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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



|           |  |                                              
|---------- |  | ---------------------------------------------
|(Mark One) |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
|x          |  | OF THE SECURITIES EXCHANGE ACT OF 1934       
|           |  | For the fiscal year ended September 28, 2007 

OR



|  |  |                                                         
|- |  | --------------------------------------------------------
| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|  |  | SECURITIES EXCHANGE ACT OF 1934                         
|  |  | For the transition period from                      to  

Commission File Number: 0-25395

Exact name of registrant as specified in its charter:



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.



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

Address and telephone number of principal executive offices:

35 Dory Road, Gloucester, Massachusetts 01930-2297

(978) 282-2000

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



|                              |  |                                     
|----------------------------- |  | ------------------------------------
|Title of Each Class           |  | Name of Exchange on Which
Registered
|Common Stock, $0.01 par value |  | NASDAQ Global Select Market         

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

None



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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES  x      NO ̈

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.  YES ̈NO  x

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

Indicate by checkmark 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. ̈

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

Large accelerated filer  x            Accelerated filer ̈Non-accelerated filer ̈

Indicate by checkmark whether the registrant is a shell company (as
defined in Exchange Act Rule12b-2).  Yes ̈No  x

The aggregate market value of the registrants common stock held by non-affiliates as of March 30, 2007 was $
2,866,888,000.

The number of shares of the registrants common stock outstanding as of November 12, 2007 was 75,893,604 shares of
$0.01 par value common stock.

An index of exhibits filed with this Form 10-K is located on page 45.

DOCUMENTS INCORPORATED BY REFERENCE:



|                                                                                                                                                                                                                                         |  |                                          
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------
|Document Description                                                                                                                                                                                                                     |  | Part of Form 10-K into which
incorporated
|Portions of the Registrants Proxy Statement with respect to the Annual Meeting of Stockholders to be held on February 4, 2008 to be filed with the Securities and Exchange Commission
not later than 120 days after September 28, 2007. |  | Part III                                 



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

FORM 10-K

FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 2007

TABLE OF CONTENTS



|         |  |                                                                                                              |  |   
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | --
|PART I  
|Item 1.  |  | Business                                                                                                     |  | 1 
|Item 1A. |  | Risk Factors                                                                                                 |  | 12
|Item 2.  |  | Properties                                                                                                   |  | 19
|Item 3.  |  | Legal Proceedings                                                                                            |  | 19
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 20
|        
|PART II 
|         |  |                                                                                                             
|Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 21
|Item 6.  |  | Selected Financial Data                                                                                      |  | 24
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 26
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 38
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 40
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 40
|Item 9A. |  | Controls and Procedures                                                                                      |  | 40
|Item 9B. |  | Other Information                                                                                            |  | 41
|        
|PART III
|         |  |                                                                                                             
|Item 10. |  | Directors, Executive Officers and Corporate Governance                                                       |  | 42
|Item 11. |  | Executive Compensation                                                                                       |  | 42
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 42
|Item 13. |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 42
|Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 42
|        
|PART IV 
|         |  |                                                                                                             
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                   |  | 43



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PART I



|Item 1. | Business.
|------- | ---------

Overview

Varian Semiconductor Equipment Associates, Inc. (Varian Semiconductor) is the leading supplier of ion implantation systems used in the fabrication of
semiconductor chips. Varian Semiconductor designs, manufactures, markets and services semiconductor processing equipment for virtually all of the major semiconductor manufacturers in the United States (U.S.), Europe and Asia Pacific
region. The VIISta ion implanter products are designed to leverage single wafer processing technology for the full range of semiconductor implant applications. Varian Semiconductor has shipped more than 3,800 systems worldwide.

Varian Semiconductor provides support, training, and after-market products and services that help its customers obtain high utilization and productivity, reduce
operating costs, and extend capital productivity of investments throughout multiple product generations. In fiscal year 2007, Varian Semiconductor was ranked number one in customer satisfaction in VLSI Research Inc.s customer survey for all
large suppliers of wafer processing equipment, an honor received in ten of the past eleven years.

Varian Semiconductors business is cyclical. The
business depends upon semiconductor manufacturers expectations and resulting capacity investments for future integrated circuit demand. During calendar year 2005, there was an 11% decline in worldwide ion implanter sales. However, due to
market share gains, Varian Semiconductors fiscal year 2005 revenue increased 13% over fiscal year 2004 as customers migrated to single wafer systems. Single wafer systems are now preferred over batch systems as they process wafers in such a
way that results in higher yields for advanced device manufacturers. By offering a superior product to meet the requirements at the batch to single wafer inflection point, Varian Semiconductor grew its market share in 2006 from 39% to 43%. Calendar
year 2007 market share reports are expected to be released in April 2008. Varian Semiconductor believes it has continued to increase its overall market share during calendar year 2007.

Varian Semiconductor maintains a website at www.vsea.com. The information contained on the Varian Semiconductor website is not included in, or incorporated by reference into, this Annual Report on Form 10-K. Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, are made available through the Varian Semiconductor website, free of charge, as soon as reasonably practicable following the
electronic filing or furnishing of such materials by Varian Semiconductor to the Securities and Exchange Commission (SEC) and are available at the SECs website at www.sec.gov.

The Industry

The semiconductor industry is essentially two
different, but connected industriesmicrochip and capital equipment (capex). The microchip industry is where microprocessors, dynamic random access memory (DRAM), operational amplifiers and hundreds of other electronic
circuits are created on small squares of silicon known as chips or die. The manufacturers of these circuits can be categorized as either logic, memory, foundry, analog or discrete. Logic, memory and foundry represent the bulk
of the industry. Logic manufacturers make chips that process information and are owned by the companies that design the chips. Memory manufacturers make chips that store information, and they too, are owned by the companies that design the chips.
Foundry manufacturers are contractors that take chip designs from other companies and make the chips for them. Over the last several years the demand for memory chips has outstripped the demand for logic chips. As the demand for memory-intensive
applications such as cameras, phones and MP3 players grows, it is expected that memory will continue to represent the bulk of chips made worldwide.

The
capex industry is where Varian Semiconductor participates. The capex industry is comprised of companies that manufacture equipment used in the production of microchips. The two segments of the capex industry are



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known as Front End of the Line (FEOL) and Back End of the Line (BEOL). In the FEOL, the various circuit components such as
transistors, diodes, resistors and capacitors are formed. In the BEOL, the wires, or interconnect, that join all of the components together to form the circuit are created. Varian manufactures tools that form the circuit components in the FEOL. The
entire semiconductor industry has grown so rapidly because it is continually able to provide more functionality for a lower cost. In order to achieve this dynamic and be successful, capex companies must innovate through aggressive research and
development. The technology and the applications that drive the entire industry are developed by the capex companies.

During the past five to ten years,
however, the semiconductor capital equipment market has experienced a slowdown in growth as compared to historical levels. This is the result of improved productivity and efficiencies of capital equipment, the transition to more productive 300mm
(300 millionths of a meter) wafers, changing demand for next generation processing chips and the increasing technical difficulties with putting more and more transistors on a microchip.

Semiconductor manufacturing is highly competitive with each manufacturer seeking to provide products that consume the least amount of power, and have the lowest cost and fastest processing speed. Integrated circuit
manufacturers generally rely on equipment suppliers for the timely development of equipment and processes to meet their rapidly changing and complex requirements. Today, a semiconductor fabrication factory, or fab, can cost over $3
billion. As the industry transitions to 45nm (45 billionths of a meter) devices, these costs are expected to increase.

The fabrication of integrated
circuits requires a number of complex and repetitive processing steps, including deposition, photolithography, etch, metrology, anneal and ion implantation. Deposition is a process in which a film of either electrically insulating or electrically
conductive material is deposited on the surface of a wafer. Photolithography is used to transfer a circuit pattern onto a light-sensitive material called photo-resist that, after development, can be used in turn to transfer the pattern onto the
silicon surface. The etch process completes the transfer of the pattern into the various thin films used to make the integrated circuit. Metrology measures critical features and properties of the device to assure correct fabrication. Anneal is used
to incorporate implanted impurities into the silicon crystal matrix and make them electrically active. Ion implantation provides a means for introducing impurities into the silicon crystal, typically into selected areas defined by the
photolithographic process. The selective implanting of ions into defined areas creates electrically conductive areas that form the transistors of the integrated circuits.

Semiconductor manufacturers have historically sought to increase the number of transistors on each microchip by shrinking device structures. Through this relentless miniaturization, microchips have
chronologically increased their processing capability or memory storage capacity. This is accomplished by exploiting advancements in photolithography. Each new advancement in photolithography is described by the minimum resolvable geometry and is
commonly referred to as a device node. State-of-the-art production is now accomplished at 65nm nodes with production of 45nm in transition at more technologically advanced fabs. Research and development for 32nm is underway at multiple
customer sites and semiconductor research labs.

Improved productivity has been accomplished by transitioning to larger and larger silicon substrates, or
wafers. From 25mm wafers used in the 1970s to the current state of the art wafer size at 300mm, each successive generation increases the number of die or microchips per wafer thereby increasing productivity. The use of a larger wafer generally
requires a great deal of infrastructure changes in equipment and factory automation systems, so transitions only occur about every 10 years. The use of 200mm wafers in production began at the end of the 1980s. The migration from 200mm to 300mm
began at the end of the 1990s. 300mm tool sales now represent the majority of all new tool sales.

To achieve higher yields, implant systems must be
capable of repeating the original process on a consistent basis for all devices on the wafer and for every wafer. These characteristics are known in the industry as uniformity and repeatability. In addition, implant systems
must process wafers without damaging the device structures or



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introducing device damaging contamination, which is typically characterized by cross contamination levels and particle defect adders.
In many cases implant performance is measured directly from the electrical performance of actual devices or device test structures. This is called electrical parametrics. In production fabs, there are typically multiple ion implantation
systems performing the same processes in order to meet the production demands of the fab. In order to allow the greatest flexibility, semiconductor manufacturers require that each system perform equally well on each device step. This characteristic
is known as tool-to-tool matching. In advanced device production, semiconductor manufacturers will often adjust the implant processes to compensate for variability in processes upstream from the implanter, making the implanters
accuracy another important attribute. Uniformity, repeatability, accuracy, cross contamination, defect adders, parametrics and tool-to-tool matching are all critical in achieving commercially acceptable yields.

Semiconductor manufacturers generally measure the cost performance of their production equipment in terms of cost of ownership, which is determined by
factoring in the fixed costs for acquisition and installation of the equipment, its variable operating costs and total wafer output. Equipment with higher wafer throughput increases total output and allows the semiconductor manufacturer to recover
the purchase and installation costs of the equipment over a greater number of wafers and thereby reduces the cost of ownership of the equipment on a per wafer basis. Throughput is most accurately measured on a net or overall basis, which takes into
account the processing speed of the equipment and any system setup and non-operational downtime for cleaning, maintenance or other repairs. The increased difficulty of achieving desired transistor performance at advanced nodes has made high yields
important in selecting processing equipment. The most desired systems are those that can achieve process results within critical tolerance limits and still operate at desired throughput rates.

The continuing evolution of semiconductor devices to smaller geometries and more complex multi-level circuitry has significantly increased the cost and performance
requirements of the capital equipment used to manufacture these devices. As wafer fabs are projected to increase in cost substantially for each subsequent device node, yield losses and depreciation costs will become a much larger percentage of the
aggregate production costs for semiconductor manufacturers relative to labor, materials and other variable manufacturing costs. As a result, there has been increasing focus by the semiconductor industry on obtaining increased capability and
productivity to maintain returns from semiconductor manufacturing equipment, thereby increasing the revenue generated and reducing the effective cost of ownership of such systems.

Products

Varian Semiconductor designs, markets, manufactures and services ion implantation systems which are used to
build the transistors that are the basis of integrated circuits. Ion implanters have the ability to implant selected elements into the silicon wafers at precise locations and depths by bombarding the silicon surface with a precisely controlled beam
of electrically charged ions of specific atomic mass and energy. These ions are embedded into the silicon crystal structure, changing the electrical properties of the silicon. The precision of ion implantation techniques permits customers to achieve
the necessary control of this doping process to construct up to 500 billion transistors of uniform characteristics on a 300mm wafer using state-of-the-art processes. Since these transistors are the starting point of all subsequent process steps,
repeatability, uniformity and yield are extremely important.

The most advanced device fabs might have as many as 30 separate implant steps. An implant is
characterized by the dose (amount of dopant) and the energy (depth that dopant goes into the silicon wafer). Varian Semiconductor provides four different single wafer implanter products which cover the full range of required applications in these
implant sectors: high currenthigh dose, low energy; ultra high dosevery high dose, very low energy; medium currentlow dose, medium energy; high energylow dose, very high energy. There is some overlap of each implanters
application coverage with the next. However, each implanter is designed to provide maximum productivity and yield within their respective application ranges.



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Varian Semiconductor currently offers the following products:

Medium Current

Recognized as the industry benchmark
for medium current performance and productivity, Varian Semiconductors single wafer VIISta 900XP series ion implanters provide superior overall throughput, precision doping capability and unmatched contamination control. These systems excel at
threshold voltage (Vt), channel, retrograde well, pocket, and halo implants. Varian Semiconductors other medium current systems include the VIISta 810HP and VIISta 810XE ion implanters. In addition, Varian Semiconductor continues
to provide support for its older generation VIISta and legacy medium current ion implanters still in use by its customers.

To achieve higher device
speeds, chip designers often increase manufacturing process complexity by utilizing multiple transistor designs in the same integrated circuit. An example of this is the use of multiple device Vts, which require separate medium current steps
in the same integrated circuits for each Vt desired. This increase in the number of applications tends to be offset by the increasing productivity of medium current systems.

Medium current implanters are used in logic, memory and foundry manufacturers. Annually, medium current represents about 30% of the total available market, or TAM, for ion implant. For 2006 the TAM for medium current
was $414 million.

High Current

The
high current VIISta HCP series single wafer ion implanter provides the highest productivity and best contamination performance. In addition, these systems feature implant angle accuracy, beam steering correction and high-tilt angle
capabilityall of which are required for advanced device fabrication. The VIISta HCP has excellent process control capability for advanced ultra shallow junction applications, and can be used for source/drain, source/drain extension, gate
doping, pre-amorphization, and materials modification applications. Varian Semiconductors other high current system is the VIISta HC ion implanter. In addition, Varian Semiconductor continues to provide support for its older generation VIISta
and legacy high current ion implanters still in use by its customers.

The high current sector is expected to grow relative to the overall implant market
due to an increase in the number of implant steps needed to produce many advanced semiconductors. Due to the very low energies and high dose concentrations that are necessary for increased transistor speed and lower device power consumption, the
productivity of high current systems tends to decline with advancing technology nodes, requiring more high current implanters. Most advanced devices require single wafer systems, and single wafer high current is expected to grow to nearly 80% of the
high current market in calendar year 2007. Varian Semiconductor was the first to introduce single wafer systems to this market sector through its VIISta platform.

High current implanters are used in logic, memory and foundry manufacturers. Annually, high current represents about 53% of the TAM for ion implant. For 2006 the TAM for high current was $720 million.

High Energy

The high energy VIISta 3000XP features
true zero degree implant and low contamination. The VIISta 3000XP is the only single wafer high energy implanter available on the market today, an advantage for semiconductor manufacturers that need increased device packing density in
high-performance devices. The VIISta 3000XP has outstanding process accuracy, offers excellent productivity, uniformity, angle control and medium current back-up flexibility. Varian Semiconductors high energy products cover retrograde well,
triple well, buried layers, and pocket applications. Varian Semiconductor continues to provide support for its legacy high energy ion implanters still in use by its customers.



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High energy implanters are used in most wafer fabs, but predominantly by memory manufacturers. Annually, high energy
represents about 17% of the TAM for ion implant. For 2006 the TAM for high energy was $230 million.

Ultra High Dose

Medium current, high current and high energy tools utilize a focused ion beam to achieve the desired dose and energy for particular implant specie. For ultra high dose
applications, the VIISta PLAD tool uses an altogether different technology. A plasma, or ionized gas, of the desired specie is created in a chamber where the wafer is held to a platen. A pulsed DC voltage is applied to the wafer platen which draws
ions to the wafer at an energy proportional to the DC pulse. This approach creates very high dose rates at low energies and provides conformal doping capability where the dopant covers all the angled surface features of the wafer uniformly. Varian
Semiconductor has implemented many advanced control features on VIISta PLAD such as closed loop dosimetry to ensure accurate dosing of the wafer. With throughput up to six times greater than traditional beamline or modified-source beamline
technologies, the VIISta PLAD has become an attractive solution for new critical very low-energy, very high-dose applications, such as dual poly gate.

Ultra high dose systems are currently used only in memory and foundry manufacturers. As applications develop, Varian Semiconductor expects ultra high dose tools to be used in all types of wafer fab facilities. For 2007, the TAM for ultra
high dose is expected to be about $70 million.

VIISta Platform

The VIISta 900XP, VIISta HCP, VIISta PLAD and VIISta 3000XP are based on the same platform, thereby providing a high degree of commonality in subsystems and overall architecture. The VIISta platform provides customers
with a great deal of flexibility in managing overall bay productivity, resulting in a reduction in customers time to first silicon, greater productivity across all applications, and an increase on their return on investment. Varian
Semiconductor has shipped more than 800 VIISta systems. The VIISta platform of ion implanters is the only single wafer platform solution for all production applications. All of the VIISta products feature the Varian Control System
(VCS), the Varian Positioning Systems (VPS), and the VIISta single wafer endstation. This high degree of commonality across the VIISta platform facilitates process matching throughout the system set, and provides
flexibility in managing capacity, product mix changes, spare parts and training.

Customer Support and Services

Varian Semiconductor provides customer support services designed to maximize the productivity of its customers equipment and to increase uptime through the
effective management of machine maintenance, parts inventory and support services. All of these services provide a direct link to Varian Semiconductors manufacturing facility and research centers.

Varian Semiconductor provides a wide range of programs, from a complete turnkey solution that supports the fabs ion implant performance, to economical service
plans for those who require less support. These programs are customized to specific customer requirements, provide dedicated labor to maintain and troubleshoot the ion implanter, and make available on-call 24/7 service for around-the-clock support.
Since 1984, Varian Semiconductor has been developing upgrades for the installed base that extends the life of the capital equipment. These upgrades provide its customers with benefits that are focused around increasing productivity and the reduction
of cost-of-ownership. Specifically, the benefits are realized as enhancements to throughput, yield, uptime, maintenance and ergonomics improvements.

For
parts management, Varian Semiconductor has approximately 30 parts banks strategically placed around the world that support more than 200 customer fabs. The use of a global enterprise resource planning system



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provides Varian Semiconductor with a distribution structure that efficiently manages inventory, delivery and logistics services. Varian Semiconductor also
offers a comprehensive consumable and non-consumable parts program that can be tailored to individual fab needs to minimize its customers cost of ownership from the ordering of individual piece parts over its eCommerce site, vShop, to complete
stocking and inventory management programs like Fab Specific Parts Programs.

Through VEDoc, an electronic documentation system, customers can easily
access information about their ion implanters. All assembly drawings, schematics, parts lists, maintenance and operation manuals, and video-illustrated maintenance procedures are available in a CD-ROM format.

Varian Semiconductors commitment to customer service also includes extensive and comprehensive customer training programs. Varian Semiconductor offers a full range
of technical training, from the basic operation and maintenance of the toolset to electronic troubleshooting and alignments. Training is available for all ion implanter products manufactured at Varian Semiconductor (medium current, high current,
high energy and PLAD tools), with specialized courses available in process applications.

Marketing and Sales

Varian Semiconductor markets, sells, installs and services ion implantation systems directly to semiconductor industry manufacturers and has sold ion implantation
products to most of the 20 largest semiconductor manufacturers in the world. Varian Semiconductors sales objective is to work closely with customers to secure purchases of multiple systems as customers expand capacity, update existing
facilities, introduce new manufacturing processes or build new wafer manufacturing facilities. Varian Semiconductor seeks to build customer loyalty and to achieve a high level of repeat business by offering highly reliable products that give its
customers a competitive edge, comprehensive field support and responsive parts replacement and service programs.

Varian Semiconductor has historically
sold at least half of its systems in any particular period to a relatively small number of customers, some of which include Elpida Memory, Inc. (Elpida), Hynix Semiconductor, Inc. (Hynix), Hynix-ST Semiconductor Limited
(Hynix-ST), IM Flash Technologies, LLC. (IM Flash), Inotera Memories, Inc. (Inotera), Intel Corporation (Intel), Micron Technology, Inc. (Micron), Nan Ya Technology Corporation (Nan
Ya), Promos Technologies, Inc. (Promos), Qimonda AG (Qimonda), Rexchip Electronics Corporation (Rexchip), Samsung Electronics Company Limited (Samsung), Semiconductor Manufacturing International
Corporation (SMIC), Taiwan Semiconductor Manufacturing Corporation, Limited (TSMC), and United Microelectronics Corporation (UMC). Some of these customers have individually accounted for more than 10% of Varian
Semiconductors total revenue in some periods. Varian Semiconductor expects that sales of its products to relatively few customers will continue to account for a high percentage of its revenue in the foreseeable future.

Revenue from Varian Semiconductors ten largest customers in fiscal years 2007, 2006 and 2005 accounted for approximately 72%, 63% and 66% of total revenue,
respectively, including the non-recurring royalties in fiscal year 2005 of $18.9 million received from Applied Materials, Inc. (Applied Materials). In fiscal year 2007, revenue from one customer accounted for 17% of Varian
Semiconductors total revenue. In fiscal year 2006, revenue from three customers accounted for 11%, 10% and 10%, respectively, of Varian Semiconductors total revenue. In fiscal year 2005, revenue from two customers accounted for 20% and
14% of Varian Semiconductors total revenue.

None of Varian Semiconductors customers has entered into a long-term agreement requiring it to
purchase Varian Semiconductors products. Although Varian Semiconductors largest customers have varied from year to year, the loss of a significant customer or a reduction in orders from any significant customer, including reductions due
to market, economic or competitive conditions in the semiconductor industry or in the industries that manufacture products utilizing integrated circuits, could adversely affect Varian Semiconductors business,



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financial condition and results of operations. In addition, sales of Varian Semiconductors systems depend, in significant part, upon the decision of a
prospective customer to increase manufacturing capacity in an existing fab facility, to introduce a new manufacturing process or to transfer a manufacturing process to a new fab facility, all of which typically involve a significant capital
commitment. Due to these and other factors, Varian Semiconductors products typically have a lengthy sales cycle during which Varian Semiconductor may expend substantial funds and management effort.

Varian Semiconductors ability to respond with prompt and effective field support is critical to Varian Semiconductors sales efforts. Due to substantial
operational and financial commitments, customers who purchase ion implantation systems require assurance that the manufacturer can provide the necessary installation and operational support. Varian Semiconductors strategy of supporting its
installed base through its customer support and research and development groups has served to encourage the use of Varian Semiconductors systems in production applications and has accelerated penetration of certain key accounts. Varian
Semiconductor believes that its marketing efforts are enhanced by the technical expertise of its research and development personnel, who provide customer process support and participate in a number of industry forums.

Varian Semiconductor markets, sells, distributes and services its products directly. Varian Semiconductor has six sales and service offices located in the U.S., six in
Europe and 26 in Asia Pacific, for a total of 38 worldwide. Varian Semiconductors sales, marketing and service engineers are linked through Varian Semiconductors information technology systems, allowing Varian Semiconductor to review
bookings and sales forecasts globally against detailed account management plans.

International sales accounted for 78% of Varian Semiconductors
total revenues in each of fiscal years 2007, 2006 and 2005, and more specifically, sales to the Asia Pacific region have accounted for 71%, 67% and 68% of total revenues in fiscal years 2007, 2006 and 2005, respectively. (Refer to the footnotes to
the financial statements for additional information on the geographic distribution of revenues and long-lived assets.)

Varian Semiconductors
business is generally not seasonal in nature, but it is cyclical based on the capital equipment investment expenditures of major semiconductor manufacturers. These expenditure patterns are based on many factors, including anticipated market demand
for integrated circuits, the development of new technologies and global economic conditions.

Backlog

Varian Semiconductor had backlog of $179.0 million and $255.1 million at the end of fiscal years 2007 and 2006, respectively. Varian Semiconductor includes in its backlog
only those orders for which it has accepted purchase orders and assigned system shipment dates within the following twelve months. Orders are typically subject to cancellation or rescheduling by customers. Due to possible changes in system delivery
schedules, cancellation of orders and delays in systems shipments, Varian Semiconductors backlog at any particular date is not necessarily an accurate predictor of revenue for any succeeding period.

Manufacturing

Varian Semiconductor manufactures its products at its
facility in Gloucester, Massachusetts. Varian Semiconductor benefits from the use of advanced manufacturing methods and technologies, including lean manufacturing, demand flow technology and statistical process control.

Varian Semiconductor purchases various unique raw materials from multiple suppliers worldwide. Varian Semiconductor closely monitors future markets and supply stream to
ensure continuous availability. Additionally, long-lead agreements with suppliers are employed to provide a strategic safety stock at supplier locations.



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Varian Semiconductor concentrates on product design characterization, high-level assembly and tests to reduce cycle time
and improve its responsiveness in an inherently cyclical capital equipment market. Varian Semiconductor believes that outsourcing non-core competency assemblies enables it to minimize its fixed costs and capital expenditures while also providing the
flexibility to increase or decrease production capacity. Varian Semiconductor purchases materials and components that are either standard products or built to Varian Semiconductors specifications. This strategy also allows Varian Semiconductor
to focus on product differentiation through system design and quality control. Varian Semiconductors manufactured subsystems incorporate advanced technologies in robotics, vacuum and microcomputers. Varian Semiconductor works closely with its
suppliers to achieve mutual cost reductions through joint design efforts. Varian Semiconductor manufactures most of its systems in clean-room environments that are similar to the clean-rooms used by semiconductor manufacturers for wafer fabrication.
This procedure is intended to reduce installation and production qualification times and the amount of particulates and other contaminants in the assembled system, which in turn improves yield and reduces downtime for the customer.

Quality efforts at Varian Semiconductor begin with product development. Varian Semiconductor uses three dimensional computer-aided design, finite element analysis and
other computer-based modeling methods to engineer and validate new designs. Product design is tested throughout all stages of development and validated through use of a phase-gate product introduction process before the first production
system is built. Concurrent engineering programs help integrate new designs into manufacturing quickly and successfully.

Competition

The semiconductor capital equipment market is highly competitive and is characterized by a small number of large companies. The larger companies include Applied
Materials, Tokyo Electron Limited (Tokyo Electron), KLA-Tencor Corporation (KLA-Tencor), Nikon Corporation, Canon, Inc., Novellus Systems, Inc. (Novellus), Lam Research Corporation, (Lam), and Hitachi
High Technologies Corporation. Varian Semiconductor faces significant competition in the ion implantation market sector. Within ion implant, multiple implant suppliers participate in one or more implant sectors. Generally, for each system selection,
Varian Semiconductor is competing with one or more major competitors. As reported by Gartner Dataquest for calendar year 2006, the revenue market share for ion implantation equipment was Varian Semiconductor 43%, Axcelis Technologies, Inc.
(Axcelis) 14%, Applied Materials 15%, Sumitomo Eaton Nova Corporation 17%, Nissin Electric Company, Limited 10%, and Ulvac Technologies, Inc. 1%. On February 13, 2007, Applied Materials announced that it was ceasing development of
beamline implant products. Applied Materials will maintain development of its plasma immersion product, which competes against Varian Semiconductors VIISta PLAD product.

There are significant competitive factors in the ion implantation market that affect an ion implant companys ability to succeed. These factors include the quality of strategic relationships with customers, the
cost of ownership a customer experiences operating the equipment, performance reliability of the equipment, the quality and cost of customer support, speed and cost effectiveness of distribution and financial viability. (In addition to these
factors, significant competitive characteristics in the semiconductor capital equipment market include flexibility, size of manufacturer, installed customer base and breadth of product line. Products designed for one sector may compete against
products offered by competitors systems in another sector.) Due to the constant innovation that has characterized semiconductor manufacturers, it is possible that the application needs and manufacturing technologies used by customers may
change, disrupting historical trends in the market significantly. Varian Semiconductor believes it competes favorably in the ion implant business. To remain competitive, Varian Semiconductor recognizes it may require significant financial resources
in order to offer a broad range of products, to maintain customer service and support centers worldwide and to invest in product and process research and development.



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Research and Development

The semiconductor manufacturing industry is subject to rapid technological change requiring new product introductions and enhancements. Varian Semiconductors ability to remain competitive in this market will depend in part upon its
ability to develop new and enhanced systems and to introduce these systems at competitive prices and on a timely and cost-effective basis. Accordingly, Varian Semiconductor devotes a significant portion of its personnel and financial resources to
research and development programs and seeks to maintain close relationships with its customers to remain responsive to their product needs.

Varian
Semiconductors current research and development efforts are directed at development of new systems and processes and improving existing system capabilities. Varian Semiconductor currently focuses its research and development efforts on the
enhancement of its VIISta platform. The VIISta platform is designed to cover the complete range of implants required for the next several generations of integrated circuits. The VIISta single wafer platform allows customers to use a single platform
for all implant applications including high current, ultra high dose, medium current and high energy.

Expenditures by Varian Semiconductor for research
and development during fiscal years 2007, 2006 and 2005 were $104.0 million,$90.6 million, and $77.7 million, respectively. Varian Semiconductor expects in future years that research and development expenditures will continue to represent a
substantial percentage of operating expenses. In addition to developing new high current, ultra high dose and high energy products, Varian Semiconductor continues to focus on maintaining its leadership position in the market for medium current
implanters.

Patent and Other Proprietary Rights

Varian Semiconductor pursues a policy of seeking patent, copyright and trade secret protection in the U.S. and other countries for developments, improvements and inventions originating within its organization that are incorporated in Varian
Semiconductors products or that fall within its fields of interest. As of November 12, 2007, Varian Semiconductor owned approximately 129 patents in the U.S., 109 patents in other countries, and had 388 patent applications on file with
various patent agencies worldwide. Varian Semiconductor intends to file additional patent applications as appropriate.

Varian Semiconductor relies on a
combination of copyright, trade secret and other laws, and contractual restrictions on disclosure, copying and transferring title to protect its rights. Varian Semiconductor has trademarks, both registered and unregistered, that are maintained and
enforced to provide customer recognition for its products in the marketplace. Varian Semiconductor 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. The termination of certain of such licenses could have a material adverse effect on Varian Semiconductors business.

Varian Semiconductors competitors, like companies in many high-technology businesses, routinely review the products of others for possible conflict with their own patent rights. There has also been substantial litigation regarding
patent and other intellectual property rights in semiconductor-related industries. Varian Semiconductor, its customers or suppliers could be subject to additional claims of patent infringement, and any such claim could require that Varian
Semiconductor pay substantial damages or remove certain features from its products or both.

Pursuant to the dispute resolution provisions of an Agreement
dated January 1, 1992 (the Agreement) between Varian Semiconductor and Applied Materials, Varian Semiconductor in September 2002 filed an arbitration demand with the American Arbitration Association asserting that Applied Materials
breached the Agreement by failing to pay royalties on products Varian Semiconductor believed were covered by the Agreements patent license to Applied Materials. In its arbitration demand, Varian Semiconductor sought to recover back royalties,



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interest and attorneys fees. On May 2, 2003, the arbitration panel issued its decision that certain of Applied Materials products were
subject to royalty obligations under the Agreement, and on September 1, 2004, the arbitration panel ruled that the patents at issue in the arbitration were valid and enforceable. Applied Materials made an initial payment of $22.0 million for
back royalties and interest on October 4, 2004 and a final payment of $2.6 million for back interest and royalties on November 8, 2004. Applied Materials also was required to pay quarterly unit-based royalty payments to Varian
Semiconductor on sales of certain products found to be within the scope of the Agreement through expiration of the Agreement on March 20, 2007.

The
royalty-bearing license agreements produced revenue of $7.5 million in fiscal year 2007, $9.5 million in fiscal year 2006 and $27.7 million in fiscal year 2005. The last of the principal patents covered by these licenses expired on July 9,
2007.

Environmental Matters

For a discussion of
environmental matters, see Risk Factors, in Item 1A and Note 22. Commitments, Contingencies and Guarantees, in Item 15.

Company History

On April 2, 1999, Varian Semiconductor was spun-off from Varian Associates, Inc. (VAI). Varian
Semiconductors business was operated as the Semiconductor Equipment Business (SEB) of VAI. VAI contributed the SEB to Varian Semiconductor, then distributed to the holders of record of VAI common stock, one share of common stock of
Varian Semiconductor for each share of VAI common stock owned.

