a result, the use of distributors is generally limited to geographic regions where the Companys direct sales force is less developed. The Company does not normally offer product return or exchange rights
(other than those relating to non-conforming or defective goods under warranty) or price protection allowances to its customers, including its distributors. Payment terms granted to distributors are similar to those granted to other customers and
payments are not dependent upon the distributors receipt of payment from their end-user customers.



The Companys products are generally subject to warranties and the Company provides for the estimated future costs of repair or replacement in cost
of sales at the time the related sale is recognized.



Foreign Currency Translation.    The Company uses the local currency as the functional currency in each country in which it operates. The functional currencies of the Companys operations are primarily the
U.S. dollar and, to a lesser extent, the Euro, Australian dollar, Japanese yen, and various other currencies.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at exchange rates at the end of the fiscal year and income and expense items
are translated at rates of exchange prevailing during the year. Translation gains and losses are included in the cumulative translation adjustment component of accumulated other comprehensive income (loss). Gains (losses) arising from transactions
denominated in currencies other than a subsidiarys functional currency are reflected in general and administrative expenses, and amounted to approximately $0.3 million during fiscal year 2004, $(0.8) million during fiscal year 2003, and $0.2
million during fiscal year 2002.



Concentration of Credit
Risk.    Financial instruments that potentially subject the Company to concentrations of credit risk include cash equivalents, trade accounts receivable, notes receivable, and foreign exchange forward contracts. The Company
invests primarily in short-term U.S. Treasury securities and money market funds. The Company sells its products and extends trade credit to a large number of customers, who are dispersed across many different industries and geographies. The Company
performs ongoing credit evaluations of these customers and generally does not require collateral from them. Trade accounts receivable include allowances for doubtful accounts as of fiscal year end 2004 and 2003 of $1.9 million and $2.0 million,
respectively. The Company seeks to minimize credit risk relating to foreign exchange forward contracts by limiting its counter-parties to major financial institutions. No single customer represented 10% or more of the Companys total sales or
trade accounts receivable in fiscal year 2004, 2003, and 2002.



Cash and Cash Equivalents.    The Company considers currency on hand, demand deposits, money market accounts, and all highly liquid debt securities with an original maturity of three months or less to be cash and
cash equivalents. The cost basis of cash and cash equivalents approximates fair value due to the short period of time to maturity.



Inventories.    Inventories are stated at the lower of cost or market, with cost being computed on an average-cost basis.
Provisions are made for potentially excess or slow-moving inventories.



Property, Plant, and Equipment.    Property, plant, and equipment are stated at cost. Major improvements are capitalized, while maintenance and repairs are expensed currently. Plant and equipment are depreciated
over their estimated useful lives using the straight-line method for financial reporting purposes and accelerated methods for tax purposes. Machinery and equipment lives vary from three to 10 years, and buildings are depreciated over 20 to 40 years.
Purchased software is depreciated over five to 10 years. Leasehold improvements are depreciated using the straight-line method over their estimated useful lives or the remaining term of the lease, whichever is less. Depreciation expense totaled
$22.6 million, $21.4 million, and $19.8 million, in fiscal years 2004, 2003, and 2002, respectively. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are removed from the accounts.



Goodwill and Intangible Assets.    In July 2001,
the Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standards No. (SFAS) 141, Business Combinations, and SFAS 142, Goodwill and Other Intangible Assets. SFAS 141
eliminates pooling-of-interests accounting prospectively and provides guidance on purchase accounting related to the recognition of intangible assets. SFAS 141 is effective for all business combinations completed after June 30, 2001. SFAS 142
changes the accounting for goodwill from an amortization method to an impairment-only approach. Under SFAS 142, goodwill must be tested for impairment annually and whenever events or circumstances occur indicating that goodwill might be impaired.
Upon adoption of SFAS 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 must cease, and intangible assets acquired prior to July 1, 2001 that do not meet the new criteria for recognition as
intangibles must be reclassified to goodwill.



The Company
elected to adopt early the provisions of SFAS 142 on the first day of fiscal year 2002 (September 29, 2001). In accordance with SFAS 142, the Company ceased amortizing goodwill with a net carrying value totaling $85.9 million as of that date,
including certain intangible assets previously



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



classified as purchased intangible assets. In connection with the adoption of SFAS 142, the Company performed a transitional impairment test and determined
that there was no impairment of goodwill.



Intangible assets
are amortized on a straight-line basis over their estimated useful lives, which range from two to 20 years.



Research and Development.    Research and development costs related to both present and future products are expensed when
incurred.



Long-Lived Assets.    The
Company evaluates the carrying value of long-lived assets in accordance with the provisions of SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, whenever events or circumstances indicate that the carrying amount of an
asset may not be fully recoverable. All long-lived assets to be disposed of are reported at the lower of carrying amount or fair market value, less expected selling costs.



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



If the Company had elected to recognize compensation cost based on the fair
value of options granted under its Omnibus Stock Plan and shares issued under its Employee Stock Purchase Plan (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 Year |       
|                                                                                                                                            |  | Oct. 1,2004 |        |   | Oct. 3,2003 |   |        | Sept. 27,2002 | 
|(in thousands, except per share amounts)                                                                                                    |  |             |        |   |             |   |        |               |  |   |        |  
|Net earnings:                                                                                                                               |  |             |        |   |             |   |        |               |  |   |        |  
|As reported                                                                                                                                 |  | $           | 59,530 |   |             | $ | 49,147 |               |  | $ | 51,627 |  
|Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax
effects |  |             | (5,657 | ) |             |   | (7,098 | )             |  |   | (6,947 | )
|                                                                                                                                            |  |             |        |   |             |   |        |               |  |   |        |  
|Pro forma                                                                                                                                   |  | $           | 53,873 |   |             | $ | 42,049 |               |  | $ | 44,680 |  
|                                                                                                                                            |  |             |        |   |             |   |        |               |  |   |        |  
|Net earnings per share:                                                                                                                     |  |             |        |   |             |   |        |               |  |   |        |  
|                                                                                                                                            |  |             |       
|Basic  as reported                                                                                                                         |  | $           | 1.72   |   |             | $ | 1.45   |               |  | $ | 1.54   |  
|                                                                                                                                            |  |             |        |   |             |   |        |               |  |   |        |  
|Basic  pro forma                                                                                                                           |  | $           | 1.56   |   |             | $ | 1.24   |               |  | $ | 1.33   |  
|                                                                                                                                            |  |             |        |   |             |   |        |               |  |   |        |  
|Diluted  as reported                                                                                                                       |  | $           | 1.66   |   |             | $ | 1.40   |               |  | $ | 1.48   |  
|                                                                                                                                            |  |             |        |   |             |   |        |               |  |   |        |  
|Diluted  pro forma                                                                                                                         |  | $           | 1.51   |   |             | $ | 1.20   |               |  | $ | 1.28   |  
|                                                                                                                                            |  |             |        |   |             |   |        |               |  |   |        |  



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



|                         |  |                    |   |  |                              |   |  |               |   |  |             |   |  |             |   |  |               |  
|------------------------ |  | ------------------ | - |  | ---------------------------- | - |  | ------------- | - |  | ----------- | - |  | ----------- | - |  | ------------- | -
|                         |  | Omnibus Stock Plan |   |  | Employee Stock Purchase Plan |  
|                         |  | Fiscal Year        |   |  | Fiscal Year                  |  
|                         |  | Oct. 1,2004        |   |  | Oct. 3,2003                  |   |  | Sept. 27,2002 |   |  | Oct. 1,2004 |   |  | Oct. 3,2003 |   |  | Sept. 27,2002 |  
|Expected dividend yield  |  | 0.0                | % |  | 0.0                          | % |  | 0.0           | % |  | 0.0         | % |  | 0.0         | % |  | 0.0           | %
|Risk-free interest rate  |  | 2.9                | % |  | 2.9                          | % |  | 2.9           | % |  | 1.0         | % |  | 1.6         | % |  | 1.6           | %
|Expected volatility      |  | 40                 | % |  | 40                           | % |  | 50            | % |  | 40          | % |  | 40          | % |  | 50            | %
|Expected life (in years) |  | 5.7                |   |  | 5.7                          |   |  | 5.7           |   |  | 0.5         |   |  | 0.5         |   |  | 0.5           |  



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The weighted-average estimated fair value of employee stock options granted was $16.26 per share for
fiscal year 2004, $13.15 per share for fiscal year 2003, and $13.30 per share for fiscal year 2002. The weighted-average estimated fair value of shares sold under the employee stock purchase plan was $9.41 for fiscal year 2004, $7.66 for fiscal year
2003, and $7.17 for fiscal year 2002.



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



|                                                           |  |             |        |   |             |   |               |  |   |        |  
|---------------------------------------------------------- |  | ----------- | ------ | - | ----------- | - | ------------- |  | - | ------ | -
|                                                           |  | Fiscal Year |       
|                                                           |  | Oct. 1,2004 |        |   | Oct. 3,2003 |   | Sept. 27,2002 | 
|(in thousands)                                             |  |             |        |   |             |   |               |  |   |        |  
|Net earnings                                               |  | $           | 59,530 |   |             | $ | 49,147        |  | $ | 51,627 |  
|Other comprehensive income (loss):                         |  |             |        |   |             |   |               |  |   |        |  
|Currency translation adjustment                            |  |             | 9,297  |   |             |   | 27,744        |  |   | 7,810  |  
|Cash flow hedge fair value adjustments                     |  |             |       |   |             |   | 231           |  |   | (231   | )
|Minimum pension liability adjustment, net of tax of $1,559 |  |             | (3,638 | ) |             |   |              |  |   |       |  
|                                                           |  |             |        |   |             |   |               |  |   |        |  
|Total other comprehensive income                           |  |             | 5,659  |   |             |   | 27,975        |  |   | 7,579  |  
|                                                           |  |             |        |   |             |   |               |  |   |        |  
|Total comprehensive income                                 |  | $           | 65,189 |   |             | $ | 77,122        |  | $ | 59,206 |  
|                                                           |  |             |        |   |             |   |               |  |   |        |  



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 fiscal years ending after December 15, 2003, in 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 becomes 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 adoption of FSP 106-2, which occurred in the



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



fourth quarter of fiscal year 2004, did not have a material impact on the Companys financial condition or results of operations.



In December 2003, the FASB issued a proposed amendment to SFAS 128,
Earnings per Share, to make it consistent with International Accounting Standard 33, Earningsper Share, so as to make earnings per share computations comparable on a global basis. As currently drafted, the amendment would
require companies to use the year-to-date average stock price to compute the number of treasury shares that could theoretically be purchased with the proceeds from exercise of share contracts such as options or warrants. The current method of
calculating earnings per share requires companies to calculate an average of the potential incremental common shares computed for each quarter when computing year-to-date incremental shares. The proposed amendment would also change other aspects of
SFAS 128 that would not impact the Companys earnings per share calculations. The amended standard is expected to be issued by December 31, 2004 and would be effective for all periods ending after December 15, 2004. Should the proposed
statement be finalized in its current form (including the proposed effective date), its adoption is not expected to have a material impact on the Companys financial condition or results of operations.



