10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2004

OR

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

For the transition period from                      to                     

Commission File Number 000-25393

VARIAN, INC.

(Exact Name of Registrant as Specified in its Charter)

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

(650) 213-8000

(Telephone Number)

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

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

The number of shares of the registrant’s common stock outstanding as of February 2, 2005 was 35,131,163.

VARIAN, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004

TABLE OF CONTENTS

		Page
PART I	Financial Information
Item 1.	Financial Statements:
	Unaudited Condensed Consolidated Statement of Earnings	3
	Unaudited Condensed Consolidated Balance Sheet	4
	Unaudited Condensed Consolidated Statement of Cash Flows	5
	Notes to the Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	41
PART II	Other Information
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 5.	Other Information	42
Item 6.	Exhibits	43

2

PART I

FINANCIAL INFORMATION

Item 1.    Financial Statements

VARIAN, INC. AND SUBSIDIARY COMPANIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF EARNINGS

(In thousands, except per share amounts)

	Fiscal Quarter Ended
	December 31, 2004			January 2, 2004
Sales	$	235,859		$	212,493
Cost of sales		148,049			132,717
Gross profit		87,810			79,776
Operating expenses
Sales and marketing		39,862			37,156
Research and development		12,840			11,155
General and administrative		16,053			10,505
Purchased in-process research and development		700			—
Total operating expenses		69,455			58,816
Operating earnings		18,355			20,960
Interest income (expense)
Interest income		959			565
Interest expense		(571	)		(618	)
Total interest income (expense), net		388			(53	)
Earnings before income taxes		18,743			20,907
Income tax expense		3,805			7,318
Net earnings	$	14,938		$	13,589
Net earnings per share:
Basic	$	0.43		$	0.39
Diluted	$	0.42		$	0.38
Shares used in per share calculations:
Basic		34,965			34,440
Diluted		35,704			35,658

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

3

VARIAN, INC. AND SUBSIDIARY COMPANIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET

(In thousands, except par value amounts)

	December 31, 2004		October 1, 2004
ASSETS
Current assets
Cash and cash equivalents	$	189,540	$	184,982
Accounts receivable, net		174,993		182,843
Inventories		165,490		135,344
Deferred taxes		29,660		30,008
Other current assets		21,391		18,986
Total current assets		581,074		552,163
Property, plant, and equipment, net		126,319		120,239
Goodwill		147,948		131,441
Intangible assets, net		33,492		21,279
Other assets		5,610		5,543
Total assets	$	894,443	$	830,665
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt	$	6,959	$	6,673
Accounts payable		67,857		70,667
Deferred profit		11,719		11,306
Accrued liabilities		178,770		160,710
Total current liabilities		265,305		249,356
Long-term debt		28,750		30,000
Deferred taxes		10,191		9,411
Other liabilities		21,879		14,687
Total liabilities		326,125		303,454
Commitments and contingencies (Notes 9, 10, 12, and 15)
Stockholders’ equity
Preferred stock—par value $0.01, authorized—1,000 shares; issued—none		—		—
Common stock—par value $0.01, authorized—99,000 shares; issued and outstanding— 35,074 shares at December 31, 2004 and 34,838 shares at October 1, 2004		261,819		257,083
Retained earnings		268,034		253,096
Accumulated other comprehensive income		38,465		17,032
Total stockholders’ equity		568,318		527,211
Total liabilities and stockholders’ equity	$	894,443	$	830,665

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

4

VARIAN, INC. AND SUBSIDIARY COMPANIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