Varian Semiconductors role in the semiconductor manufacturing market can be traced to
VAIs pioneering work in ultra-high vacuum technology. In the 1960s, this technology was applied to many physics and space research projects requiring ultra-high vacuum environments. This technology proved critical in the semiconductor
manufacturing process. SEB was successful in developing methods for controlling electron beams and ions in ultra-high vacuum environments and in depositing materials onto silicon wafers to create switching devices.

SEB entered the ion implantation business in fiscal year 1975 through the acquisition of Extrion Corporation, in Gloucester, Massachusetts. Since then, Varian
Semiconductor has developed a complete line of medium and high current ion implanters, added the high energy product line in fiscal year 1998 through the acquisition of Genus, Inc. and added the ultra high dose product in early 2007. These systems
introduce precise quantities of dopant materials into silicon wafers, creating desired electrical characteristics. In June 1997, SEB sold its Thin Film Systems (TFS) business, which made physical vapor deposition equipment, also known as
sputtering systems, to Novellus.

Employees

As of
November 2, 2007, Varian Semiconductor had 1,702 full-time employees worldwide1,284 in North America, 334 in Asia Pacific and 84 in Europe. None of Varian Semiconductors employees based in the U.S. are subject to collective
bargaining agreements and Varian Semiconductor has never experienced a work stoppage, slowdown or strike. None of Varian Semiconductors employees is represented by a labor union and Varian Semiconductor considers its employee relations to be
good.



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Executive Officers of the Registrant

The current executive officers of Varian Semiconductor are listed below. Executive officers are elected on an annual basis and serve at the discretion of the Board of Directors.



|                                                                                                                       |  |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---------------------------------------------------------------------------------------------------------------------- |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name and Title                                                                                                         |  | Age |  | Business Experience                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Gary E. Dickerson Chief Executive Officer                                                                              |  | 50  |  | Mr. Dickerson has served as Varian Semiconductors Chief Executive Officer and a Director of Varian Semiconductor since October 2004. Prior to joining Varian Semiconductor, Mr. Dickerson
was President and Chief Operating Officer of KLA-Tencor from July 2002 to April 2004. From July 1999 to June 2002, he served as Chief Operating Officer of KLA-Tencor. Previously at KLA-Tencor, Mr. Dickerson was the Executive Vice President of
the Customer Group from July 1997 to June 1999, Group Vice President for the Wafer Inspection Group from January 1996 to June 1997, and General Manager of the Wisard Division from July 1994 to December 1995.                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                       |  |    
|Robert J. Halliday Executive Vice President and Chief Financial Officer                                                |  | 53  |  | Mr. Halliday has served as Varian Semiconductors Executive Vice President and Chief Financial Officer since October 2006. From October 2004 to October 2006, he served as Executive Vice
President, Treasurer and Chief Financial Officer. From November 2002 to October 2004, Mr. Halliday served as Varian Semiconductors Vice President, Treasurer and Chief Financial Officer. From March 2001 to November 2002, Mr. Halliday served as
Varian Semiconductors Vice President and Chief Financial Officer. Prior to joining Varian Semiconductor, Mr. Halliday was Vice President and Chief Financial Officer of Unica Corporation, a software company. Previously, Mr. Halliday was at
Ionics, Inc., a manufacturer of water treatment capital equipment. At Ionics, Inc., he was Chief Operating Officer in 2000; Vice President of the Consumer Water Group from 1996 to 2000; and Chief Financial Officer from 1990 to 2000. Mr. Halliday has
been a director of Zoll Medical Corporation since July 2003.
|                                                                                                                       |  |    
|Robert J. Perlmutter, Ph.D. Executive Vice President, Implant Business Units                                           |  | 50  |  | Dr. Perlmutter has served as Varian Semiconductors Executive Vice President of Implant Business Units since October 2006. Prior to joining Varian Semiconductor, Dr. Perlmutter was a
Group Vice President of KLA-Tencor from July 2006 to October 2006. From October 2001 to June 2006, he served as Vice President and General Manager of KLA-Tencors WIN Divisionresponsible for the brightfield and darkfield patterned wafer
inspection product lines. Previously at KLA-Tencor, Dr. Perlmutter was Vice President and General Manager of the Surfscan Division from October 1999 to October 2001. From September 1995 to September 1999, Dr. Perlmutter served as a Sr. Director
and then, Vice President of Engineering for KLA-Tencors Reticle and Photomask Inspection Division.                                                                                                                                                                                                                       
|                                                                                                                       |  |    
|Yong-Kil Kim, Ph.D. Executive Vice President, General Manager, Asia Pacific Operations, President of Varian Korea Ltd. |  | 50  |  | Dr. Kim has served as Varian Semiconductors Executive Vice President since October 2004. He has served as Varian Semiconductors Vice President and General Manger of its Asia
Pacific Operations since May 2000 and President of Varian Korea, Limited since April 1999. From April 1997 to March 1999, he                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        



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|                                                              |  |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------------------------------------------------------------- |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name and Title                                                |  | Age |  | Business Experience                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                              |  |     |  | served as Executive Vice President of Varian Korea, Limited. From July 1994 to March 1997, he was Director of Sales and Marketing for the Asia Pacific Region. Mr. Kim joined Varian
Associates, Inc. in August 1989 and held various managerial positions in Applications, Marketing and Sales. Previously, Mr. Kim worked for IBMs T.J. Watson Research Center in Yorktown Heights, New York, from July 1988 to August 1989, and
earlier at Massachusetts Institute of Technology in Cambridge, Massachusetts from 1983 to July 1988.
|                                                              |  |    
|Thomas C. Baker Vice President, Finance, Corporate Controller |  | 42  |  | Mr. Baker has served as Varian Semiconductors Vice President of Finance since October 2006. From June 2003 to October 2006, Mr. Baker was Varian Semiconductors Corporate
Controller and served as Operations Controller and Assistant Controller from February 2001 to June 2003. Mr. Baker was Chief Financial Officer of Chelton Microwave, a manufacturer of microwave components, from 1996 to 2001. Prior to that, he was
Corporate Controller of Robertson-Ceco Corporation, a leading manufacturer of metal buildings.        



|Item 1A. | Risk Factors.
|-------- | -------------

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

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

Varian Semiconductor faces intense competition in the semiconductor equipment industry.

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



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Varian Semiconductor derives a substantial portion of its revenues from a small number of customers, and its business
may be harmed by the loss of any one significant customer.

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

Varian Semiconductors quarterly results of operations are likely to fluctuate, and as a result, Varian
Semiconductor may fail to meet the expectations of its investors and securities analysts, which may cause the price of its common stock to decline.

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



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



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



| |  |  | the extent that customers use Varian Semiconductors products and services in their business;
| | - |  | ---------------------------------------------------------------------------------------------



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



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



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



| |  |  | a technical change that Varian Semiconductor is unable to address with its products;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | a failure to achieve continued market acceptance of Varian Semiconductors key products;
| | - |  | ----------------------------------------------------------------------------------------



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



| |  |  | introduction of new products by Varian Semiconductors competitors;
| | - |  | -------------------------------------------------------------------



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



| |  |  | legal or technical challenges to Varian Semiconductors products and technology;
| | - |  | --------------------------------------------------------------------------------



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



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



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



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

It is
difficult for Varian Semiconductor to predict the quarter in which it will be recognizing revenue from large product orders.

Varian Semiconductor
customarily sells a relatively small number of systems within any period. Consequently, Varian Semiconductors revenue and financial results could be negatively impacted for a particular quarter if anticipated orders from even a few customers
are not received in time to permit shipment and/or there are delays in customer acceptance of the product upon installation or future obligations included in the contract do not permit revenue to be recognized on current tool sales under generally
accepted accounting principles (GAAP). Generally, Varian Semiconductor recognizes all or a portion of the revenue from a product upon shipment provided title and risk of loss has passed to the customer, evidence of an arrangement exists,
fees are contractually fixed or determinable, collectibility is reasonably assured through historical collection results and regular credit evaluations, and there are no uncertainties regarding customer acceptance. [Please refer to the full revenue
recognition policy in Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations in the Critical Accounting Policies and Significant Judgments and Accounting Estimates section.] As a result, it is often
difficult to determine the timing of product revenue recognition. In addition, Varian Semiconductors product order backlog at the beginning of each quarter may not include all systems needed to achieve expected revenues for that quarter.
Because Varian Semiconductor may build systems according to forecast, the absence of a significant backlog for an extended period of time could adversely affect financial results.

Varian Semiconductors future business depends, in part, on its ability to successfully introduce and manage the transition to new products, and Varian Semiconductor may not succeed in accomplishing these
goals.

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

Varian Semiconductor is subject to the risks of operating internationally
and it derives a substantial portion of its revenues from outside the U.S.

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



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



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



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



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



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



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



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

If
Varian Semiconductor is unable to protect its proprietary rights adequately, it may lose its ability to compete effectively in the semiconductor equipment industry.

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



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



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



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



| |  |  | that the rights granted under Varian Semiconductors patents will provide it with competitive advantages.
| | - |  | ---------------------------------------------------------------------------------------------------------

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

In addition, Varian Semiconductor maintains and enforces its trademarks to increase customer recognition of its products. If
its trademarks are used by unauthorized third parties, Varian Semiconductors business may be harmed. Varian Semiconductor also relies on contractual restrictions on disclosure, copying and transferring title, including confidentiality
agreements with vendors, strategic partners, co-developers, employees, consultants and other third parties to protect its proprietary rights. If these contractual agreements are breached, Varian Semiconductor may not have adequate remedies for
any such breaches. Varian Semiconductor also cannot provide assurance that its trade secrets will not otherwise become known to or be independently developed by others.

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

Varian Semiconductor could incur substantial costs and diversion of management resources in defending patent suits brought against it or in asserting its patent rights
against others. If the outcome of any such litigation is unfavorable to Varian Semiconductor, its business may be harmed. Varian Semiconductor may not be aware of pending or issued patents held by third parties that relate to its products or
technologies. In the event that a claim is asserted against Varian Semiconductor, it may need to acquire a license to or contest the validity of a competitors patent. Varian Semiconductor cannot be certain that it could acquire such a license
on commercially acceptable terms, if at all, or that it would prevail in such a proceeding. From time to time Varian Semiconductor has received notices from and has issued notices to such third parties alleging infringement of patent and other



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intellectual property rights relating to its products. If Varian Semiconductor is subject to future claims of patent infringement, it may be required to make
substantial settlement or damage payments and may have to devote substantial resources to reengineering its products.

Varian Semiconductor depends on
limited groups of suppliers or single source suppliers, the loss of which could impair its ability to manufacture products and systems.

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

Varian Semiconductors outsource providers may fail to perform as it expects

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

Varian Semiconductors indemnification obligations under the
Distribution Related Agreements could be substantial, and Varian Semiconductor may not be fully indemnified in accordance with the Distribution Related Agreements for the expenses it incurs.

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

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

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



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VAI has been named by the U.S. Environmental Protection Agency and third parties as a potentially responsible party under
the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (CERCLA), at eight sites where VAI is alleged to have shipped manufacturing waste for recycling or disposal. VAI is also in various stages of
environmental investigation and/or remediation under the direction of, or in consultation with foreign, federal, state and local agencies at certain current or former VAI facilities. The Distribution Related Agreements provide that each of VMS,
Varian Semiconductor and VI will indemnify the others for one-third of these environmental investigation and remediation costs, as adjusted for any insurance proceeds and tax benefits expected to be realized upon payment of these costs.

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

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

Varian Semiconductors ability to manage potential growth or decline, integration of potential acquisitions, and potential disposition of product lines and technologies creates risks.

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

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



17



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Varian Semiconductor manufactures its products at one primary manufacturing facility and is thus subject to risk of
disruption.

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

If Varian Semiconductor
loses key employees or is unable to attract and retain key employees, it may be unable to pursue business opportunities.

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

Varian Semiconductor has anti-takeover defenses that could delay or prevent an acquisition and could adversely affect the price of its common stock.

Provisions of Varian Semiconductors certificate of incorporation and by-laws and of Delaware law could delay, defer or prevent an acquisition or change in
control of Varian Semiconductor or otherwise adversely affect the price of its common stock. For example, Varian Semiconductors Board of Directors is classified into three classes, and stockholders do not have the right to call special
meetings of stockholders. Varian Semiconductors certificate of incorporation also permits its Board of Directors to issue shares of preferred stock without stockholder approval. In addition to delaying or preventing an acquisition, the
issuance of a substantial number of preferred shares could adversely affect the price of the common stock. Varian Semiconductor has also adopted a stockholders rights plan which could significantly dilute the equity interests of a person
seeking to acquire control of Varian Semiconductor without the approval of the Board of Directors.

Varian Semiconductor does not anticipate paying
dividends on its common stock in the future.

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

Varian Semiconductors financial results may be adversely impacted by higher than
expected tax rates or exposure to additional income tax liabilities.

As a global company, Varian Semiconductors effective tax rate is highly
dependent upon the geographic composition of worldwide earnings and tax regulations governing each region. Varian Semiconductor is subject to income taxes in both the U.S. and various foreign jurisdictions, and significant judgment is required to
determine worldwide tax liabilities. Varian Semiconductors effective tax rate could be adversely affected by changes in the distribution of earnings between countries with differing statutory tax rates, in the valuation of deferred tax assets,
in tax laws or by material audit assessments, which could affect profitability. For example, due to the global business realignment, the distribution of worldwide earnings has changed. Under audit, Varian Semiconductor could face significant
challenges regarding the geographic composition of these earnings from one or more jurisdictions. In addition, Varian Semiconductors effective tax rate has benefited from the research



18



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##### Table of Contents

and development (R & D) tax credit which expires on December 31, 2007. If the R & D credit is not extended, Varian
Semiconductors tax liability may increase. Further, the carrying value of deferred tax assets, which are predominantly in the U.S., is dependent on Varian Semiconductors ability to generate future taxable income in the U.S. Varian
Semiconductor is also subject to regular examination of its tax returns by the Internal Revenue Service (IRS) and other taxing authorities. The IRS and other tax authorities have increasingly focused attention on intercompany transfer pricing with
respect to sales of products, services, and the use of intangible assets. Varian Semiconductor could face significant future challenges on these transfer pricing issues in one or more jurisdictions. Varian Semiconductor regularly assesses the
likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. Although Varian Semiconductor believes that its tax estimates are reasonable, there can be no assurance
that any final determination will not be materially different from the treatment reflected in its historical income tax provisions and accruals.



|Item 2. | Properties.
|------- | -----------

Varian Semiconductors
headquarters and manufacturing facility is located in Gloucester, Massachusetts. In addition, Varian Semiconductor has six sales and service offices located in the U.S. and 32 located outside of the U.S., including offices in France, Germany
(three), the Netherlands, Japan (nine), Korea (four), Taiwan (five), China (five), Switzerland, Singapore and Malaysia (two). These offices and facilities aggregate approximately 665 thousand square feet, of which 224 thousand square feet
is leased. Since fiscal year 1994, the manufacturing facilities have been registered to the internationally recognized ISO 9001 standard. ISO 2000 certification was obtained in fiscal year 2002, and recertification was obtained in 2005. Field
support operations in Europe and Korea have been registered to the ISO 9001:2002 standard since 2003 and 2002, respectively, with Europe operations obtaining recertification in 2006.

Varian Semiconductors management does not believe there is any material, long-term, excess capacity in Varian Semiconductors facilities, although utilization is subject to change based on customer demand.
Furthermore, Varian Semiconductors management believes that Varian Semiconductors facilities and equipment generally are well maintained, in good operating condition, suitable for Varian Semiconductors purposes, and adequate for
its present operations.

The following table reflects Varian Semiconductors locations by geographic segment.



|              |  |                   |  |                                   
|------------- |  | ----------------- |  | ----------------------------------
|Location      |  | Property Interest |  | Approx. Sq. Footage of Floor Space
|North America |  | Own               |  | 377,000                           
|North America |  | Lease             |  | 125,000                           
|Korea         |  | Own               |  | 64,000                            
|Korea         |  | Lease             |  | 4,000                             
|Japan         |  | Lease             |  | 25,000                            
|Europe        |  | Lease             |  | 11,000                            
|Taiwan        |  | Lease             |  | 39,000                            
|Other         |  | Lease             |  | 20,000                            
|              |  |                   |  |                                   
|Total         |  |                   |  | 665,000                           
|              |  |                   |  |                                   



|Item 3. | Legal Proceedings.
|------- | ------------------

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



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

From time to time, Varian Semiconductor may become involved in a number of legal
actions and could incur an uninsured liability in one or more of them. Accordingly, while the ultimate outcome of these legal matters is not determinable, management believes the resolution of these matters will not have a material adverse effect on
the financial condition or results of operations of Varian Semiconductor.



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

No matters were submitted to a vote of security holders of Varian Semiconductor, through solicitation of proxies or otherwise, during the last quarter of fiscal year 2007.



20



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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.
|------- | -------------------------------------------------------------------------------------------------------------

Since April 5, 1999, Varian Semiconductors common stock has traded on The Nasdaq Global Select Market under the symbol VSEA.

The following table sets forth the high and low sale prices per share of Varian Semiconductors common stock during each quarter for the two most recent fiscal
years. The share prices have been retroactively adjusted to reflect the three-for-two stock split in May 2007.



|                 |  |      |       |     |   |      
|---------------- |  | ---- | ----- | --- | - | -----
|Fiscal Year 2006 |  | High |       | Low
|First Quarter    |  | $    | 20.64 |     | $ | 16.20
|Second Quarter   |  | $    | 23.96 |     | $ | 17.56
|Third Quarter    |  | $    | 22.95 |     | $ | 18.45
|Fourth Quarter   |  | $    | 25.36 |     | $ | 17.25
|                 |  |     
|Fiscal Year 2007 |  | High |       | Low
|First Quarter    |  | $    | 30.98 |     | $ | 23.52
|Second Quarter   |  | $    | 36.51 |     | $ | 26.39
|Third Quarter    |  | $    | 46.92 |     | $ | 35.45
|Fourth Quarter   |  | $    | 58.17 |     | $ | 38.46

The reported closing price of Varian Semiconductors common stock on The Nasdaq Global Select Market on
September 28, 2007 was $53.52 per share. The number of stockholders of record on November 12, 2007 was 2,474.

Varian Semiconductor has never
declared or paid cash dividends on its common stock and does not expect to pay any cash dividends on its common stock in the foreseeable future.

In
October 2004, Varian Semiconductors Board of Directors authorized the repurchase, from time to time, of up to $100 million of Varian Semiconductors common stock on the open market. Subsequently, the Board of Directors has voted on
increases to the amount of funds that may be expended in repurchasing Varian Semiconductors common stock to a total of $700 million as of November 13, 2007. The program does not have a fixed expiration date. During fiscal 2007, Varian
Semiconductor spent $426.5 million on the repurchase of 11,343,017 shares at a weighted-average price per share of $37.58.

See Item 12 of Part III of
this Annual Report on Form 10-K for information regarding securities authorized for issuance under our equity compensation plans.



21



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##### Table of Contents

The following table provides information about purchases by Varian Semiconductor Equipment Associates, Inc. (Varian
Semiconductor) during the quarter ended September 28, 2007 of equity securities that are registered by Varian Semiconductor pursuant to Section 12 of the Securities Exchange Act of 1934:

ISSUER PURCHASES OF EQUITY SECURITIES



|                               |  |                                                 |  |                                            |       |                                                                                                    |           |                                                                                                                                               |   |        
|------------------------------ |  | ----------------------------------------------- |  | ------------------------------------------ | ----- | -------------------------------------------------------------------------------------------------- | --------- | --------------------------------------------------------------------------------------------------------------------------------------------- | - | -------
|Period                         |  | (a) Total Number of Shares (or Units) Purchased |  | (b) Average Price Paid per Share (or Unit) |       | (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs(1) |           | (d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (in
thousands)(2)
|June 30  July 27, 2007        |  | 1,123,900                                       |  | $                                          | 42.22 |                                                                                                    | 1,123,900 |                                                                                                                                               | $ | 42,662 
|July 28  August 24, 2007      |  | 734,094                                         |  | $                                          | 48.66 |                                                                                                    | 734,094   |                                                                                                                                               | $ | 106,943
|August 25  September 28, 2007 |  | 776,008                                         |  | $                                          | 54.12 |                                                                                                    | 776,008   |                                                                                                                                               | $ | 64,948 
|Total:(3)                      |  | 2,634,002                                       |  | $                                          | 47.52 |                                                                                                    | 2,634,002 |                                                                                                                                               | $ | 64,948 

---

|(1) | All shares were purchased pursuant to the publicly announced repurchase program described in footnote 2. Varian Semiconductor repurchased an aggregate of 16,964,350 shares of its
common stock pursuant to the repurchase program that was publicly announced on October 22, 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | In October 2004, Varian Semiconductors Board of Directors authorized the repurchase, from time to time, of up to $100 million of Varian Semiconductors common stock on
the open market. Subsequently, the Board of Directors has voted on increases to the amount of funds that may be expended in repurchasing Varian Semiconductors common stock to a total of $700 million as of November 13, 2007. The program does
not have a fixed expiration date.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | In addition to the repurchases made during the fiscal year ended September 28, 2007, Varian Semiconductor has repurchased 963,864 shares at total cost of $45.7 million between
September 29, 2007 and November 12, 2007, the latest practicable date prior to the filing date.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

COMPARISON OF FIVE-YEAR CUMULATIVE STOCKHOLDERS RETURNS

PERFORMANCE GRAPH FOR VARIAN SEMICONDUCTOR

The
comparative stock performance graph below compares the cumulative stockholder return on our common stock for the period from September 27, 2002 through September 28, 2007 with the cumulative total return on (1) the Total Return Index
for The Nasdaq Stock Market (US) and (2) the Goldman Sachs Semiconductor Index, which is a published industry index. The cumulative total return computations set forth in the performance graph assume the investment of $100 in our common stock,
the Nasdaq Stock Market (US) and the Goldman Sachs Semiconductor Index on September 29, 2001. The stock price performance shown on the graph and table below is not necessarily indicative of future price performance.

LOGO



|                                      |  |                             |  |           |  |           |  |           |  |           |  |          
|------------------------------------- |  | --------------------------- |  | --------- |  | --------- |  | --------- |  | --------- |  | ---------
|                                      |  | Cumulative Total Return ($)
|                                      |  | ($100 Initial Investment)  
|                                      |  | 9/27/2002                   |  | 10/3/2003 |  | 10/1/2004 |  | 9/30/2005 |  | 9/29/2006 |  | 9/28/2007
|Varian Semiconductor Equipment        |  | 100.00                      |  | 252.83    |  | 204.04    |  | 263.66    |  | 342.56    |  | 749.35   
|Nasdaq Global Select Market Composite |  | 100.00                      |  | 156.52    |  | 161.95    |  | 180.49    |  | 190.34    |  | 225.28   
|Goldman Sachs Semiconductor Index     |  | 100.00                      |  | 183.28    |  | 164.73    |  | 195.09    |  | 202.04    |  | 222.22   



23



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##### Table of Contents

|Item 6. | Selected Financial Data.
|------- | ------------------------

The information
included in the following table reflects selected consolidated summary financial data for each of the last five fiscal years. This data should be read in conjunction with the consolidated financial statements and notes thereto included in Item
15-Exhibits and Financial Statement Schedules, and with Item 7Managements Discussion and Analysis of Financial Condition and Results of Operations below.



|                                            |  |                                                 |         |         |   |       |  |      |       |      |   |       |  |   |      
|------------------------------------------- |  | ----------------------------------------------- | ------- | ------- | - | ----- |  | ---- | ----- | ---- | - | ----- |  | - | -----
|                                            |  | Fiscal Year                                    
|                                            |  | 20071,2                                         |         | 20062,3 |   | 20054 |  | 2004 |       | 2003
|                                            |  | (amounts in millions, except per share amounts)
|Consolidated Statements of Income Data:     |  |                                                 |         |         |   |       |  |      |       |      |   |       |  |   |      
|Revenue                                     |  | $                                               | 1,054.9 |         | $ | 730.7 |  | $    | 600.5 |      | $ | 530.1 |  | $ | 362.5
|Gross profit                                |  | $                                               | 488.9   |         | $ | 309.5 |  | $    | 268.7 |      | $ | 239.8 |  | $ | 151.4
|Provision for income taxes                  |  | $                                               | 134.5   |         | $ | 30.6  |  | $    | 32.4  |      | $ | 28.8  |  | $ | 5.3  
|Net income                                  |  | $                                               | 142.2   |         | $ | 94.7  |  | $    | 72.0  |      | $ | 61.1  |  | $ | 10.8 
|Weighted average shares outstandingbasic   |  |                                                 | 80.2    |         |   | 84.6  |  |      | 82.8  |      |   | 81.2  |  |   | 77.0 
|Weighted average shares outstandingdiluted |  |                                                 | 82.2    |         |   | 85.8  |  |      | 84.6  |      |   | 83.3  |  |   | 79.2 
|Net income per sharebasic                  |  | $                                               | 1.77    |         | $ | 1.12  |  | $    | 0.87  |      | $ | 0.75  |  | $ | 0.14 
|Net income per sharediluted                |  | $                                               | 1.73    |         | $ | 1.10  |  | $    | 0.85  |      | $ | 0.73  |  | $ | 0.14 
|                                            |  |                                                 |         |         |  
|Consolidated Balance Sheet Data             |  |                                                 |         |         |   |       |  |      |       |      |   |       |  |   |      
|Cash and cash equivalents                   |  | $                                               | 109.5   |         | $ | 258.9 |  | $    | 193.4 |      | $ | 218.6 |  | $ | 310.5
|Investments                                 |  | $                                               | 184.5   |         | $ | 290.6 |  | $    | 280.6 |      | $ | 173.9 |  | $ | 40.0 
|Total assets                                |  | $                                               | 799.1   |         | $ | 938.4 |  | $    | 862.8 |      | $ | 749.5 |  | $ | 598.6
|Working capital                             |  | $                                               | 439.1   |         | $ | 564.2 |  | $    | 640.5 |      | $ | 533.6 |  | $ | 431.9
|Long term liabilities                       |  | $                                               | 60.5    |         | $ | 24.3  |  | $    | 25.5  |      | $ | 25.3  |  | $ | 20.2 
|Total liabilities                           |  | $                                               | 233.1   |         | $ | 183.5 |  | $    | 173.7 |      | $ | 173.4 |  | $ | 124.6
|Stockholders equity                        |  | $                                               | 566.0   |         | $ | 755.0 |  | $    | 689.1 |      | $ | 576.1 |  | $ | 474.0

---

|(1) | Fiscal year 2007 includes a provision for income taxes of 49% due to Varian Semiconductors global realignment of its business structure.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------



|(2) | In fiscal year 2006, Varian Semiconductor adopted the provisions of FAS 123(R), which resulted in $12.9 million net expense or $0.15 per diluted share in fiscal year 2006 and $10.0
million net expense or $0.12 per diluted share in fiscal year 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Fiscal year 2006 results included a $9.0 million discrete income tax benefit and $1.6 million of related interest income, net income of $10.0 million after tax or $0.12 per diluted
share in total, related to the completion of a routine tax examination by the U.S. Internal Revenue Service.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Fiscal year 2005 results included non-recurring pre-tax royalty revenue of $18.9 million and interest income of $5.7 million, net income of $17.0 million after tax or $0.20 per
diluted share, relating to a settlement of a patent license agreement with Applied Materials.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

QUARTERLY FINANCIAL DATA

(Unaudited)

Selected Quarterly Results of Operations

The following tables set forth unaudited quarterly condensed consolidated statements of income data for each of the eight fiscal quarters in the period ended
September 28, 2007. The quarterly data should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K.



|                                            |  |                                                 |       |   |               |   |              |  |               |       |           |   |       |  |   |        
|------------------------------------------- |  | ----------------------------------------------- | ----- | - | ------------- | - | ------------ |  | ------------- | ----- | --------- | - | ----- |  | - | -------
|                                            |  | 2007                                           
|                                            |  | FirstQuarter                                    |       |   | SecondQuarter |   | ThirdQuarter |  | FourthQuarter |       | TotalYear
|                                            |  | (amounts in millions, except per share amounts)
|Revenue                                     |  | $                                               | 225.6 |   |               | $ | 241.8        |  | $             | 288.7 |           | $ | 298.7 |  | $ | 1,054.8
|Cost of revenue                             |  |                                                 | 125.1 |   |               |   | 131.0        |  |               | 153.0 |           |   | 156.8 |  |   | 565.9  
|                                            |  |                                                 |       |   |               |   |              |  |               |       |           |   |       |  |   |        
|Gross profit                                |  |                                                 | 100.5 |   |               |   | 110.8        |  |               | 135.7 |           |   | 141.9 |  |   | 488.9  
|Operating expenses                          |  |                                                 | 54.7  |   |               |   | 58.1         |  |               | 57.7  |           |   | 61.5  |  |   | 232.0  
|                                            |  |                                                 |       |   |               |   |              |  |               |       |           |   |       |  |   |        
|Operating income                            |  |                                                 | 45.8  |   |               |   | 52.7         |  |               | 78.0  |           |   | 80.4  |  |   | 256.9  
|Net interest and other income               |  |                                                 | 6.3   |   |               |   | 5.8          |  |               | 4.2   |           |   | 3.5   |  |   | 19.8   
|                                            |  |                                                 |       |   |               |   |              |  |               |       |           |   |       |  |   |        
|Income before income taxes                  |  |                                                 | 52.1  |   |               |   | 58.5         |  |               | 82.2  |           |   | 83.9  |  |   | 276.7  
|Provision for income taxes                  |  |                                                 | 15.1  |   |               |   | 20.1         |  |               | 58.8  |           |   | 40.5  |  |   | 134.5  
|                                            |  |                                                 |       |   |               |   |              |  |               |       |           |   |       |  |   |        
|Net income                                  |  | $                                               | 37.0  |   |               | $ | 38.4         |  | $             | 23.4  |           | $ | 43.4  |  | $ | 142.2  
|                                            |  |                                                 |       |   |               |   |              |  |               |       |           |   |       |  |   |        
|Weighted average shares outstandingbasic   |  |                                                 | 83.1  |   |               |   | 82.0         |  |               | 79.1  |           |   | 76.4  |  |   | 80.2   
|Weighted average shares outstandingdiluted |  |                                                 | 84.6  |   |               |   | 83.8         |  |               | 81.1  |           |   | 78.5  |  |   | 82.2   
|Net income per sharebasic                  |  | $                                               | 0.45  |   |               | $ | 0.47         |  | $             | 0.30  |           | $ | 0.57  |  | $ | 1.77   
|Net income per sharediluted                |  | $                                               | 0.44  |   |               | $ | 0.46         |  | $             | 0.29  |           | $ | 0.55  |  | $ | 1.73   
|                                            | 
|                                            |  | 2006                                           
|                                            |  | FirstQuarter                                    |       |   | SecondQuarter |   | ThirdQuarter |  | FourthQuarter |       | TotalYear
|                                            |  | (amounts in millions, except per share amounts)
|Revenue                                     |  | $                                               | 160.9 |   |               | $ | 170.5        |  | $             | 186.2 |           | $ | 213.1 |  | $ | 730.7  
|Cost of revenue                             |  |                                                 | 97.4  |   |               |   | 100.3        |  |               | 105.1 |           |   | 118.4 |  |   | 421.2  
|                                            |  |                                                 |       |   |               |   |              |  |               |       |           |   |       |  |   |        
|Gross profit                                |  |                                                 | 63.5  |   |               |   | 70.2         |  |               | 81.1  |           |   | 94.7  |  |   | 309.5  
|Operating expenses                          |  |                                                 | 49.9  |   |               |   | 53.7         |  |               | 50.7  |           |   | 52.3  |  |   | 206.6  
|                                            |  |                                                 |       |   |               |   |              |  |               |       |           |   |       |  |   |        
|Operating income                            |  |                                                 | 13.6  |   |               |   | 16.5         |  |               | 30.4  |           |   | 42.4  |  |   | 102.9  
|Net interest and other income               |  |                                                 | 5.4   |   |               |   | 4.9          |  |               | 6.4   |           |   | 5.7   |  |   | 22.4   
|                                            |  |                                                 |       |   |               |   |              |  |               |       |           |   |       |  |   |        
|Income before income taxes                  |  |                                                 | 19.0  |   |               |   | 21.4         |  |               | 36.8  |           |   | 48.1  |  |   | 125.3  
|(Benefit from) provision for income taxes   |  |                                                 | (3.3  | ) |               |   | 6.6          |  |               | 12.1  |           |   | 15.2  |  |   | 30.6   
|                                            |  |                                                 |       |   |               |   |              |  |               |       |           |   |       |  |   |        
|Net income                                  |  | $                                               | 22.3  |   |               | $ | 14.8         |  | $             | 24.7  |           | $ | 32.9  |  | $ | 94.7   
|                                            |  |                                                 |       |   |               |   |              |  |               |       |           |   |       |  |   |        
|Weighted average shares outstandingbasic   |  |                                                 | 84.5  |   |               |   | 85.4         |  |               | 85.2  |           |   | 83.3  |  |   | 84.6   
|Weighted average shares outstandingdiluted |  |                                                 | 85.6  |   |               |   | 86.6         |  |               | 86.2  |           |   | 84.6  |  |   | 85.8   
|Net income per sharebasic                  |  | $                                               | 0.26  |   |               | $ | 0.17         |  | $             | 0.29  |           | $ | 0.39  |  | $ | 1.12   
|Net income per sharediluted                |  | $                                               | 0.26  |   |               | $ | 0.17         |  | $             | 0.29  |           | $ | 0.39  |  | $ | 1.10   



25



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##### Table of Contents

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

This Annual Report on Form 10-K contains certain forward-looking statements. For purposes of the safe harbor provisions under The Private Securities Litigation Reform Act
of 1995, any statements using the terms believes, anticipates, expects, plans or similar expressions, are forward-looking statements. The forward-looking statements involve risks and uncertainties that
could cause actual results to differ materially from those projected. There are a number of important factors that could cause Varian Semiconductors actual results to differ materially from those indicated by forward-looking statements made in
this report and presented by management from time to time. Some of the important risks and uncertainties that may cause Varian Semiconductors financial results to differ are described in Item 1A. Risk Factors.