In March 2004, the FASB issued a proposed standard, Share-Based Payment,
an amendment of FASB Statements Nos. 123 and 95, which addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of that company or liabilities that are
based on the fair value of that companys equity instruments, or that may be settled by the issuance of such equity instruments. The proposed standard would eliminate companies ability to account for share-based compensation transactions
using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and generally would require that such transactions be accounted for using a fair value-based method and
recognized as expense in our Consolidated Statement of Earnings. In its current form, the proposed standard would require companies to assess the most appropriate model to calculate the value of the options. The Company currently uses the
Black-Scholes option-pricing model to value options for financial statement disclosure purposes. However, the Company may deem an alternative model to be the most appropriate under the standard when it is issued in final form. The use of a different
model to value options may result in a different fair value than the use of the Black-Scholes option-pricing model. In addition, there are a number of other requirements under the proposed standard that would result in different accounting treatment
than currently required, should the proposed standard be implemented in its current form. These differences include, but are not limited to, the accounting for the tax benefit on employee stock options and for stock issued under the Companys
employee stock purchase plan. As currently proposed, the standard would be effective for fiscal periods beginning after June 15, 2005. Should the proposed statement be finalized in its current form, its adoption would have a material impact on the
Companys results of operations since it would be required to expense the fair value of stock options granted under its Omnibus Stock Plan and stock purchases under its Employee Stock Purchase Plan.



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 3. Balance Sheet Detail



|                               |  |                   |          |   |              |   |          |  
|------------------------------ |  | ----------------- | -------- | - | ------------ | - | -------- | -
|                               |  | Fiscal Year Ended |         
|                               |  | Oct. 1, 2004      |          |   | Oct. 3, 2003 |  
|(in thousands)                 |  |                   |          |   |              |   |          |  
|Inventories                    |  |                   |          |   |              |   |          |  
|Raw materials and parts        |  | $                 | 70,660   |   |              | $ | 62,809   |  
|Work in process                |  |                   | 12,076   |   |              |   | 12,539   |  
|Finished goods                 |  |                   | 52,608   |   |              |   | 50,301   |  
|                               |  |                   |          |   |              |   |          |  
|                               |  | $                 | 135,344  |   |              | $ | 125,649  |  
|                               |  |                   |          |   |              |   |          |  
|Property, plant, and equipment |  |                   |          |   |              |   |          |  
|Land and land improvements     |  | $                 | 8,280    |   |              | $ | 8,258    |  
|Buildings                      |  |                   | 94,876   |   |              |   | 91,920   |  
|Machinery and equipment        |  |                   | 179,577  |   |              |   | 173,160  |  
|Construction in progress       |  |                   | 16,438   |   |              |   | 10,119   |  
|                               |  |                   |          |   |              |   |          |  
|                               |  |                   | 299,171  |   |              |   | 283,457  |  
|Accumulated depreciation       |  |                   | (178,932 | ) |              |   | (163,369 | )
|                               |  |                   |          |   |              |   |          |  
|                               |  | $                 | 120,239  |   |              | $ | 120,088  |  
|                               |  |                   |          |   |              |   |          |  
|Accrued liabilities            |  |                   |          |   |              |   |          |  
|Payroll and employee benefits  |  | $                 | 47,678   |   |              | $ | 34,697   |  
|Income taxes                   |  |                   | 18,035   |   |              |   | 9,490    |  
|Deferred service revenue       |  |                   | 26,213   |   |              |   | 22,245   |  
|Contract advances              |  |                   | 21,819   |   |              |   | 28,189   |  
|Other                          |  |                   | 46,965   |   |              |   | 47,317   |  
|                               |  |                   |          |   |              |   |          |  
|                               |  | $                 | 160,710  |   |              | $ | 141,938  |  
|                               |  |                   |          |   |              |   |          |  



Note 4. Forward Exchange Contracts



The Company enters into foreign exchange forward
contracts to minimize the short-term impact of foreign currency fluctuations on assets and liabilities denominated in 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. During the year ended October 1, 2004,
there were no outstanding foreign exchange forward contracts designated as cash flow hedges of forecasted transactions. During the year ended October 1, 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 October 1, 2004 follows:



|                  |  |                   |        |                        |   |       
|----------------- |  | ----------------- | ------ | ---------------------- | - | ------
|                  |  | NotionalValueSold |        | NotionalValuePurchased
|(in thousands)    |  |                   |        |                        |   |       
|Euro              |  | $                 |       |                        | $ | 45,525
|Australian dollar |  |                   |       |                        |   | 13,610
|Japanese yen      |  |                   | 9,415  |                        |   |      
|Canadian dollar   |  |                   | 4,945  |                        |   |      
|British pound     |  |                   |       |                        |   | 3,295 
|Swedish krona     |  |                   | 792    |                        |   |      
|                  |  |                   |        |                        |   |       
|Total             |  | $                 | 15,152 |                        | $ | 62,430
|                  |  |                   |        |                        |   |       



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 5. Goodwill and Other Intangible Assets



Changes in the carrying amount of goodwill for each of the Companys reporting segments in fiscal years 2004 and 2003
follow:



|                                                 |  |                       |         |   |                    |   |                          |  |       |       |  |   |         |  
|------------------------------------------------ |  | --------------------- | ------- | - | ------------------ | - | ------------------------ |  | ----- | ----- |  | - | ------- | -
|                                                 |  | ScientificInstruments |         |   | VacuumTechnologies |   | ElectronicsManufacturing |  | Total |      
|(in thousands)                                   |  |                       |         |   |                    |   |                          |  |       |      
|Balance as of September 27, 2002                 |  | $                     | 112,854 |   |                    | $ | 966                      |  | $     | 2,102 |  | $ | 115,922 |  
|Fiscal year 2003 acquisitions (Note 6)           |  |                       | 9,529   |   |                    |   |                         |  |       |      |  |   | 9,529   |  
|Contingent payments on prior years acquisitions |  |                       | 1,000   |   |                    |   |                         |  |       |      |  |   | 1,000   |  
|Foreign currency impacts and other adjustments   |  |                       | (40     | ) |                    |   |                         |  |       |      |  |   | (40     | )
|                                                 |  |                       |         |   |                    |   |                          |  |       |       |  |   |         |  
|Balance as of October 3, 2003                    |  |                       | 123,343 |   |                    |   | 966                      |  |       | 2,102 |  |   | 126,411 |  
|Fiscal year 2004 acquisitions (Note 6)           |  |                       | 4,016   |   |                    |   |                         |  |       |      |  |   | 4,016   |  
|Contingent payments on prior years acquisitions |  |                       | 1,070   |   |                    |   |                         |  |       |      |  |   | 1,070   |  
|Foreign currency impacts and other adjustments   |  |                       | (56     | ) |                    |   |                         |  |       |      |  |   | (56     | )
|                                                 |  |                       |         |   |                    |   |                          |  |       |       |  |   |         |  
|Balance as of October 1, 2004                    |  | $                     | 128,373 |   |                    | $ | 966                      |  | $     | 2,102 |  | $ | 131,441 |  
|                                                 |  |                       |         |   |                    |   |                          |  |       |       |  |   |         |  



The Company performs
an annual goodwill impairment assessment in 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 as required by SFAS 142 and determined that there
was no impairment of goodwill.



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



|                            |  |                 |        |                         |   |        |     |  |   |       
|--------------------------- |  | --------------- | ------ | ----------------------- | - | ------ | --- |  | - | ------
|                            |  | October 1, 2004
|                            |  | Gross           |        | AccumulatedAmortization |   |        | Net
|(in thousands)              |  |                 |        |                         |   |        |    
|Intangible assets           |  |                 |        |                         |   |        |     |  |   |       
|Existing technology         |  | $               | 10,172 |                         | $ | (2,988 | )   |  | $ | 7,184 
|Patents and core technology |  |                 | 6,777  |                         |   | (1,066 | )   |  |   | 5,711 
|Trade names and trademarks  |  |                 | 2,176  |                         |   | (654   | )   |  |   | 1,522 
|Customer lists              |  |                 | 7,505  |                         |   | (1,806 | )   |  |   | 5,699 
|Other                       |  |                 | 2,445  |                         |   | (1,282 | )   |  |   | 1,163 
|                            |  |                 |        |                         |   |        |     |  |   |       
|                            |  | $               | 29,075 |                         | $ | (7,796 | )   |  | $ | 21,279
|                            |  |                 |        |                         |   |        |     |  |   |       
|                            | 
|                            |  | 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
|                            |  |                 |        |                         |   |        |     |  |   |       



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Intangible assets are amortized on a straight-line basis over their estimated useful lives, which
range from two to 20 years. Actual aggregate amortization expense relating to intangible assets recorded in the three most recent fiscal years as well as estimated amortization expense for the next five fiscal years follow:



|                               |  |   |       
|------------------------------ |  | - | ------
|(in thousands)                 |  |  
|Actual amortization expense    |  |   |       
|Fiscal year 2002               |  | $ | 1,561 
|Fiscal year 2003               |  | $ | 2,641 
|Fiscal year 2004               |  | $ | 2,892 
|                               | 
|Estimated amortization expense |  |   |       
|Fiscal year 2005               |  | $ | 4,184 
|Fiscal year 2006               |  |   | 3,837 
|Fiscal year 2007               |  |   | 3,187 
|Fiscal year 2008               |  |   | 3,015 
|Fiscal year 2009               |  |   | 2,218 
|Thereafter                     |  |   | 4,838 
|                               |  |   |       
|Total                          |  | $ | 21,279
|                               |  |   |       



Note 6. Acquisitions



Digilab Business.    In
September 2004, the Company acquired certain assets of Digilab, LLC (the Digilab Business) for approximately $14.0 million in cash, subject to certain net asset adjustments. The transaction also includes an opportunity for an additional
purchase price payment of up to $10.0 million if the acquired product lines reach specific financial performance targets during the 12-month period following closing. The Digilab Business, which has become part of the Companys Scientific
Instruments segment, includes Fourier Transform infrared (FT-IR) spectroscopy instruments, FT-IR imaging microscopes, near infrared (NIR) spectroscopy instruments, and Raman spectroscopy instruments. These products expanded
the Companys product range of information rich detectors and spectrometers for life science and industrial materials research applications and are now being marketed and sold through the Companys existing distribution channels worldwide.