Overview

Varian Semiconductor is the leading supplier of ion
implantation equipment used in the fabrication of semiconductor chips. Varian Semiconductor designs, manufactures, markets and services semiconductor processing equipment for virtually all of the major semiconductor manufacturers in the world. The
VIISta ion implanter products are designed to leverage single wafer processing technology for the full range of semiconductor implant applications. Varian Semiconductor has shipped more than 3,800 systems worldwide.

Varian Semiconductor provides support, training, and after-market products and services that help its customers obtain high utilization and productivity, reduce
operating costs, and extend capital productivity of investments through multiple product generations. In fiscal year 2007, Varian Semiconductor was ranked number one in customer satisfaction in VLSI Research Inc.s customer survey for all large
suppliers of wafer processing equipment, an honor received in ten of the past eleven years.

Varian Semiconductors business is cyclical. The business
depends upon semiconductor manufacturers expectations and resulting capacity investments for future integrated circuit demand. During calendar year 2005, there was an 11% decline in worldwide ion implanter sales. However, due to market share
gains, Varian Semiconductors fiscal year 2005 revenue increased 13% over fiscal year 2004 as customers migrated to single wafer systems. Single wafer systems are now preferred over batch systems as they process wafers in such a way that
results in higher yields for advanced device manufacturers. By offering a superior product to meet the requirements at the batch to single wafer inflection point, Varian Semiconductor grew its market share in 2006 from 39% to 43%. Calendar year 2007
market share reports are expected to be released in April 2008. Varian Semiconductor believes it has continued to increase its overall market share during calendar year 2007.

Wafer size and market.    The migration from 200mm to 300mm began at the end of the 1990s and 300mm fabs now represent more than half of semiconductor expansions. Most advanced devices below
130nm are produced on 300mm wafers. Varian Semiconductor believes the increase in shipments from 200mm to 300mm will continue and is evidence that Varian Semiconductors tools meet the newest technology requirements. Memory manufacturers
typically produce integrated circuits used for DRAM, flash, etc. which store and retrieve information, while logic manufacturers typically produce integrated circuits used to process data. Significant purchasing fluctuations from memory, logic and
foundry fabs could lead to significant fluctuations in Varian Semiconductors revenues, even if the total ion implant market remains flat.

The first
table below shows Varian Semiconductors calendar year 2006, 2005 and 2004 market share, as reported by Gartner Dataquest in April 2007, April 2006 and April 2005, respectively. Market share estimates are calculated on a subset of revenue,
and information reported by Gartner Dataquest may not be consistent on a company by company basis. The second table below shows the total available market for ion implanter sales in calendar years 2006, 2005 and 2004, also reported by Gartner
Dataquest in April 2007, April 2006 and April 2005. The total available market represents an estimated worldwide total revenue for ion implanters sold by all companies which sell ion implanters during each of the calendar years.



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Market Share



|               |  |                     |   |  |                  |   |  |                  |  
|-------------- |  | ------------------- | - |  | ---------------- | - |  | ---------------- | -
|               |  | Calendar Year Ended |  
|               |  | December 31,2006    |   |  | December 31,2005 |   |  | December 31,2004 |  
|By market      |  |                     |   |  |                  |   |  |                  |  
|Medium current |  | 53                  | % |  | 58               | % |  | 52               | %
|High current   |  | 46                  | % |  | 38               | % |  | 22               | %
|High energy    |  | 17                  | % |  | 10               | % |  | 10               | %
|Overall        |  | 43                  | % |  | 39               | % |  | 31               | %

Total Available Market



|               |  |                     |       |                  |   |                  |  |   |      
|-------------- |  | ------------------- | ----- | ---------------- | - | ---------------- |  | - | -----
|               |  | Calendar Year Ended
|               |  | December 31,2006    |       | December 31,2005 |   | December 31,2004
|               |  | (in millions)      
|By market      |  |                     |       |                  |   |                  |  |   |      
|Medium current |  | $                   | 414   |                  | $ | 330              |  | $ | 447  
|High current   |  |                     | 720   |                  |   | 598              |  |   | 595  
|High energy    |  |                     | 230   |                  |   | 194              |  |   | 223  
|               |  |                     |       |                  |   |                  |  |   |      
|Overall        |  | $                   | 1,364 |                  | $ | 1,122            |  | $ | 1,265
|               |  |                     |       |                  |   |                  |  |   |      

Market Share and Total Available Market.    Market share and total available market
research data is also published by VLSI Research Inc. In April 2007, VLSI Research Inc. reported that Varian Semiconductors overall market share was 46% and that the total available market was $1,285 million for calendar year 2006.

Varian Semiconductors four point increase in market share in calendar year 2006 and a 22% increase in the total available market for ion implanter sales, both
as reported by Gartner Dataquest, led to increased revenues during 2006, compared to 2005. Varian Semiconductors increase in high current market share is a result of the industry shift to single wafer implanters at advanced technology nodes
(65nm and below). Varian Semiconductor began developing single wafer high current tools during 1994 and believes it is currently the industry leader. The increase in high energy market share is primarily related to customer mix in the total
available market for high energy tools. The decrease in medium current market share is primarily related to growth in the medium current market in Japan, where Varian Semiconductor has more competition in the medium current sector. Varian
Semiconductor continues to invest heavily in research and development to maintain its medium current market share lead. Calendar year 2007 market share reports are expected to be released in April 2008. Varian Semiconductor believes it has continued
to increase its overall market share during calendar year 2007.

Critical Accounting Policies and Significant Accounting Estimates

Varian Semiconductors discussion and analysis of its financial condition and results of operations are based upon Varian Semiconductors consolidated financial
statements, which have been prepared in accordance with generally accepted accounting principles (GAAP) in the U.S. The preparation of these consolidated financial statements requires Varian Semiconductor to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On a continual basis, Varian Semiconductor makes estimates and judgments on revenues, inventories, accounts
receivable, long-lived assets, income taxes, warranty obligations, deferred revenue, post-retirement benefits, contingencies, stock-based compensation and foreign currencies. Varian Semiconductor operates in a highly cyclical and competitive
industry that is influenced by a variety of diverse factors including, but not limited to, technological advances, product life cycles, customer and supplier lead times, and geographic and macroeconomic trends. Estimating product demand beyond a
relatively short forecasting horizon is difficult and



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prone to forecasting error due to the cyclical nature and inherent lack of visibility in the industry. Varian Semiconductor bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or conditions. See also the factors discussed in Item 1A. Risk Factors.

Varian Semiconductor believes that the following sets forth the critical accounting policies used by Varian Semiconductor in the preparation of its consolidated financial statements.

Revenue Recognition

Product revenue includes established products,
new products, upgrades and spare parts.

Varian Semiconductor recognizes revenue from product sales upon shipment, provided title and risk of loss has
passed to the customer, evidence of an arrangement exists, fees are contractually fixed or determinable, collectibility is reasonably assured through historical collection results and regular credit evaluations, and there are no uncertainties
regarding customer acceptance.

For established and new products, a portion of the total purchase price is typically not due until installation occurs and
the customer accepts the product. For established products, the lesser of the amount allocated to the equipment or the contractual amount due upon delivery is recorded as product revenue upon delivery. The amount deferred is recognized as revenue
upon customer acceptance. For new products, revenue allocated to the equipment is recognized upon customer acceptance. Revenue related to spare parts and upgrade sales is recognized upon the later of delivery or when the title and risk of loss
passes to the customer.

Products are classified as established products if post-delivery acceptance provisions and the installation process have been
determined to be routine, due to the fact that the acceptance provisions are generally a replication of pre-shipment procedures, and there is a demonstrated history of achieving predetermined installation cost targets. The majority of products are
designed and manufactured to meet contractual customer specifications. To ensure customer specifications are satisfied, the systems are tested at Varian Semiconductors manufacturing facility prior to shipment. To the extent that
customers conditions cannot be replicated in Varian Semiconductors facilities or if there is not a demonstrated history of meeting newer customer specifications, then the product is treated as new for revenue recognition purposes. Varian
Semiconductor has predetermined criteria for changing the classification of a new product to an established product. A new product must achieve a set number of acceptances and a set target for installation cost. Once the criteria have been achieved
for a new product, the product is considered established.

Service revenue includes revenue from maintenance and service contracts, extended warranties,
paid service and system installation services. Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts. Extended warranty revenue is deferred and recognized ratably over the applicable warranty
term. Revenue related to paid service is recorded when earned and revenue related to installation is recorded upon fulfillment of the service obligation and customer acceptance. It takes approximately three to six weeks for Varian Semiconductor
technicians to complete the installation of Varian Semiconductor products and perform tests agreed to with customers. Certain customers formally document their acceptance of Varian Semiconductors products at this time. Other customers elect to
perform additional internal testing prior to formal acceptance, and this process generally takes eight to twelve weeks.

Royalty and license revenue is
recognized when contractual obligations are met, and in the case of royalties, upon receipt of a royalty report from the customer, evidence of an arrangement exists, fees are fixed or determinable and collection is reasonably assured. When fees are
not fixed or determinable, revenue is recorded when payments become due.



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Varian Semiconductors transactions frequently include the sale of systems and services under multiple element
arrangements. Revenue under these arrangements is allocated to all elements, except systems, based upon the fair value of those elements. All elements may not be delivered and recognized as revenue during the same period. In such cases, Varian
Semiconductor defers the relative fair value of the undelivered element until that element is delivered. The amount allocated to installation is based upon hourly rates at the estimated time to complete the service. The fair value of all other
elements is based upon the price charged when these amounts are sold separately and unaccompanied by other elements. The amount of revenue allocated to systems is done on a residual method basis. Under this method, the total value of the arrangement
is allocated first to the undelivered elements based on their fair values, with the remainder being allocated to systems revenue. If fair value cannot be determined for any of the undelivered elements, the entire value of the arrangement is
deferred.

Inventory and Purchase Order Commitments

Varian Semiconductor values its inventory at the lower of cost or market. The determination of lower of cost or market requires that Varian Semiconductor make significant assumptions about future demand for products and the transition to
new product offerings from legacy products. Estimating product demand beyond a relatively short forecasting horizon is difficult and prone to forecasting error due to the cyclical nature and inherent lack of visibility in the industry. Varian
Semiconductor also provides for losses on those open purchase order commitments in which Varian Semiconductors estimated obligation to receive inventory under the commitments exceeds expected production demand. These assumptions include, but
are not limited to, future manufacturing schedules, customer demand, supplier lead time and technological and market obsolescence. Once inventory is written down and a new cost basis has been established, it is not written back up if demand
increases. If market conditions are less favorable than those projected by management, additional inventory provisions may be required. If market conditions are more favorable than those projected by management, and specific inventory previously
written down is subsequently sold, gross profit could benefit by the amount of the specific write-down to carrying value previously recorded. In the case of purchase order commitments, more favorable market conditions or successful negotiations with
suppliers will result in a reduction of provisions in the period the excess purchase order commitments are reduced.

Valuation Allowance on Deferred Tax
Assets and Income Tax Provision

Varian Semiconductor records a valuation allowance against deferred tax assets if it is more likely than not that a
portion of the deferred tax asset will not be realized. On a quarterly basis, Varian Semiconductor evaluates both the positive and negative evidence bearing upon the realizability of its deferred tax assets. Varian Semiconductor considers future
taxable income, ongoing prudent and feasible tax planning strategies, and the ability to utilize tax losses and credits in assessing the need for a valuation allowance. A valuation allowance related to certain state tax credit carryforwards has been
recorded. Management has concluded that it is more likely than not that these credits will not be utilized since historically the annual amount of state credits generated exceeds the amount of credits that can be used. Should Varian Semiconductor
determine that it is not able to realize all or part of its other deferred tax assets in the future, a valuation allowance would be required resulting in an expense recorded within the provision for income taxes in the statement of income in the
period in which such determination was made. It is possible that the amount of the deferred tax asset considered realizable could be reduced in the near term if future taxable income is reduced. Varian Semiconductors effective tax rate is
affected by levels of taxable income in domestic and foreign tax jurisdictions, U.S. tax credits generated and utilized for research and development expenditures, U.S. foreign income exclusion, investment tax credits and other tax incentives
specific to domestic and foreign operations.

Product Warranties

Varian Semiconductor provides for the estimated cost of product warranties, the amount of which is based primarily upon historical information, at the time product
revenue is recognized. While Varian Semiconductor engages in extensive product quality programs and processes including actively monitoring and evaluating the



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quality of its component supplies, Varian Semiconductors warranty obligation is affected by product failure rates, utilization levels, material usage,
service delivery costs incurred in correcting a product failure, and supplier warranties on parts delivered to Varian Semiconductor. Should actual product failure rates, utilization levels, material usage, service delivery costs incurred in
correcting a product failure, or supplier warranties on parts differ from Varian Semiconductors estimates, revisions to the estimated warranty liability would be required.

Results of Operations

Fiscal Year

Varian Semiconductors fiscal year is a 52- or 53-week period that ends on the Friday nearest September 30. Fiscal year 2007 was comprised of a 52-week period ended on September 28, 2007. Fiscal year
2006 was comprised of a 52-week period ended on September 29, 2006. Fiscal year 2005 was comprised of a 52-week period ended on September 30, 2005.

Fiscal Year 2007 Compared to Fiscal Year 2006 and

Fiscal Year 2006 Compared to Fiscal Year 2005

Revenue

The following table sets forth revenue by revenue stream and
territory for fiscal years 2007, 2006 and 2005:



|                      |  |                        |           |                                      |   |                    |                                      |        |         |  |                |         |   |        |     |   |                |   |         |   |  |     |  
|--------------------- |  | ---------------------- | --------- | ------------------------------------ | - | ------------------ | ------------------------------------ | ------ | ------- |  | -------------- | ------- | - | ------ | --- | - | -------------- | - | ------- | - |  | --- | -
|                      |  | Fiscal Year Ended      |           | Fiscal Year 2006 to Fiscal Year 2007 |   |                    | Fiscal Year 2005 to Fiscal Year 2006 |       
|                      |  | September 28, 2007     |           | September 29, 2006                   |   | September 30, 2005 |                                      | Change |         |  | Percent Change |         |   | Change |     |   | Percent Change |  
|                      |  | (Amounts in thousands) |          
|                      | 
|Revenue               |  |                        |           |                                     
|Product               |  | $                      | 961,329   |                                      | $ | 642,038            |                                      | $      | 488,719 |  | $              | 319,291 |   |        | 50  | % |                | $ | 153,319 |   |  | 31  | %
|Service               |  |                        | 86,062    |                                      |   | 79,222             |                                      |        | 84,078  |  |                | 6,840   |   |        | 9   | % |                |   | (4,856  | ) |  | -6  | %
|Royalty and license   |  |                        | 7,473     |                                      |   | 9,454              |                                      |        | 27,724  |  |                | (1,981  | ) |        | -21 | % |                |   | (18,270 | ) |  | -66 | %
|                      |  |                        |           |                                      |   |                    |                                      |        |         |  |                |         |   |        |     |   |                |   |         |   |  |     |  
|Revenue               |  | $                      | 1,054,864 |                                      | $ | 730,714            |                                      | $      | 600,521 |  | $              | 324,150 |   |        | 44  | % |                | $ | 130,193 |   |  | 22  | %
|                      |  |                        |           |                                      |   |                    |                                      |        |         |  |                |         |   |        |     |   |                |   |         |   |  |     |  
|Revenue by territory: |  |                        |           |                                      |   |                    |                                      |        |         |  |                |         |   |        |     |   |                |   |         |   |  |     |  
|Asia Pacific          |  | $                      | 747,445   |                                      | $ | 491,121            |                                      | $      | 408,582 |  | $              | 256,324 |   |        | 52  | % |                | $ | 82,539  |   |  | 20  | %
|North America*        |  |                        | 234,078   |                                      |   | 161,129            |                                      |        | 134,778 |  |                | 72,949  |   |        | 45  | % |                |   | 26,351  |   |  | 20  | %
|Europe                |  |                        | 73,341    |                                      |   | 78,464             |                                      |        | 57,161  |  |                | (5,123  | ) |        | -7  | % |                |   | 21,303  |   |  | 37  | %
|                      |  |                        |           |                                      |   |                    |                                      |        |         |  |                |         |   |        |     |   |                |   |         |   |  |     |  
|Revenue               |  | $                      | 1,054,864 |                                      | $ | 730,714            |                                      | $      | 600,521 |  | $              | 324,150 |   |        | 44  | % |                | $ | 130,193 |   |  | 22  | %
|                      |  |                        |           |                                      |   |                    |                                      |        |         |  |                |         |   |        |     |   |                |   |         |   |  |     |  

---

|* | North America revenue for fiscal year 2005 included $18.9 million in past due royalties from Applied Materials.
|- | ---------------------------------------------------------------------------------------------------------------

Product

Varian Semiconductors product sales increased by 50%
during fiscal year 2007 after a 31% increase during fiscal year 2006. The fiscal year 2007 increase was primarily due to increased tool sales to memory customers. On a unit basis, the number of tools recorded in revenue increased 51% during fiscal
year 2007 compared to fiscal year 2006. Revenue from parts and upgrades sales increased 16% during fiscal year 2007. In fiscal year 2006, Varian Semiconductors product sales increased by 31% due to a unit increase in system sales of 33%,
primarily related to high current system sales, and an increase in sales of parts. Varian Semiconductor believes that market share gains, particularly in the high current sector, and an overall increase in industry spending, were the primary reasons
for Varian Semiconductors increase in sales in fiscal year 2006. Varian Semiconductor believes it has continued to increase its overall market share during calendar year 2007.



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Service

Service
revenue increased by 9% in fiscal year 2007 as compared to fiscal year 2006, primarily as a result of increases in installation revenue resulting from increased tool sales. Generally, installation revenue is influenced by shipment volume of systems,
product mix, customer mix, timing of customer acceptance and the fair value of installations. As products mature and the installation requires less effort to complete, the fair value of installation revenue per system is reduced, which reduces
installation revenue per tool. System installation revenues decreased by 6% in fiscal year 2006 compared to fiscal year 2005, primarily as a result of the reduction in fair value of system installations. Service contract revenues partially offset
this decrease by increasing 8% from fiscal year 2005 to fiscal year 2006, primarily as a result of sales of service contracts with new systems.

Royalty
and License

In fiscal year 2005, Varian Semiconductor received payments from Applied Materials of $18.9 million for past due royalties. Applied
Materials was also required to make quarterly unit-based royalties payments to Varian Semiconductor on future sales of certain products found to be within the scope of the Agreement through the expiration of the Agreement in March 2007. In fiscal
years 2007, 2006 and 2005, Varian Semiconductor recognized an additional $4.5 million, $6.4 million, and $5.3 million, respectively, as royalty revenue related to this agreement.

Pursuant to the terms of a Settlement and License Agreement between Lam and Varian Semiconductor, Lam was required to make quarterly cash payments of $1.25 million through the first quarter of fiscal year 2005 for
future use of the patents. These quarterly cash payments were recognized as revenue through fiscal year 2005.

Customers

Revenue from Varian Semiconductors ten largest customers in fiscal years 2007, 2006 and 2005 accounted for approximately 72%, 63% and 66% of revenue, respectively.
Varian Semiconductor expects that sales of its products to relatively few customers will continue to account for a high percentage of its revenue for the foreseeable future. In fiscal year 2007, revenue from one customer accounted for 17% of Varian
Semiconductors total revenue. In fiscal year 2006, revenue from three customers accounted for 11%, 10% and 10%, respectively, of Varian Semiconductors total revenue. In fiscal year 2005, revenue from two customers accounted for 20% and
14% of Varian Semiconductors total revenue.



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Shipment Mix

Varian
Semiconductors tools are used primarily for 200mm and 300mm wafer size implants. In addition, Varian Semiconductors tools are used by logic, memory and foundry manufacturersfor integrated circuits. Logic manufacturers make chips
that process information and are owned by the companies that design the chips. Memory manufacturers make chips that store information and they, too, are owned by the companies that design the chips. Foundry manufacturers are contractors that take
chip designs from other companies and make the chips for them. Over the last several years the demand for memory chips has outstripped logic. As the demand for memory intensive applications such as cameras, phones and MP3 players grows, it is
expected that memory will continue to represent the bulk of chips made worldwide. The following table sets forth tool shipments by wafer size and market, as a percent of total tool shipments, for fiscal years 2007, 2006 and 2005. Percentages are
based on the number of tools shipped during the respective period.



|              |  |                    |   |  |                            |   |  |                            |   |  |                |   |  |                |  
|------------- |  | ------------------ | - |  | -------------------------- | - |  | -------------------------- | - |  | -------------- | - |  | -------------- | -
|              |  | Fiscal Year Ended  |   |  | Fiscal 2006 to Fiscal 2007 |   |  | Fiscal 2005 to Fiscal 2006 |  
|              |  | September 28, 2007 |   |  | September 29, 2006         |   |  | September 30, 2005         |   |  | Percent Change |   |  | Percent Change |  
|By wafer size |  |                    |   |  |                            |   |  |                            |   |  |                |   |  |                |  
|300 mm        |  | 91                 | % |  | 75                         | % |  | 55                         | % |  | 21             | % |  | 36             | %
|200 mm        |  | 9                  | % |  | 25                         | % |  | 45                         | % |  | -64            | % |  | -44            | %
|              |  |                    |   |  |                            |   |  |                            |   |  |                |   |  |                |  
|Shipments     |  | 100                | % |  | 100                        | % |  | 100                        | % |  |                |   |  |                |  
|              |  |                    |   |  |                            |   |  |                            |   |  |                |   |  |                |  
|By market     |  |                    |   |  |                            |   |  |                            |   |  |                |   |  |                |  
|Memory        |  | 70                 | % |  | 51                         | % |  | 66                         | % |  | 37             | % |  | -23            | %
|Logic         |  | 14                 | % |  | 19                         | % |  | 14                         | % |  | -26            | % |  | 36             | %
|Foundry       |  | 16                 | % |  | 30                         | % |  | 20                         | % |  | -47            | % |  | 50             | %
|              |  |                    |   |  |                            |   |  |                            |   |  |                |   |  |                |  
|Shipments     |  | 100                | % |  | 100                        | % |  | 100                        | % |  |                |   |  |                |  
|              |  |                    |   |  |                            |   |  |                            |   |  |                |   |  |                |  

Cost of Product Revenue

Cost of product revenue was $511.1 million and gross margin was 47% for fiscal year 2007, compared to the cost of product revenue of $371.1 million and gross margin of 42% for fiscal year 2006. For fiscal year 2005,
cost of product revenue was $280.4 million and gross margin was 43%. The increase in gross margin from fiscal year 2006 to fiscal year 2007 was primarily due to product mix and more efficient factory operations due to higher sales volume. Improved
supply chain management and more efficient regional service support also contributed to the increases in gross margin in fiscal year 2007. These positive factors more than offset the decreases in gross margin attributable to the overall sales mix.
As tool sales become a higher portion of total sales, overall margins decrease. This is due to the fact that tools generally have lower margins than parts and upgrades. Gross margin decreased during fiscal year 2006 compared to fiscal year 2005 also
due to higher tool sales as a portion of total sales. In addition, during fiscal year 2006 there were increased product transition costs and market share penetrations, where the initial costs to support the first system in the fab were higher than
for follow-on business. Cost of product revenue in fiscal years 2006 and 2005 was favorably impacted by $1.7 million in each year, from the sale of certain inventory for which the carrying value had been reduced in previous periods. Cost of product
revenue for fiscal year 2007 and fiscal year 2006 included $1.3 million and $1.1 million, respectively, of equity-based compensation costs recorded upon the adoption of SFAS No. 123(R), Share-Based Payment (SFAS No. 123
(R)) as of October 1, 2005.

Cost of Service Revenue

Cost of service revenue was $54.8 million and gross margin was 36% for fiscal year 2007, compared to $50.1 million and gross margin of 37% for fiscal year 2006 and $51.4 million and gross margin of 39% for fiscal year 2005. The decreases in
service margins were related to decreased margins on installations which were influenced



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by lower fair value of installations, product and regional mix. The fair value of installations is assessed periodically and is largely based upon the
historical experience of the effort and cost to complete installations. The fair value of tool installation is determined at the time of tool shipment. As products have matured and the installation requires less effort to complete, the fair value of
installation revenue per installation is reduced. Based upon the results of the first quarter 2006, the fair value was reduced for certain products shipped in the remaining quarters of fiscal year 2006 thus reducing the gross margin. Generally,
installation revenue is influenced by shipment volume of systems, product mix, customer mix, timing of customer acceptances and the fair value of installations. Cost of service revenue for each of fiscal years 2007 and 2006 included $1.0 million of
equity-based compensation costs recorded upon the adoption of SFAS No. 123(R) as of October 1, 2005.

Research and Development

Research and development expenses were $104.0 million for fiscal year 2007, compared to $90.6 million for fiscal year 2006 and $77.7 million for fiscal year 2005, an
increase of $13.4 million, or 15% from fiscal year 2006 to fiscal year 2007, and an increase of $12.9 million, or 17% from fiscal year 2005 to fiscal year 2006. The increases in research and development spending are attributable to Varian
Semiconductors rapid product development cycle (which aims to introduce new products every nine to twelve months) and continuing efforts to improve productivity and technical development of its products. Varian Semiconductor focuses on
maintaining its leadership position in the markets for medium current and high current implanters, improving its position in the high energy business and continuing to invest in additional new and next generation products. Research and development
expense for fiscal year 2007 and fiscal year 2006 included $3.9 million and $3.7 million, respectively, of equity-based compensation costs recorded upon the adoption of SFAS No. 123(R) as of October 1, 2005.

Marketing, General and Administrative

Marketing, general and
administrative expenses were $128.1 million for fiscal year 2007, compared to $116.1 million for fiscal year 2006 and $104.9 million for fiscal year 2005, an increase of $12.0 million, or 10% from fiscal year 2006 to fiscal year 2007, and an
increase of $11.2 million, or 11% from fiscal year 2005 to fiscal year 2006. The increase in expense from fiscal year 2006 to fiscal year 2007 was due to increases in headcount and incentive compensation in support of the increase in overall
business activity. Additionally, information technology and finance professional consulting expenses were higher due to spending related to Varian Semiconductors implementation of its global reorganization plan which is designed to better
align its processes with the geographic location of its customers and suppliers. The increase in expense from fiscal year 2005 to fiscal year 2006 was primarily the result of the expensing of stock based compensation. Increased product marketing
expenses, service expenses, and IT expenses also contributed to the increase. These increases were partially offset by decreases in marketing expenses related to the customer evaluations and demonstration of new generation products, and decreases in
legal expenses. Marketing, general and administrative expenses for fiscal year 2007 and fiscal year 2006 included $13.5 million and $13.2 million, respectively, of equity-based compensation costs recorded upon the adoption of SFAS No. 123(R) as
of October 1, 2005. Additionally, the first quarter of fiscal year 2005 included a $3.5 million charge, largely non-cash, associated with the retirement of the President and Chief Operating Officer of Varian Semiconductor.

Restructuring Costs

During fiscal year 2005, Varian Semiconductor
recognized $0.9 million in restructuring costs. The restructuring costs related to reductions in headcount and facilities in Europe. The restructuring reserve balance of $0.2 million as of September 30, 2005, was paid during fiscal year 2006.
There were no additional charges in fiscal years 2006 or 2007.

Interest Income and Interest Expense

During fiscal year 2007, Varian Semiconductor earned $19.5 million in net interest income, compared to $21.5 million for fiscal year 2006 and $16.3 million for fiscal
year 2005. The decrease in interest income for fiscal year 2007 was



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related to a decrease in average cash and investment balances, primarily attributable to share repurchases during fiscal year 2007 of $426.5 million.
Interest income in fiscal year 2006 included $1.6 million related to the release of tax refunds by the IRS upon the conclusion of a multi-year tax examination. Interest income in fiscal year 2005 included $5.7 million in interest on the past due
royalties received from Applied Materials. In addition, interest income, during both fiscal years 2006 and 2005, increased due to higher cash balances and rates, along with an increased portfolio of investments. At September 28, 2007, Varian
Semiconductor had $57.5 million in cash equivalents whose interest was exempt from US federal taxation. The rates of return on these cash equivalents were approximately 33% lower than rates earned on comparable fully-taxable cash equivalents.

Other Income (Expense), Net.

During fiscal year 2007,
Varian Semiconductor recorded other income of $0.3 million related to foreign exchange gains offset by miscellaneous charges. During fiscal year 2006, Varian Semiconductor recorded other income of $0.9 million, primarily related to a gain on the
sale of certain non-operating real estate owned by Varian Semiconductor. During fiscal year 2005, Varian Semiconductor recorded other income of $2.8 million, primarily related to the reduction of an estimated loss contingency of $2.7 million
associated with patent infringement and antitrust litigation.

Provision for Income Taxes

Varian Semiconductors effective income tax rate was 49% in fiscal year 2007, 24% in fiscal year 2006 and 31% in fiscal year 2005. The 2007 provision was impacted by
tax charges related to Varian Semiconductors realignment of its global business structure and establishment of international operations that will provide operational and financial services to all of its international locations. A significant
element of the new structure involves the sharing of certain expenses related to the ongoing development of intangible property. Tax charges to implement the new structure impacted the fiscal year 2007 effective tax rate by approximately 15
percentage points. These charges consisted primarily of additional royalty payments that will be taxed in the United States and the loss of certain U.S. tax deductions related to research and development and certain other administration expenses.
Varian Semiconductor anticipates that it may experience an effective tax rate in the 30% to 32% range in fiscal 2008, and possibly a lower rate in subsequent years, as it begins to realize operational and tax efficiencies resulting from this
realignment.

Exclusive of the effects of the discrete tax benefit received in the first quarter of fiscal year 2006, as discussed in the following
paragraph, and other discrete items, the effective tax rate would have been 32% for the fiscal year 2006. The rate is lower than the U.S. federal statutory rate in fiscal years 2006 and 2005, principally due to credits and lower-taxed foreign
income. Future tax rates may vary from these historic rates depending on the worldwide composition of earnings and the continuing availability of income tax credits, as well as the potential resolution of tax contingencies.

In the normal course of business, Varian Semiconductor and its subsidiaries are examined by various tax authorities, including the IRS. The IRS conducted an examination
for the tax years 1999 through 2003 as part of its routine examinations of Varian Semiconductors income tax returns. The IRS completed fieldwork for this examination of Varian Semiconductor in the fourth quarter of fiscal year 2005 and
submitted its report to the Joint Committee for final approval. Varian Semiconductor was notified of Joint Committee approval in the first quarter of fiscal year 2006. Related to the conclusion of this examination, Varian Semiconductor recorded a
discrete tax benefit of $9.0 million in the first quarter of fiscal year 2006. The IRS is currently examining certain refund claims filed by Varian Semiconductor for fiscal year 2000 through fiscal year 2004. The favorable resolution of these claims
could result in a benefit to the financial statements.



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Net Income

As a
result of the foregoing factors, for fiscal year 2007 Varian Semiconductor recorded net income of $142.2 million, compared to net income of $94.7 million for fiscal year 2006 and $72.0 million for fiscal year 2005. The net income per diluted share
was $1.73 for fiscal year 2007, compared to net income per diluted share of $1.10 for fiscal year 2006 and $0.85 for fiscal year 2005.

Liquidity and
Capital Resources

Varian Semiconductor generated $108.3 million of cash from operations during fiscal year 2007, compared to $140.6 million during
fiscal year 2006. Cash provided by operations in fiscal year 2007 was derived primarily from net income of $142.2 million, non-cash expenses such as stock based compensation of $19.7 million and depreciation and amortization of $14.4 million.
Increases in accounts receivable of $61.8 million and inventories of $51.6 million were related to higher business volume. These increases were partially offset by increases in accrued expenses and deferred revenue. The increase in accrued expenses
is associated with an anticipated long-term tax liability relating to the global realignment discussed above. The increase in deferred revenue of $8.1 million was related to the increase in volume and timing of tool shipments and the increase in
accrued expenses was related to incentive compensation in support of the increase in overall business activity.

In fiscal year 2006, cash provided by
operations was derived primarily from net income of $94.7 million, less non-cash expenses such as stock based compensation of $18.9 million, depreciation and amortization of $13.0 million, and the tax benefit from stock options exercised and
employee stock purchase plan issuances of $10.8 million. Also contributing to cash from operations were a decrease in other current assets of $14.7 million and an increase in accounts payable of $12.6 million. The cash flow effects of net income,
non-cash items and the changes in other current assets and accounts payable were partially offset by increases in inventory of $11.8 million and decreases in accrued expenses of $5.9 million. The decrease in other current assets is primarily related
to the receipt of refunds from the IRS associated with the conclusion of a multi-year tax examination. The increase in accounts payable and inventory is related to a higher manufacturing build schedule for the first quarter of fiscal year 2007 as
opposed to the schedule for the first quarter of fiscal year 2006. Additionally, increases in inventory are also due to increased field inventory primarily for new customers.

During fiscal year 2007, Varian Semiconductor used $108.7 million for the net purchase of investments and $10.9 million for the purchase of property, plant and equipment. In fiscal year 2006, Varian Semiconductor used
$9.1 million for the net purchase of investments and $12.0 million for the purchase of property, plant and equipment. In fiscal year 2007, Varian Semiconductors net purchase of investments was lower than in fiscal year 2006 due to the
repurchase of $426.5 million of its stock and the relative attractiveness of rates of return on cash equivalents. In fiscal year 2005, Varian Semiconductor used $109.6 million for the net purchase of investments and $12.4 million for the purchase of
property, plant and equipment.

During fiscal year 2007, Varian Semiconductor used $355.2 million of cash for financing activities. Varian Semiconductor
repurchased $426.5 million of its stock during the fiscal year as part of its authorized share repurchase program. This was partially offset by the issuance of stock upon the exercise of stock options and under the employee stock purchase plan of
$54.2 million and the excess tax benefit from stock based compensation of $17.6 million. Varian Semiconductors Board of Directors amended the share repurchase program by increasing the amount of funds that may be expended in repurchasing
common stock from $200 million to $700 million as of November 13, 2007. The program does not have a fixed expiration date. During fiscal year 2007, Varian Semiconductor repurchased 11.3 million shares at a weighted-average price per share
of $37.58.

During fiscal year 2006, Varian Semiconductor used $54.5 million of cash for financing activities. Varian Semiconductor repurchased $108.9
million of its stock during the fiscal year as part of its authorized share repurchase program. This was partially offset by the issuance of stock upon the exercise of stock options and under the employee stock purchase plan of $50.3 million and the
excess tax benefit from stock based compensation of $4.5 million. During fiscal year 2006, Varian Semiconductors Board of Directors amended the



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share repurchase program by increasing the amount of funds that may be expended in repurchasing common stock from $100 million to $200 million. During fiscal
year 2005, Varian Semiconductor generated $23.4 million of cash from financing activities, primarily due to the issuance of stock upon the exercise of stock options and under the employee stock purchase plan of $27.7 million, partially offset by
repayments of short- and long-term borrowings.

As of September 28, 2007 and September 29, 2006, Varian Semiconductors subsidiary in Japan
had two credit facilities available with two different financial institutions. At September 28, 2007, maximum available borrowings under each of the two facilities were as follows: Yen 1,000,000,000 ($8.7 million) and Yen 500,000,000 ($4.3
million). The loans are not collateralized and contain no restrictive covenants, although each loan is guaranteed by Varian Semiconductor. The interest rate for the Yen 1,000,000,000 credit facility is based on the short-term prime rate
(approximately 1.875% at September 28, 2007 and 1.675% at September 29, 2006). The interest rate for the Yen 500,000,000 facility is the 3-month Tokyo interbank offered rate (TIBOR) + 1.00% (approximately 1.84% at September 28, 2007).
There were no outstanding borrowings under either facility at September 28, 2007 or September 29, 2006.

Varian Semiconductor also has borrowing
capacity in Europe and Taiwan. Varian Semiconductors subsidiary in Europe maintains a credit facility that includes overdraft protection of Euro 2.5 million which at September 28, 2007 translated to $3.5 million. Interest accrues at
the Euro base rate + 1.5% and was approximately 6.55% at September 28, 2007. Varian Semiconductors subsidiary in Taiwan maintains a credit facility of $1.0 million. Any outstanding borrowings under the Taiwan facility accrue interest at
the local base rate + 2.0% plus taxes, which was approximately 7.54% at September 28, 2007, and are payable on demand. Neither credit facility is collateralized nor do they contain any restrictive covenants, although each facility is guaranteed
by Varian Semiconductor. There were no outstanding borrowings as of September 28, 2007 or September 29, 2006 under either facility.

In February
2003, Varian Semiconductor purchased its previously leased facility located in Newburyport, Massachusetts. The purchase price consisted of cash payments totaling $3.4 million, the assumption of the sellers outstanding loan of $5.1 million and
the transfer of other prepaid assets of $0.8 million. The loan has a fixed interest rate of 9.05% with monthly payments of principal and interest until the loan matures in January 2013. The loan may be prepaid in full, but not in part, at any time
after November 5, 2006. Prepayment would require Varian Semiconductor to pay a prepayment penalty equal to the greater of two percent of the outstanding principal balance or the excess of the present value of all future loan payments over the
outstanding principal balance of the loan. The loan is secured by the property. The $3.3 million carrying amount of the loan had an estimated fair value of $3.5 million at September 28, 2007. The fair value of the loan was estimated using a
discounted cash flow analysis. The interest rate was estimated based on current market conditions and Varian Semiconductors financial condition at September 28, 2007. As of September 28, 2007, Varian Semiconductor also has a standby
letter of credit outstanding for $0.9 million as a guarantee for the debt on this facility.

Varian Semiconductors liquidity is affected by many
factors, some based on the normal operations of the business and others related to the uncertainties of the industry and global economies. Varian Semiconductor believes that cash, cash equivalents and investments of $294.1 million at
September 28, 2007 will be sufficient to satisfy working capital requirements, commitments for capital expenditures, any future common stock repurchases and other purchase commitments, environmental contingencies and cash requirements for the
foreseeable future.

Off-Balance Sheet Arrangements

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



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Contractual Obligations

Under GAAP, some obligations and commitments are not required to be included in the consolidated balance sheets and statements of income. These obligations and commitments, while entered into in the normal course of business, may have a
material impact on liquidity. The following commitments as of September 28, 2007 have not been included in the consolidated balance sheets and statements of income included under Item 8. Financial Statements and Supplementary
Data.



|                           |  |                        |        |                  |   |           |  |           |     |               |   |     |  |   |  
|-------------------------- |  | ---------------------- | ------ | ---------------- | - | --------- |  | --------- | --- | ------------- | - | --- |  | - | -
|                           |  | Commitments by Period 
|                           |  | Total                  |        | Less than 1 year |   | 1-3 Years |  | 3-5 Years |     | After 5 Years
|                           |  | (amounts in thousands)
|Operating leases           |  | $                      | 2,799  |                  | $ | 1,793     |  | $         | 707 |               | $ | 299 |  | $ | 
|Purchase order commitments |  |                        | 77,001 |                  |   | 76,877    |  |           | 124 |               |   |    |  |   | 
|                           |  |                        |        |                  |   |           |  |           |     |               |   |     |  |   |  
|Total commitments          |  | $                      | 79,800 |                  | $ | 78,670    |  | $         | 831 |               | $ | 299 |  | $ | 
|                           |  |                        |        |                  |   |           |  |           |     |               |   |     |  |   |  

Transactions with Affiliates and Related Parties

Operations prior to April 2, 1999 had been part of the former VAI, now operates as VMS. On April 2, 1999, VAI contributed its SEB to Varian Semiconductor, then
distributed to the holders of record of VAI common stock one share of common stock of Varian Semiconductor for each share of VAI common stock owned on March 24, 1999. At the same time, VAI contributed its Instruments Business (IB)
to VI and distributed to the holders of record of VAI common stock one share of common stock of IB for each share of VAI common stock owned on March 24, 1999. VAI retained its Health Care Systems business and changed its name to VMS effective
as of April 2, 1999. These transactions were accomplished under the terms of a Distribution Agreement by and among Varian Semiconductor, VAI, hereafter referred to as VMS for periods following the spin-off and VI (the Distribution
Agreement). For purposes of providing an orderly transition and to define certain ongoing relationships between and among Varian Semiconductor, VMS and VI after the spin-off, Varian Semiconductor, VMS and VI also entered into the Distribution
Related Agreements.

The Distribution Related Agreements provide that from and after the spin-off, VMS, VI, and Varian Semiconductor will indemnify each
and their respective subsidiaries, directors, officers, employees and agents against all losses arising in connection with shared liabilities (including certain environmental and legal liabilities). All shared liabilities will be managed and
administered by VMS and expenses and losses, net of proceeds and other receivables, will be borne one-third each by VMS, VI, and Varian Semiconductor. The Distribution Related Agreements also provide that Varian Semiconductor shall assume all of its
liabilities, other than shared liabilities (including accounts payable, accrued payroll and pension liabilities) in accordance with their terms. During fiscal years 2007, 2006 and 2005, Varian Semiconductor was charged $0.9 million, $1.4 million and
$1.2 million, respectively, by VMS in settlement of these obligations.

Recent Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement
No. 109. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This
interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation will be effective for Varian Semiconductor for its fiscal year 2008. Varian Semiconductor does not expect that the
adoption of this interpretation will have a material impact on its financial statements.



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In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit
fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. However, for some
entities, the application of this statement will change current practice. This statement will be effective for Varian Semiconductors fiscal year 2009. Varian Semiconductor is in the process of evaluating the impact of this statement on its
financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
Including an amendment of FASB Statement No. 115. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The
decision to measure items at fair value can be made on an instrument-by-instrument basis, but once the decision is made, it is permanent. This statement will be effective for Varian Semiconductors fiscal year 2009. Varian Semiconductor is in
the process of evaluating the impact of this statement on its financial statements.



|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk.
|-------- | -----------------------------------------------------------

Foreign Currency Exchange Risk

As a multinational company, Varian Semiconductor faces exposure to adverse movements
in foreign currency exchange rates. This exposure may change over time as Varian Semiconductors business practices evolve and could impact Varian Semiconductors financial results. However, based on the results of an annual test, a 10%
change in the exchange rate of the U.S. dollar against other major currencies would not have a material effect on Varian Semiconductors results of operations. Historically, Varian Semiconductors primary exposures have resulted from
non-U.S. dollar-denominated sales and purchases in Asia Pacific and Europe. Varian Semiconductor does not enter into forward exchange contracts for trading purposes. Varian Semiconductors forward exchange contracts generally range from one to
nine months in original maturity. No forward exchange contract exceeds one year in original maturity.

Varian Semiconductor hedges currency exposures that
are associated with certain of its assets and liabilities denominated in various non-U.S. dollar currencies. The aggregate exchange losses for the fiscal years ended 2007, 2006 and 2005 were $311,000, $146,000 and $46,000, respectively.



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Forward exchange contracts outstanding are summarized as follows (dollars in thousands):



|                                          |  |                    |        |                    |        |            |   |                |  |               |        |            |        |  |   |       
|----------------------------------------- |  | ------------------ | ------ | ------------------ | ------ | ---------- | - | -------------- |  | ------------- | ------ | ---------- | ------ |  | - | ------
|                                          |  | September 28, 2007 |        | September 29, 2006
|                                          |  | Notional Value     |        | Contract Rate      |        | Fair Value |   | Notional Value |  | Contract Rate |        | Fair Value
|Foreign currency purchase contracts:      |  |                    |        |                    |        |            |   |                |  |               |        |            |        |  |   |       
|Singapore Dollar                          |  | $                  | 4,609  |                    | 1.52   |            | $ | 4,678          |  | $             | 1,239  |            | 1.57   |  | $ | 1,224 
|New Taiwan Dollar                         |  |                    | 2,093  |                    | 32.93  |            |   | 2,100          |  |               | 2,227  |            | 32.83  |  |   | 2,215 
|Korean Won                                |  |                    | 218    |                    | 913.35 |            |   | 216            |  |               | 2,251  |            | 947.68 |  |   | 2,254 
|Japanese Yen                              |  |                    | 557    |                    | 115.21 |            |   | 556            |  |               | 4,133  |            | 117.60 |  |   | 4,132 
|Israeli Shekel                            |  |                    |       |                    |       |            |   |               |  |               | 51     |            | 4.30   |  |   | 51    
|                                          |  |                    |        |                    |        |            |   |                |  |               |        |            |        |  |   |       
|Total foreign currency purchase contracts |  | $                  | 7,477  |                    |        |            | $ | 7,550          |  | $             | 9,901  |            |        |  | $ | 9,876 
|                                          |  |                    |        |                    |        |            |   |                |  |               |        |            |        |  |   |       
|Foreign currency sell contracts:          |  |                    |        |                    |        |            |   |                |  |               |        |            |        |  |   |       
|Japanese Yen                              |  | $                  | 24,186 |                    | 114.91 |            | $ | 24,052         |  | $             | 10,265 |            | 117.72 |  | $ | 10,272
|Korean Won                                |  |                    | 5,072  |                    | 939.70 |            |   | 5,177          |  |               | 3,232  |            | 961.90 |  |   | 3,286 
|Euro                                      |  |                    | 1,077  |                    | 0.73   |            |   | 1,112          |  |               | 205    |            | 0.78   |  |   | 203   
|Israeli Shekel                            |  |                    | 311    |                    | 4.13   |            |   | 319            |  |               | 203    |            | 4.37   |  |   | 206   
|Singapore Dollar                          |  |                    | 169    |                    | 1.49   |            |   | 168            |  |               |       |            |       |  |   |      
|New Taiwan Dollar                         |  |                    |       |                    |       |            |   |               |  |               | 61     |            | 32.91  |  |   | 61    
|British Pound                             |  |                    |       |                    |       |            |   |               |  |               | 78     |            | 0.53   |  |   | 77    
|                                          |  |                    |        |                    |        |            |   |                |  |               |        |            |        |  |   |       
|Total foreign currency sell contracts     |  | $                  | 30,815 |                    |        |            | $ | 30,828         |  | $             | 14,044 |            |        |  | $ | 14,105
|                                          |  |                    |        |                    |        |            |   |                |  |               |        |            |        |  |   |       
|Total contracts                           |  | $                  | 38,292 |                    |        |            | $ | 38,378         |  | $             | 23,945 |            |        |  | $ | 23,981
|                                          |  |                    |        |                    |        |            |   |                |  |               |        |            |        |  |   |       

Varian Semiconductor uses derivative instruments to protect its foreign operations from fluctuations in earnings
and cash flows caused by volatility in currency exchange rates. Varian Semiconductor hedges its current exposures and a portion of its anticipated foreign currency exposures with hedging instruments having terms of up to twelve months.

Varian Semiconductors international sales, except for those in Japan, are primarily denominated in the U.S. dollar. For foreign currency-denominated sales,
however, the volatility of the foreign currency markets represents risk to Varian Semiconductor. Upon forecasting the exposure, Varian Semiconductor enters into hedges with forward sales contracts whose critical terms are designed to match those of
the underlying exposure. These hedges are evaluated for effectiveness at least quarterly using the change in value of the forward contracts to the change in value of the underlying transaction, with the effective portion of the hedge accumulated in
other comprehensive income. Any measured ineffectiveness is included immediately in other income and expense in the consolidated statements of operations. There was an immaterial amount of ineffectiveness recognized during the fiscal years ended
September 28, 2007 and September 29, 2006. There were four forward foreign exchange sell contracts designated as hedges of anticipated product sales in Japanese Yen outstanding at September 28, 2007 totaling an equivalent of $12.6
million. In addition, there were two forward foreign exchange purchase contracts totaling an equivalent of $6.5 million offsetting two of the four forward sell contracts. At September 29, 2006, there were seven forward foreign exchange sell
contracts outstanding designated as hedges of anticipated product sales in Japanese Yen totaling an equivalent of $35.5 million. In addition, there were three forward foreign exchange purchase contracts totaling an equivalent of $11.7 million
offsetting three of the seven forward sell contracts.

There were approximately $0.1 million net unrealized losses on these forward Yen contracts as of
September 28, 2007. There were approximately $0.7 million in net unrealized gains on these forward Yen contracts as of September 29, 2006. The fair value of forward exchange contracts generally reflects the estimated amounts that Varian
Semiconductor would receive or pay to terminate the contracts at the reporting date. The notional amounts of forward exchange contracts are not a measure of Varian Semiconductors exposure.



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Interest Rate Risk

Although payments under certain of Varian Semiconductors overseas borrowing facilities are tied to market indices, Varian Semiconductor is not exposed to material interest rate risk from these borrowing facilities. Varian
Semiconductor has no material cash flow exposure due to rate changes for cash equivalents and short-term investments. Varian Semiconductor maintains cash investments primarily in U.S. Treasury, government agency and investment-grade corporate and
municipal securities, as well as short-term time deposits with investment grade financial institutions. Cash equivalents at September 28, 2007 and September 29, 2006 were $84.5 million and $234.1 million, respectively. At
September 28, 2007, Varian Semiconductors short-term investments were $88.4 million and consisted primarily of U.S. Treasury, government agency and corporate bonds and certificates of deposit with ratings of AA or better. At
September 29, 2006, Varian Semiconductors short-term investments were $154.8 million and consisted primarily of U.S. Treasury, government agency and corporate bonds and certificates of deposit with ratings of AA or better. At
September 28, 2007, Varian Semiconductors long-term investments were $96.2 million and consisted primarily of U.S. Treasury, government agency and corporate bonds with ratings of AA or better. At September 29, 2006, Varian
Semiconductors long-term investments were $135.8 million and consisted of the same types of securities as at September 28, 2007.

In February
2003, Varian Semiconductor purchased its facility located in Newburyport, Massachusetts. As part of the purchase price, Varian Semiconductor assumed the sellers outstanding loan of $5.1 million. The loan has a fixed interest rate of 9.05% with
monthly payments of principal and interest until the loan matures in January 2013. The loan may be prepaid in full, but not in part, at any time after November 5, 2006. The loan is secured by the property. The $3.3 million remaining principal
amount of the loan had an estimated fair value of $3.5 million at September 28, 2007. The fair value of the loan was estimated using a discounted cash flow analysis. The interest rate was estimated based on current market conditions and Varian
Semiconductors financial condition at September 28, 2007.

Commodity Price Risk

Varian Semiconductor is not exposed to material commodity price risk.



|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 and Financial Statement Schedules.



|Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
|------- | -------------------------------------------------------------------------------------

Not applicable.



|Item 9A. | Controls and Procedures.
|-------- | ------------------------

Disclosure
Controls and Procedures

The management of Varian Semiconductor, with the participation of the Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of the disclosure controls and procedures of Varian Semiconductor as of September 28, 2007. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the Exchange Act), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to Varian Semiconductors management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding



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required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance
of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of Varian Semiconductors disclosure controls and procedures
as of September 28, 2007, Varian Semiconductors Chief Executive Officer and Chief Financial Officer concluded that, as of such date, Varian Semiconductors disclosure controls and procedures were effective at the reasonable assurance
level.

Changes in Internal Control over Financial Reporting

No change in Varian Semiconductors internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 28, 2007 that has materially
affected, or is reasonably likely to materially affect, Varian Semiconductors internal control over financial reporting.

Managements Report
on Internal Control over Financial Reporting

Management of Varian Semiconductor is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Management, with the participation of the Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of Varian
Semiconductors internal control over financial reporting as of September 28, 2007. In their evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal ControlIntegrated Framework.

Based on managements evaluation using the COSO criteria, management concludes that Varian Semiconductor
maintained effective internal control over financial reporting as of September 28, 2007. This evaluation has been audited by PricewaterhouseCoopers LLP, an independent registered accounting firm, as stated in their report which appears herein.



|Item 9B. | Other Information.
|-------- | ------------------

None.



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PART III



|Item 10. | Directors, Executive Officers and Corporate Governance.
|-------- | -------------------------------------------------------

The response to this item is contained in part under the caption Executive Officers of the Registrant in Part I of this Annual Report on Form 10-K and in part in Varian Semiconductors Proxy Statement
for the Annual Meeting of Stockholders to be held on February 4, 2008 (the 2008 Proxy Statement) under the captions Election of Directors, Information About Stockholder Proposals for 2009 Annual Meeting and
Corporate Governance which sections are incorporated herein by this reference.

The information required by this Item pursuant to Item 405
of Regulation S-K will appear under the heading Section 16(a) Beneficial Ownership Reporting Compliance in the 2008 Proxy Statement, which section is incorporated herein by reference.

Varian Semiconductor has adopted a written code of ethics that applies to its principal executive officer, principal financial officer, and principal accounting officer
or controller, or persons performing similar functions. Varian Semiconductors code of ethics, which also applies to its directors and all of its officers and employees, can be found on its web site, which is located at www.vsea.com, and is
also an exhibit to this report. Varian Semiconductor intends to make all required disclosures concerning any amendments to, or waivers from, its code of business conduct and ethics on its web site.



|Item 11. | Executive Compensation.
|-------- | -----------------------

The response to this
item is contained in the 2008 Proxy Statement under the caption Executive Compensation, including Compensation Discussion and Analysis, Director Compensation, Compensation Committee Interlocks and Insider
Participation and Compensation Committee Report which sections are incorporated herein by this reference.



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

The response to this item is contained in the 2008 Proxy Statement under the caption Principal Stockholders and Equity Compensation Plan
Information, which sections are incorporated herein by this reference.



|Item 13. | Certain Relationships and Related Transactions, and Director Independence.
|-------- | --------------------------------------------------------------------------

The response to this item is contained in the 2008 Proxy Statement under the captions Director Independence and Transactions with Related Persons, which section is incorporated herein by this
reference.



|Item 14. | Principal Accounting Fees and Services.
|-------- | ---------------------------------------

The
response to this item is contained in the 2008 Proxy Statement under the caption Independent Registered Public Accounting Firms Fees, which section is incorporated herein by this reference.



42



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##### Table of Contents

PART IV



|Item 15. | Exhibits and Financial Statement Schedules.
|-------- | -------------------------------------------

The following documents are filed as part of this Annual Report on Form 10-K:



| | (1) | Consolidated Financial Statements: (see index on page F-1 of this report)
| | --- | -------------------------------------------------------------------------



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



| |  |  | Consolidated Balance Sheets as of September 28, 2007 and September 29, 2006
| | - |  | ---------------------------------------------------------------------------



| |  |  | Consolidated Statements of Income for fiscal years ended September 28, 2007, September 29, 2006 and September 30, 2005
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | Consolidated Statements of Cash Flows for fiscal years ended September 28, 2007, September 29, 2006 and September 30, 2005
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | Consolidated Statements of Stockholders Equity and Comprehensive Income for fiscal years ended September 28, 2007, September 29, 2006 and
September 30, 2005
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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

The following financial statement schedule of Varian Semiconductor and its subsidiaries for fiscal years 2007, 2006 and 2005 is filed as a part of this Annual Report on Form 10-K and should be read in conjunction with
the consolidated financial statements of Varian Semiconductor and its subsidiaries.



| |  |  | 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 financial statements or the notes thereto.



| | (3) | The list of Exhibits filed as a part of this Annual Report on Form 10-K are set forth in the Exhibit Index immediately preceding such Exhibits, and is incorporated herein by this
reference.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



43



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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 SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.By:

/s/    ROBERT J.
HALLIDAYRobert J. HallidayExecutive Vice President and Chief Financial Officer


Date: November 21, 2007

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/    GARY E.
DICKERSON Gary E. Dickerson       |  | Chief Executive Officer (Principal Executive Officer)                              |  | November 21, 2007
|                                                 |  |                                                                                   
|/s/    ROBERT J.
HALLIDAY Robert J. Halliday     |  | Executive Vice President and Chief Financial Officer (Principal Financial Officer) |  | November 21, 2007
|                                                 |  |                                                                                   
|/s/    THOMAS C.
BAKER Thomas C. Baker           |  | Vice President, Finance (Principal Accounting Officer)                             |  | November 21, 2007
|                                                 |  |                                                                                   
|/s/    RICHARD A.
AURELIO Richard A. Aurelio     |  | Chairman of the Board                                                              |  | November 21, 2007
|                                                 |  |                                                                                   
|/s/    ROBERT W.
DUTTON Robert W. Dutton         |  | Director                                                                           |  | November 21, 2007
|                                                 |  |                                                                                   
|/s/    DENNIS G.
SCHMAL Dennis G. Schmal         |  | Director                                                                           |  | November 21, 2007
|                                                 |  |                                                                                   
|/s/    ELIZABETH E.
TALLETT Elizabeth E. Tallett |  | Director                                                                           |  | November 21, 2007
|                                                 |  |                                                                                   
|/s/    XUN CHEN Xun Chen                         |  | Director                                                                           |  | November 21, 2007



44



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##### Table of Contents

EXHIBIT INDEX



|            |  |                                                                                                                                                                                                  |  |            |  |                 |  |                |  |                     
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------- |  | --------------- |  | -------------- |  | --------------------
|            |  | Incorporated by Reference                                                                                                                                                                       
|Exhibit No. |  | Description                                                                                                                                                                                      |  | Form       |  | SEC Filing Date |  | Exhibit Number |  | Filed with this 10-K
|2.1         |  | Distribution Agreement among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc. dated as of January 14, 1999.                                             |  | 10-12(g)   |  | 02/12/1999      |  | 2.1            |  |                     
|            |  |                                                                                                                                                                                                  |  |            | 
|3.1         |  | Restated Certificate of Incorporation of Varian Semiconductor Equipment Associates, Inc.                                                                                                         |  | 10-12(g)   |  | 02/12/1999      |  | 3.1            |  |                     
|            |  |                                                                                                                                                                                                  |  |            | 
|3.2         |  | By-Laws of Varian Semiconductor Equipment Associates, Inc.                                                                                                                                       |  | 10-12(g)/a |  | 03/08/1999      |  | 3.2            |  |                     
|            |  |                                                                                                                                                                                                  |  |            | 
|4.1         |  | Specimen Common Stock Certificate.                                                                                                                                                               |  | 10-12(g)/a |  | 03/08/1999      |  | 4.1            |  |                     
|            |  |                                                                                                                                                                                                  |  |            | 
|4.2         |  | Rights Agreement between First Chicago Trust Company of New York and the Registrant, dated as of February 19, 1999.                                                                              |  | 10-12(g)/a |  | 03/08/1999      |  | 4.2            |  |                     
|            |  |                                                                                                                                                                                                  |  |            | 
|4.3         |  | Amendment dated as of October 15, 2001 to the Rights Agreement between First Chicago Trust Company of New York and Registrant, dated February 19, 1999, to appoint EquiServe Trust Company, N.A. |  | 10-K       |  | 12/20/2001      |  | 10.12          |  |                     
|            |  |                                                                                                                                                                                                  |  |            | 
|4.4         |  | Amendment No. 2 dated as of October 25, 2004 to the Rights Agreement (as amended) between EquiServe Trust Company, N.A. and the Registrant.                                                      |  | 10-K       |  | 12/14/2004      |  | 4.4            |  |                     
|            |  |                                                                                                                                                                                                  |  |            | 
|10.1        |  | Form of Employee Benefits Allocation Agreement among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.                                                   |  | 10-12(g)   |  | 02/12/1999      |  | 10.1           |  |                     
|            |  |                                                                                                                                                                                                  |  |            | 
|10.2        |  | Form of Intellectual Property Agreement among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc., and Varian, Inc.                                                         |  | 10-12(g)   |  | 02/12/1999      |  | 10.2           |  |                     
|            |  |                                                                                                                                                                                                  |  |            | 
|10.3        |  | Form of Tax Sharing Agreement among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.                                                                    |  | 10-12(g)   |  | 02/12/1999      |  | 10.3           |  |                     
|            |  |                                                                                                                                                                                                  |  |            | 
|10.4        |  | Form of Transition Services Agreement among Varian Associates, Inc., Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.                                                            |  | 10-12(g)   |  | 02/12/1999      |  | 10.4           |  |                     
|            |  |                                                                                                                                                                                                  |  |            | 
|10.5        |  | Form of Change in Control Agreement for Chief Executive Officer and Chairman of the Board.                                                                                                       |  | 8-K        |  | 10/15/2004      |  | 10.3           |  |                     
|            |  |                                                                                                                                                                                                  |  |            | 
|10.6        |  | Form of Indemnity Agreement with Directors and Executive Officers.                                                                                                                               |  | 10-12(g)/a |  | 03/08/1999      |  | 10.8           |  |                     
|            |  |                                                                                                                                                                                                  |  |            | 
|10.7        |  | Varian Semiconductor Equipment Associates, Inc. Amended and Restated 2006 Stock Incentive Plan                                                                                                   |  | 8-K        |  | 03/13/2006      |  | 10.6           |  |                     
|            |  |                                                                                                                                                                                                  |  |            | 
|10.8        |  | Varian Semiconductor Equipment Associates, Inc. 2006 Management Incentive Plan.                                                                                                                  |  | 10-K       |  | 12/07/2006      |  | 10.8           |  |                     
|            |  |                                                                                                                                                                                                  |  |            | 
|10.9        |  | Varian Semiconductor Equipment Associates, Inc. Deferred Compensation Plan                                                                                                                       |  |            |  |                 |  | 10.9           |  | X                   