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



|                                              |  |                 |      |  
|--------------------------------------------- |  | --------------- | ---- | -
|                                              |  | AmountAllocated |     
|(in millions)                                 |  |                 |     
|Accounts receivable                           |  | $               | 4.3  |  
|Inventories                                   |  |                 | 2.0  |  
|Other current assets                          |  |                 | 0.1  |  
|Property, plant, and equipment                |  |                 | 0.3  |  
|Goodwill                                      |  |                 | 3.9  |  
|Identified intangible assets                  |  |                 | 6.8  |  
|                                              |  |                 |      |  
|Total assets acquired                         |  |                 | 17.4 |  
|Liabilities assumed                           |  |                 | (3.5 | )
|                                              |  |                 |      |  
|Net assets acquired                           |  |                 | 13.9 |  
|Purchased in-process research and development |  |                 | 0.1  |  
|                                              |  |                 |      |  
|Total consideration                           |  | $               | 14.0 |  
|                                              |  |                 |      |  



The amounts allocated
to identified intangible assets are based upon a preliminary analysis which utilized the income approach, the royalty savings approach, and the cost approach to determine the fair



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



value of significant identified intangible assets acquired in the transaction. The identified intangible assets are being amortized using the straight-line
method over their respective estimated useful lives (weighted average of 7.0 years). The amount allocated to in-process research and development (which was immediately expensed) related to new NIR and Raman products that were in the research and
development stage at the time of the acquisition. Risk-adjusted discount rates ranging from 14.5% to 18.5% were applied to cash flow projections to determine the present value of the different intangible assets including the in-process research and
development.



The purchase price allocation for the Digilab
Business is preliminary pending completion of the closing balance sheet and the intangible asset valuation, which are expected to be finalized during the quarter ending December 31, 2004. Upon completion of these matters, any necessary adjustments
will be made to the preliminary purchase price allocation and will result in corresponding adjustments to goodwill.



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



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



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



The amounts allocated
to identified intangible assets are based upon an analysis which utilized the income approach, the royalty savings approach, and the cost approach to determine the fair value of significant identified intangible assets acquired in the transaction.
The identified intangible assets are being amortized using the straight-line method over their respective estimated useful lives (weighted-average of 6.7 years). A risk-adjusted discount rate of 12% was applied to cash flow projections to determine
the present value of the different intangible assets.



ANSYS
Technologies, Inc.    In February 2002, the Company acquired 100% of the outstanding capital stock of ANSYS Technologies, Inc. (ANSYS), a supplier of consumable products for life science and other applications,
for total consideration of $46.2 million, including $45.6 million in cash and assumed net debt and direct acquisition costs of $0.6 million. As a result of this acquisition, the Company added ANSYS complementary separations and diagnostics
consumable products to the Companys existing line of consumable products in its Scientific Instruments segment.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                                           |  |                 |      |  
|---------------------------------------------------------- |  | --------------- | ---- | -
|                                                           |  | AmountAllocated |     
|(in millions)                                              |  |                 |     
|Current assets                                             |  | $               | 6.0  |  
|Property, plant, and equipment                             |  |                 | 11.1 |  
|Other assets                                               |  |                 | 0.2  |  
|Goodwill                                                   |  |                 | 24.1 |  
|Existing technology and other identified intangible assets |  |                 | 7.8  |  
|                                                           |  |                 |      |  
|Total assets acquired                                      |  |                 | 49.2 |  
|Liabilities assumed                                        |  |                 | (3.9 | )
|                                                           |  |                 |      |  
|Net assets acquired                                        |  |                 | 45.3 |  
|Purchased in-process research and development              |  |                 | 0.9  |  
|                                                           |  |                 |      |  
|Total consideration                                        |  | $               | 46.2 |  
|                                                           |  |                 |      |  



The amounts allocated
to existing technology and other identified intangible assets were based upon an analysis which utilized the income approach, the royalty savings approach, and the cost approach to determine the fair value of significant identified intangible assets
acquired in the transaction. The identified intangible assets are being amortized using the straight-line method over their respective estimated useful lives (weighted-average of 9.5 years). The amount allocated to purchased in-process research and
development relates to several new consumable products that were in the research and development phase at the time of the acquisition. The percentage of completion for these products ranged from 49% to 73%. Risk-adjusted discount rates ranging from
15% to 29% were applied to cash flow projections to determine the present value of the different intangible assets including the in-process research and development.



Other Acquisitions.    During fiscal year 2003, the Company paid $0.4 million for one other
acquisition, which related to its Electronics Manufacturing segment. This acquisition did not have a material affect on the Companys financial condition or results of operations.



During fiscal year 2002, the Company made three other acquisitions having an aggregate purchase price of $11.2 million in
cash, including contingent payments made after those acquisitions were completed. These acquisitions primarily related to the Companys Scientific Instruments segment.



All of the above acquisitions were accounted for using the purchase method of accounting. Accordingly, the Companys
Consolidated Statement of Earnings for fiscal years 2004, 2003, and 2002 include the results of operations of the acquired companies since the effective dates of their respective purchases. There were no significant differences between the
accounting policies of the Company and any of the acquired companies. Pro forma sales, earnings from operations, net earnings, and net earnings per share have not been presented because the effects of these acquisitions were not material on either
an individual or an aggregated basis.



In connection with the
Digilab Business acquisition, the Company has accrued but not yet paid a portion of the purchase price amount that has been retained to secure the sellers indemnification obligations. This retained amount, which is due to be paid during fiscal
year 2005 (net of any indemnification claims), totaled approximately $2.1 million at October 1, 2004. In addition to this retained payment, the Company is, from time to time, obligated to pay additional cash purchase price amounts in the event that
certain financial or operational milestones are met by the acquired businesses. As of October 1, 2004, up to a maximum of $19.5 million could be payable through fiscal year 2006 under these contingent consideration arrangements. Of this maximum
amount, a total of $10.0 million relates to the Digilab Business acquisition and can be earned if acquired product lines reach specific financial



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VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



performance targets through fiscal year 2005. The remaining $9.5 million relates to the acquisition of Bear Instruments, Inc. in fiscal year 2001 and can be
earned if acquired product lines reach specific financial performance targets through fiscal year 2006. Any contingent payments made will be recorded as additional goodwill at the time they are earned.



Note 7. 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 years 2004,
2003, and 2002, the impact of options to purchase approximately 129,000, 1,154,000, and 703,000 shares, respectively, was excluded from the calculation of diluted earnings per share as the effect of these options was anti-dilutive.



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



|                                            |  |                   |  |             |  |              
|------------------------------------------- |  | ----------------- |  | ----------- |  | -------------
|                                            |  | Fiscal Year Ended
|                                            |  | Oct. 1,2004       |  | Oct. 3,2003 |  | Sept. 27,2002
|(in thousands)                              |  |                   |  |             |  |              
|Weighted-average basic shares outstanding   |  | 34,640            |  | 33,929      |  | 33,578       
|Net effect of dilutive stock options        |  | 1,133             |  | 1,128       |  | 1,350        
|                                            |  |                   |  |             |  |              
|Weighted-average diluted shares outstanding |  | 35,773            |  | 35,057      |  | 34,928       
|                                            |  |                   |  |             |  |              



Note 8. Debt and Credit Facilities



Credit Facilities.    During
fiscal year 2002, the Company established a three-year unsecured revolving bank credit facility in the amount of $50.0 million for working capital purposes. No amounts were borrowed under this credit facility. 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 October 1, 2004). The credit facility is available to the Companys wholly owned Japanese subsidiary for working capital purposes. As of October 1, 2004, no amounts were outstanding under this credit facility at an annual interest rate of
0.8%, and 300 million yen (approximately $2.7 million) was available for future borrowing. Any 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 October 1, 2004.



In addition to these bank credit facilities, as of October 1, 2004, the Company and its subsidiaries had a total of $76.1 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 October 1, 2004. All of these credit facilities contain certain customary conditions and events of default, with which the
Company was in compliance at October 1, 2004. Of the $76.1 million in uncommitted and unsecured credit facilities, a total of $41.6 million was limited for use by, or in favor of, certain subsidiaries at October 1, 2004, and a total of $16.4 million
of this $41.6 million was being utilized in the form of bank guarantees or short-term standby letters of credit. These guarantees and letters of credit



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VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



related primarily to advance payments or deposits made to the Companys subsidiaries by customers for which separate liabilities were recorded in the
Consolidated Financial Statements at October 1, 2004. No amounts had been drawn by beneficiaries under these or any other outstanding guarantees or letters of credit as of that date.



Long-term Debt.    As of October 1, 2004, the Company had $32.5 million in term loans
outstanding, compared to $35.0 million at October 3, 2003. As of both October 1, 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 October
1, 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 October 1, 2004. The Company also had other long-term notes payable of $4.2 million as of October 1, 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 October 1, 2004:



|                                          |  |              |       |      |   |       |  |      |       |      |   |            |  |       |   |  |   |        |  |   |       
|----------------------------------------- |  | ------------ | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ---------- |  | ----- | - |  | - | ------ |  | - | ------
|                                          |  | Fiscal Years
|                                          |  | 2005         |       | 2006 |   | 2007  |  | 2008 |       | 2009 |   | Thereafter |  | Total
|(in thousands)                            |  |              |       |      |   |       |  |      |       |      |   |            |  |      
|Long-term debt(including current portion) |  | $            | 6,673 |      | $ | 2,500 |  | $    | 2,500 |      | $ | 6,250      |  | $     |  |  | $ | 18,750 |  | $ | 36,673
|                                          |  |              |       |      |   |       |  |      |       |      |   |            |  |       |   |  |   |        |  |   |       



Note 9. Warranty and
Indemnification Obligations



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



|                              |  |                   |        |   |             |   |        |  
|----------------------------- |  | ----------------- | ------ | - | ----------- | - | ------ | -
|                              |  | Fiscal Year Ended |       
|                              |  | Oct. 1,2004       |        |   | Oct. 3,2003 |  
|(in thousands)                |  |                   |        |   |             |  
|Beginning balance             |  | $                 | 10,261 |   |             | $ | 9,029  |  
|Charges to costs and expenses |  |                   | 8,109  |   |             |   | 6,813  |  
|Warranty expenditures         |  |                   | (7,895 | ) |             |   | (5,581 | )
|                              |  |                   |        |   |             |   |        |  
|Ending balance                |  | $                 | 10,475 |   |             | $ | 10,261 |  
|                              |  |                   |        |   |             |   |        |  



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



The Company 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,



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VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



intellectual property, litigation, and environmental matters. The agreements containing these indemnification obligations are disclosed as exhibits to the
Companys Form 10-K (see Exhibits 2.1, 10.1, 10.2, and 10.3 of this document). The estimated fair value of these indemnification obligations is not considered to be material.



The Companys By-Laws require it to indemnify its officers and directors, as well as those who act as directors and
officers of other entities at the request of the Company, against expenses, judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceedings arising out of their services to the Company. In
addition, the Company has entered into separate indemnity agreements with each director and officer that provide for indemnification of these directors and officers under certain circumstances. The form of these indemnity agreements is disclosed as
an exhibit to the Companys Form 10-K. The indemnification obligations are more fully described in the By-Laws and the indemnification agreements (see Exhibits 3.2 and 10.10 of this document). 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 reasonably be estimated. The Company has not made payments related to these indemnification obligations, and the estimated fair value of these indemnification obligations is not
considered to be material.