45



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|            |  |                                                                                                                                                                                             |  |          |  |                 |  |                |  |                     
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- |  | --------------- |  | -------------- |  | --------------------
|            |  | Incorporated by Reference                                                                                                                                                                  
|Exhibit No. |  | Description                                                                                                                                                                                 |  | Form     |  | SEC Filing Date |  | Exhibit Number |  | Filed with this 10-K
|10.10       |  | Agreement dated as of July 24, 1998, between Varian Associates, Inc. and High Voltage Engineering Europa B.V.                                                                               |  | 10-12(g) |  | 02/12/1999      |  | 10.9           |  |                     
|            |  |                                                                                                                                                                                             |  |          | 
|10.11       |  | Varian Semiconductor Equipment Associates, Inc. Employee Stock Purchase Plan.                                                                                                               |  | 10-K     |  | 12/20/2001      |  | 10.11          |  |                     
|            |  |                                                                                                                                                                                             |  |          | 
|10.12       |  | Purchase and Sale Agreement made as of November 27, 2002, by and between Berkshire-Newburyport Limited Partnership and Varian Semiconductor Equipment Associates, Inc.                      |  | 10-Q     |  | 02/05/2003      |  | 10.1           |  |                     
|            |  |                                                                                                                                                                                             |  |          | 
|10.13       |  | First Amendment to Purchase and Sale Agreement, dated as of January 6, 2003, by and between Berkshire-Newburyport Limited Partnership and Varian Semiconductor Equipment Associates, Inc.   |  | 10-Q     |  | 02/05/2003      |  | 10.2           |  |                     
|            |  |                                                                                                                                                                                             |  |          | 
|10.14       |  | Second Amendment to Purchase and Sale Agreement, dated as of January 28, 2003, by and between Berkshire-Newburyport Limited Partnership and Varian Semiconductor Equipment Associates, Inc. |  | 10-Q     |  | 02/05/2003      |  | 10.3           |  |                     
|            |  |                                                                                                                                                                                             |  |          | 
|10.15       |  | Form of Change in Control Agreement for Chief Financial Officer.                                                                                                                            |  | 8-K      |  | 10/15/2004      |  | 10.4           |  |                     
|            |  |                                                                                                                                                                                             |  |          | 
|10.16       |  | Form of Change in Control Agreement for Certain Designated Executives.                                                                                                                      |  | 8-K      |  | 10/15/2004      |  | 10.5           |  |                     
|            |  |                                                                                                                                                                                             |  |          | 
|10.17       |  | Form of Nonstatutory Stock Option Agreement for Directors                                                                                                                                   |  | 8-K      |  | 03/13/2006      |  | 10.1           |  |                     
|            |  |                                                                                                                                                                                             |  |          | 
|10.18       |  | Form of Nonstatutory Stock Option Agreement for Officers                                                                                                                                    |  | 8-K      |  | 03/13/2006      |  | 10.2           |  |                     
|            |  |                                                                                                                                                                                             |  |          | 
|10.19       |  | Form of Nonstatutory Stock Option Agreement for Employees                                                                                                                                   |  | 8-K      |  | 03/13/2006      |  | 10.3           |  |                     
|            |  |                                                                                                                                                                                             |  |          | 
|10.20       |  | Form of Restricted Stock Agreement for Officers                                                                                                                                             |  | 8-K      |  | 03/13/2006      |  | 10.4           |  |                     
|            |  |                                                                                                                                                                                             |  |          | 
|10.21       |  | Form of Restricted Stock Agreement for Employees                                                                                                                                            |  | 8-K      |  | 03/13/2006      |  | 10.5           |  |                     
|            |  |                                                                                                                                                                                             |  |          | 
|10.22       |  | Form of Deferred Stock Units Agreement for Directors                                                                                                                                        |  | 8-K      |  | 03/17/2006      |  | 10.1           |  |                     
|            |  |                                                                                                                                                                                             |  |          | 
|10.23       |  | Offer Letter from the Registrant to Gary E. Dickerson, as amended.                                                                                                                          |  | 10-Q     |  | 08/05/2005      |  | 10.2           |  |                     
|            |  |                                                                                                                                                                                             |  |          | 
|10.24       |  | VSEA Expatriate Assignment Offer Letter, 2005, from the Registrant to Yong-Kil Kim.                                                                                                         |  | 10-Q     |  | 08/05/2005      |  | 10.1           |  |                     
|            |  |                                                                                                                                                                                             |  |          | 
|10.25       |  | Retirement Agreement and General Release, dated as of December 8, 2005 between Alan P. Sheng and Varian Semiconductor Equipment Associates, Inc.                                            |  | 10-K     |  | 12/13/2005      |  | 10.21          |  |                     
|            |  |                                                                                                                                                                                             |  |          | 
|10.26       |  | Agreement and General Release, dated as of January 2, 2006 between John E. Aldeborgh and Varian Semiconductor Equipment Associates, Inc.                                                    |  | 8-K      |  | 01/03/2006      |  | 10.1           |  |                     



46



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|            |  |                                                                                                                                                                   |  |      |  |                 |  |                |  |                     
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | --------------- |  | -------------- |  | --------------------
|            |  | Incorporated by Reference                                                                                                                                        
|Exhibit No. |  | Description                                                                                                                                                       |  | Form |  | SEC Filing Date |  | Exhibit Number |  | Filed with this 10-K
|10.27       |  | Letter Agreement, dated as of January 2, 2006 between Richard A. Aurelio and Varian Semiconductor Equipment Associates, Inc.                                      |  | 8-K  |  | 01/03/2006      |  | 10.2           |  |                     
|            |  |                                                                                                                                                                   |  |      | 
|10.28       |  | Form of Amendment to all Change in Control Agreements                                                                                                             |  | 10-K |  | 12/13/2005      |  | 10.22          |  |                     
|            |  |                                                                                                                                                                   |  |      | 
|10.29       |  | Form of Restricted Stock Agreement for Officers with Performance Vesting                                                                                          |  | 10-K |  | 12/07/2006      |  | 10.30          |  |                     
|            |  |                                                                                                                                                                   |  |      | 
|10.30       |  | Amendment, dated February 8, 2007 to Letter Agreement between Richard A. Aurelio and Varian Semiconductor Equipment Associates, Inc., dated as of January 2, 2006 |  | 10-K |  |                 |  | 10.30          |  | X                   
|            |  |                                                                                                                                                                   |  |      | 
|14.1        |  | Code of Business Conduct and Ethics                                                                                                                               |  | 10-K |  | 12/07/2006      |  | 14.1           |  |                     
|            |  |                                                                                                                                                                   |  |      | 
|21.1        |  | Subsidiaries of the Registrant.                                                                                                                                   |  | 10-K |  |                 |  | 21.1           |  | X                   
|            |  |                                                                                                                                                                   |  |      | 
|23.1        |  | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.                                                                             |  | 10-K |  |                 |  | 23.1           |  | X                   
|            |  |                                                                                                                                                                   |  |      | 
|31.1        |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                           |  | 10-K |  |                 |  | 31.1           |  | X                   
|            |  |                                                                                                                                                                   |  |      | 
|31.2        |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                           |  | 10-K |  |                 |  | 31.2           |  | X                   
|            |  |                                                                                                                                                                   |  |      | 
|32.1        |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.            |  | 10-K |  |                 |  | 32.1           |  | X                   
|            |  |                                                                                                                                                                   |  |      | 
|32.2        |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.            |  | 10-K |  |                 |  | 32.2           |  | X                   



47



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##### Table of Contents

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

The
following 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 Balance Sheets as of September 28, 2007 and September 29, 2006                                                                                                                                                             |  | F-3 
|                                                                                                                                                                                                                                        | 
|Consolidated Statements of Income for fiscal years ended September 28, 2007, September 29, 2006 and September 30, 2005                                                                                                                  |  | F-4 
|                                                                                                                                                                                                                                        | 
|Consolidated Statements of Cash Flows for fiscal years ended September 28, 2007, September 29, 2006 and September 30, 2005                                                                                                              |  | F-5 
|                                                                                                                                                                                                                                        | 
|Consolidated Statements of Stockholders Equity and Comprehensive Income for fiscal years ended September 28, 2007, September 29, 2006 and September 30, 2005                                                                           |  | F-6 
|                                                                                                                                                                                                                                        | 
|Notes to the Consolidated Financial Statements                                                                                                                                                                                          |  | F-7 
|                                                                                                                                                                                                                                        | 
|The following financial statement schedule of the Registrant and its subsidiaries for fiscal years 2007, 2006 and 2005 should be read in conjunction with the Consolidated Financial Statements of
the Registrant and its subsidiaries: |  |     
|                                                                                                                                                                                                                                        | 
|Financial Statement Schedule                                                                                                                                                                                                            |  |     
|                                                                                                                                                                                                                                        | 
|Schedule IIValuation and Qualifying Accounts                                                                                                                                                                                           |  | S-1 

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 financial statements or the notes thereto.



F-1



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##### Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Varian Semiconductor Equipment Associates, Inc.:

In our opinion, the
consolidated financial statements listed in the index appearing under Item 15(1), present fairly, in all material respects, the financial position of Varian Semiconductor Equipment Associates, Inc. and its subsidiaries at September 28,
2007 and September 29, 2006, and the results of their operations and their cash flows for each of the three years in the period ended September 28, 2007 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 index appearing under Item 15(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 28, 2007, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for these financial statements and financial statement schedule, for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Managements Report on Internal Control over Financial Reporting appearing
under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Companys internal control over financial reporting based on our integrated audits, which were
integrated audits in 2007 and 2006. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of
internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 4 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in fiscal year 2006.

A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PRICEWATERHOUSECOOPERS LLP

Boston,
Massachusetts

November 21, 2007



F-2



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##### Table of Contents

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                                                                 |  |                                           |          |   |                   |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                                                                                 |  | September 28,2007                         |          |   | September 29,2006 |  
|                                                                                                                                                                                                                                 |  | (amounts in thousands, except share data) |         
|ASSETS                                                                                                                                                                                                                           |  |                                           |          |   |                   |   |          |  
|Current assets                                                                                                                                                                                                                   |  |                                           |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                                                                        |  | $                                         | 109,514  |   |                   | $ | 258,891  |  
|Short-term investments                                                                                                                                                                                                           |  |                                           | 88,384   |   |                   |   | 154,810  |  
|Accounts receivable, net                                                                                                                                                                                                         |  |                                           | 189,573  |   |                   |   | 125,992  |  
|Inventories                                                                                                                                                                                                                      |  |                                           | 170,293  |   |                   |   | 133,929  |  
|Deferred income taxes                                                                                                                                                                                                            |  |                                           | 27,907   |   |                   |   | 31,592   |  
|Other current assets                                                                                                                                                                                                             |  |                                           | 26,010   |   |                   |   | 18,102   |  
|                                                                                                                                                                                                                                 |  |                                           |          |   |                   |   |          |  
|Total current assets                                                                                                                                                                                                             |  |                                           | 611,681  |   |                   |   | 723,316  |  
|                                                                                                                                                                                                                                 |  |                                          
|Long-term investments                                                                                                                                                                                                            |  |                                           | 96,153   |   |                   |   | 135,777  |  
|Property, plant and equipment, net                                                                                                                                                                                               |  |                                           | 73,980   |   |                   |   | 62,249   |  
|Goodwill                                                                                                                                                                                                                         |  |                                           | 12,280   |   |                   |   | 12,280   |  
|Other assets                                                                                                                                                                                                                     |  |                                           | 4,994    |   |                   |   | 4,744    |  
|                                                                                                                                                                                                                                 |  |                                           |          |   |                   |   |          |  
|Total assets                                                                                                                                                                                                                     |  | $                                         | 799,088  |   |                   | $ | 938,366  |  
|                                                                                                                                                                                                                                 |  |                                           |          |   |                   |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                             |  |                                           |          |   |                   |   |          |  
|                                                                                                                                                                                                                                 |  |                                          
|Current liabilities                                                                                                                                                                                                              |  |                                           |          |   |                   |   |          |  
|Current portion of long-term debt                                                                                                                                                                                                |  | $                                         | 510      |   |                   | $ | 466      |  
|Accounts payable                                                                                                                                                                                                                 |  |                                           | 49,863   |   |                   |   | 45,937   |  
|Accrued expenses                                                                                                                                                                                                                 |  |                                           | 50,478   |   |                   |   | 41,656   |  
|Income taxes payable                                                                                                                                                                                                             |  |                                           | 4,811    |   |                   |   | 12,291   |  
|Product warranty                                                                                                                                                                                                                 |  |                                           | 12,183   |   |                   |   | 8,934    |  
|Deferred revenue                                                                                                                                                                                                                 |  |                                           | 54,742   |   |                   |   | 49,840   |  
|                                                                                                                                                                                                                                 |  |                                           |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                                                                        |  |                                           | 172,587  |   |                   |   | 159,124  |  
|                                                                                                                                                                                                                                 |  |                                          
|Long-term accrued expenses and other liabilities                                                                                                                                                                                 |  |                                           | 53,904   |   |                   |   | 17,300   |  
|Deferred income taxes                                                                                                                                                                                                            |  |                                           | 3,858    |   |                   |   | 3,722    |  
|Long-term debt                                                                                                                                                                                                                   |  |                                           | 2,761    |   |                   |   | 3,270    |  
|                                                                                                                                                                                                                                 |  |                                           |          |   |                   |   |          |  
|Total liabilities                                                                                                                                                                                                                |  |                                           | 233,110  |   |                   |   | 183,416  |  
|                                                                                                                                                                                                                                 |  |                                           |          |   |                   |   |          |  
|                                                                                                                                                                                                                                 |  |                                          
|Commitments, contingencies and guarantees (Note 22)                                                                                                                                                                              |  |                                           |          |   |                   |   |          |  
|                                                                                                                                                                                                                                 |  |                                          
|Stockholders equity                                                                                                                                                                                                             |  |                                           |          |   |                   |   |          |  
|Preferred stock, $0.01 par value; 5,000,000 shares authorized; none issued or outstanding                                                                                                                                        |  |                                           |         |   |                   |   |         |  
|Common stock, $0.01 par value; 150,000,000 shares authorized; 92,716,665 shares issued and 75,752,315 shares outstanding at September 28,
2007; 88,962,816 shares issued and 83,341,483 shares outstanding at September 29, 2006 |  |                                           | 927      |   |                   |   | 890      |  
|Capital in excess of par value                                                                                                                                                                                                   |  |                                           | 548,426  |   |                   |   | 452,932  |  
|Less: Cost of 16,964,350 shares of common stock held in treasury at September 28, 2007                                                                                                                                           |  |                                           | (535,423 | ) |                   |   | (108,910 | )
|Retained earnings                                                                                                                                                                                                                |  |                                           | 553,221  |   |                   |   | 411,014  |  
|Accumulated other comprehensive loss                                                                                                                                                                                             |  |                                           | (1,173   | ) |                   |   | (976     | )
|                                                                                                                                                                                                                                 |  |                                           |          |   |                   |   |          |  
|Total stockholders equity                                                                                                                                                                                                       |  |                                           | 565,978  |   |                   |   | 754,950  |  
|                                                                                                                                                                                                                                 |  |                                           |          |   |                   |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                                                       |  | $                                         | 799,088  |   |                   | $ | 938,366  |  
|                                                                                                                                                                                                                                 |  |                                           |          |   |                   |   |          |  

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



F-3



---

##### Table of Contents

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF INCOME



|                                            |  |                                               |           |   |                   |   |         |                   |  |   |         |  
|------------------------------------------- |  | --------------------------------------------- | --------- | - | ----------------- | - | ------- | ----------------- |  | - | ------- | -
|                                            |  | Fiscal Year Ended                             |          
|                                            |  | September 28,2007                             |           |   | September 29,2006 |   |         | September 30,2005 | 
|                                            |  | (amounts in thousands, except per share data) |          
|Revenue                                     |  |                                               |           |   |                   |   |         |                   |  |   |         |  
|Product                                     |  | $                                             | 961,329   |   |                   | $ | 642,038 |                   |  | $ | 488,719 |  
|Service                                     |  |                                               | 86,062    |   |                   |   | 79,222  |                   |  |   | 84,078  |  
|Royalty and license                         |  |                                               | 7,473     |   |                   |   | 9,454   |                   |  |   | 27,724  |  
|                                            |  |                                               |           |   |                   |   |         |                   |  |   |         |  
|Total revenue                               |  |                                               | 1,054,864 |   |                   |   | 730,714 |                   |  |   | 600,521 |  
|                                            |  |                                               |           |   |                   |   |         |                   |  |   |         |  
|Cost of revenue                             |  |                                               |           |   |                   |   |         |                   |  |   |         |  
|Product                                     |  |                                               | 511,137   |   |                   |   | 371,114 |                   |  |   | 280,447 |  
|Service                                     |  |                                               | 54,803    |   |                   |   | 50,070  |                   |  |   | 51,367  |  
|                                            |  |                                               |           |   |                   |   |         |                   |  |   |         |  
|Total cost of revenue                       |  |                                               | 565,940   |   |                   |   | 421,184 |                   |  |   | 331,814 |  
|                                            |  |                                               |           |   |                   |   |         |                   |  |   |         |  
|Gross profit                                |  |                                               | 488,924   |   |                   |   | 309,530 |                   |  |   | 268,707 |  
|                                            |  |                                               |           |   |                   |   |         |                   |  |   |         |  
|Operating expenses                          |  |                                               |           |   |                   |   |         |                   |  |   |         |  
|Research and development                    |  |                                               | 104,025   |   |                   |   | 90,604  |                   |  |   | 77,661  |  
|Marketing, general and administrative       |  |                                               | 128,055   |   |                   |   | 116,063 |                   |  |   | 104,883 |  
|Restructuring                               |  |                                               |          |   |                   |   |        |                   |  |   | 914     |  
|                                            |  |                                               |           |   |                   |   |         |                   |  |   |         |  
|Total operating expenses                    |  |                                               | 232,080   |   |                   |   | 206,667 |                   |  |   | 183,458 |  
|                                            |  |                                               |           |   |                   |   |         |                   |  |   |         |  
|Operating income                            |  |                                               | 256,844   |   |                   |   | 102,863 |                   |  |   | 85,249  |  
|Interest income                             |  |                                               | 20,792    |   |                   |   | 22,323  |                   |  |   | 16,989  |  
|Interest expense                            |  |                                               | (1,268    | ) |                   |   | (809    | )                 |  |   | (641    | )
|Other income, net                           |  |                                               | 300       |   |                   |   | 918     |                   |  |   | 2,765   |  
|                                            |  |                                               |           |   |                   |   |         |                   |  |   |         |  
|Income before income taxes                  |  |                                               | 276,668   |   |                   |   | 125,295 |                   |  |   | 104,362 |  
|Provision for income taxes                  |  |                                               | 134,461   |   |                   |   | 30,611  |                   |  |   | 32,352  |  
|                                            |  |                                               |           |   |                   |   |         |                   |  |   |         |  
|Net income                                  |  | $                                             | 142,207   |   |                   | $ | 94,684  |                   |  | $ | 72,010  |  
|                                            |  |                                               |           |   |                   |   |         |                   |  |   |         |  
|Weighted average shares outstandingbasic   |  |                                               | 80,151    |   |                   |   | 84,605  |                   |  |   | 82,829  |  
|Weighted average shares outstandingdiluted |  |                                               | 82,220    |   |                   |   | 85,790  |                   |  |   | 84,593  |  
|Net income per sharebasic                  |  | $                                             | 1.77      |   |                   | $ | 1.12    |                   |  | $ | 0.87    |  
|Net income per sharediluted                |  | $                                             | 1.73      |   |                   | $ | 1.10    |                   |  | $ | 0.85    |  

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



F-4



---

##### Table of Contents

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                                                 |  |                        |          |   |                   |   |          |                   |  |   |          |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | -------- | - | ----------------- | - | -------- | ----------------- |  | - | -------- | -
|                                                                                                                                 |  | Fiscal Year Ended      |         
|                                                                                                                                 |  | September 28,2007      |          |   | September 29,2006 |   |          | September 30,2005 | 
|                                                                                                                                 |  | (amounts in thousands) |         
|Cash flow from operating activities:                                                                                             |  |                        |          |   |                   |   |          |                   |  |   |          |  
|Net income                                                                                                                       |  | $                      | 142,207  |   |                   | $ | 94,684   |                   |  | $ | 72,010   |  
|Adjustments to reconcile net income to net cash provided by operating activities:                                                |  |                        |          |   |                   |   |          |                   |  |   |          |  
|Depreciation and amortization                                                                                                    |  |                        | 14,370   |   |                   |   | 12,971   |                   |  |   | 12,805   |  
|Amortization of investment premiums                                                                                              |  |                        | 88       |   |                   |   | 646      |                   |  |   | 1,663    |  
|Deferred income taxes                                                                                                            |  |                        | 3,822    |   |                   |   | (2,482   | )                 |  |   | (2,312   | )
|Stock-based compensation                                                                                                         |  |                        | 19,651   |   |                   |   | 18,916   |                   |  |   | 4,115    |  
|Tax benefit from stock-based compensation                                                                                        |  |                        | 21,721   |   |                   |   | 10,825   |                   |  |   | 9,915    |  
|Excess tax benefits from stock-based compensation                                                                                |  |                        | (17,591  | ) |                   |   | (4,529   | )                 |  |   |         |  
|Changes in assets and liabilities:                                                                                               |  |                        |          |   |                   |   |          |                   |  |   |          |  
|Accounts receivable                                                                                                              |  |                        | (61,844  | ) |                   |   | (1,528   | )                 |  |   | (191     | )
|Inventories                                                                                                                      |  |                        | (51,600  | ) |                   |   | (11,827  | )                 |  |   | (34,616  | )
|Other current assets                                                                                                             |  |                        | (7,908   | ) |                   |   | 14,694   |                   |  |   | 5,686    |  
|Accounts payable                                                                                                                 |  |                        | 3,815    |   |                   |   | 12,595   |                   |  |   | (839     | )
|Accrued expenses                                                                                                                 |  |                        | 31,566   |   |                   |   | (5,898   | )                 |  |   | 6,929    |  
|Product warranty                                                                                                                 |  |                        | 3,054    |   |                   |   | 1,227    |                   |  |   | 763      |  
|Deferred revenue                                                                                                                 |  |                        | 8,124    |   |                   |   | 1,829    |                   |  |   | (2,242   | )
|Other                                                                                                                            |  |                        | (1,199   | ) |                   |   | (1,511   | )                 |  |   | (694     | )
|                                                                                                                                 |  |                        |          |   |                   |   |          |                   |  |   |          |  
|Net cash provided by operating activities                                                                                        |  |                        | 108,276  |   |                   |   | 140,612  |                   |  |   | 72,992   |  
|                                                                                                                                 |  |                        |          |   |                   |   |          |                   |  |   |          |  
|Cash flows from investing activities:                                                                                            |  |                        |          |   |                   |   |          |                   |  |   |          |  
|Purchase of property, plant and equipment                                                                                        |  |                        | (10,968  | ) |                   |   | (11,987  | )                 |  |   | (12,386  | )
|Proceeds from sales and maturities of investments                                                                                |  |                        | 204,235  |   |                   |   | 345,897  |                   |  |   | 145,030  |  
|Purchase of investments                                                                                                          |  |                        | (95,553  | ) |                   |   | (355,043 | )                 |  |   | (254,580 | )
|                                                                                                                                 |  |                        |          |   |                   |   |          |                   |  |   |          |  
|Net cash provided by (used in) investing activities                                                                              |  |                        | 97,714   |   |                   |   | (21,133  | )                 |  |   | (121,936 | )
|                                                                                                                                 |  |                        |          |   |                   |   |          |                   |  |   |          |  
|Cash flows from financing activities:                                                                                            |  |                        |          |   |                   |   |          |                   |  |   |          |  
|Proceeds from the issuance of common stock upon exercise of options and issuance of stock under the employee stock purchase
plan |  |                        | 54,159   |   |                   |   | 50,321   |                   |  |   | 27,665   |  
|Excess tax benefits from stock-based compensation                                                                                |  |                        | 17,591   |   |                   |   | 4,529    |                   |  |   |         |  
|Repurchase of common stock                                                                                                       |  |                        | (426,513 | ) |                   |   | (108,910 | )                 |  |   |         |  
|Repayment of notes payable                                                                                                       |  |                        |         |   |                   |   | 40       |                   |  |   | (3,848   | )
|Repayment of long-term debt                                                                                                      |  |                        | (465     | ) |                   |   | (466     | )                 |  |   | (426     | )
|                                                                                                                                 |  |                        |          |   |                   |   |          |                   |  |   |          |  
|Net cash (used in) provided by financing activities                                                                              |  |                        | (355,228 | ) |                   |   | (54,486  | )                 |  |   | 23,391   |  
|                                                                                                                                 |  |                        |          |   |                   |   |          |                   |  |   |          |  
|Effects of exchange rates on cash                                                                                                |  |                        | (139     | ) |                   |   | 472      |                   |  |   | 401      |  
|                                                                                                                                 |  |                        |          |   |                   |   |          |                   |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                                                             |  |                        | (149,377 | ) |                   |   | 65,465   |                   |  |   | (25,152  | )
|Cash and cash equivalents at beginning of period                                                                                 |  |                        | 258,891  |   |                   |   | 193,426  |                   |  |   | 218,578  |  
|                                                                                                                                 |  |                        |          |   |                   |   |          |                   |  |   |          |  
|Cash and cash equivalents at end of period                                                                                       |  | $                      | 109,514  |   |                   | $ | 258,891  |                   |  | $ | 193,426  |  
|                                                                                                                                 |  |                        |          |   |                   |   |          |                   |  |   |          |  
|Supplemental information to the cash flow:                                                                                       |  |                        |          |   |                   |   |          |                   |  |   |          |  
|Cash payments for income taxes, net of refunds                                                                                   |  | $                      | 95,707   |   |                   | $ | 16,296   |                   |  | $ | 14,509   |  
|Cash payments for interest                                                                                                       |  | $                      | 358      |   |                   | $ | 361      |                   |  | $ | 427      |  
|Non-cash transfers of engineering and demonstration tools from inventory to equipment, net                                       |  | $                      | 15,242   |   |                   | $ | 5,607    |                   |  | $ | 6,597    |  

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



F-5



---

##### Table of Contents

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME



|                                                                                                               |  |                                   |   |  |             |     |                              |   |         |               |  |   |                  |   |                      |   |         |                                   |   |         |                          |  |   |        |   |  |   |          |  
|-------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | - |  | ----------- | --- | ---------------------------- | - | ------- | ------------- |  | - | ---------------- | - | -------------------- | - | ------- | --------------------------------- | - | ------- | ------------------------ |  | - | ------ | - |  | - | -------- | -
|                                                                                                               |  | Number ofCommonSharesOutstanding  |   |  | CommonStock |     | Capital inExcess ofPar Value |   |         | TreasuryStock |  |   | RetainedEarnings |   | DeferredCompensation |   |         | AccumulatedOtherComprehensiveLoss |   |         | TotalStockholdersEquity | 
|                                                                                                               |  | (shares and amounts in thousands) |  
|Balance at October 1, 2004                                                                                     |  | 81,920                            |   |  | $           | 819 |                              | $ | 331,246 |               |  | $ |                 |   |                      | $ | 244,320 |                                   | $ | (149    | )                        |  | $ | (156   | ) |  | $ | 576,080  |  
|Components of comprehensive income:                                                                            |  |                                   |   |  |             |     |                              |   |         |               |  |   |                  |   |                      |   |         |                                   |   |         |                          |  |   |        |   |  |   |          |  
|Net income                                                                                                     |  |                                  |   |  |             |    |                              |   |        |               |  |   |                 |   |                      |   | 72,010  |                                   |   |        |                          |  |   |       |   |  |   | 72,010   |  
|Unrealized gain on cash flow hedging instruments                                                               |  |                                  |   |  |             |    |                              |   |        |               |  |   |                 |   |                      |   |        |                                   |   |        |                          |  |   | 2,082  |   |  |   | 2,082    |  
|Reclassification adjustment for realized gains on cash flow hedging instruments included in net income         |  |                                  |   |  |             |    |                              |   |        |               |  |   |                 |   |                      |   |        |                                   |   |        |                          |  |   | (869   | ) |  |   | (869     | )
|Unrealized loss on investments                                                                                 |  |                                  |   |  |             |    |                              |   |        |               |  |   |                 |   |                      |   |        |                                   |   |        |                          |  |   | (1,770 | ) |  |   | (1,770   | )
|                                                                                                               |  |                                   |   |  |             |     |                              |   |         |               |  |   |                  |   |                      |   |         |                                   |   |         |                          |  |   |        |   |  |   |          |  
|Total comprehensive income                                                                                     |  |                                  |   |  |             |    |                              |   |        |               |  |   |                 |   |                      |   |        |                                   |   |        |                          |  |   |       |   |  |   | 71,453   |  
|                                                                                                               |  |                                   |   |  |             |     |                              |   |         |               |  |   |                  |   |                      |   |         |                                   |   |         |                          |  |   |        |   |  |   |          |  
|Deferred compensation related to restricted shares                                                             |  | 585                               |   |  |             | 6   |                              |   | 10,081  |               |  |   |                 |   |                      |   |        |                                   |   | (10,087 | )                        |  |   |       |   |  |   |         |  
|Amortization of stock-based compensation                                                                       |  |                                  |   |  |             |    |                              |   |        |               |  |   |                 |   |                      |   |        |                                   |   | 870     |                          |  |   |       |   |  |   | 870      |  
|Stock-based compensation expense                                                                               |  |                                  |   |  |             |    |                              |   | 3,093   |               |  |   |                 |   |                      |   |        |                                   |   |        |                          |  |   |       |   |  |   | 3,093    |  
|Issuance of common stock through stock option and stock purchase plans, including income tax benefit of $9,915 |  | 3,027                             |   |  |             | 30  |                              |   | 37,550  |               |  |   |                 |   |                      |   |        |                                   |   |        |                          |  |   |       |   |  |   | 37,580   |  
|                                                                                                               |  |                                   |   |  |             |     |                              |   |         |               |  |   |                  |   |                      |   |         |                                   |   |         |                          |  |   |        |   |  |   |          |  
|Balance at September 30, 2005                                                                                  |  | 85,532                            |   |  |             | 855 |                              |   | 381,970 |               |  |   |                 |   |                      |   | 316,330 |                                   |   | (9,366  | )                        |  |   | (713   | ) |  |   | 689,076  |  
|Components of comprehensive income:                                                                            |  |                                   |   |  |             |     |                              |   |         |               |  |   |                  |   |                      |   |         |                                   |   |         |                          |  |   |        |   |  |   |          |  
|Net income                                                                                                     |  |                                  |   |  |             |    |                              |   |        |               |  |   |                 |   |                      |   | 94,684  |                                   |   |        |                          |  |   |       |   |  |   | 94,684   |  
|Unrealized gain on cash flow hedging instruments                                                               |  |                                  |   |  |             |    |                              |   |        |               |  |   |                 |   |                      |   |        |                                   |   |        |                          |  |   | 1,547  |   |  |   | 1,547    |  
|Reclassification adjustment for realized gains on cash flow hedging instruments included in net income         |  |                                  |   |  |             |    |                              |   |        |               |  |   |                 |   |                      |   |        |                                   |   |        |                          |  |   | (2,102 | ) |  |   | (2,102   | )
|Unrealized gain on investments                                                                                 |  |                                  |   |  |             |    |                              |   |        |               |  |   |                 |   |                      |   |        |                                   |   |        |                          |  |   | 448    |   |  |   | 448      |  
|Reclassification adjustment for realized losses on investments included in net income                          |  |                                  |   |  |             |    |                              |   |        |               |  |   |                 |   |                      |   |        |                                   |   |        |                          |  |   | (156   | ) |  |   | (156     | )
|                                                                                                               |  |                                   |   |  |             |     |                              |   |         |               |  |   |                  |   |                      |   |         |                                   |   |         |                          |  |   |        |   |  |   |          |  
|Total comprehensive income                                                                                     |  |                                  |   |  |             |    |                              |   |        |               |  |   |                 |   |                      |   |        |                                   |   |        |                          |  |   |       |   |  |   | 94,421   |  
|                                                                                                               |  |                                   |   |  |             |     |                              |   |         |               |  |   |                  |   |                      |   |         |                                   |   |         |                          |  |   |        |   |  |   |          |  
|Deferred compensation adjustment                                                                               |  |                                  |   |  |             |    |                              |   | (9,366  | )             |  |   |                 |   |                      |   |        |                                   |   | 9,366   |                          |  |   |       |   |  |   |         |  
|Acquisition of treasury shares                                                                                 |  | (5,621                            | ) |  |             |    |                              |   |        |               |  |   | (108,910         | ) |                      |   |        |                                   |   |        |                          |  |   |       |   |  |   | (108,910 | )
|Stock-based compensation expense                                                                               |  |                                  |   |  |             |    |                              |   | 18,916  |               |  |   |                 |   |                      |   |         |                                   |   |        |                          |  |   |       |   |  |   | 18,916   |  
|Issuance of common stock under stock plans including, income tax benefit of $10,825                            |  | 3,430                             |   |  |             | 35  |                              |   | 61,412  |               |  |   |                 |   |                      |   |        |                                   |   |        |                          |  |   |       |   |  |   | 61,447   |  
|                                                                                                               |  |                                   |   |  |             |     |                              |   |         |               |  |   |                  |   |                      |   |         |                                   |   |         |                          |  |   |        |   |  |   |          |  
|Balance at September 29, 2006                                                                                  |  | 83,341                            |   |  |             | 890 |                              |   | 452,932 |               |  |   | (108,910         | ) |                      |   | 411,014 |                                   |   |        |                          |  |   | (976   | ) |  |   | 754,950  |  
|Components of comprehensive income:                                                                            |  |                                   |   |  |             |     |                              |   |         |               |  |   |                  |   |                      |   |         |                                   |   |         |                          |  |   |        |   |  |   |          |  
|Net income                                                                                                     |  |                                  |   |  |             |    |                              |   |        |               |  |   |                 |   |                      |   | 142,207 |                                   |   |        |                          |  |   |       |   |  |   | 142,207  |  
|Unrealized gain on cash flow hedging instruments                                                               |  |                                  |   |  |             |    |                              |   |        |               |  |   |                 |   |                      |   |        |                                   |   |        |                          |  |   | 335    |   |  |   | 335      |  
|Reclassification adjustment for realized gains on cash flow hedging instruments included in net income         |  |                                  |   |  |             |    |                              |   |        |               |  |   |                 |   |                      |   |        |                                   |   |        |                          |  |   | (548   | ) |  |   | (548     | )
|Unrealized loss on investments                                                                                 |  |                                  |   |  |             |    |                              |   |        |               |  |   |                 |   |                      |   |        |                                   |   |        |                          |  |   | (787   | ) |  |   | (787     | )
|Reclassification adjustment for realized gains on investments included in net income                           |  |                                  |   |  |             |    |                              |   |        |               |  |   |                 |   |                      |   |        |                                   |   |        |                          |  |   | 27     |   |  |   | 27       |  
|                                                                                                               |  |                                   |   |  |             |     |                              |   |         |               |  |   |                  |   |                      |   |         |                                   |   |         |                          |  |   |        |   |  |   |          |  
|Total comprehensive income                                                                                     |  |                                  |   |  |             |    |                              |   |        |               |  |   |                 |   |                      |   |        |                                   |   |        |                          |  |   |       |   |  |   | 141,234  |  
|                                                                                                               |  |                                   |   |  |             |     |                              |   |         |               |  |   |                  |   |                      |   |         |                                   |   |         |                          |  |   |        |   |  |   |          |  
|Defined benefit obligation upon adoption of SFAS 158, net of tax                                               |  |                                   |   |  |             |     |                              |   |         |               |  |   |                  |   |                      |   |         |                                   |   |         |                          |  |   | 776    |   |  |   | 776      |  
|Acquisition of treasury shares                                                                                 |  | (11,343                           | ) |  |             |    |                              |   |        |               |  |   | (426,513         | ) |                      |   |        |                                   |   |        |                          |  |   |       |   |  |   | (426,513 | )
|Stock-based compensation expense                                                                               |  |                                  |   |  |             |    |                              |   | 19,651  |               |  |   |                 |   |                      |   |         |                                   |   |        |                          |  |   |       |   |  |   | 19,651   |  
|Issuance of common stock under stock plans including, income tax benefit of $21,721                            |  | 3,754                             |   |  |             | 37  |                              |   | 75,843  |               |  |   |                 |   |                      |   |        |                                   |   |        |                          |  |   |       |   |  |   | 75,880   |  
|                                                                                                               |  |                                   |   |  |             |     |                              |   |         |               |  |   |                  |   |                      |   |         |                                   |   |         |                          |  |   |        |   |  |   |          |  
|Balance at September 28, 2007                                                                                  |  | 75,752                            |   |  | $           | 927 |                              | $ | 548,426 |               |  | $ | (535,423         | ) |                      | $ | 553,221 |                                   | $ |        |                          |  | $ | (1,173 | ) |  | $ | 565,978  |  
|                                                                                                               |  |                                   |   |  |             |     |                              |   |         |               |  |   |                  |   |                      |   |         |                                   |   |         |                          |  |   |        |   |  |   |          |  

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



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1.    Company

Varian
Semiconductor Equipment Associates, Inc. (Varian Semiconductor) designs, manufactures, markets and services semiconductor processing equipment used in the fabrication of integrated circuits to customers located both in the United States
(U.S.) and in international markets. Varian Semiconductor faces risk factors similar to all companies in the semiconductor manufacturing equipment market including, but not limited to, competition, market downturn, technological change,
international operations and related foreign currency risks and the ability to recruit and retain key employees.