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



Note 10. Stock Option and Purchase Plans



Effective April 2, 1999, the Company adopted the Omnibus Stock Plan (the
Plan) under which shares of common stock can be issued to officers, directors, consultants, and key employees. The maximum number of shares of the Companys common stock available for awards under the Plan was initially 4,200,000
plus 4,512,000 shares granted in substitution for other options in connection with the Distribution. On February 7, 2002, the Companys stockholders approved an amendment of the Plan to increase by 1,000,000 the number of shares of common stock
reserved for issuance under the Plan.



The Plan is administered
by the Compensation Committee of the Companys Board of Directors. The exercise price for stock options granted under the Plan may not be less than 100% of the fair market value at the date of the grant. Options granted are exercisable at the
times and on the terms established by the Compensation Committee, but not later than ten years after the date of grant. Options granted generally become exercisable in cumulative installments of one-third each year commencing one year following the
date of grant.



At October 1, 2004, options with respect to
795,000 shares were available for grant under the Plan.



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Option Activity Under the Plan



|                                         |  |                   |   |              |                               |                |        |       |   |                               |   |        |  |       |                               |  |   |      
|---------------------------------------- |  | ----------------- | - | ------------ | ----------------------------- | -------------- | ------ | ----- | - | ----------------------------- | - | ------ |  | ----- | ----------------------------- |  | - | -----
|                                         |  | Fiscal Year Ended
|                                         |  | Oct. 1, 2004      |   | Oct. 3, 2003 |                               | Sept. 27, 2002
|                                         |  | Shares            |   |              | Weighted-AverageExercisePrice |                | Shares |       |   | Weighted-AverageExercisePrice |   | Shares |  |       | Weighted-AverageExercisePrice
|(shares in thousands)                    |  |                   |   |              |                               |                |        |       |   |                               |   |        |  |       |                              
|Outstanding at beginning of fiscal year  |  | 4,429             |   |              | $                             | 20.65          |        | 4,358 |   |                               | $ | 18.64  |  | 4,329 |                               |  | $ | 16.59
|Granted                                  |  | 567               |   |              | $                             | 38.76          |        | 520   |   |                               | $ | 31.36  |  | 684   |                               |  | $ | 26.89
|Exercised                                |  | (1,310            | ) |              | $                             | 14.46          |        | (422  | ) |                               | $ | 12.70  |  | (617  | )                             |  | $ | 11.90
|Cancelled or expired                     |  | (46               | ) |              | $                             | 33.10          |        | (27   | ) |                               | $ | 27.18  |  | (38   | )                             |  | $ | 31.77
|                                         |  |                   |   |              |                               |                |        |       |   |                               |   |        |  |       |                               |  |   |      
|Outstanding at end of fiscal year        |  | 3,640             |   |              | $                             | 25.54          |        | 4,429 |   |                               | $ | 20.65  |  | 4,358 |                               |  | $ | 18.64
|                                         |  |                   |   |              |                               |                |        |       |   |                               |   |        |  |       |                               |  |   |      
|Shares exercisable at end of fiscal year |  | 2,730             |   |              | $                             | 22.48          |        | 3,334 |   |                               | $ | 17.57  |  | 3,122 |                               |  | $ | 14.73
|                                         |  |                   |   |              |                               |                |        |       |   |                               |   |        |  |       |                               |  |   |      



Outstanding and Exercisable Options
at October 1, 2004



|                         |  |                     |  |                                           |  |                               |       |                |       |                                 |   |      
|------------------------ |  | ------------------- |  | ----------------------------------------- |  | ----------------------------- | ----- | -------------- | ----- | ------------------------------- | - | -----
|                         |  | Options Outstanding |  | Options Exercisable                      
|Range of Exercise Prices |  | Shares              |  | Weighted-AverageRemainingContractual Life |  | Weighted-AverageExercisePrice |       | Shares         |       | Weighted- AverageExercise Price
|                         |  | (in thousands)      |  | (in years)                                |  |                               |       | (in thousands) |       |                                
|$  8.25$9.50            |  | 776                 |  | 4.5                                       |  | $                             | 9.49  |                | 776   |                                 | $ | 9.49 
|$10.31$25.76            |  | 1,169               |  | 5.6                                       |  | $                             | 22.11 |                | 1,041 |                                 | $ | 21.66
|$26.10$34.56            |  | 1,035               |  | 7.1                                       |  | $                             | 32.86 |                | 782   |                                 | $ | 33.37
|$34.70$54.94            |  | 660                 |  | 8.8                                       |  | $                             | 39.01 |                | 131   |                                 | $ | 41.05
|                         |  |                     |  |                                           |  |                               |       |                |       |                                 |   |      
|Total                    |  | 3,640               |  | 6.4                                       |  | $                             | 25.54 |                | 2,730 |                                 | $ | 22.48
|                         |  |                     |  |                                           |  |                               |       |                |       |                                 |   |      



Employee Stock Purchase Plan



During fiscal year 2000, the Companys Board of
Directors approved an Employee Stock Purchase Plan (the ESPP) for which the Company set aside 1,200,000 shares of common stock for issuance. In February 2003, the Companys stockholders approved the ESPP.



Under the ESPP, eligible Company employees may set aside, through payroll
deductions, between 1% and 10% of eligible compensation for purchases of the Companys common stock. The participants purchase price is the lower of 85% of the stocks market value on the enrollment date or 85% of the stocks
market value on the purchase date. Enrollment dates occur every six months and purchase dates occur each quarter.



During fiscal years 2004, 2003, and 2002, employees purchased 136,600 shares for $3.9 million, 161,000 shares for $3.8 million, and 160,000 shares for
$3.4 million, respectively. As of October 1, 2004, a total of approximately 597,000 shares remained available for issuance under the ESPP.



Note 11. Stock Repurchase Programs



In November 2002, the Companys Board of Directors authorized the Company to repurchase up to 1,000,000 shares of its common stock until October 1,
2004. During fiscal year 2004, the Company repurchased and retired 597,000 shares for an aggregate cost of $24.2 million. During fiscal years 2003 and 2002, the Company repurchased and retired 353,000 shares for an aggregate cost of $10.4 million
and 50,000 shares for an aggregate cost of $1.6 million, respectively.



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



In May 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. During fiscal year 2004, the Company repurchased and retired 192,000 shares for an aggregate cost of $7.5 million. As of October 1, 2004 the Company had remaining
authorization for future repurchases of approximately 808,000 shares.



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 October 1, 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 $2.6 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 13 years as of
October 1, 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 October 1, 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 October 1, 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 $4.8 million to $15.9 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 October 1, 2004. As to each of these sites and facilities, it was determined that a particular amount within the range of certain estimated costs was a better estimate of the future environmental-related cost than any
other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, these amounts totaled $7.0 million at October 1, 2004. The Company therefore had an accrual of $4.6 million as of October 1,
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.



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



At October 1, 2004, the Companys reserve for environmental-related costs, based upon future
environmental-related costs estimated by the Company as of that date, was calculated as follows:



|                                          |  |                |      |                      |   |                                |  |   |     | 
|----------------------------------------- |  | -------------- | ---- | -------------------- | - | ------------------------------ |  | - | --- | 
|                                          |  | RecurringCosts |      | Non- Recurring Costs |   | Total Anticipated Future Costs | 
|(in millions)                             |  |                |      |                      |   |                                | 
|Fiscal Year                               |  |                |      |                      |   |                                |  |   |     | 
|2005                                      |  | $              | 0.3  |                      | $ | 0.6                            |  | $ | 0.9 | 
|2006                                      |  |                | 0.3  |                      |   | 0.4                            |  |   | 0.7 | 
|2007                                      |  |                | 0.3  |                      |   | 0.4                            |  |   | 0.7 | 
|2008                                      |  |                | 0.3  |                      |   | 0.2                            |  |   | 0.5 | 
|2009                                      |  |                | 0.3  |                      |   | 0.1                            |  |   | 0.4 | 
|Thereafter                                |  |                | 4.5  |                      |   | 0.7                            |  |   | 5.2 | 
|                                          |  |                |      |                      |   |                                |  |   |     | 
|Total costs                               |  | $              | 6.0  |                      | $ | 2.4                            |  |   | 8.4 | 
|                                          |  |                |      |                      |   |                                |  |   |     | 
|Less imputed interest                     |  |                | (2.4 | )                   
|                                          |  |                |      |                      |   |                                |  |   |     | 
|Reserve amount                            |  |                | 6.0  |                     
|Less current portion                      |  |                | (0.5 | )                   
|                                          |  |                |      |                      |   |                                |  |   |     | 
|Long-term (included in Other liabilities) |  | $              | 5.5  |                     
|                                          |  |                |      |                      |   |                                |  |   |     | 



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



An insurance company has agreed to pay a portion of certain of VAIs
(now VMS) future environmental-related costs for which the Company has an indemnification obligation, and the Company therefore has a $1.2 million receivable in other assets as of October 1, 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.



During the fourth quarter of fiscal year 2003, the Company settled a patent infringement lawsuit brought by Unaxis Balzers Aktiengesellschaft
Liechtenstein (Unaxis), in which Unaxis sought infringement damages for the period beginning when the Companys alleged infringing product (a Vacuum Technologies leak detection system) was introduced in 1997 until the patent expired
in 2001. In exchange for a $1.1 million cash payment, Unaxis agreed to dismiss all pending claims against the Company and released the Company from any future claims relating to this matter.



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 13. Retirement Plans



Certain employees of the Company in the United States are eligible to participate in the Companys sponsored, defined
contribution retirement plan. For employee contributions made after certain minimum employment conditions have been met, the Company is obligated to match the participants contribution up to 6% of their eligible compensation. Participants are
entitled, upon termination or retirement, to receive their account balances, which are held by a third party trustee. The Company has no defined benefit plans in the U.S. In addition to the U.S. retirement plan, a number of the Companys
foreign subsidiaries have retirement plans for regular full-time employees. Several of these plans are defined benefit plans. Total expense for all retirement plans amounted to $10.0 million, $9.1 million, and $7.1 million, for fiscal years 2004,
2003, and 2002, respectively. The retirement plan expense for fiscal year 2004 excludes defined benefit pension plan curtailment gains of approximately $1.5 million.



Net periodic pension cost for defined benefit pension plans is determined in accordance with SFAS 87, Employers
Accounting for Pensions, and is made up of several components that reflect different aspects of the Companys pension-related financial arrangements and the cost of benefits earned by participating employees. These components are determined
using certain actuarial assumptions. Changes in the projected benefit obligation, fair value of plan assets, and funded status relating to the Companys defined benefit pension plans follows:



|                                                                    |  |              |         |   |              |   |         |                |  |   |         |  
|------------------------------------------------------------------- |  | ------------ | ------- | - | ------------ | - | ------- | -------------- |  | - | ------- | -
|                                                                    |  | Fiscal Year  |        
|                                                                    |  | Oct. 1, 2004 |         |   | Oct. 3, 2003 |   |         | Sept. 27, 2002 | 
|(in thousands)                                                      |  |              |         |   |              |   |         |                | 
|Change in projected benefit obligation                              |  |              |         |   |              |   |         |                |  |   |         |  
|Projected benefit obligation at beginning of fiscal year            |  | $            | 57,386  |   |              | $ | 43,075  |                |  | $ | 35,815  |  
|Service cost, including plan participant contributions              |  |              | 2,772   |   |              |   | 2,908   |                |  |   | 2,385   |  
|Interest cost                                                       |  |              | 3,051   |   |              |   | 2,569   |                |  |   | 2,151   |  
|Actuarial (gain) loss                                               |  |              | (41     | ) |              |   | 2,665   |                |  |   | 614     |  
|Foreign currency changes                                            |  |              | 3,302   |   |              |   | 8,133   |                |  |   | 3,108   |  
|Benefit payments                                                    |  |              | (2,329  | ) |              |   | (1,964  | )              |  |   | (1,967  | )
|Curtailment                                                         |  |              | (4,870  | ) |              |   |        |                |  |   |        |  
|Plan amendments and other adjustments                               |  |              | 15      |   |              |   |        |                |  |   | 969     |  
|                                                                    |  |              |         |   |              |   |         |                |  |   |         |  
|Projected benefit obligation at end of fiscal year                  |  | $            | 59,286  |   |              | $ | 57,386  |                |  | $ | 43,075  |  
|                                                                    |  |              |         |   |              |   |         |                |  |   |         |  
|Change in fair value of plan assets and funded status               |  |              |         |   |              |   |         |                |  |   |         |  
|Fair value of plan assets at beginning of fiscal year               |  | $            | 44,079  |   |              | $ | 36,694  |                |  | $ | 31,819  |  
|Actual return on plan assets                                        |  |              | 5,414   |   |              |   | 930     |                |  |   | 2,002   |  
|Employer and plan participant contributions                         |  |              | 1,618   |   |              |   | 2,643   |                |  |   | 1,693   |  
|Foreign currency changes                                            |  |              | 2,558   |   |              |   | 6,826   |                |  |   | 1,335   |  
|Benefit and expense payments                                        |  |              | (2,264  | ) |              |   | (1,998  | )              |  |   | (483    | )
|Other adjustments                                                   |  |              |        |   |              |   | (1,016  | )              |  |   | 328     |  
|                                                                    |  |              |         |   |              |   |         |                |  |   |         |  
|Fair value of plan assets at end of fiscal year                     |  |              | 51,405  |   |              |   | 44,079  |                |  |   | 36,694  |  
|Projected benefit obligation at end of fiscal year                  |  |              | (59,286 | ) |              |   | (57,386 | )              |  |   | (43,075 | )
|                                                                    |  |              |         |   |              |   |         |                |  |   |         |  
|Projected benefit obligation in excess of fair value of plan assets |  |              | (7,881  | ) |              |   | (13,307 | )              |  |   | (6,381  | )
|Unrecognized prior service cost                                     |  |              | 156     |   |              |   | 498     |                |  |   | 673     |  
|Unrecognized net actuarial loss                                     |  |              | 6,697   |   |              |   | 12,059  |                |  |   | 5,447   |  
|                                                                    |  |              |         |   |              |   |         |                |  |   |         |  
|Net accrued benefit cost at end of fiscal year                      |  | $            | (1,028  | ) |              | $ | (750    | )              |  | $ | (261    | )
|                                                                    |  |              |         |   |              |   |         |                |  |   |         |  



F-24



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Additional information pertaining to the Companys defined benefit pension plans as of the end
of fiscal years 2004 and 2003 is outlined below.



|                                                                               |  |                 |         |   |             |   |        |  
|------------------------------------------------------------------------------ |  | --------------- | ------- | - | ----------- | - | ------ | -
|                                                                               |  | Fiscal Year End |        
|                                                                               |  | Oct. 1,2004     |         |   | Oct. 3,2003 |  
|(in thousands)                                                                 |  |                 |         |   |             |   |        |  
|Amounts included in the Consolidated Balance Sheet                             |  |                 |         |   |             |   |        |  
|Prepaid benefit cost                                                           |  | $               | 2,146   |   |             | $ | (750   | )
|Accrued benefit cost                                                           |  |                 | (10,241 | ) |             |   | (3,642 | )
|Intangible assets                                                              |  |                 | 287     |   |             |   | 474    |  
|Accumulated other comprehensive loss                                           |  |                 | 6,780   |   |             |   | 3,168  |  
|                                                                               |  |                 |         |   |             |   |        |  
|Net accrued benefit cost at end of fiscal year                                 |  | $               | (1,028  | ) |             | $ | (750   | )
|                                                                               |  |                 |         |   |             |   |        |  
|Accumulated benefit obligation for all defined benefit pension plans           |  | $               | 55,269  |   |             | $ | 48,827 |  
|                                                                               |  |                 |         |   |             |   |        |  
|Weighted-average assumptions used to determine benefit obligations             |  |                 |         |   |             |   |        |  
|Discount rate                                                                  |  |                 | 5.5     | % |             |   | 5.3    | %
|Rate of compensation increases                                                 |  |                 | 3.6     | % |             |   | 3.6    | %
|                                                                               |  |                
|Weighted-average asset allocations by asset category                           |  |                 |         |   |             |   |        |  
|Equity securities                                                              |  |                 | 42      | % |             |   | 36     | %
|Debt securities                                                                |  |                 | 48      |   |             |   | 50     |  
|Real estate                                                                    |  |                 | 1       |   |             |   | 1      |  
|Other                                                                          |  |                 | 9       |   |             |   | 13     |  
|                                                                               |  |                 |         |   |             |   |        |  
|Total                                                                          |  |                 | 100     | % |             |   | 100    | %
|                                                                               |  |                 |         |   |             |   |        |  
|Additional information                                                         |  |                 |         |   |             |   |        |  
|Increase in minimum liability included in other comprehensive income after tax |  | $               | 3,638   |   |             | $ |       |  
|                                                                               |  |                 |         |   |             |   |        |  



Information relating
to defined benefit pension plans with an accumulated benefit obligation in excess of the fair value of plan assets follows:



|                               |  |                 |        |             |   |       
|------------------------------ |  | --------------- | ------ | ----------- | - | ------
|                               |  | Fiscal Year End
|                               |  | Oct. 1,2004     |        | Oct. 3,2003
|Projected benefit obligation   |  | $               | 51,047 |             | $ | 57,386
|Accumulated benefit obligation |  |                 | 47,030 |             |   | 48,827
|Fair value of plan assets      |  |                 | 39,060 |             |   | 44,078



Net Periodic
Pension Cost.    The components of the Companys net periodic cost relating to defined benefit pension plans and the weighted-average assumptions used to determine that cost follow:



|                                                                         |  |             |        |   |             |   |        |               |  |   |        |  
|------------------------------------------------------------------------ |  | ----------- | ------ | - | ----------- | - | ------ | ------------- |  | - | ------ | -
|                                                                         |  | Fiscal Year |       
|                                                                         |  | Oct. 1,2004 |        |   | Oct. 3,2003 |   |        | Sept. 27,2002 | 
|(dollars in thousands)                                                   |  |             |        |   |             |   |        |               |  |   |        |  
|Components of net periodic pension cost                                  |  |             |        |   |             |   |        |               |  |   |        |  
|Service cost, net of plan participant contributions                      |  | $           | 2,133  |   |             | $ | 2,146  |               |  | $ | 1,719  |  
|Interest cost                                                            |  |             | 3,051  |   |             |   | 2,569  |               |  |   | 2,151  |  
|Expected return on plan assets                                           |  |             | (2,955 | ) |             |   | (2,775 | )             |  |   | (2,002 | )
|Amortization of prior service cost and actuarial gains and losses        |  |             | 501    |   |             |   | 366    |               |  |   | (154   | )
|Curtailment gain                                                         |  |             | (1,439 | ) |             |   |       |               |  |   |       |  
|                                                                         |  |             |        |   |             |   |        |               |  |   |        |  
|Net periodic pension cost                                                |  | $           | 1,291  |   |             | $ | 2,306  |               |  | $ | 1,714  |  
|                                                                         |  |             |        |   |             |   |        |               |  |   |        |  
|Weighted-average assumptions used to determine net periodic pension cost |  |             |        |   |             |   |        |               |  |   |        |  
|Discount rate                                                            |  |             | 5.3    | % |             |   | 5.7    | %             |  |   | 5.9    | %
|Expected return on plan assets                                           |  |             | 6.4    | % |             |   | 7.0    | %             |  |   | 7.3    | %
|Rate of compensation increases                                           |  |             | 3.6    | % |             |   | 4.0    | %             |  |   | 4.1    | %



F-25



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Basis for Assumptions.    The Company utilizes yields on country-specific,
long-term Corporate AA bond indices (typically 10- or 15-year indices) as the basis for its discount rate assumptions for each of its defined benefit pension plans. With regard to the expected return on plan assets, most assets are invested in
low-risk, long-term fixed income investments such as direct insurance policies and guaranteed insurance contracts. For these asset types, the expected rate of return is established either by reference to yields on comparable long-term corporate bond
indices in that country or the return guaranteed by the issuer of the investment security (net of expenses). The exception to this is in the United Kingdom, where the majority of plan assets are invested in equity securities, with the remainder
invested in corporate bonds, real estate, and cash. Due to the nature of these investments, long-term money and corporate bond yields and an implied equity risk premium are considered in establishing the asset return assumption for the defined
benefit pension plan in the United Kingdom.



Defined Benefit
Pension Plan Curtailments and Settlement.    During fiscal year 2004, the Company ceased future benefit accruals to its existing defined benefit pension plans in Australia and the Netherlands and commenced contributions to
new defined contribution plans for the benefit of their participants. In connection with these actions, the Company recorded curtailment gains of approximately $1.5 million during fiscal year 2004. Subsequent to October 1, 2004, the Company settled
the Australian defined benefit pension plan in the first quarter of fiscal year 2005, which resulted in a corresponding settlement loss of approximately $1.5 million.



Employer Contributions.    During fiscal year ended October 1, 2004, the Company made
contributions totaling $1.0 million to its defined benefit pension plans. The Company currently anticipates contributing an additional $0.9 million to these plans in fiscal year 2005.