Note 2.    Summary
of Significant Accounting Policies

Fiscal Year

Varian Semiconductors fiscal year is a 52- to 53-week period that ends on the Friday nearest September 30. Fiscal year 2007 is comprised of a 52-week period ended on September 28, 2007. Fiscal year 2006 is comprised of a
52-week period ended on September 29, 2006. Fiscal year 2005 is comprised of a 52-week period ended on September 30, 2005.

Principles of
Consolidation

The consolidated financial statements include the accounts of Varian Semiconductor and its wholly owned subsidiaries. All material
intercompany accounts and transactions are eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. On an ongoing basis, Varian Semiconductor evaluates its estimates and assumptions including, but not limited to, deferred revenue, loss contingencies, warranty accruals,
the reserve for excess and obsolete inventory, income taxes payable, deferred tax assets and allowance for doubtful accounts. Actual results may differ from those estimates.

Revenue Recognition

Product revenue includes established products, new products, upgrades and spare parts.

Varian Semiconductor recognizes revenue from product sales upon shipment, provided title and risk of loss has passed to the customer, evidence of an
arrangement exists, fees are contractually fixed or determinable, collectibility is reasonably assured through historical collection results and regular credit evaluations, and there are no uncertainties regarding customer acceptance.

For established and new products, a portion of the total purchase price is typically not due until installation occurs and the customer accepts the product. For
established products, the lesser of the amount allocated to the equipment or the contractual amount due upon delivery is recorded as product revenue upon delivery. The amount deferred is recognized as revenue upon customer acceptance. For new
products, revenue allocated to the equipment is recognized upon customer acceptance. Revenue related to spare parts and upgrade sales is recognized upon the later of delivery or when the title and risk of loss passes to the customer.

Products are classified as established products if post-delivery acceptance provisions and the installation process have been determined to be routine, due to the fact
that the acceptance provisions are generally a replication of



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



pre-shipment procedures, and there is a demonstrated history of achieving predetermined installation cost targets. The majority of products are designed and
manufactured to meet contractual customer specifications. To ensure customer specifications are satisfied, the systems are tested at Varian Semiconductors manufacturing facility prior to shipment. To the extent that customers conditions
cannot be replicated in Varian Semiconductors facilities or if there is not a demonstrated history of meeting newer customer specifications, then the product is treated as new for revenue recognition purposes. Varian Semiconductor has
predetermined criteria for changing the classification of a new product to an established product. A new product must achieve a set number of acceptances and a set target for installation cost. Once the criteria have been achieved for a new product,
the product is considered established.

Service revenue includes revenue from maintenance and service contracts, extended warranties, paid service and
system installation services. Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts. Extended warranty revenue is deferred and recognized ratably over the applicable warranty term. Revenue
related to paid service is recorded when earned and revenue related to installation is recorded upon fulfillment of the service obligation and customer acceptance. It takes approximately three to six weeks for Varian Semiconductor technicians to
complete the installation of Varian Semiconductor products and perform tests agreed to with customers. Certain customers formally document their acceptance of Varian Semiconductors products at this time. Other customers elect to perform
additional internal testing prior to formal acceptance, and this process generally takes eight to twelve weeks.

Royalty and license revenue is recognized
when contractual obligations are met, and in the case of royalties, upon receipt of a royalty report from the customer, evidence of an arrangement exists, fees are fixed or determinable and collection is reasonably assured. When fees are not fixed
or determinable, revenue is recorded when payments become due.

Varian Semiconductors transactions frequently include the sale of systems and
services under multiple element arrangements. Revenue under these arrangements is allocated to all elements, except systems, based upon the fair value of those elements. All elements may not be delivered and recognized as revenue during the same
period. In such cases, Varian Semiconductor defers the relative fair value of the undelivered element until that element is delivered. The amount allocated to installation is based upon hourly rates at the estimated time to complete the service. The
fair value of all other elements is based upon the price charged when these amounts are sold separately and unaccompanied by other elements. The amount of revenue allocated to systems is done on a residual method basis. Under this method, the total
value of the arrangement is allocated first to the undelivered elements based on their fair values, with the remainder being allocated to systems revenue. If fair value cannot be determined for any of the undelivered elements, the entire value of
the arrangement is deferred.

Deferred Revenue

Deferred revenue includes customer advances and amounts that have been billed per the contractual terms but have not been recognized as revenue. Varian Semiconductor also defers the fair value of extended warranties bundled with equipment
sales as deferred revenue. Deferred revenue for extended warranties is recognized ratably over the applicable warranty term, which generally is from 13 to 24 months from the date the customer accepts the products.

Evaluation Tools

Varian Semiconductor occasionally supplies
evaluation tools to potential new customers, usually for a period of three months to one year. While the tool is at the customers semiconductor manufacturing factory (fab), Varian Semiconductor and the customer work closely
together through complex processes to qualify the tool for



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



that particular customers requirements. These qualification costs are included in marketing, general and administrative expenses in the period
incurred. In addition, during the evaluation period, Varian Semiconductor generally reduces the carrying value of the evaluation tool ratably over a period of four years. This cost is recorded as a component of marketing, general and administrative
expenses and the carrying value of the evaluation tool is included in inventory. Customer evaluations are often successful and upon fulfillment of all four revenue recognition criteria. Varian Semiconductor recognizes the revenue from the evaluation
tool and remaining tool cost through revenue and cost of product revenue, respectively.

Stock-based Compensation

Effective October 1, 2005, Varian Semiconductor adopted the provisions of the Financial Accounting Standard Board (FASB) Statement of Financial
Accounting Standards (SFAS) No. 123R, Share-Based Payment (SFAS No. 123(R)). (See Note 4 of Notes to Consolidated Financial Statements). Under SFAS No. 123(R), Varian Semiconductor is required
to record compensation cost for all share-based payments granted after the date of adoption based on the grant date fair value, estimated in accordance with the provisions of SFAS 123(R), and for the unvested portion of all share-based payments
previously granted that remain outstanding based on the grant date fair value, estimated in accordance with the original provisions of SFAS 123. The estimated fair value of Varian Semiconductors stock-based awards is expensed on a
straight-line basis.

The choice of a valuation technique, and the approach utilized to develop the underlying assumptions for that technique, involve
significant judgments. These judgments reflect managements assessment of the most accurate method of valuing the stock options Varian Semiconductor issues, based on our historical experience, knowledge of current conditions and beliefs of what
could occur in the future given available information. Varian Semiconductors judgments could change over time as additional information becomes available, or the facts underlying the assumptions change over time. Any change in judgments could
have a material impact on Varian Semiconductors financial statements. Varian Semiconductor believes that these estimates incorporate all relevant information and represent a reasonable approximation in light of the difficulties involved in
valuing non-traded stock options.

Cash, Cash Equivalents and Investments

Varian Semiconductor considers currency on hand, demand deposits, and all highly liquid investments with a remaining maturity of three months or less at the date of purchase to be cash and cash equivalents. The
carrying amounts of cash and cash equivalents approximate estimated fair value because of the short-term maturities of those financial instruments.

Short-term investments consist primarily of certificates of deposit, Treasury and government agency securities and corporate bonds with ratings AA or better. All short-term investments have been classified as available-for-sale and are
carried at fair market value, which approximates cost, due to the short period of time to maturity and the relative risk of the investments. As of September 28, 2007, Varian Semiconductor had the ability but not the intent to liquidate certain
investments in order to meet its liquidity needs for the next 12 months. Accordingly, those investments with contractual maturities greater than one year from the date of acquisition have been classified as long-term.

Accounts Receivable and Allowance for Doubtful Accounts

Substantially all of Varian Semiconductors accounts receivable balance relate to trade receivables. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is Varian
Semiconductors best estimate of the amount of probable credit losses in its existing accounts



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



receivable. Varian Semiconductor maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make
required payments for products and services. Accounts with known financial issues are first reviewed and specific estimates are recorded. The remaining accounts receivable balances are then grouped in categories by the amount of days the balance is
past due, and the estimated loss is calculated as a percentage of the total category based upon past history. Account balances are charged off against the allowance when it is probable the receivable will not be recovered.

Inventory and Purchase Order Commitments

Varian Semiconductor values
its inventory at the lower of cost or market using the first-in, first-out method. On a quarterly basis, Varian Semiconductor assesses the realizability of all inventories to determine whether adjustments for impairment are required. The
determination of lower of cost or market requires that Varian Semiconductor make significant assumptions about future demand for products and the transition to new product offerings from legacy products. Estimating product demand beyond a relatively
short forecasting horizon is difficult and prone to forecasting error due to the cyclical nature and inherent lack of visibility in the industry. Varian Semiconductor also provides for losses on those open purchase order commitments in which Varian
Semiconductors estimated obligation to receive inventory under the commitments exceeds expected production demand. These assumptions include, but are not limited to, future manufacturing schedules, customer demand, supplier lead time and
technological and market obsolescence. Once inventory is written down and a new cost basis has been established, it is not written back up if demand increases.

Property, Plant, and Equipment

Property, plant, and equipment are stated at cost. Major improvements are capitalized, while maintenance and
repairs are expensed in the period the cost is incurred. Plant and equipment are depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are amortized using the straight-line method over their estimated
useful lives, or the remaining term of the lease, whichever is less. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are relieved from the accounts, and resulting gains or losses are included in
operating income in the consolidated statements of income.

Goodwill and Other Long-Lived Assets

At September 28, 2007 and September 29, 2006, goodwill was $12.3 million. In accordance with the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets, goodwill is not amortized. Varian Semiconductor tests for the impairment of goodwill on an annual basis or whenever events or changes in circumstances suggest that the carrying amount may not be recoverable. Varian
Semiconductor tests for goodwill impairment at the entity level, as its subsidiaries do not constitute separate businesses and all possess similar economic characteristics. The test is performed by deducting the fair value of all assets and
liabilities from the total estimated fair value to determine residual goodwill. As of September 28, 2007, Varian Semiconductor completed its annual goodwill impairment test and determined that no impairments existed.

Whenever events or changes in circumstances indicate that the carrying amounts of a long-lived asset may not be recoverable, Varian Semiconductor reviews these assets
for impairment. If the future undiscounted cash flows are less than the carrying amount of that asset, an impairment exists. Varian Semiconductor recognizes an impairment loss based on the excess of the carrying amount over the fair value of the
assets. Fair value is normally assessed using a discounted cash flow model.

Product Warranties

Varian Semiconductor provides for the estimated cost of product warranties, the amount of which is based primarily upon historical information, at the time product
revenue is recognized. While Varian Semiconductor



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



engages in extensive product quality programs and processes including actively monitoring and evaluating the quality of its component supplies, Varian
Semiconductors warranty obligation is affected by product failure rates, utilization levels, material usage, service delivery costs incurred in correcting a product failure, and supplier warranties on parts delivered to Varian Semiconductor.
Should actual product failure rates, utilization levels, material usage, service delivery costs incurred in correcting a product failure, or supplier warranties on parts differ from Varian Semiconductors estimates, revisions to the estimated
warranty liability would be required.

Environmental Liabilities

Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the costs can be reasonably estimated. Generally, the timing of these accruals coincides with completion of a
feasibility study or Varian Semiconductors commitment to a formal plan of action. In situations where the various uncertainties make it difficult to assess the likelihood and scope of further investigation or remediation activities or to
estimate then future costs, the lower limit of an estimated range is accrued on a non-discounted basis. All other liabilities, where Varian Semiconductor has generally sufficient knowledge to estimate the scope of costs and future activities, are
accrued on a discounted basis. Should new information become available and/or different assumptions are applied in the estimation of environmental liabilities, revisions to the accrued environmental liability would be required.

Income Taxes

Varian Semiconductor uses the asset and liability
method of accounting for deferred income taxes. The provision for income taxes includes income taxes currently payable and those deferred as a result of temporary differences between the financial statement and tax bases of assets and liabilities. A
valuation allowance is provided to reduce deferred tax assets to the amount of future tax benefit when it is more likely than not that some portion of the deferred tax assets will not be realized. Projected future taxable income and ongoing tax
planning strategies are considered and evaluated when assessing the need for a valuation allowance. Any increase or decrease in a valuation allowance could have a material adverse or beneficial impact on Varian Semiconductors income tax
provision and net income in the period in which the determination is made.

Derivative Financial Instruments

Varian Semiconductors foreign subsidiaries operate and sell Varian Semiconductors products in various global markets. As a result, Varian Semiconductor is
exposed to changes in foreign currency exchange rates. Varian Semiconductor utilizes foreign currency forward exchange contracts to hedge against currency exposures that are associated with certain of its assets and liabilities denominated in
various non-U.S. dollar currencies. The effect of exchange rate changes on forward exchange contracts is expected to offset the effect of exchange rate changes on the underlying hedged items. Varian Semiconductor believes these financial instruments
do not subject it to speculative risk that would otherwise result from changes in currency exchange rates. Varian Semiconductor does not use derivative financial instruments for speculative or trading purposes.

All of Varian Semiconductors derivative financial instruments are recorded at fair value based upon quoted market prices for comparable instruments. For derivative
instruments designated and qualifying as cash flow hedges of anticipated foreign currency denominated transactions, the effective portion of the gain or loss on these hedges is reported as a component of accumulated other comprehensive income in
stockholders equity, and is reclassified into earnings when the hedged transaction affects earnings. If the transaction being hedged fails to occur, or if a portion of any derivative is ineffective, the gain or loss on the associated financial
instrument is



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



recorded immediately in earnings. For derivative instruments used to hedge existing foreign currency denominated assets or liabilities, the gain or loss on
these hedges is recorded immediately in earnings to offset the changes in the fair value of the assets or liabilities being hedged. There were four forward foreign exchange sell contracts designated as hedges of anticipated product sales in Japanese
Yen outstanding at September 28, 2007 totaling an equivalent notional value of $12.6 million. In addition, there were two forward foreign exchange purchase contracts in the amount of an equivalent notional value of $6.5 million offsetting two
of the four forward sell contracts.

Foreign Currency Translation

For international operations, the U.S. dollar is the functional currency. Monetary assets and liabilities of foreign subsidiaries are translated into U.S. dollars at current exchange rates. Nonmonetary assets such as
inventories and property, plant, and equipment are translated at historical rates. Income and expense items are translated at effective rates of exchange prevailing during each year, except that inventories and depreciation charged to operations are
translated at historical rates. Foreign exchange gains and losses are recorded in the Statement of Income in other income (expense), net.

Concentration
of Risk

Financial instruments that potentially expose Varian Semiconductor to concentrations of credit risk consist principally of trade accounts
receivable, cash investments and forward foreign exchange contracts. In recent fiscal years, Varian Semiconductor has sold over half of its systems to its ten largest customers, and its trade accounts receivable is primarily comprised of these
respective customers. However, the concentration of credit risk is limited as the customer base is dispersed among many geographic regions and is comprised primarily of large multi-national companies. Varian Semiconductor performs ongoing credit
evaluations and generally does not require collateral from its customers. As of September 28, 2007, one customer accounted for 15% of the total accounts receivable balance. As of September 29, 2006, two customers accounted for 15% and 11%
of the total accounts receivable balance.

In fiscal year 2007, revenue from one customer accounted for 17% of Varian Semiconductors total revenue.
In fiscal year 2006, revenue from three customers accounted for 11%, 10% and 10% of Varian Semiconductors total revenue. In fiscal year 2005, revenue from two customers accounted for 20% and 14% of Varian Semiconductors total revenue.

Varian Semiconductor considers currency on hand, demand deposits, and all highly liquid investments with a remaining maturity of three months or less at
the date of purchase to be cash and cash equivalents. The carrying amounts of cash and cash equivalents approximate estimated fair value because of the short-term maturities of those financial instruments. Cash equivalents at September 28, 2007
and September 29, 2006 were $84.5 million and $234.1 million, respectively. Cash and cash equivalents are invested with multiple financial institutions. Investments consist primarily of U.S. Treasury, government agency and corporate bonds and
certificates of deposit with ratings AA or better. All investments have been classified as available-for-sale and are carried at fair market value due to the short period of time to maturity and the relative risk of the investments. Varian
Semiconductor manages its cash equivalents and investments as a single portfolio of highly marketable securities that is intended to be available to meet Varian Semiconductors current cash requirements. Varian Semiconductor also places forward
foreign exchange contracts with investment grade financial institutions in order to minimize currency risk exposure.

Varian Semiconductor obtains some of
the components and subassemblies that are included in its products from a limited group of suppliers, or in some cases a single source supplier. The loss of any supplier, including any



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



single source supplier, would require obtaining one or more replacement suppliers and may also require devoting significant resources to product development
to incorporate new parts from other sources into Varian Semiconductors products. The need to change suppliers or to alternate between suppliers might cause delays in delivery or significantly increase Varian Semiconductors costs.
Although Varian Semiconductor has insurance to protect against loss due to business interruption from these and other sources, Varian Semiconductor cannot provide assurance that such coverage will be adequate or that it will remain available on
commercially acceptable terms. Although Varian Semiconductor seeks to reduce its dependence on these limited source suppliers, disruption or loss of these sources could negatively impact its business and damage customer relationships.

Recent Accounting Pronouncements

In July 2006, the FASB issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprises
financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation will be
effective for Varian Semiconductor for its fiscal year 2008. Varian Semiconductor does not expect that the adoption of this interpretation will have a material impact on its financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. However, for some entities, the application of this statement will
change current practice. This statement will be effective for Varian Semiconductors fiscal year 2009. Varian Semiconductor is in the process of evaluating the impact of this statement on its financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement
No. 115. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The decision to measure items at fair value can
be made on an instrument-by-instrument basis, but once the decision is made, it is permanent. This statement will be effective for Varian Semiconductors fiscal year 2009. Varian Semiconductor is in the process of evaluating the impact of this
statement on its financial statements.

Note 3.    Stock Split

On April 24, 2007, Varian Semiconductor announced that its Board of Directors approved a three-for-two stock split, to be effected in the form of a stock dividend, payable on May 30, 2007 to stockholders of
record at the close of business on May 15, 2007. Varian Semiconductor has retained the current par value of $0.01 per share for all common shares. All references in the financial statements and notes to the number of shares outstanding, per
share amounts, stock option, restricted stock and ESPP data of Varian Semiconductors common shares have been restated to reflect the effect of the stock split for all periods presented.

Stockholders equity as of October 1, 2004, September 30, 2005, September 29, 2006 and September 28, 2007 reflects the stock split by
reclassifying from Capital in excess of par value to Common stock an amount equal to the par value of the additional shares arising from the split.



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 4.    Stock-Based Compensation

Effective October 1, 2005, Varian Semiconductor adopted on a modified prospective basis the provisions of SFAS No. 123(R), Share-Based Payment (Revised
2004), (SFAS No. 123(R)) and related guidance, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options,
restricted stock awards and employee stock purchases related to Varian Semiconductors Employee Stock Purchase Plan (ESPP) based on estimated fair values. Accordingly, stock-based compensation cost is measured at grant date, based
on the fair value of the award, and is recognized as expense on a straight-line basis over the employees requisite service period.

Varian
Semiconductor adopted SFAS No. 123(R) using the modified prospective transition method, which requires the application of the accounting standard as of October 1, 2005, the first day of Varian Semiconductors fiscal year 2006. Under
this transition method, stock-based compensation expense recognized during the fiscal year ended September 29, 2006 includes: (a) ESPP awards with the offering period commencing on July 1, 2005, based on the grant-date fair value
estimated in accordance with the original provisions of SFAS No. 123, (b) stock options and restricted stock awards granted prior to, but not yet vested as of September 30, 2005, based on the grant-date fair value estimated in
accordance with the original provisions of SFAS No. 123, and (c) stock options, restricted stock and ESPP awards granted, subsequent to September 30, 2005, based on the grant-date fair value, in accordance with the provisions of SFAS
No. 123(R). Under the modified prospective transition method, results for prior periods are not restated.

The estimated fair value of Varian
Semiconductors stock-based awards, less expected forfeitures, is amortized over the awards vesting period on a straight-line basis. The effect of recording stock-based compensation for the fiscal year ended September 28, 2007 was as
follows:



|                                                           |  |                                               |        |   |                                               |   |        |  
|---------------------------------------------------------- |  | --------------------------------------------- | ------ | - | --------------------------------------------- | - | ------ | -
|                                                           |  | Fiscal Year Ended                             |       
|                                                           |  | September 28, 2007                            |        |   | September 29, 2006                            |  
|                                                           |  | (Amounts inthousands exceptper share amounts) |        |   | (Amounts inthousands exceptper share amounts) |  
|Stock-based compensation expense by type of award:         |  |                                               |        |   |                                               |   |        |  
|Stock options                                              |  | $                                             | 9,885  |   |                                               | $ | 11,858 |  
|Restricted stock                                           |  |                                               | 8,719  |   |                                               |   | 6,169  |  
|Employee Stock Purchase Plan                               |  |                                               | 1,047  |   |                                               |   | 977    |  
|Less: Amounts capitalized as inventory                     |  |                                               |       |   |                                               |   | (88    | )
|                                                           |  |                                               |        |   |                                               |   |        |  
|Total stock-based compensation                             |  |                                               | 19,651 |   |                                               |   | 18,916 |  
|Less: Tax effect on stock-based compensation               |  |                                               | (9,688 | ) |                                               |   | (6,053 | )
|                                                           |  |                                               |        |   |                                               |   |        |  
|Effect on net income                                       |  | $                                             | 9,963  |   |                                               | $ | 12,863 |  
|                                                           |  |                                               |        |   |                                               |   |        |  
|Effect on earnings per share                               |  |                                               |        |   |                                               |   |        |  
|Basic                                                      |  | $                                             | 0.12   |   |                                               | $ | 0.15   |  
|Diluted                                                    |  | $                                             | 0.12   |   |                                               | $ | 0.15   |  
|Effect of stock-based compensation on income by line item: |  |                                               |        |   |                                               |   |        |  
|Cost of product revenue                                    |  | $                                             | 1,261  |   |                                               | $ | 1,112  |  
|Cost of service revenue                                    |  |                                               | 1,048  |   |                                               |   | 938    |  
|Research and development expense                           |  |                                               | 3,863  |   |                                               |   | 3,673  |  
|Marketing, general and administrative expense              |  |                                               | 13,479 |   |                                               |   | 13,193 |  
|Provision for income taxes                                 |  |                                               | (9,688 | ) |                                               |   | (6,053 | )
|                                                           |  |                                               |        |   |                                               |   |        |  
|Total cost related to stock-based compensation             |  | $                                             | 9,963  |   |                                               | $ | 12,863 |  
|                                                           |  |                                               |        |   |                                               |   |        |  



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##### Table of Contents

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Varian Semiconductor estimates the fair value of stock options using the Black-Scholes valuation model. Key input
assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the risk-free interest rate over the options expected term, the expected annual dividend yield and the expected
stock price volatility. Varian Semiconductor has determined that a blended volatility, using Varian Semiconductors historical and implied volatility measures and a peer group implied volatility, best reflects expected volatility over the
expected term of the option. Varian Semiconductor believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of Varian Semiconductors stock options
granted during fiscal year 2007. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

The fair value of each option granted during the fiscal years ended September 28, 2007 and September 29, 2006 were estimated on the grant date using the Black-Scholes option-pricing model with the following
weighted-average assumptions:



|                                       |  |                    |       |   |                    |   |      |  
|-------------------------------------- |  | ------------------ | ----- | - | ------------------ | - | ---- | -
|                                       |  | Fiscal Year Ended  |      
|                                       |  | September 28, 2007 |       |   | September 29, 2006 |  
|Expected life (in years)               |  |                    | 4.0   |   |                    |   | 4.1  |  
|Expected volatility                    |  |                    | 39.2  | % |                    |   | 38.8 | %
|Risk-free interest rate                |  |                    | 4.6   | % |                    |   | 4.8  | %
|Expected dividend yield                |  |                    | 0.0   | % |                    |   | 0.0  | %
|Weighted-average grant date fair value |  | $                  | 12.88 |   |                    | $ | 8.61 |  

Prior to the adoption of SFAS No. 123(R)

Prior to October 1, 2005, Varian Semiconductor accounted for its stock plans under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
(APB No. 25) and FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensationan Interpretation of APB Opinion No. 25 and provided the required pro forma disclosures of SFAS
No. 123, Accounting for Stock-Based Compensation as amended by SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. Stock-based compensation expense related to restricted stock
granted at no cost to the employees were reflected in net income.

The pro-forma information for the fiscal year ended September 30, 2005 was as
follows:



|                                                                                                                              |  |                                                 |         |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ------- | -
|                                                                                                                              |  | Fiscal Year 2005                                |        
|                                                                                                                              |  | (amounts in thousands,except per share amounts) |        
|Net income as reported                                                                                                        |  | $                                               | 72,010  |  
|Add: Compensation expense included in net income, net of related tax benefit                                                  |  |                                                 | 2,864   |  
|Less: Stock-based employee compensation expense determined under fair value method for all awards, net of related tax benefit |  |                                                 | (14,048 | )
|                                                                                                                              |  |                                                 |         |  
|Pro forma net income (loss)                                                                                                   |  | $                                               | 60,826  |  
|                                                                                                                              |  |                                                 |         |  
|Net income (loss) per share:                                                                                                  |  |                                                 |         |  
|Basic, pro forma                                                                                                              |  | $                                               | 0.73    |  
|Basic, as reported                                                                                                            |  | $                                               | 0.87    |  
|Diluted, pro forma                                                                                                            |  | $                                               | 0.71    |  
|Diluted, as reported                                                                                                          |  | $                                               | 0.85    |  



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##### Table of Contents

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The $14.0 million in pro-forma stock-based compensation for the fiscal year ended September 30, 2005 included
$2.1 million resulting from the amendment to the definition of retirement in the Omnibus Stock Plan by Varian Semiconductors Board of Directors on October 5, 2004 and the Retirement Agreement entered into on December 8, 2004 (see
Note 20. Retirement Plans).

The fair value of Varian Semiconductors stock-based awards granted during the fiscal year ended September 30, 2005
was estimated using the following weighted-average assumptions:



|                                       |  |                                     |      |   |      |   |      |  
|-------------------------------------- |  | ----------------------------------- | ---- | - | ---- | - | ---- | -
|                                       |  | Fiscal Year EndedSeptember 30, 2005 |     
|                                       |  | Options                             |      |   | ESPP |  
|Expected life (in years)               |  |                                     | 4.0  |   |      |   | 0.5  |  
|Expected volatility                    |  |                                     | 55.5 | % |      |   | 40.7 | %
|Risk-free interest rate                |  |                                     | 3.8  | % |      |   | 2.6  | %
|Expected dividend yield                |  |                                     | 0.0  | % |      |   | 0.0  | %
|Weighted-average grant date fair value |  | $                                   | 7.27 |   |      | $ | 4.42 |  

Stock Incentive Plan

The 2006 Stock Incentive Plan (the Plan), which replaced the Amended and Restated Omnibus Stock Plan upon shareholder approval on February 9, 2006, provides for the grant of non-qualified share-based awards to eligible
employees, consultants and non-employee directors of Varian Semiconductor. As of September 28, 2007, a total of 9,070,231 shares were reserved for future issuance under the Plan.

Stock option awards granted under the Plan generally have a life no longer than eight years after the date of the grant and generally vest as to 25% one year from date of grant with the remaining 75% vesting in twelve
equal quarterly installments so that all options are vested at the end of four years.

Restricted stock awards are granted under the Plan at $0.01 per
share and generally vest as to 25% one year from the date of grant with the remaining 75% vesting in twelve equal quarterly installments. In December 2006, the Board of Directors approved a performance-based restricted stock award to certain
executives of Varian Semiconductor. Varian Semiconductor assessed the probability of these executives meeting the performance goals on a quarterly basis throughout the performance period. The terms of the award requires that vesting occurs only if
specified performance targets and service conditions, as established by the Compensation Committee, are satisfied for the fiscal year ending September 28, 2007. Following the end of the performance period, Varian Semiconductor determined the
performance goals were met, thus, the awards will vest 25% one year from the date of grant with the remaining 75% vesting in twelve equal quarterly installments.

Stock compensation expense associated with restricted common stock and restricted stock units is charged for the difference between the market value on the date of grant and the issuance price, less estimated forfeitures, and is amortized
over the awards vesting period on a straight-line basis.