Estimated Future Benefit Payments.    As of October 1, 2004, benefit payments, which reflect
expected future service, as appropriate, are expected to be $0.5 million, $0.5 million, $0.6 million, $0.6 million, $0.7 million, and $4.3 million during fiscal years 2005, 2006, 2007, 2008, 2009, and 2010 through 2014, respectively.



Other Postretirement Benefits.    At the
Distribution, the Company assumed responsibility for certain post-employment and post-retirement benefits for active employees of the Company; the responsibility for all others, principally retirees of VAI, remained with VMS, although the Company is
obligated to reimburse VMS for certain costs relating to certain VAI retirees. The Companys portion of assets and liabilities as well as related expenses for shared post-employment and post-retirement benefits, which are not material, have
been included in these Consolidated Financial Statements.



Note 14.
Stockholders Equity



On April 2, 1999, stockholders
of record of VAI on March 24, 1999 received in the Distribution one share of the Companys common stock for each share of VAI common stock held on April 2, 1999. Each stockholder also received one preferred stock purchase right
(Right) for each share of common stock distributed, entitling the stockholder to purchase one one-thousandth of a share of Participating Preferred Stock, par value $0.01 per share, for $200.00 (subject to adjustment), in the event of
certain changes in the Companys ownership. The Participating Preferred Stock is designed so that each one one-thousandth of a share has economic and voting terms similar to those of one share of common stock. The Rights will expire no later
than March 2009. As of October 1, 2004, no Rights were eligible to be exercised and none had been exercised through that date.



Note 15. Income Taxes



The sources of earnings before income taxes follow:



|                             |  |             |        |             |   |               |  |   |       
|---------------------------- |  | ----------- | ------ | ----------- | - | ------------- |  | - | ------
|                             |  | Fiscal Year
|                             |  | Oct. 1,2004 |        | Oct. 3,2003 |   | Sept. 27,2002
|(in thousands)               |  |             |        |             |   |              
|United States                |  | $           | 25,046 |             | $ | 24,172        |  | $ | 40,568
|Foreign                      |  |             | 66,539 |             |   | 51,438        |  |   | 40,599
|                             |  |             |        |             |   |               |  |   |       
|Earnings before income taxes |  | $           | 91,585 |             | $ | 75,610        |  | $ | 81,167
|                             |  |             |        |             |   |               |  |   |       



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Income tax expense on earnings consists of the following:



|                   |  |             |        |   |             |   |        |               |  |   |        |  
|------------------ |  | ----------- | ------ | - | ----------- | - | ------ | ------------- |  | - | ------ | -
|                   |  | Fiscal Year |       
|                   |  | Oct. 1,2004 |        |   | Oct. 3,2003 |   |        | Sept. 27,2002 | 
|(in thousands)     |  |             |        |   |             |   |        |               |  |   |        |  
|Current            |  |             |        |   |             |   |        |               |  |   |        |  
|U.S. federal       |  | $           | 11,893 |   |             | $ | (1,898 | )             |  | $ | 10,713 |  
|Foreign            |  |             | 23,270 |   |             |   | 17,301 |               |  |   | 16,812 |  
|State and local    |  |             | 2,932  |   |             |   | 1,996  |               |  |   | 2,531  |  
|                   |  |             |        |   |             |   |        |               |  |   |        |  
|Total current      |  |             | 38,095 |   |             |   | 17,399 |               |  |   | 30,056 |  
|                   |  |             |        |   |             |   |        |               |  |   |        |  
|Deferred           |  |             |        |   |             |   |        |               |  |   |        |  
|U.S. federal       |  |             | (5,912 | ) |             |   | 6,056  |               |  |   | 395    |  
|Foreign            |  |             | (373   | ) |             |   | 2,618  |               |  |   | (911   | )
|State and local    |  |             | 245    |   |             |   | 390    |               |  |   |       |  
|                   |  |             |        |   |             |   |        |               |  |   |        |  
|Total deferred     |  |             | (6,040 | ) |             |   | 9,064  |               |  |   | (516   | )
|                   |  |             |        |   |             |   |        |               |  |   |        |  
|Income tax expense |  | $           | 32,055 |   |             | $ | 26,463 |               |  | $ | 29,540 |  
|                   |  |             |        |   |             |   |        |               |  |   |        |  



Deferred tax assets
and liabilities are recognized for the temporary differences between the tax basis and reported amounts of assets and liabilities, tax loss and credit carry-forwards, and the remittance of earnings from foreign subsidiaries. Their significant
components follow:



|                                            |  |                 |        |   |             |   |        |  
|------------------------------------------- |  | --------------- | ------ | - | ----------- | - | ------ | -
|                                            |  | Fiscal Year End |       
|                                            |  | Oct. 1,2004     |        |   | Oct. 3,2003 |  
|(in thousands)                              |  |                 |        |   |             |   |        |  
|Assets                                      |  |                 |        |   |             |   |        |  
|Inventory                                   |  | $               | 9,532  |   |             | $ | 8,871  |  
|Revenue recognition                         |  |                 | 3,402  |   |             |   | 5,076  |  
|Capitalized research costs                  |  |                 | 11,016 |   |             |   | 5,659  |  
|Loss and credit carry-forwards              |  |                 | 3,928  |   |             |   | 6,242  |  
|Deferred compensation                       |  |                 | 6,857  |   |             |   | 5,132  |  
|Product warranty                            |  |                 | 3,125  |   |             |   | 3,200  |  
|Other                                       |  |                 | 6,102  |   |             |   | 2,500  |  
|                                            |  |                 |        |   |             |   |        |  
|Gross deferred tax assets                   |  |                 | 43,962 |   |             |   | 36,680 |  
|Valuation allowance                         |  |                 | (3,500 | ) |             |   | (5,500 | )
|                                            |  |                 |        |   |             |   |        |  
|Total deferred tax assets                   |  |                 | 40,462 |   |             |   | 31,180 |  
|                                            |  |                 |        |   |             |   |        |  
|Liabilities                                 |  |                 |        |   |             |   |        |  
|Depreciation and amortization               |  |                 | 13,984 |   |             |   | 12,370 |  
|Unremitted earnings of foreign subsidiaries |  |                 | 4,800  |   |             |   | 4,800  |  
|                                            |  |                 |        |   |             |   |        |  
|Total deferred tax liabilities              |  |                 | 18,784 |   |             |   | 17,170 |  
|                                            |  |                 |        |   |             |   |        |  
|Net deferred tax assets                     |  | $               | 21,678 |   |             | $ | 14,010 |  
|                                            |  |                 |        |   |             |   |        |  



As of October 1, 2004,
the Companys foreign manufacturing and sales subsidiaries have accumulated approximately $65 million of earnings that have been reinvested in their operations. The Company has not provided U.S. tax on these earnings. The amount of the
unrecognized deferred tax liability on such earnings is not significant.



As of October 1, 2004, the Company has U.S. tax credit carry-forwards of approximately $3.9 million, of which $0.7 million and $2.8 million begin to expire in 2005 and 2007, respectively.



F-27



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



A valuation allowance has been provided against $3.5 million of foreign tax credit carry-forwards. If
recognized these carry-forwards will be accounted for as a credit to stockholders equity.



The difference between the reported income tax rate and the federal statutory income tax rate is attributable to the following:



|                                              |  |             |   |  |             |   |  |               |  
|--------------------------------------------- |  | ----------- | - |  | ----------- | - |  | ------------- | -
|                                              |  | Fiscal Year |  
|                                              |  | Oct. 1,2004 |   |  | Oct. 3,2003 |   |  | Sept. 27,2002 |  
|Federal statutory income tax rate             |  | 35.0        | % |  | 35.0        | % |  | 35.0          | %
|State and local taxes, net of federal benefit |  | 2.2         |   |  | 2.1         |   |  | 2.0           |  
|Foreign taxes                                 |  | (2.5        | ) |  | (1.6        | ) |  | (0.3          | )
|Other                                         |  | 0.3         |   |  | (0.5        | ) |  | (0.3          | )
|                                              |  |             |   |  |             |   |  |               |  
|Reported income tax rate                      |  | 35.0        | % |  | 35.0        | % |  | 36.4          | %
|                                              |  |             |   |  |             |   |  |               |  



The Companys
income taxes payable have been reduced and deferred tax assets increased by the tax benefits associated with exercises of employee stock options. These benefits were credited directly to stockholders equity and amounted to $13.3 million, $1.9
million, and $6.1 million for fiscal years 2004, 2003, and 2002, respectively. In fiscal year 2004, accumulated other comprehensive loss was decreased $1.6 million for the tax benefit of the minimum pension liability.



Note 16. Restructuring Costs



Fiscal Year 2004 Plans.    During fiscal year
2004, the Company undertook certain restructuring actions to reorganize the management structure in its Scientific Instruments factories in Australia and the Netherlands. These actions were undertaken to narrow the strategic and operational focus of
these factories and involved the termination of three employees. These actions were initiated in the fourth quarter of fiscal year 2004. All severance and other employee-related costs relating to this restructuring plan were recorded and included in
general and administrative expenses in the fourth quarter of fiscal year 2004. This restructuring plan did not involve any non-cash components.



The following table sets forth changes in the Companys liability relating to the foregoing restructuring plan during fiscal year 2004:



|                           |  |                  |       |   |                    |   |       |  |   |       |  
|-------------------------- |  | ---------------- | ----- | - | ------------------ | - | ----- |  | - | ----- | -
|                           |  | Fiscal Year 2004 |      
|                           |  | Employee-Related |       |   | Facilities-Related |   | Total | 
|(in thousands)             |  |                  |       |   |                    |   |       |  |   |       |  
|Balance at October 3, 2003 |  | $                |      |   |                    | $ |      |  | $ |      |  
|Charges to expense         |  |                  | 1,024 |   |                    |   |      |  |   | 1,024 |  
|Cash payments              |  |                  | (359  | ) |                    |   |      |  |   | (359  | )
|                           |  |                  |       |   |                    |   |       |  |   |       |  
|Balance at October 1, 2004 |  | $                | 665   |   |                    | $ |      |  | $ | 665   |  
|                           |  |                  |       |   |                    |   |       |  |   |       |  



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



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VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table sets forth changes in the Companys liability relating to the foregoing
restructuring plan during fiscal year 2004:



|                           |  |                  |     |                    |   |       |  |   |    
|-------------------------- |  | ---------------- | --- | ------------------ | - | ----- |  | - | ---
|                           |  | Fiscal Year 2004
|                           |  | Employee-Related |     | Facilities-Related |   | Total
|(in thousands)             |  |                  |     |                    |   |       |  |   |    
|Balance at October 3, 2003 |  | $                |    |                    | $ |      |  | $ |   
|Charges to expense         |  |                  | 859 |                    |   |      |  |   | 859
|                           |  |                  |     |                    |   |       |  |   |    
|Balance at October 1, 2004 |  | $                | 859 |                    | $ |      |  | $ | 859
|                           |  |                  |     |                    |   |       |  |   |    



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



The following table sets forth changes in the Companys liability relating to the foregoing restructuring plan during fiscal years 2003 and 2004:



|                                               |  |                            |        |   |                    |   |       |       |  |   |        |  
|---------------------------------------------- |  | -------------------------- | ------ | - | ------------------ | - | ----- | ----- |  | - | ------ | -
|                                               |  | Fiscal Years 2003 and 2004 |       
|                                               |  | Employee-Related           |        |   | Facilities-Related |   |       | Total | 
|(in thousands)                                 |  |                            |        |   |                    |   |       |       |  |   |        |  
|Balance at September 27, 2002                  |  | $                          |       |   |                    | $ | 392   |       |  | $ | 392    |  
|Charges to expense                             |  |                            | 5,242  |   |                    |   | 1,729 |       |  |   | 6,971  |  
|Cash payments                                  |  |                            | (4,043 | ) |                    |   | (387  | )     |  |   | (4,430 | )
|Foreign currency impacts and other adjustments |  |                            | (27    | ) |                    |   | (537  | )     |  |   | (564   | )
|                                               |  |                            |        |   |                    |   |       |       |  |   |        |  
|Balance at October 3, 2003                     |  |                            | 1,172  |   |                    |   | 1,197 |       |  |   | 2,369  |  
|Charges to expense, net of reversals of $216   |  |                            | 558    |   |                    |   | (22   | )     |  |   | 536    |  
|Cash payments                                  |  |                            | (1,750 | ) |                    |   | (338  | )     |  |   | (2,088 | )
|Foreign currency impacts and other adjustments |  |                            | 169    |   |                    |   | (7    | )     |  |   | 162    |  
|                                               |  |                            |        |   |                    |   |       |       |  |   |        |  
|Balance at October 1, 2004                     |  | $                          | 149    |   |                    | $ | 830   |       |  | $ | 979    |  
|                                               |  |                            |        |   |                    |   |       |       |  |   |        |  



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



During fiscal year 2004, the Company incurred approximately $2.2 million in other costs relating directly to the Southern California facility
consolidation that were in addition to the restructuring costs described above. These costs included approximately $1.7 million of non-cash charges for accelerated depreciation of assets to be disposed of upon the closure of facilities,
approximately $0.1 million in facility relocation costs, and approximately $0.4 million in employee retention and relocation costs.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 17. Operating Lease Commitments



As of October 1, 2004, the Company was committed to minimum rentals for certain facilities and other leased assets under
long-term non-cancelable operating leases as follows:



|               |  |   |       
|-------------- |  | - | ------
|(in thousands) |  |  
|Fiscal Year    |  |   |       
|2004           |  | $ | 7,414 
|2005           |  |   | 4,225 
|2006           |  |   | 2,850 
|2007           |  |   | 2,185 
|2008           |  |   | 1,957 
|Thereafter     |  |   | 25,461
|               |  |   |       
|Total          |  | $ | 44,092
|               |  |   |       



Rent expense for
fiscal years 2004, 2003, and 2002, was $8.3 million, $8.4 million, and $7.5 million, respectively.



Note 18. Industry and Geographic Segments



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 products 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, control, measure, or test
vacuum environments in a broad range of life science, industrial, and scientific applications requiring ultra-clean or high-vacuum environments. The Electronics Manufacturing segment provides 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 as required by SFAS 131, Disclosures about Segments of an Enterprise and Related Information. Management also views and evaluates as its core business the combined operations of the Companys
Scientific Instruments and Vacuum Technologies segments.



Corporate includes shared costs of legal, tax, accounting, human resources, real estate, information technology, treasury, 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 may 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 may not be meaningful.



The Company operates various manufacturing and marketing operations outside
the United States. In fiscal years 2004, 2003, and 2002, no single country outside the United States accounted for more than 10% of total sales or more than 10% of total assets. Transactions between geographic areas are accounted for at cost and are
not included in sales.



Included in the total of International
sales are export sales recorded by U.S. entities in fiscal years 2004, 2003, and 2002, of $50 million, $49 million, and $54 million, respectively.



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VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Industry Segments



|                          |  |             |     |                 |   |      |                     |      |                      |  |                               |    |   |      |   |    |      |  |      |    |      |  |      |     |      |   |      |  |      |     |      |   |      |  |   |    |  |   |    |  |   |    |  |   |    |  |   |   
|------------------------- |  | ----------- | --- | --------------- | - | ---- | ------------------- | ---- | -------------------- |  | ----------------------------- | -- | - | ---- | - | -- | ---- |  | ---- | -- | ---- |  | ---- | --- | ---- | - | ---- |  | ---- | --- | ---- | - | ---- |  | - | -- |  | - | -- |  | - | -- |  | - | -- |  | - | --
|                          |  | Total Sales |     | Pretax Earnings |   |      | Identifiable Assets |      | Capital Expenditures |  | Depreciation And Amortization
|                          |  | 2004        |     | 2003            |   | 2002 |                     | 2004 |                      |  | 2003                          |    |   | 2002 |   |    | 2004 |  | 2003 |    | 2002 |  | 2004 |     | 2003 |   | 2002 |  | 2004 |     | 2003 |   | 2002
|(in millions)             |  |             |     |                 |   |      |                     |      |                      |  |                               |    |   |      |   |    |      |  |      |    |      |  |      |     |      |   |      |  |      |     |      |   |     
|Scientific Instruments    |  | $           | 585 |                 | $ | 552  |                     | $    | 494                  |  | $                             | 54 |   |      | $ | 52 |      |  | $    | 54 |      |  | $    | 437 |      | $ | 402  |  | $    | 371 |      | $ | 14   |  | $ | 19 |  | $ | 9  |  | $ | 13 |  | $ | 12 |  | $ | 9 
|Vacuum Technologies       |  |             | 140 |                 |   | 117  |                     |      | 111                  |  |                               | 23 |   |      |   | 13 |      |  |      | 17 |      |  |      | 59  |      |   | 56   |  |      | 56  |      |   | 4    |  |   | 2  |  |   | 4  |  |   | 4  |  |   | 4  |  |   | 4 
|Electronics Manufacturing |  |             | 191 |                 |   | 179  |                     |      | 175                  |  |                               | 21 |   |      |   | 21 |      |  |      | 18 |      |  |      | 93  |      |   | 91   |  |      | 85  |      |   | 3    |  |   | 4  |  |   | 5  |  |   | 6  |  |   | 6  |  |   | 5 
|                          |  |             |     |                 |   |      |                     |      |                      |  |                               |    |   |      |   |    |      |  |      |    |      |  |      |     |      |   |      |  |      |     |      |   |      |  |   |    |  |   |    |  |   |    |  |   |    |  |   |   
|Total industry segments   |  |             | 916 |                 |   | 848  |                     |      | 780                  |  |                               | 98 |   |      |   | 86 |      |  |      | 89 |      |  |      | 589 |      |   | 549  |  |      | 512 |      |   | 21   |  |   | 25 |  |   | 18 |  |   | 23 |  |   | 22 |  |   | 18
|General corporate         |  |             |    |                 |   |     |                     |      |                     |  |                               | (7 | ) |      |   | (9 | )    |  |      | (6 | )    |  |      | 242 |      |   | 188  |  |      | 123 |      |   | 2    |  |   | 5  |  |   | 4  |  |   | 2  |  |   | 2  |  |   | 3 
|Interest income           |  |             |    |                 |   |     |                     |      |                     |  |                               | 3  |   |      |   | 1  |      |  |      | 1  |      |  |      |    |      |   |     |  |      |    |      |   |     |  |   |   |  |   |   |  |   |   |  |   |   |  |   |  
|Interest expense          |  |             |    |                 |   |     |                     |      |                     |  |                               | (2 | ) |      |   | (2 | )    |  |      | (3 | )    |  |      |    |      |   |     |  |      |    |      |   |     |  |   |   |  |   |   |  |   |   |  |   |   |  |   |  
|                          |  |             |     |                 |   |      |                     |      |                      |  |                               |    |   |      |   |    |      |  |      |    |      |  |      |     |      |   |      |  |      |     |      |   |      |  |   |    |  |   |    |  |   |    |  |   |    |  |   |   
|Total company             |  | $           | 916 |                 | $ | 848  |                     | $    | 780                  |  | $                             | 92 |   |      | $ | 76 |      |  | $    | 81 |      |  | $    | 831 |      | $ | 737  |  | $    | 635 |      | $ | 23   |  | $ | 30 |  | $ | 22 |  | $ | 25 |  | $ | 24 |  | $ | 21
|                          |  |             |     |                 |   |      |                     |      |                      |  |                               |    |   |      |   |    |      |  |      |    |      |  |      |     |      |   |      |  |      |     |      |   |      |  |   |    |  |   |    |  |   |    |  |   |    |  |   |   