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##### Table of Contents

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table summarizes the stock option and restricted stock activity for the fiscal year ended
September 28, 2007:



|                                          |  |                       |   |                                   |                               |       |                                          |     |                          |   |             |  |           |                                     |  |   |      
|----------------------------------------- |  | --------------------- | - | --------------------------------- | ----------------------------- | ----- | ---------------------------------------- | --- | ------------------------ | - | ----------- |  | --------- | ----------------------------------- |  | - | -----
|                                          |  | Stock Option Activity |   | Unvested RestrictedStock Activity
|                                          |  | Shares                |   |                                   | Weighted-AverageExercisePrice |       | Weighted-AverageRemainingContractualTerm |     | AggregateIntrinsic Value |   | Shares      |  |           | Weighted-AverageGrantDate FairValue
|                                          |  |                       |   |                                   |                               |       | (In years)                               |     | (In thousands)           |   |             |  |           |                                    
|Outstanding at September 29, 2006         |  | 6,820,047             |   |                                   | $                             | 16.19 |                                          |     |                          |   |             |  | 1,067,511 |                                     |  | $ | 20.17
|Granted                                   |  | 971,351               |   |                                   | $                             | 34.59 |                                          |     |                          |   |             |  | 446,296   |                                     |  |   | 29.70
|Options exercised                         |  | (3,199,696            | ) |                                   | $                             | 15.95 |                                          |     |                          |   |             |  |           |                                     |  |   |      
|Vesting of restricted stock               |  |                       |   |                                   |                               |       |                                          |     |                          |   |             |  | (402,860  | )                                   |  |   | 19.92
|Forfeited/expired/cancelled               |  | (144,249              | ) |                                   | $                             | 16.85 |                                          |     |                          |   |             |  | (36,434   | )                                   |  |   | 22.91
|                                          |  |                       |   |                                   |                               |       |                                          |     |                          |   |             |  |           |                                     |  |   |      
|Outstanding at September 28, 2007         |  | 4,447,453             |   |                                   | $                             | 20.36 |                                          | 4.8 |                          | $ | 147,575,227 |  | 1,074,513 |                                     |  | $ | 24.13
|                                          |  |                       |   |                                   |                               |       |                                          |     |                          |   |             |  |           |                                     |  |   |      
|Options vested at September 28, 2007      |  | 4,334,807             |   |                                   | $                             | 20.17 |                                          | 4.8 |                          | $ | 144,673,951 |  |           |                                     |  |   |      
|Options exercisable at September 28, 2007 |  | 2,297,346             |   |                                   | $                             | 15.32 |                                          | 3.8 |                          | $ | 87,768,757  |  |           |                                     |  |   |      

As of September 28, 2007, the unrecognized compensation cost related to unvested stock options was $20.5
million before estimated forfeitures. This unrecognized compensation will be recognized over an estimated weighted average amortization period of 2.8 years.

As of September 28, 2007, the unrecognized compensation cost related to unvested restricted stock was $23.7 million before estimated forfeitures. This unrecognized compensation will be recognized over an estimated weighted average
amortization period of 2.8 years.

The total intrinsic value of options exercised during the fiscal year ended September 28, 2007 was $69.5 million,
with intrinsic value defined as the difference between the market price on the date of exercise and the grant date price. The total amount of cash received from the exercise of these options was $51.0 million. The actual tax benefit realized for the
tax deductions from option exercises totaled $24.0 million for the year ended September 28, 2007.

The total intrinsic value of options exercised
during the fiscal year ended September 29, 2006 was $32.9 million, with intrinsic value defined as the difference between the market price on the date of exercise and the grant date price. The total amount of cash received from the exercise of
these options was $47.3 million. The actual tax benefit realized for the tax deductions from option exercises totaled $11.6 million for the year ended September 29, 2006.

The total fair value of restricted stock grants that vested during the fiscal year ended September 28, 2007 was $16.1 million. The total fair value of restricted stock grants that vested during the fiscal year
ended September 29, 2006 was $5.1million.

During the fiscal year ended September 28, 2007, Varian Semiconductor awarded a total of 23,030
restricted stock units which vested upon grant.



F-17



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##### Table of Contents

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table summarizes significant ranges of outstanding and exercisable stock options as of
September 28, 2007:



|                         |  |                   |  |                                 |  |                              |       |                          |   |                             |  |                              |  |                         |       |  |   |           
|------------------------ |  | ----------------- |  | ------------------------------- |  | ---------------------------- | ----- | ------------------------ | - | --------------------------- |  | ---------------------------- |  | ----------------------- | ----- |  | - | ----------
|Range of Exercise Prices |  | NumberOutstanding |  | AverageRemainingContractualLife |  | WeightedAverageExercisePrice |       | AggregateIntrinsic Value |   | NumberVested andExercisable |  | WeightedAverageExercisePrice |  | AggregateIntrinsicValue
|                         |  |                   |  | (In years)                      |  |                              |       |                          |   |                             |  |                              |  |                        
|$ 4.38 - $12.28          |  | 581,252           |  | 2.9                             |  | $                            | 9.14  |                          | $ | 25,795,047                  |  | 581,252                      |  | $                       | 9.14  |  | $ | 25,795,047
|$12.29 - $15.64          |  | 673,326           |  | 3.7                             |  | $                            | 15.10 |                          | $ | 25,871,082                  |  | 542,404                      |  | $                       | 15.23 |  | $ | 20,770,981
|$15.65 - $15.71          |  | 1,042,940         |  | 5.2                             |  | $                            | 15.69 |                          | $ | 39,450,951                  |  | 509,970                      |  | $                       | 15.69 |  | $ | 19,290,261
|$15.72 - $23.39          |  | 779,323           |  | 4.1                             |  | $                            | 19.96 |                          | $ | 26,153,857                  |  | 585,045                      |  | $                       | 19.90 |  | $ | 19,670,721
|$23.40 - $24.99          |  | 452,448           |  | 5.9                             |  | $                            | 23.97 |                          | $ | 13,368,828                  |  | 49,550                       |  | $                       | 23.77 |  | $ | 1,474,112 
|$25.00 - $53.52          |  | 877,664           |  | 6.3                             |  | $                            | 34.22 |                          | $ | 16,935,462                  |  | 29,125                       |  | $                       | 27.16 |  | $ | 767,635   
|$53.53 - $57.24          |  | 40,500            |  | 6.9                             |  | $                            | 56.35 |                          | $ |                            |  |                             |  | $                       |      |  | $ |          
|                         |  |                   |  |                                 |  |                              |       |                          |   |                             |  |                              |  |                         |       |  |   |           
|                         |  | 4,447,453         |  | 4.8                             |  | $                            | 20.36 |                          | $ | 147,575,227                 |  | 2,297,346                    |  | $                       | 15.32 |  | $ | 87,768,757
|                         |  |                   |  |                                 |  |                              |       |                          |   |                             |  |                              |  |                         |       |  |   |           

The aggregate intrinsic value in the preceding table represents the total intrinsic value, based on Varian
Semiconductors closing stock price of $53.52 as of September 28, 2007, that would have been received by the option holders had all option holders exercised their options as of that date. The total number of in-the-money options
exercisable as of September 28, 2007 was 2.3 million.

Employee Stock Purchase Plan

Employees of Varian Semiconductor who elect to participate in the ESPP are able to purchase common stock at the lower of 85% of the fair market value of Varian
Semiconductors common stock on the first or last day of the applicable offering period. Typically, each offering period lasts six months. The ESPP permits an enrolled employee to have withheld from his or her salary an amount between 1% and
10% of compensation, which is used to purchase shares of common stock and is intended to meet the requirements of Section 423 of the Internal Revenue Code. The first offering period commenced on July 1, 2002. As of September 28, 2007,
there were a total of 1,046,541 shares of common stock reserved for issuance under the ESPP. The fair value of shares issued under the ESPP was estimated on the commencement date of each offering period using the Black-Scholes option-pricing model
with the following assumptions:



|                                       |  |                    |      |   |                    |   |      |  
|-------------------------------------- |  | ------------------ | ---- | - | ------------------ | - | ---- | -
|                                       |  | Fiscal Year Ended  |     
|                                       |  | September 28, 2007 |      |   | September 29, 2006 |  
|Expected life (in years)               |  |                    | 0.5  |   |                    |   | 0.5  |  
|Expected volatility                    |  |                    | 44.6 | % |                    |   | 37.9 | %
|Risk-free interest rate                |  |                    | 5.1  | % |                    |   | 4.8  | %
|Expected dividend yield                |  |                    | 0.0  | % |                    |   | 0.0  | %
|Weighted-average grant date fair value |  | $                  | 9.69 |   |                    | $ | 5.56 |  

Note 5.    Cash, Cash Equivalents and Investments

Varian Semiconductor considers currency on hand, demand deposits, and all highly liquid investments with a remaining maturity of three months or less at the date of
purchase to be cash and cash equivalents. The carrying amounts of cash and cash equivalents approximate estimated fair value because of the short-term maturities of those financial instruments. Cash equivalents at September 28, 2007 and
September 29, 2006 were $84.5 million and $234.1 million, respectively.



F-18



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##### Table of Contents

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Investments consist primarily of U.S. Treasury, government agency and corporate bonds and certificates of deposit
with ratings AA or better. All investments have been classified as available-for-sale and are carried at fair market value due to the short period of time to maturity and the relative risk of the investments. As of September 28, 2007, Varian
Semiconductor had the ability but no longer the intent to liquidate certain investments in order to meet its liquidity needs for the next 12 months. Accordingly, those investments with contractual maturities greater than one year from the date of
acquisition have been classified as long-term.

As of September 28, 2007, a net unrealized gain on investments of $58 thousand was recorded as
accumulated other comprehensive gain. As of September 29, 2006, a net unrealized loss on investments of $1.5 million was recorded as accumulated other comprehensive loss.

Varian Semiconductor has determined that the unrealized losses at September 28, 2007, as aggregated by security type in the table below, are temporary. This assessment is based upon the nature of the investments
and the causes of the unrealized losses. The investments are in corporate and US Treasury and agency bonds, as stated in the investment policy. The unrealized losses relate to the decline in fair value due to differences between the securities
interest rates at acquisition and current interest rates.



|                                    |  |                                         |        |                       |                                       |     |                     |       |                       |        |  |                     |      |                       |  |   |         |  |   |      |  
|----------------------------------- |  | --------------------------------------- | ------ | --------------------- | ------------------------------------- | --- | ------------------- | ----- | --------------------- | ------ |  | ------------------- | ---- | --------------------- |  | - | ------- |  | - | ---- | -
|                                    |  | In Loss Position for Lessthan 12 Months |        |                       | In Loss Position for 12Months or More |     |                     | Total |                      
|                                    |  | EstimatedFair Value                     |        | GrossUnrealizedLosses |                                       |     | EstimatedFair Value |       | GrossUnrealizedLosses |        |  | EstimatedFair Value |      | GrossUnrealizedLosses | 
|                                    |  | (Amounts in thousands)                  |       
|U.S. Treasury and agency securities |  | $                                       | 6,431  |                       | $                                     | (6  | )                   |       | $                     | 16,598 |  | $                   | (124 | )                     |  | $ | 23,029  |  | $ | (130 | )
|Corporate bonds                     |  |                                         | 35,252 |                       |                                       | (77 | )                   |       |                       | 42,476 |  |                     | (268 | )                     |  |   | 77,728  |  |   | (345 | )
|                                    |  |                                         |        |                       |                                       |     |                     |       |                       |        |  |                     |      |                       |  |   |         |  |   |      |  
|                                    |  | $                                       | 41,683 |                       | $                                     | (83 | )                   |       | $                     | 59,074 |  | $                   | (392 | )                     |  | $ | 100,757 |  | $ | (475 | )
|                                    |  |                                         |        |                       |                                       |     |                     |       |                       |        |  |                     |      |                       |  |   |         |  |   |      |  

Investments by security type at September 28, 2007 were as follows:



|                                    |  |                        |         |                          |   |                          |  |   |                     |   |  |   |        
|----------------------------------- |  | ---------------------- | ------- | ------------------------ | - | ------------------------ |  | - | ------------------- | - |  | - | -------
|                                    |  | Cost                   |         | Gross  Unrealized  Gains |   | Gross  Unealized  Losses |  |   | EstimatedFair Value
|                                    |  | (Amounts in thousands)
|Bank certificates of deposit        |  | $                      | 10,450  |                          | $ |                         |  | $ |                    |   |  | $ | 10,450 
|U.S. Treasury and agency securities |  |                        | 50,472  |                          |   | 197                      |  |   | (130                | ) |  |   | 50,539 
|Corporate bonds                     |  |                        | 115,797 |                          |   | 162                      |  |   | (345                | ) |  |   | 115,614
|Municipal bonds                     |  |                        | 5,000   |                          |   |                         |  |   |                    |   |  |   | 5,000  
|Other                               |  |                        | 2,760   |                          |   | 174                      |  |   |                    |   |  |   | 2,934  
|                                    |  |                        |         |                          |   |                          |  |   |                     |   |  |   |        
|                                    |  | $                      | 184,479 |                          | $ | 533                      |  | $ | (475                | ) |  | $ | 184,537
|                                    |  |                        |         |                          |   |                          |  |   |                     |   |  |   |        

Investments by security type at September 29, 2006 were as follows:



|                                    |  |      |         |                          |   |                           |  |   |                     |   |  |   |        
|----------------------------------- |  | ---- | ------- | ------------------------ | - | ------------------------- |  | - | ------------------- | - |  | - | -------
|                                    |  | Cost |         | Gross  Unrealized  Gains |   | Gross  Unrealized  Losses |  |   | EstimatedFair Value
|                                    |  |      |         | (amounts in thousands)   |   |                           | 
|Bank certificates of deposit        |  | $    | 24,319  |                          | $ |                          |  | $ |                    |   |  | $ | 24,319 
|U.S. Treasury and agency securities |  |      | 110,326 |                          |   | 34                        |  |   | (856                | ) |  |   | 109,504
|Corporate bonds                     |  |      | 157,440 |                          |   | 120                       |  |   | (796                | ) |  |   | 156,764
|                                    |  |      |         |                          |   |                           |  |   |                     |   |  |   |        
|                                    |  | $    | 292,085 |                          | $ | 154                       |  | $ | (1,652              | ) |  | $ | 290,587
|                                    |  |      |         |                          |   |                           |  |   |                     |   |  |   |        



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##### Table of Contents

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The investment maturities are as follows:



|                                    |  |                        |         |                   |   |        
|----------------------------------- |  | ---------------------- | ------- | ----------------- | - | -------
|                                    |  | Estimated Fair Value  
|                                    |  | September 28,2007      |         | September 29,2006
|                                    |  | (amounts in thousands)
|Maturing within 1 year              |  | $                      | 88,384  |                   | $ | 154,810
|Maturing between 1 year and 5 years |  |                        | 94,525  |                   |   | 135,777
|Maturing over 5 years               |  |                        | 1,628   |                   |   |       
|                                    |  |                        |         |                   |   |        
|Total                               |  | $                      | 184,537 |                   | $ | 290,587
|                                    |  |                        |         |                   |   |        

Note 6.    Accounts Receivable

Accounts receivable consist of the following:



|                                |  |                        |         |   |                   |   |         |  
|------------------------------- |  | ---------------------- | ------- | - | ----------------- | - | ------- | -
|                                |  | September 29,2007      |         |   | September 29,2006 |  
|                                |  | (amounts in thousands) |        
|Accounts receivable             |  | $                      | 190,133 |   |                   | $ | 126,900 |  
|Allowance for doubtful accounts |  |                        | (560    | ) |                   |   | (908    | )
|                                |  |                        |         |   |                   |   |         |  
|Accounts receivable, net        |  | $                      | 189,573 |   |                   | $ | 125,992 |  
|                                |  |                        |         |   |                   |   |         |  

Note 7.    Inventories

The components of inventories are as follows:



|                        |  |                        |         |                   |   |        
|----------------------- |  | ---------------------- | ------- | ----------------- | - | -------
|                        |  | September 28,2007      |         | September 29,2006
|                        |  | (amounts in thousands)
|Raw materials and parts |  | $                      | 81,330  |                   | $ | 65,599 
|Work in process         |  |                        | 41,539  |                   |   | 36,224 
|Finished goods          |  |                        | 47,424  |                   |   | 32,106 
|                        |  |                        |         |                   |   |        
|Total inventories       |  | $                      | 170,293 |                   | $ | 133,929
|                        |  |                        |         |                   |   |        

During fiscal year 2006, gross margin and pre-tax income was favorably impacted by $1.7 million due to the sale of
certain inventory for which the carrying value had been reduced in previous periods.

Note 8.    Property, Plant and Equipment

The components of property, plant, and equipment are as follows:



|                                     |  |            |  |                        |          |   |                   |   |          |  
|------------------------------------ |  | ---------- |  | ---------------------- | -------- | - | ----------------- | - | -------- | -
|                                     |  | UsefulLife |  | September 28,2007      |          |   | September 29,2006 |  
|                                     |  | (in years) |  | (amounts in thousands) |         
|Land and land improvement            |  |           |  | $                      | 5,918    |   |                   | $ | 5,867    |  
|Buildings and leasehold improvements |  | 7-20       |  |                        | 54,958   |   |                   |   | 52,206   |  
|Machinery and equipment              |  | 2-7        |  |                        | 125,783  |   |                   |   | 102,070  |  
|Construction in progress             |  |           |  |                        | 2,578    |   |                   |   | 5,381    |  
|                                     |  |            |  |                        |          |   |                   |   |          |  
|                                     |  |            |  |                        | 189,237  |   |                   |   | 165,524  |  
|Accumulated depreciation             |  |            |  |                        | (115,257 | ) |                   |   | (103,275 | )
|                                     |  |            |  |                        |          |   |                   |   |          |  
|Property, plant and equipment, net   |  |            |  | $                      | 73,980   |   |                   | $ | 62,249   |  
|                                     |  |            |  |                        |          |   |                   |   |          |  



F-20



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##### Table of Contents

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Depreciation expense was $14.4 million, $13.0 million and $12.8 million for fiscal years 2007, 2006 and 2005,
respectively. There were no capital leases as of September 28, 2007 or September 29, 2006.

Note 9.    Notes Payable

As of September 28, 2007 and September 29, 2006, Varian Semiconductors subsidiary in Japan had two credit facilities available with two
different financial institutions. At September 28, 2007, maximum available borrowings under each of the two facilities were as follows: Yen 1,000,000,000 ($8.7 million) and Yen 500,000,000 ($4.3 million). The loans are not collateralized and
contain no restrictive covenants, although each loan is guaranteed by Varian Semiconductor. The interest rate for the Yen 1,000,000,000 credit facility is based on the short-term prime rate (approximately 1.875% at September 28, 2007 and 1.675%
at September 29, 2006). The interest rate for the Yen 500,000,000 facility is the 3-month Tokyo interbank offered rate (TIBOR) + 1.00% (approximately 1.84% at September 28, 2007). There were no outstanding borrowings under either facility
at September 28, 2007 or September 29, 2006.

Varian Semiconductor also has borrowing capacity in Europe and Taiwan. Varian Semiconductors
subsidiary in Europe maintains a credit facility that includes overdraft protection of Euro 2.5 million which at September 28, 2007 translated to $3.5 million. Interest accrues at the Euro base rate + 1.5% and was approximately 6.55% at
September 28, 2007. Varian Semiconductors subsidiary in Taiwan maintains a credit facility of $1.0 million. Any outstanding borrowings under the Taiwan facility accrue interest at the local base rate + 2.0% plus taxes, which was
approximately 7.54% at September 28, 2007, and are payable on demand. Neither credit facility is collateralized nor do they contain any restrictive covenants, although each facility is guaranteed by Varian Semiconductor. There were no
outstanding borrowings as of September 28, 2007 or September 29, 2006 under either facility.

Note 10.    Accrued Expenses

The components of accrued expenses are as follows:



|                            |  |                        |        |                   |   |       
|--------------------------- |  | ---------------------- | ------ | ----------------- | - | ------
|                            |  | September 28,2007      |        | September 29,2006
|                            |  | (amounts in thousands)
|Accrued incentives          |  | $                      | 18,103 |                   | $ | 11,887
|Accrued employee benefits   |  |                        | 11,842 |                   |   | 10,029
|Accrued payroll             |  |                        | 5,356  |                   |   | 5,408 
|Accrued retirement benefits |  |                        | 7,149  |                   |   | 7,494 
|Other                       |  |                        | 8,028  |                   |   | 6,838 
|                            |  |                        |        |                   |   |       
|Total accrued expenses      |  | $                      | 50,478 |                   | $ | 41,656
|                            |  |                        |        |                   |   |       

Note 11.    Restructurings

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



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



During fiscal year 2005, Varian Semiconductor recognized approximately $0.9 million in restructuring costs. The
restructuring costs related to reductions in headcount and facilities in Europe. The restructuring reserve balance of $0.2 million as of September 30, 2005, was paid during fiscal year 2006.

Varian Semiconductor recognized no additional restructuring costs during fiscal year 2007 or 2006.

Note 12.    Product Warranties

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

Product warranty
activity for fiscal years 2006 and 2007 was as follows:



|                                                 |  |                        |         |  
|------------------------------------------------ |  | ---------------------- | ------- | -
|                                                 |  | Liability              |        
|                                                 |  | (amounts in thousands) |        
|Balance as of October 1, 2005                    |  | $                      | 8,585   |  
|Accruals for warranties issued during the period |  |                        | 12,938  |  
|Decrease to pre-existing warranties              |  |                        | (418    | )
|Settlements made during the period               |  |                        | (11,292 | )
|                                                 |  |                        |         |  
|Balance as of September 30, 2006                 |  | $                      | 9,813   |  
|Accruals for warranties issued during the period |  |                        | 15,883  |  
|Decrease to pre-existing warranties              |  |                        | (921    | )
|Settlements made during the period               |  |                        | (11,796 | )
|                                                 |  |                        |         |  
|Balance as of September 29, 2007                 |  | $                      | 12,979  |  
|                                                 |  |                        |         |  
|                                                 | 
|Current portion of product warranty              |  |                        | 12,183  |  
|Long-term portion of product warranty            |  |                        | 796     |  
|                                                 |  |                        |         |  
|Total product warranty                           |  | $                      | 12,979  |  
|                                                 |  |                        |         |  



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 13.    Deferred Revenue

The components of deferred revenue are as follows:



|                                                            |  |                        |        |                   |   |       
|----------------------------------------------------------- |  | ---------------------- | ------ | ----------------- | - | ------
|                                                            |  | September 28,2007      |        | September 29,2006
|                                                            |  | (amounts in thousands)
|Fully deferred systems, installation and acceptance revenue |  | $                      | 40,415 |                   | $ | 31,270
|Extended warranties                                         |  |                        | 15,007 |                   |   | 11,351
|Maintenance and service contracts                           |  |                        | 7,341  |                   |   | 6,092 
|Other deferred revenue                                      |  |                        | 635    |                   |   | 5,880 
|                                                            |  |                        |        |                   |   |       
|Total deferred revenue                                      |  | $                      | 63,398 |                   | $ | 54,593
|                                                            |  |                        |        |                   |   |       
|                                                            |  |                       
|Current portion of deferred revenue                         |  | $                      | 54,742 |                   | $ | 49,840
|Long-term portion of deferred revenue                       |  |                        | 8,656  |                   |   | 4,753 
|                                                            |  |                        |        |                   |   |       
|Total deferred revenue                                      |  | $                      | 63,398 |                   | $ | 54,593
|                                                            |  |                        |        |                   |   |       

Note 14.    Long-Term Accrued Expenses and Other Long-Term Liabilities

$53.9 million in long-term accrued expenses and other long-term liabilities at September 28, 2007 are comprised of accruals of $28.5 million for long-term tax
liabilities In addition, post-employment liabilities, environmental and other costs not expected to be expended within the next year are included in long-term accrued expenses and other long-term liabilities. The current portion is recorded within
accrued expenses. $17.3 million in long-term accrued expenses and other long-term liabilities at September 29, 2006 are comprised of post-employment liabilities, environmental and other costs.

Note 15.    Long-term Debt

In February 2003,
Varian Semiconductor purchased its previously leased facility located in Newburyport, Massachusetts. The purchase price consisted of cash payments totaling $3.4 million, the assumption of the sellers outstanding loan of $5.1 million and the
transfer of other prepaid assets of $0.8 million. The loan has a fixed interest rate of 9.05% with monthly payments of principal and interest until the loan matures in January 2013. The loan may be prepaid in full, but not in part, at any time after
November 5, 2006. Prepayment would require Varian Semiconductor to pay a prepayment penalty equal to the greater of two percent of the outstanding principal balance or the excess of the present value of all future loan payments over the
outstanding principal balance of the loan. The $3.3 million carrying amount of the loan had an estimated fair value of $3.5 million at September 28, 2007. The fair value of the loan was estimated using a discounted cash flow analysis. The
interest rate was estimated based on current market conditions and Varian Semiconductors financial condition at September 28, 2007.



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The loan payments are as follows:



|                                   |  |                        |       |  
|---------------------------------- |  | ---------------------- | ----- | -
|Fiscal Year                        |  | Annual LoanPayments    |      
|                                   |  | (amounts in thousands) |      
|2008                               |  | $                      | 785   |  
|2009                               |  |                        | 785   |  
|2010                               |  |                        | 785   |  
|2011                               |  |                        | 785   |  
|2012                               |  |                        | 785   |  
|Thereafter                         |  |                        | 196   |  
|                                   |  |                        |       |  
|Total loan payments                |  |                        | 4,121 |  
|Less: Amount representing interest |  |                        | (850  | )
|                                   |  |                        |       |  
|Total principal                    |  |                        | 3,271 |  
|Current portion of long-term debt  |  |                        | (510  | )
|                                   |  |                        |       |  
|Long-term debt                     |  | $                      | 2,761 |  
|                                   |  |                        |       |  

As of September 28, 2007, Varian Semiconductor also had a standby letter of credit outstanding for $0.9
million as a guarantee for the debt on this facility.

Note 16.    Forward Exchange Contracts

As a multinational company, Varian Semiconductor faces exposure to adverse movements in foreign currency exchange rates. This exposure may change over time as Varian
Semiconductors business practices evolve and could impact Varian Semiconductors financial results. However, based on the results of an annual test, a 10% change in the exchange rate of the U.S. dollar against other major currencies would
not have a material effect on Varian Semiconductors results of operations. Historically, Varian Semiconductors primary exposures have resulted from non-U.S. dollar-denominated sales and purchases in Asia Pacific and Europe. Varian
Semiconductor does not enter into forward exchange contracts for trading purposes. Varian Semiconductors forward exchange contracts generally range from one to nine months in original maturity. No forward exchange contract exceeds one year in
original maturity.

Varian Semiconductor hedges currency exposures that are associated with certain of its assets and liabilities denominated in various
non-U.S. dollar currencies. The aggregate exchange losses for the fiscal years ended 2007, 2006 and 2005 were $311,000, $146,000 and $46,000, respectively.

Forward exchange contracts outstanding are summarized as follows (dollars in thousands):



|                                          |  |                    |       |                    |        |           |   |               |  |              |       |           |        |  |   |      
|----------------------------------------- |  | ------------------ | ----- | ------------------ | ------ | --------- | - | ------------- |  | ------------ | ----- | --------- | ------ |  | - | -----
|                                          |  | September 28, 2007 |       | September 29, 2006
|                                          |  | NotionalValue      |       | ContractRate       |        | FairValue |   | NotionalValue |  | ContractRate |       | FairValue
|Foreign currency purchase contracts:      |  |                    |       |                    |        |           |   |               |  |              |       |           |        |  |   |      
|Singapore Dollar                          |  | $                  | 4,609 |                    | 1.52   |           | $ | 4,678         |  | $            | 1,239 |           | 1.57   |  | $ | 1,224
|New Taiwan Dollar                         |  |                    | 2,093 |                    | 32.93  |           |   | 2,100         |  |              | 2,227 |           | 32.83  |  |   | 2,215
|Korean Won                                |  |                    | 218   |                    | 913.35 |           |   | 216           |  |              | 2,251 |           | 947.68 |  |   | 2,254
|Japanese Yen                              |  |                    | 557   |                    | 115.21 |           |   | 556           |  |              | 4,133 |           | 117.60 |  |   | 4,132
|Israeli Shekel                            |  |                    |      |                    |       |           |   |              |  |              | 51    |           | 4.30   |  |   | 51   
|                                          |  |                    |       |                    |        |           |   |               |  |              |       |           |        |  |   |      
|Total foreign currency purchase contracts |  | $                  | 7,477 |                    |        |           | $ | 7,550         |  | $            | 9,901 |           |        |  | $ | 9,876
|                                          |  |                    |       |                    |        |           |   |               |  |              |       |           |        |  |   |      



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                      |  |                    |        |                    |        |           |   |               |  |              |        |           |        |  |   |       
|------------------------------------- |  | ------------------ | ------ | ------------------ | ------ | --------- | - | ------------- |  | ------------ | ------ | --------- | ------ |  | - | ------
|                                      |  | September 28, 2007 |        | September 29, 2006
|                                      |  | NotionalValue      |        | ContractRate       |        | FairValue |   | NotionalValue |  | ContractRate |        | FairValue
|Foreign currency sell contracts:      |  |                    |        |                    |        |           |   |               |  |              |        |           |        |  |   |       
|Japanese Yen                          |  | $                  | 24,186 |                    | 114.91 |           | $ | 24,052        |  | $            | 10,265 |           | 117.72 |  | $ | 10,272
|Korean Won                            |  |                    | 5,072  |                    | 939.70 |           |   | 5,177         |  |              | 3,232  |           | 961.90 |  |   | 3,286 
|Euro                                  |  |                    | 1,077  |                    | 0.73   |           |   | 1,112         |  |              | 205    |           | 0.78   |  |   | 203   
|Israeli Shekel                        |  |                    | 311    |                    | 4.13   |           |   | 319           |  |              | 203    |           | 4.37   |  |   | 206   
|Singapore Dollar                      |  |                    | 169    |                    | 1.49   |           |   | 168           |  |              |       |           |       |  |   |      
|New Taiwan Dollar                     |  |                    |       |                    |       |           |   |              |  |              | 61     |           | 32.91  |  |   | 61    
|British Pound                         |  |                    |       |                    |       |           |   |              |  |              | 78     |           | 0.53   |  |   | 77    
|                                      |  |                    |        |                    |        |           |   |               |  |              |        |           |        |  |   |       
|Total foreign currency sell contracts |  | $                  | 30,815 |                    |        |           | $ | 30,828        |  | $            | 14,044 |           |        |  | $ | 14,105
|                                      |  |                    |        |                    |        |           |   |               |  |              |        |           |        |  |   |       
|Total contracts                       |  | $                  | 38,292 |                    |        |           | $ | 38,378        |  | $            | 23,945 |           |        |  | $ | 23,981
|                                      |  |                    |        |                    |        |           |   |               |  |              |        |           |        |  |   |       

Varian Semiconductor uses derivative instruments to protect its foreign operations from fluctuations in earnings
and cash flows caused by volatility in currency exchange rates. Varian Semiconductor hedges its current exposures and a portion of its anticipated foreign currency exposures with hedging instruments having terms of up to twelve months.

Varian Semiconductors international sales, except for those in Japan, are primarily denominated in the U.S. dollar. For foreign currency-denominated sales,
however, the volatility of the foreign currency markets represents risk to Varian Semiconductor. Upon forecasting the exposure, Varian Semiconductor enters into hedges with forward sales contracts whose critical terms are designed to match those of
the underlying exposure. These hedges are evaluated for effectiveness at least quarterly using the change in value of the forward contracts to the change in value of the underlying transaction, with the effective portion of the hedge accumulated in
other comprehensive income. Any measured ineffectiveness is included immediately in other income and expense in the consolidated statements of operations. There was an immaterial amount of ineffectiveness recognized during the fiscal years ended
September 28, 2007 and September 29, 2006. There were four forward foreign exchange sell contracts designated as hedges of anticipated product sales in Japanese Yen outstanding at September 28, 2007 totaling an equivalent of $12.6
million. In addition, there were two forward foreign exchange purchase contracts totaling an equivalent of $6.5 million offsetting two of the four forward sell contracts. At September 29, 2006, there were seven forward foreign exchange sell
contracts outstanding designated as hedges of anticipated product sales in Japanese Yen totaling an equivalent of $35.5 million. In addition, there were three forward foreign exchange purchase contracts totaling an equivalent of $11.7 million
offsetting three of the seven forward sell contracts.

There were approximately $0.1 million net unrealized losses on these forward Yen contracts as of
September 28, 2007. There were approximately $0.7 million in net unrealized gains on these forward Yen contracts as of September 29, 2006. The fair value of forward exchange contracts generally reflects the estimated amounts that Varian
Semiconductor would receive or pay to terminate the contracts at the reporting date. The notional amounts of forward exchange contracts are not a measure of Varian Semiconductors exposure.