Geographic
Information



|                                  |  |                                     |     |                                     |   |      |             |      |     |                 |      |      |                     |      |   |      |      |  |   |      |   |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |      |  |      |     |   |  |   |     |   |  |   |     |  |   |     |  |   |    
|--------------------------------- |  | ----------------------------------- | --- | ----------------------------------- | - | ---- | ----------- | ---- | --- | --------------- | ---- | ---- | ------------------- | ---- | - | ---- | ---- |  | - | ---- | - |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | - |  | ---- | --- | ---- |  | ---- | --- | - |  | - | --- | - |  | - | --- |  | - | --- |  | - | ---
|                                  |  | Sales to Unaffiliated Customers (1) |     | Intergeographic Sales to Affiliates |   |      | Total Sales |      |     | Pretax Earnings |      |      | Identifiable Assets
|                                  |  | 2004                                |     | 2003                                |   | 2002 |             | 2004 |     |                 | 2003 |      |                     | 2002 |   |      | 2004 |  |   | 2003 |   |  | 2002 |       |   | 2004 |   |       | 2003 |  |   | 2002  |   |  | 2004 |     | 2003 |  | 2002
|(in millions)                     |  |                                     |     |                                     |   |      |             |      |     |                 |      |      |                     |      |   |      |      |  |   |      |   |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |      |  |     
|United States                     |  | $                                   | 491 |                                     | $ | 477  |             | $    | 469 |                 | $    | 271  |                     |      | $ | 251  |      |  | $ | 203  |   |  | $    | 762   |   |      | $ | 728   |      |  | $ | 672   |   |  | $    | 46  |      |  | $    | 43  |   |  | $ | 57  |   |  | $ | 387 |  | $ | 376 |  | $ | 360
|International                     |  |                                     | 425 |                                     |   | 371  |             |      | 311 |                 |      | 133  |                     |      |   | 108  |      |  |   | 101  |   |  |      | 558   |   |      |   | 479   |      |  |   | 412   |   |  |      | 64  |      |  |      | 51  |   |  |   | 41  |   |  |   | 199 |  |   | 173 |  |   | 152
|                                  |  |                                     |     |                                     |   |      |             |      |     |                 |      |      |                     |      |   |      |      |  |   |      |   |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |      |  |      |     |   |  |   |     |   |  |   |     |  |   |     |  |   |    
|Total geographic segments         |  |                                     | 916 |                                     |   | 848  |             |      | 780 |                 |      | 404  |                     |      |   | 359  |      |  |   | 304  |   |  |      | 1,320 |   |      |   | 1,207 |      |  |   | 1,084 |   |  |      | 110 |      |  |      | 94  |   |  |   | 98  |   |  |   | 586 |  |   | 549 |  |   | 512
|Eliminations, corporate and other |  |                                     |    |                                     |   |     |             |      |    |                 |      | (404 | )                   |      |   | (359 | )    |  |   | (304 | ) |  |      | (404  | ) |      |   | (359  | )    |  |   | (304  | ) |  |      | (18 | )    |  |      | (18 | ) |  |   | (17 | ) |  |   | 245 |  |   | 188 |  |   | 123
|                                  |  |                                     |     |                                     |   |      |             |      |     |                 |      |      |                     |      |   |      |      |  |   |      |   |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |      |  |      |     |   |  |   |     |   |  |   |     |  |   |     |  |   |    
|Total company                     |  | $                                   | 916 |                                     | $ | 848  |             | $    | 780 |                 | $    |     |                     |      | $ |     |      |  | $ |     |   |  | $    | 916   |   |      | $ | 848   |      |  | $ | 780   |   |  | $    | 92  |      |  | $    | 76  |   |  | $ | 81  |   |  | $ | 831 |  | $ | 737 |  | $ | 635
|                                  |  |                                     |     |                                     |   |      |             |      |     |                 |      |      |                     |      |   |      |      |  |   |      |   |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |      |  |      |     |   |  |   |     |   |  |   |     |  |   |     |  |   |    
|                                  |  |                                     |     |                                     |   |      |             |      |     |                 |      |      |                    
|                                  |  | Long-Lived Assets (2)               |     |                                     |   |      |             |      |     |                 |      |      |                     |      |   |      |      |  |   |      |   |  |      |       |   |      |   |       |      |  |   |       |   |  |     
|                                  |  | 2004                                |     | 2003                                |   | 2002 |             |      |     |                 |      |      |                     |      |   |      |      |  |   |      |   |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |      |  |     
|(in millions)                     |  |                                     |     |                                     |   |      |             |      |     |                 |      |      |                     |      |   |      |      |  |   |      |   |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |      |  |     
|United States                     |  | $                                   | 84  |                                     | $ | 81   |             | $    | 77  |                 |      |      |                     |      |   |      |      |  |   |      |   |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |      |  |      |     |   |  |   |     |   |  |   |     |  |   |     |  |   |    
|Italy                             |  |                                     | 15  |                                     |   | 14   |             |      | 14  |                 |      |      |                     |      |   |      |      |  |   |      |   |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |      |  |      |     |   |  |   |     |   |  |   |     |  |   |     |  |   |    
|Other international               |  |                                     | 25  |                                     |   | 27   |             |      | 18  |                 |      |      |                     |      |   |      |      |  |   |      |   |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |      |  |      |     |   |  |   |     |   |  |   |     |  |   |     |  |   |    
|                                  |  |                                     |     |                                     |   |      |             |      |     |                 |      |      |                     |      |   |      |      |  |   |      |   |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |      |  |      |     |   |  |   |     |   |  |   |     |  |   |     |  |   |    
|Total company                     |  | $                                   | 124 |                                     | $ | 122  |             | $    | 109 |                 |      |      |                     |      |   |      |      |  |   |      |   |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |      |  |      |     |   |  |   |     |   |  |   |     |  |   |     |  |   |    
|                                  |  |                                     |     |                                     |   |      |             |      |     |                 |      |      |                     |      |   |      |      |  |   |      |   |  |      |       |   |      |   |       |      |  |   |       |   |  |      |     |      |  |      |     |   |  |   |     |   |  |   |     |  |   |     |  |   |    

---

|(1) |  | Sales are generally based on the location of the operation furnishing goods and services. Export sales recorded by U.S. entities are included in International sales. No single
customer accounted for more than 10% of sales in any of the fiscal years presented.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Excludes goodwill, intangible assets, and long-term deferred tax assets.
|--- |  | ------------------------------------------------------------------------



Note 19. Subsequent Events



Acquisition of Magnex Scientific Limited.    On November 3, 2004, the Company acquired Magnex Scientific Limited
(Magnex) for approximately $31.8 million in cash and assumed net debt, subject to certain net asset adjustments. The transaction also includes an opportunity for additional purchase price payments of up to $6.0 million over a three-year
period, depending on the performance of the Magnex business relative to certain financial targets. Magnex designs, develops, manufactures, sells, and services superconducting magnets for human and other magnetic resonance (MR) imaging,
NMR, and Fourier Transform mass spectroscopy, and gradients for MR microscopy. These magnets are used in the Companys NMR and MR imaging systems, and are also sold to original equipment manufacturers and end-users. The Magnex business became
part of the Companys Scientific Instruments segment. The



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VARIAN, INC. AND SUBSIDIARY COMPANIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Company will complete its allocation of the purchase price paid for Magnex following the completion of the closing balance sheet, a valuation of acquired
intangible assets, and certain other matters. This is currently expected to occur by the end of the fiscal quarter ending December 31, 2004.



U.K. Field Support Administration Restructuring.    In October 2004, in connection with the Companys announcement
of the definitive agreement to acquire Magnex, the Company committed to a plan to rationalize its field support administration in the United Kingdom. The objective of the plan is to achieve operational efficiencies and eliminate redundant costs
resulting from the Magnex acquisition. The plan will involve the termination of approximately 20 employees, the consolidation of certain field support administrative functions currently located in the Companys Walton, U.K. location to
Magnexs location in Oxford, U.K., and the closure of the Walton facility.



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SCHEDULE II



VARIAN, INC. AND
SUBSIDIARY COMPANIES



VALUATION AND QUALIFYING ACCOUNTS

for fiscal years 2004, 2003, and 2002

(In thousands)



|                                            |  |                                |       |                             |   |            |  |                          |  |   |     |  |   |      
|------------------------------------------- |  | ------------------------------ | ----- | --------------------------- | - | ---------- |  | ------------------------ |  | - | --- |  | - | -----
|                                            |  | Balance at Beginning of Period |       | Charged toCosts andExpenses |   | Deductions |  | Balance atEnd ofPeriod  
|Description                                 |  |                                |       | Description                 |   | Amount     | 
|Allowance for Doubtful Accounts Receivable: |  |                                |       |                             |   |            |  |                          |  |   |     |  |   |      
|Fiscal year 2004                            |  | $                              | 2,010 |                             | $ | 318        |  | Write-offs & adjustments |  | $ | 412 |  | $ | 1,916
|                                            |  |                                |       |                             |   |            |  |                          |  |   |     |  |   |      
|Fiscal year 2003                            |  | $                              | 2,286 |                             | $ | 295        |  | Write-offs & adjustments |  | $ | 571 |  | $ | 2,010
|                                            |  |                                |       |                             |   |            |  |                          |  |   |     |  |   |      
|Fiscal year 2002                            |  | $                              | 2,217 |                             | $ | 305        |  | Write-offs & adjustments |  | $ | 236 |  | $ | 2,286
|                                            |  |                                |       |                             |   |            |  |                          |  |   |     |  |   |      



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##### Table of Contents

VARIAN, INC. AND SUBSIDIARY COMPANIES



Quarterly Consolidated Financial Data (Unaudited)



Amounts as reported for each quarterly period in fiscal years 2004 and 2003
follow:



|                                        |  |                  |       |               |   |              |  |               |       |  |   |      
|--------------------------------------- |  | ---------------- | ----- | ------------- | - | ------------ |  | ------------- | ----- |  | - | -----
|                                        |  | Fiscal Year 2004
|                                        |  | FirstQuarter     |       | SecondQuarter |   | ThirdQuarter |  | FourthQuarter
|(in millions, except per share amounts) |  |                  |       |               |   |              |  |               |       |  |   |      
|Sales                                   |  | $                | 212.5 |               | $ | 232.7        |  | $             | 236.7 |  | $ | 234.1
|                                        |  |                  |       |               |   |              |  |               |       |  |   |      
|Gross profit                            |  | $                | 79.8  |               | $ | 88.4         |  | $             | 89.3  |  | $ | 89.7 
|                                        |  |                  |       |               |   |              |  |               |       |  |   |      
|Net earnings                            |  | $                | 13.6  |               | $ | 14.7         |  | $             | 15.4  |  | $ | 15.8 
|                                        |  |                  |       |               |   |              |  |               |       |  |   |      
|Net earnings per share                  |  |                  |       |               |   |              |  |               |       |  |   |      
|                                        |  |                  |       |              
|Basic                                   |  | $                | 0.39  |               | $ | 0.42         |  | $             | 0.44  |  | $ | 0.46 
|                                        |  |                  |       |               |   |              |  |               |       |  |   |      
|Diluted                                 |  | $                | 0.38  |               | $ | 0.41         |  | $             | 0.43  |  | $ | 0.44 
|                                        |  |                  |       |               |   |              |  |               |       |  |   |      
|                                        | 
|                                        |  | Fiscal Year 2003
|                                        |  | FirstQuarter     |       | SecondQuarter |   | ThirdQuarter |  | FourthQuarter
|(in millions, except per share amounts) |  |                  |       |               |   |              |  |               |       |  |   |      
|Sales                                   |  | $                | 195.7 |               | $ | 204.7        |  | $             | 208.7 |  | $ | 238.6
|                                        |  |                  |       |               |   |              |  |               |       |  |   |      
|Gross profit                            |  | $                | 76.4  |               | $ | 78.3         |  | $             | 77.9  |  | $ | 89.2 
|                                        |  |                  |       |               |   |              |  |               |       |  |   |      
|Net earnings                            |  | $                | 12.7  |               | $ | 13.9         |  | $             | 10.7  |  | $ | 11.8 
|                                        |  |                  |       |               |   |              |  |               |       |  |   |      
|Net earnings per share                  |  |                  |       |               |   |              |  |               |       |  |   |      
|                                        |  |                  |       |              
|Basic                                   |  | $                | 0.37  |               | $ | 0.41         |  | $             | 0.32  |  | $ | 0.35 
|                                        |  |                  |       |               |   |              |  |               |       |  |   |      
|Diluted                                 |  | $                | 0.36  |               | $ | 0.40         |  | $             | 0.31  |  | $ | 0.34 
|                                        |  |                  |       |               |   |              |  |               |       |  |   |      



Net earnings per share
for the four quarters of each fiscal year may not sum to the total for the fiscal year because of the different number of shares outstanding during each period.



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