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 17.    Income Taxes

Provision for income taxes:



|                           |  |                        |         |   |                   |   |        |                   |  |   |        |  
|-------------------------- |  | ---------------------- | ------- | - | ----------------- | - | ------ | ----------------- |  | - | ------ | -
|                           |  | Fiscal Year Ended      |        
|                           |  | September 28,2007      |         |   | September 29,2006 |   |        | September 30,2005 | 
|                           |  | (amounts in thousands) |        
|Current                    |  |                        |         |   |                   |   |        |                   |  |   |        |  
|U.S. Federal               |  | $                      | 117,897 |   |                   | $ | 22,234 |                   |  | $ | 27,875 |  
|State                      |  |                        | 2,586   |   |                   |   | 753    |                   |  |   | 789    |  
|Foreign                    |  |                        | 10,156  |   |                   |   | 10,106 |                   |  |   | 6,000  |  
|                           |  |                        |         |   |                   |   |        |                   |  |   |        |  
|Total current              |  |                        | 130,639 |   |                   |   | 33,093 |                   |  |   | 34,664 |  
|                           |  |                        |         |   |                   |   |        |                   |  |   |        |  
|Deferred                   |  |                        |         |   |                   |   |        |                   |  |   |        |  
|U.S. Federal               |  |                        | 5,749   |   |                   |   | (2,473 | )                 |  |   | (1,956 | )
|State                      |  |                        | 164     |   |                   |   | (71    | )                 |  |   | (56    | )
|Foreign                    |  |                        | (2,091  | ) |                   |   | 62     |                   |  |   | (300   | )
|                           |  |                        |         |   |                   |   |        |                   |  |   |        |  
|Total deferred             |  |                        | 3,822   |   |                   |   | (2,482 | )                 |  |   | (2,312 | )
|                           |  |                        |         |   |                   |   |        |                   |  |   |        |  
|Provision for income taxes |  | $                      | 134,461 |   |                   | $ | 30,611 |                   |  | $ | 32,352 |  
|                           |  |                        |         |   |                   |   |        |                   |  |   |        |  

Total pre-tax income consists of the following:



|        |  |                        |         |   |                   |   |                   |  |   |        
|------- |  | ---------------------- | ------- | - | ----------------- | - | ----------------- |  | - | -------
|        |  | Fiscal Year Ended     
|        |  | September 28,2007      |         |   | September 29,2006 |   | September 30,2005
|        |  | (amounts in thousands)
|U.S.    |  | $                      | 298,706 |   |                   | $ | 91,870            |  | $ | 90,552 
|Foreign |  |                        | (22,038 | ) |                   |   | 33,425            |  |   | 13,810 
|        |  |                        |         |   |                   |   |                   |  |   |        
|Total   |  | $                      | 276,668 |   |                   | $ | 125,295           |  | $ | 104,362
|        |  |                        |         |   |                   |   |                   |  |   |        

In fiscal 2007, Varian Semiconductor implemented a plan to realign the legal entities within its worldwide
affiliated group. The objective of this realignment was to make its legal structure more consistent with the geographic mix of its customers and suppliers. To effect this realignment, Varian Semiconductor established operations in Switzerland which
will provide operational and financial services to all of its international locations. A significant element of the new structure involves the sharing of certain expenses related to the development of intangible property. The geographic breakout of
pre-tax income reflects the changes made to global cost allocations and additional intercompany expenses incurred by Varian Semiconductors foreign subsidiaries resulting from the realignment. The initial impact of this realignment caused
Varian Semiconductors effective tax rate to increase by approximately 15.4% in the fiscal year 2007.



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The effective tax rate on income before taxes differs from the U.S. federal statutory tax rate as a result of the
following:



|                                                            |  |                   |   |  |                   |   |  |                   |  
|----------------------------------------------------------- |  | ----------------- | - |  | ----------------- | - |  | ----------------- | -
|                                                            |  | Fiscal Year Ended |  
|                                                            |  | September 28,2007 |   |  | September 29,2006 |   |  | September 30,2005 |  
|U.S. Federal statutory rate                                 |  | 35.0              | % |  | 35.0              | % |  | 35.0              | %
|State taxes, net                                            |  | 0.8               |   |  | 0.4               |   |  | 0.5               |  
|Tax benefit resulting from IRS examination                  |  |                  |   |  | (7.2              | ) |  |                  |  
|Domestic manufacturing/Export sales incentive               |  | (0.8              | ) |  | (3.0              | ) |  | (2.5              | )
|Research and development tax credits                        |  | (1.8              | ) |  | (0.5              | ) |  | (2.5              | )
|Foreign tax differential and net U.S. tax on foreign income |  | (0.7              | ) |  | (1.1              | ) |  | (0.2              | )
|Tax impact of global realignment, net                       |  | 15.4              |   |  |                  |   |  |                  |  
|Other                                                       |  | 0.7               |   |  | 0.8               |   |  | 0.7               |  
|                                                            |  |                   |   |  |                   |   |  |                   |  
|Effective tax rate                                          |  | 48.6              | % |  | 24.4              | % |  | 31.0              | %
|                                                            |  |                   |   |  |                   |   |  |                   |  

Varian Semiconductor has not provided for possible U.S. taxes on the undistributed income of foreign subsidiaries,
as it is Varian Semiconductors policy to indefinitely reinvest these earnings in non-U.S. operations. However, Varian Semiconductor may decide to repatriate a portion of these earnings to the extent that it does not incur an additional U.S.
tax liability. At September 28, 2007, September 29, 2006 and September 30, 2005, such undistributed foreign income was approximately $31.4 million, $30.6 million and $20.7 million, respectively. Quantification of the deferred tax
liability, if any, associated with indefinitely reinvested earnings is not practicable.

The components of the deferred tax assets and liabilities were as
follows:



|                                        |  |                        |         |   |                   |   |        |  
|--------------------------------------- |  | ---------------------- | ------- | - | ----------------- | - | ------ | -
|                                        |  | September 28,2007      |         |   | September 29,2006 |  
|                                        |  | (amounts in thousands) |        
|Deferred tax assets:                    |  |                        |         |   |                   |   |        |  
|Inventory                               |  | $                      | 10,539  |   |                   | $ | 16,684 |  
|Product warranty                        |  |                        | 2,886   |   |                   |   | 2,874  |  
|Deferred revenue                        |  |                        | 4,761   |   |                   |   | 3,561  |  
|Accrued vacation and other compensation |  |                        | 4,196   |   |                   |   | 4,561  |  
|Allowance for doubtful accounts         |  |                        | 161     |   |                   |   | 307    |  
|State tax credit carryforwards          |  |                        | 12,089  |   |                   |   | 9,050  |  
|Stock compensation                      |  |                        | 2,211   |   |                   |   | 3,533  |  
|Net operating loss                      |  |                        | 2,307   |   |                   |   |       |  
|Other                                   |  |                        | 846     |   |                   |   | 72     |  
|                                        |  |                        |         |   |                   |   |        |  
|Total deferred tax assets               |  |                        | 39,996  |   |                   |   | 40,642 |  
|Less: Valuation allowance               |  |                        | (12,089 | ) |                   |   | (9,050 | )
|                                        |  |                        |         |   |                   |   |        |  
|Total net deferred tax assets           |  |                        | 27,907  |   |                   |   | 31,592 |  
|                                        |  |                       
|Deferred tax liabilities:               |  |                        |         |   |                   |   |        |  
|Property, plant and equipment           |  |                        | (2,681  | ) |                   |   | (2,837 | )
|Other                                   |  |                        | (1,177  | ) |                   |   | (885   | )
|                                        |  |                        |         |   |                   |   |        |  
|Total deferred tax liabilities          |  |                        | (3,858  | ) |                   |   | (3,722 | )
|                                        |  |                        |         |   |                   |   |        |  
|Net deferred tax asset                  |  | $                      | 24,049  |   |                   | $ | 27,870 |  
|                                        |  |                        |         |   |                   |   |        |  



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between
the tax bases of assets and liabilities and their reported amounts. Deferred tax assets include state tax credit carryforwards of $18.6 million, $13.9 million and $13.2 million at September 28, 2007, September 29, 2006, and
September 30, 2005, respectively. These credits begin to expire in fiscal year 2009.

SFAS No. 109, Accounting for Income Taxes,
requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that a portion of the deferred tax asset will not be realized. On a quarterly basis, Varian Semiconductor evaluates both the positive and negative
evidence bearing upon the realizability of its deferred tax assets. Varian Semiconductor considers future taxable income, ongoing prudent and feasible tax planning strategies, and the ability to utilize tax losses and credits in assessing the need
for a valuation allowance. A valuation allowance related to certain state tax credit carryforwards has been recorded. Management has concluded that it is more likely than not that these credits will not be utilized, since historically the annual
amount of state credits generated exceeds the amount of credits that can be used. Should Varian Semiconductor determine that it is not able to realize all or part of its other deferred tax assets in the future, a valuation allowance would be
required resulting in an expense recorded within the provision for income taxes in the Statement of Income in the period in which such determination was made. It is reasonably possible that the amount of the deferred tax asset considered realizable
could be reduced in the near term if future taxable income is reduced.

In the normal course of business, Varian Semiconductor and its subsidiaries are
examined by various tax authorities, including the U.S. Internal Revenue Service (IRS). The IRS conducted an examination for the tax years 1999 through 2003 as part of its routine examinations of Varian Semiconductors income tax
returns. Fieldwork for the examination was completed in the fourth quarter of fiscal year 2005 and submitted to the Congressional Joint Committee on Taxation (Joint Committee) for final approval. Varian Semiconductor was notified of
Joint Committee approval in the first quarter of fiscal year 2006. In the first quarter of fiscal year 2006, Varian Semiconductor recognized a discrete income tax benefit of $9.0 million related to the favorable conclusion of this multi-year
examination by the IRS. Additionally, Varian Semiconductor reduced other current assets by $11.2 million upon the receipt of an $11.2 million refund from the IRS. Included in interest income for fiscal year 2006 is $1.6 million of interest income
related to the final resolution of the audit. The IRS is currently examining certain refund claims filed by Varian Semiconductor for fiscal year 2000 through fiscal year 2004. The favorable resolution of these claims could result in a benefit to the
financial statements.

In fiscal years 2007, 2006 and 2005, tax deductions associated with certain exercises of stock options, activity related to Varian
Semiconductors ESPP and vesting of certain restricted stock shares resulted in a tax benefit recorded to capital in excess of par value of $22.5 million, $10.8 million and $9.9 million, respectively. Varian Semiconductor has elected to account
for the indirect benefits of stock-based compensation on the research tax credit, extraterritorial income deduction, and qualified production deduction through the income statement rather than through paid-in-capital.

Note 18.    Computation of Net Income Per Share

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



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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



|                                             |  |                                               |         |      |   |        |  |   |       
|-------------------------------------------- |  | --------------------------------------------- | ------- | ---- | - | ------ |  | - | ------
|                                             |  | Fiscal Year                                  
|                                             |  | 2007                                          |         | 2006 |   | 2005  
|                                             |  | (amounts in thousands, except per share data)
|Numerator                                    |  |                                               |         |      |   |        |  |   |       
|Net Income                                   |  | $                                             | 142,207 |      | $ | 94,684 |  | $ | 72,010
|                                             |  |                                               |         |      |   |        |  |   |       
|                                             |  |                                               |        
|Denominator                                  |  |                                               |         |      |   |        |  |   |       
|Denominator for basic income per share:      |  |                                               |         |      |   |        |  |   |       
|Weighted average shares outstanding          |  |                                               | 80,151  |      |   | 84,605 |  |   | 82,830
|Effect of dilutive securities:               |  |                                               |         |      |   |        |  |   |       
|Stock options and restricted common stock    |  |                                               | 2,069   |      |   | 1,185  |  |   | 1,764 
|                                             |  |                                               |         |      |   |        |  |   |       
|Denominator for diluted net income per share |  |                                               | 82,220  |      |   | 85,790 |  |   | 84,594
|                                             |  |                                               |         |      |   |        |  |   |       
|Net income per sharebasic                   |  | $                                             | 1.77    |      | $ | 1.12   |  | $ | 0.87  
|Net income per sharediluted                 |  | $                                             | 1.73    |      | $ | 1.10   |  | $ | 0.85  

Share amounts used to compute net income per share prior to May 30, 2007 have been adjusted to reflect the
three-for-two stock split effected on that day. Please refer to Note 3.

For fiscal years 2007, 2006 and 2005, 0.3 million, 2.0 million and
2.1 million potentially dilutive shares, respectively, were excluded from the computation of diluted earnings per share.

Note
19.    Share Repurchase Plan

In October 2004, Varian Semiconductors Board of Directors authorized the repurchase, from time
to time, of up to $100 million of Varian Semiconductors common stock on the open market. Subsequently, the Board of Directors has voted on increases to the amount of funds that may be expended in repurchasing Varian Semiconductors common
stock to a total of $700 million as of November 13, 2007. The program does not have a fixed expiration date.

Share repurchases under the program during
fiscal years ended September 28, 2007 and September 29, 2006 were as follows:



|                                             |  |                                                        |            |                   |   |          
|-------------------------------------------- |  | ------------------------------------------------------ | ---------- | ----------------- | - | ---------
|                                             |  | Fiscal Year Ended                                     
|                                             |  | September 28,2007                                      |            | September 29,2006
|                                             |  | (amounts in thousands, exceptshare and per share data)
|Number of shares of common stock repurchased |  |                                                        | 11,343,017 |                   |   | 5,621,333
|Total cost of repurchase                     |  | $                                                      | 426,512    |                   | $ | 108,910  
|Average price paid per share                 |  | $                                                      | 37.58      |                   | $ | 19.36    

In addition to the repurchases made during fiscal year 2007, Varian Semiconductor has repurchased 963,864 shares
at total cost of $45.7 million between September 29, 2007 and November 12, 2007, the latest practicable date prior to the filing date of this annual report on Form 10-K.



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 20.    Retirement Plans

Varian Semiconductor has a defined contribution retirement plan covering substantially all of its U.S. employees. Varian Semiconductor makes a guaranteed contribution, and in some years a discretionary contribution,
to each participants account, generally calculated on fiscal year earnings and as a percentage of the participants base pay. Participants are entitled, upon termination or retirement, to their portion of the retirement fund assets, which
are held by a third-party custodian. Effective April 2, 1999, Varian Semiconductor assumed responsibility for all of the retirement plans for active employees of Varian Semiconductor; the responsibility for all others, principally retirees of
Varian Associates, Inc. (VAI), remained with VAI and, subsequently, VMS. Liabilities for post-employment and post-retirement benefits of $5.4 million and $4.3 million have been included in the consolidated financial statements as of
September 28, 2007 and September 29, 2006, respectively. In fiscal years 2007, 2006 and 2005, Varian Semiconductors retirement benefit expense was $8.6 million, $7.2 million and $6.2 million, respectively. These expenses consist of
Varian Semiconductors defined contribution retirement plan as well as amounts paid to Varian Medical Systems, Inc. (VMS) in reimbursement of shared retirement costs.

On October 5, 2004, Varian Semiconductors Board of Directors amended the definition of retirement to mean (i) for non-employee directors, the voluntary cessation of service as a director after
completion of at least three years of service as a director, (ii) for employees, other than executive officers as provided in clause (iii) below, the voluntary resignation from employment after completion of at least ten years of service
as an employee and the attainment of age 55, and (iii) for executive officers, the voluntary resignation from employment after the attainment of a combined age and years of service as an employee of at least 65, a minimum age of 55, and
completion of at least five years of service as an employee. Related to this amended definition, the first quarter of fiscal year 2005 included a $3.5 million charge, largely non-cash, associated with the retirement of the President and Chief
Operating Officer of Varian Semiconductor.

Varian Semiconductor adopted SFAS No. 158, Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R), effective September 28, 2007. SFAS No. 158 requires an employer to recognize in its statement of financial position an asset for a
plans overfunded status or a liability for a plans underfunded status, measure a plans assets and its obligations that determine its funded status as of the end of the employers fiscal year, and recognize changes in the
funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes are reported in accumulated other comprehensive loss. The following table summarizes the incremental effects of the initial adoption of SFAS
No. 158 on Varian Semiconductors Consolidated Balance Sheet at September 28, 2007:



|                                           |  |                              |         |   |                     |   |      |                             |  |   |         |  
|------------------------------------------ |  | ---------------------------- | ------- | - | ------------------- | - | ---- | --------------------------- |  | - | ------- | -
|                                           |  | BeforeApplication ofSFAS 158 |         |   | SFAS 158Adjustments |   |      | AfterApplication ofSFAS 158 | 
|                                           |  | (amounts in thousands)       |        
|Total liabilities                          |  | $                            | 232,334 |   |                     | $ | 776  |                             |  | $ | 233,110 |  
|Accumulated other comprehensive loss       |  | $                            | (397    | ) |                     | $ | (776 | )                           |  | $ | (1,173  | )
|Total stockholders equity                 |  | $                            | 566,754 |   |                     | $ | (776 | )                           |  | $ | 565,978 |  
|Total liabilities and stockholders equity |  | $                            | 799,088 |   |                     | $ |     |                             |  | $ | 799,088 |  



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 21.    Lease Commitments

Varian Semiconductor leases various types of warehouse and office facilities and equipment, furniture and fixtures under noncancelable lease agreements that expire at
various dates. Future minimum lease payments under operating leases are as follows:



|                             |  |                        |      
|---------------------------- |  | ---------------------- | -----
|Fiscal Year                  |  | Operating Leases      
|                             |  | (amounts in thousands)
|2008                         |  | $                      | 1,793
|2009                         |  |                        | 455  
|2010                         |  |                        | 252  
|2011                         |  |                        | 157  
|2012                         |  |                        | 142  
|                             |  |                        |      
|Total minimum lease payments |  | $                      | 2,799
|                             |  |                        |      

Rental expense for fiscal years 2007, 2006 and 2005, was $2.4 million, $2.3 million and $2.2 million,
respectively.

Note 22.    Commitments, Contingencies and Guarantees

Varian Semiconductor is currently a defendant in a number of legal actions and could incur an uninsured liability in one or more of them. In the opinion of management,
the outcome of such litigation would not have a material adverse effect on the consolidated financial position, results of operations or cash flows of Varian Semiconductor.

As permitted under Delaware law, Varian Semiconductor has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was, serving in such
capacity at the request of Varian Semiconductor. The term of the indemnification period is for the officers or directors lifetime. The maximum potential amount of future payments Varian Semiconductor could be required to make under these
indemnification agreements is unlimited; however, Varian Semiconductor has a Director and Officer insurance policy that limits its exposure and enables Varian Semiconductor to recover a portion of any future amounts paid. As a result of Varian
Semiconductors insurance policy coverage, management believes the estimated fair value of these indemnification agreements is minimal. Accordingly, Varian Semiconductor has not recorded any liabilities for these agreements as of
September 28, 2007.

Varian Semiconductor enters into indemnification agreements in the normal course of business. Pursuant to these agreements,
Varian Semiconductor indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally Varian Semiconductor customers, in connection with any patent, or any copyright or
other intellectual property infringement claim by any third party with respect to Varian Semiconductor products. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential
amount of future payments Varian Semiconductor could be required to make under these indemnification agreements is unlimited. Management believes the estimated fair value of these agreements is minimal. Accordingly, Varian Semiconductor has not
recorded any liabilities for these agreements as of September 28, 2007.

Varian Semiconductor also indemnifies certain customers with respect to
damages, losses and liabilities they may suffer or incur relating to personal injury, personal property damage, product liability, and environmental claims relating to the use of Varian Semiconductors products and services or resulting from
the acts or omissions of Varian Semiconductor, its employees, officers, authorized agents or subcontractors. Varian Semiconductor has general and umbrella insurance policies that limit its exposure under these indemnification



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



obligations and guarantees. As a result of Varian Semiconductors insurance policy coverage, Varian Semiconductor believes the estimated fair value of
these indemnification agreements is minimal. Accordingly, Varian Semiconductor has not recorded any liabilities for these agreements as of September 28, 2007.

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

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

Varian Semiconductor also enters into purchase order commitments in the normal
course of business. As of September 28, 2007, Varian Semiconductor had approximately $77.0 million of purchase order commitments with various suppliers.

Environmental Remediation

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

For certain of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further investigation or remediation activities
or to estimate the future costs of such activities if undertaken. Varian Semiconductor has accrued $1.2 million in estimated environmental investigation and remediation costs for these sites and facilities as of September 28, 2007 and $1.2
million as of September 29, 2006. As to other sites and facilities, sufficient knowledge has been gained to be able to reasonably estimate the scope and costs of future environmental activities. As such, Varian Semiconductor has accrued $4.1
million as of September 28, 2007 and $4.2 million as of September 29, 2006, which represents future costs discounted at 7%, net of inflation, to cover Varian Semiconductors portion of these costs. This reserve is in addition to the
$1.2 million as of September 28, 2007 and $1.2 million as of September 29, 2006 previously described.



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



As of September 28, 2007, Varian Semiconductors environmental liability, based upon future
environmental-related costs estimated by VMS as of that date and included in current and long-term accrued expenses, is calculated as follows:



|                        |  |                       |     |                    |   |                              |  |   |    
|----------------------- |  | --------------------- | --- | ------------------ | - | ---------------------------- |  | - | ---
|Year                    |  | RecurringCosts        |     | Non-recurringCosts |   | TotalAnticipatedFuture Costs
|                        |  | (amounts in millions)
|2008                    |  | $                     | 0.3 |                    | $ | 0.3                          |  | $ | 0.6
|2009                    |  |                       | 0.2 |                    |   | 0.2                          |  |   | 0.4
|2010                    |  |                       | 0.2 |                    |   | 0.2                          |  |   | 0.4
|2011                    |  |                       | 0.2 |                    |   | 0.2                          |  |   | 0.4
|2012                    |  |                       | 0.3 |                    |   | 0.4                          |  |   | 0.7
|Thereafter              |  |                       | 3.7 |                    |   | 0.9                          |  |   | 4.6
|                        |  |                       |     |                    |   |                              |  |   |    
|Total costs             |  | $                     | 4.9 |                    | $ | 2.2                          |  |   | 7.1
|                        |  |                       |     |                    |   |                              |  |   |    
|Less: imputed interest  |  |                       |     |                    |   |                              |  |   | 1.8
|                        |  |                       |     |                    |   |                              |  |   |    
|Environmental liability |  |                       |     |                    |   |                              |  | $ | 5.3
|                        |  |                       |     |                    |   |                              |  |   |    

The current portion of the reserve is $0.5 million. The long-term portion of the reserve is $4.8 million, which is
included in long-term accrued expenses.

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

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

Varian Semiconductor evaluates its liability for environmental-related investigation and remediation in light of the liability and
financial wherewithal of potentially responsible parties and insurance companies where Varian Semiconductor believes that it has rights to contribution, indemnity and/or reimbursement. Claims for recovery of environmental investigation and
remediation costs already incurred, and to be incurred in the future, have been asserted against various insurance companies and other third parties. In 1992, VAI filed a lawsuit against 36 insurance companies with respect to most of the
above-referenced sites and facilities. VAI received certain cash settlements with respect to these lawsuits in prior years. VMS has also reached an agreement with an insurance company under which the insurance company agreed to pay a portion of
Varian Semiconductors past and future environmental-related expenditures. Although VMS intends to aggressively pursue additional insurance recoveries, Varian Semiconductor has not reduced any liability in anticipation of recovery with respect
to claims made against third parties.



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Legal Proceedings

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

From time to time, Varian Semiconductor may become involved in a number of legal actions and could incur an uninsured liability in one or more of them. Accordingly,
while the ultimate outcome of these legal matters is not determinable, management believes the resolution of these matters will not have a material adverse effect on the financial condition or results of operations of Varian Semiconductor.

Note 23.    Settlements and License Agreements

Pursuant to a settlement agreement dated March 7, 2006 between Varian Semiconductor and Nissin Ion Equipment Co., Ltd., a patent infringement litigation asserted by Varian Semiconductor against Nissin Ion was
settled in the Western District of Texas without any admission of infringement or payment by Nissin Ion. This case was closed by the Court on March 20, 2006.

During fiscal year 2002, Varian Semiconductor and Lam Research Corporation, (Lam), came to an agreement on patent infringement litigation claims. As part of the agreement, Varian Semiconductor granted a license to Lam for
certain patents. In return, Varian Semiconductor received a warrant to purchase 2 million shares of Lam common stock at $21.30 per share and $20.0 million. The warrant was valued at $22.8 million and was recognized as revenue in fiscal year
2002. The $20.0 million cash was paid in installments with $5.0 million paid immediately in exchange for prior use of the patents and the remaining $15.0 million in 12 quarterly payments of $1.25 million through the first quarter of fiscal year 2005
in exchange for future use of the patents.

Pursuant to the dispute resolution provisions of an Agreement dated January 1, 1992 (the
Agreement) between Varian Semiconductor and Applied Materials, in September 2002 Varian Semiconductor filed an arbitration demand with the American Arbitration Association asserting that Applied Materials breached the Agreement by failing to
pay royalties on products Varian Semiconductor believed were covered by the Agreements patent license to Applied Materials. In its arbitration demand, Varian Semiconductor sought to recover back royalties, interest and attorneys fees. On
May 2, 2003, the arbitration panel issued its decision that certain of Applied Materials products were subject to royalty obligations under the Agreement, and on September 1, 2004 the arbitration panel ruled that the patents at issue
in the arbitration were valid and enforceable. Applied Materials made an initial payment of $22.0 million for back royalties and interest on October 4, 2004 and a final payment of $2.6 million for back interest and royalties on November 8,
2004. Applied Materials also was required to pay quarterly unit-based royalty payments to Varian Semiconductor on future sales of certain products found to be within the scope of the Agreement through expiration of the Agreement on March 20,
2007.

The royalty-bearing license agreements produced revenue of $7.5 million in fiscal year 2007, $9.5 million in fiscal year 2006 and $27.7 million in
fiscal year 2005. The last of the principal patents covered by these licenses expired on July 9, 2007.

Note 24.    Other
Transactions with Affiliates

Varian Semiconductor, VMS and VI entered into the Distribution Related Agreements for purposes of providing an orderly
transition and to define certain ongoing relationships between and among Varian Semiconductor, VMS and VI after the spin-off.



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VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The Distribution Related Agreements provide that, from and after the spin-off, VMS, VI and Varian Semiconductor
indemnify each other and their respective subsidiaries, directors, officers, employees and agents against all losses arising in connection with shared liabilities, including certain environmental and legal liabilities. All shared liabilities are
managed and administered by VMS and expenses and losses, net of proceeds and other receivables, are borne one-third each by VMS, VI and Varian Semiconductor. The Distribution Related Agreements also provide that Varian Semiconductor shall assume all
of its liabilities, other than shared liabilities, including accounts payable, accrued payroll and pension liabilities, in accordance with their terms. During fiscal years 2007, 2006 and 2005, Varian Semiconductor was charged $0.9 million, $1.4
million and $1.2 million, respectively, by VMS in settlement of these obligations. Varian Semiconductors accounts payable balance due to VMS at September 28, 2007 was $0.1 million. Varian Semiconductors accounts payable balance due
to VMS at September 29, 2006 was $0.1 million.

Note 25.    Operating Segments and Geographic Information

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

Revenue from Varian Semiconductors ten largest customers, in fiscal years 2007, 2006 and 2005, accounted for
approximately 72%, 63% and 66% of total revenue, respectively, including the non-recurring royalties in fiscal year 2005 of $18.9 million received from Applied Materials. Varian Semiconductor expects that sales of its products to relatively few
customers will continue to account for a high percentage of its revenue in the foreseeable future. In fiscal year 2007, revenue from one customer accounted for 17% of Varian Semiconductors total revenue. In fiscal year 2006, revenue from three
customers accounted for 11%, 10% and 10%, respectively, of Varian Semiconductors total revenue. In fiscal year 2005, revenue from two customers accounted for 20% and 14% of Varian Semiconductors total revenue.

Sales to Asia Pacific accounted for 71%, 67% and 68% of revenues in fiscal years 2007, 2006 and 2005, respectively. North American sales accounted for 22%, 22% and 22%
of Varian Semiconductors total revenues in fiscal years 2007, 2006 and 2005, respectively. European sales accounted for 7%, 11% and 10% of Varian Semiconductors total revenues in fiscal years 2007, 2006 and 2005, respectively.

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



|                          |  |                        |         |        |   |        |  |        |        |       |   |         |  |              |         |  |   |         |  |   |          
|------------------------- |  | ---------------------- | ------- | ------ | - | ------ |  | ------ | ------ | ----- | - | ------- |  | ------------ | ------- |  | - | ------- |  | - | ---------
|                          |  | NorthAmerica           |         | Europe |   | Japan  |  | Taiwan |        | Korea |   | Other   |  | Consolidated
|                          |  | (amounts in thousands)
|2007                      |  |                        |         |        |   |        |  |        |        |       |   |         |  |              |         |  |   |         |  |   |          
|Revenue                   |  | $                      | 234,078 |        | $ | 73,341 |  | $      | 65,314 |       | $ | 283,562 |  | $            | 235,054 |  | $ | 163,515 |  | $ | 1,054,864
|Long Lived Assets net of: |  |                        | 68,193  |        |   | 403    |  |        | 402    |       |   | 430     |  |              | 8,989   |  |   | 437     |  |   | 78,854   
|                          |  |                        |         |        |   |        | 
|2006                      |  |                        |         |        |   |        |  |        |        |       |   |         |  |              |         |  |   |         |  |   |          
|Revenue                   |  | $                      | 161,129 |        | $ | 78,464 |  | $      | 73,731 |       | $ | 149,330 |  | $            | 151,147 |  | $ | 116,913 |  | $ | 730,714  
|Long Lived Assets net of: |  |                        | 56,513  |        |   | 465    |  |        | 8,820  |       |   | 431     |  |              | 11,652  |  |   | 1,392   |  |   | 79,273   
|                          |  |                        |         |        |   |        | 
|2005                      |  |                        |         |        |   |        |  |        |        |       |   |         |  |              |         |  |   |         |  |   |          
|Revenue                   |  | $                      | 134,778 |        | $ | 57,161 |  | $      | 50,634 |       | $ | 98,461  |  | $            | 196,714 |  | $ | 62,773  |  | $ | 600,521  
|Long Lived Assets net of: |  |                        | 54,413  |        |   | 530    |  |        | 8,831  |       |   | 424     |  |              | 8,566   |  |   | 1,336   |  |   | 74,100   



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SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

For the fiscal years ended 2007, 2006, and 2005

(Amounts in thousands)



|                                                      |  |                                |        |                     |             |                        |        |   |            |   |  |                                |  |   |       |   |  |   |       
|----------------------------------------------------- |  | ------------------------------ | ------ | ------------------- | ----------- | ---------------------- | ------ | - | ---------- | - |  | ------------------------------ |  | - | ----- | - |  | - | ------
|                                                      |  | Balance at Beginning of
Period |        | Charges to Expenses |             | Reductions to Expenses |        |   | Deductions |   |  | Balanceat End ofPeriod        
|Description                                           |  |                                |        |                     | Description |                        | Amount |   |           
|Allowance for Doubtful Accounts & Accounts Receivable |  |                                |        |                     |             |                        |        |   |            |   |  |                                |  |   |       |   |  |   |       
|Fiscal Year Ended 2007                                |  | $                              | 908    |                     | $           | 54                     |        | $ | (211       | ) |  | Write-offs & adjustments       |  | $ | 191   |   |  | $ | 560   
|Fiscal Year Ended 2006                                |  | $                              | 892    |                     | $           | 22                     |        | $ | (11        | ) |  | Write-offs & adjustments       |  | $ | (5    | ) |  | $ | 908   
|Fiscal Year Ended 2005                                |  | $                              | 1,388  |                     | $           | 66                     |        | $ | (546       | ) |  | Write-offs & adjustments       |  | $ | 16    |   |  | $ | 892   
|                                                      |  |                                |        |                     |             |                       
|Excess and Obsolete Inventory Provision               |  |                                |        |                     |             |                        |        |   |            |   |  |                                |  |   |       |   |  |   |       
|Fiscal Year Ended 2007                                |  | $                              | 22,918 |                     | $           | 3,443                  |        | $ |           |   |  | Inventory write-offs           |  | $ | 2,623 |   |  | $ | 23,738
|Fiscal Year Ended 2006                                |  | $                              | 28,465 |                     | $           | 3,967                  |        | $ | (1,692     | ) |  | Inventory write-offs           |  | $ | 7,822 |   |  | $ | 22,918
|Fiscal Year Ended 2005                                |  | $                              | 29,145 |                     | $           | 3,438                  |        | $ | (1,660     | ) |  | Inventory write-offs           |  | $ | 2,458 |   |  | $ | 28,465
|                                                      |  |                                |        |                     |             |                       
|Valuation Allowance on Deferred Tax Asset             |  |                                |        |                     |             |                        |        |   |            |   |  |                                |  |   |       |   |  |   |       
|Fiscal Year Ended 2007                                |  | $                              | 9,050  |                     | $           | 3,039                  |        | $ |           |   |  | State tax credit carryforwards |  | $ |      |   |  | $ | 12,089
|Fiscal Year Ended 2006                                |  | $                              | 8,591  |                     | $           | 459                    |        | $ |           |   |  | State tax credit carryforwards |  | $ |      |   |  | $ | 9,050 
|Fiscal Year Ended 2005                                |  | $                              | 7,158  |                     | $           | 1,433                  |        | $ |           |   |  | State tax credit carryforwards |  | $ |      |   |  | $ | 8,591 



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