	Fiscal Quarter Ended
	December 31, 2004			January 2, 2004
Cash flows from operating activities
Net earnings	$	14,938		$	13,589
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		7,204			6,306
Loss on disposition of property, plant, and equipment		69			37
Purchased in-process research and development		700			—
Stock-based compensation expense		40			—
Tax benefit from stock option exercises		900			3,716
Deferred taxes		(3,000	)		—
Changes in assets and liabilities, excluding effects of acquisitions:
Accounts receivable, net		21,914			6,713
Inventories		(337	)		(8,373	)
Other current assets		(206	)		4,647
Other assets		(610	)		71
Accounts payable		(8,856	)		(2,112	)
Deferred profit		(520	)		(1,847	)
Accrued liabilities		(6,982	)		(6,882	)
Other liabilities		(416	)		(135	)
Net cash provided by operating activities		24,838			15,730
Cash flows from investing activities
Proceeds from sale of property, plant, and equipment		77			56
Purchase of property, plant, and equipment		(6,517	)		(4,359	)
Purchase of businesses, net of cash acquired		(25,198	)		—
Net cash used in investing activities		(31,638	)		(4,303	)
Cash flows from financing activities
Repayment of debt		(1,250	)		(1,565	)
Issuance of debt		—			1,831
Repurchase of common stock		—			(2,478	)
Issuance of common stock		3,796			8,997
Transfers to Varian Medical Systems, Inc.		(406	)		(326	)
Net cash provided by financing activities		2,140			6,459
Effects of exchange rate changes on cash and cash equivalents		9,218			4,531
Net increase in cash and cash equivalents		4,558			22,417
Cash and cash equivalents at beginning of period		184,982			135,791
Cash and cash equivalents at end of period	$	189,540		$	158,208
Supplemental cash flow information
Income taxes paid, net of refunds received	$	4,066		$	4,595
Interest paid	$	560		$	597

See accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

5

VARIAN, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.    Unaudited Interim Condensed Consolidated Financial Statements

These unaudited interim condensed consolidated financial statements of Varian, Inc. and its subsidiary companies (collectively, the “Company”) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The October 1, 2004 balance sheet data was derived from audited financial statements, but does not include all disclosures required in audited financial statements by GAAP. These unaudited interim condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 1, 2004 filed with the SEC. In the opinion of the Company’s management, the unaudited interim condensed consolidated financial statements include all normal recurring adjustments necessary to present fairly the information required to be set forth therein. The results of operations for the fiscal quarter ended December 31, 2004 are not necessarily indicative of the results to be expected for a full year or for any other periods.

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

Note 2.    Description of Business and Basis of Presentation

The Company is a major supplier of scientific instruments and consumable laboratory supplies, vacuum products and services, and contract electronics manufacturing services. These businesses primarily serve life science, industrial, academic, and research customers. Until April 2, 1999, the business of the Company was operated as the Instruments Business of Varian Associates, Inc. (“VAI”). On that date, VAI distributed to the holders of its common stock one share of common stock of the Company and one share of common stock of Varian Semiconductor Equipment Associates, Inc. (“VSEA”), which was formerly operated as the Semiconductor Equipment business of VAI, for each share of VAI (the “Distribution”). At the same time, VAI retained its Health Care Systems business and changed its name to Varian Medical Systems, Inc. (“VMS”). Transfers made to VMS pursuant to the terms of the Distribution are reflected as financing activities in the Unaudited Condensed Consolidated Statement of Cash Flows.

Note 3.    Summary of Significant Accounting Policies

Fiscal Periods. The Company’s fiscal years reported are the 52- or 53-week periods ending on the Friday nearest September 30. Fiscal year 2005 will comprise the 52-week period ending September 30, 2005, and fiscal year 2004 was comprised of the 52-week period ended October 1, 2004. The fiscal quarters ended December 31, 2004 and January 2, 2004 each comprised 13 weeks, respectively.

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

6

VARIAN, INC. AND SUBSIDIARY COMPANIES

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

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

	Fiscal Quarter Ended
	December 31, 2004			January 2, 2004
(in thousands, except per share amounts)
Net earnings:
As reported	$	14,938		$	13,589
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects		(1,230	)		(1,618	)
Pro forma	$	13,708		$	11,971
Net earnings per share:
Basic – as reported	$	0.43		$	0.39
Basic – pro forma	$	0.39		$	0.35
Diluted – as reported	$	0.42		$	0.38
Diluted – pro forma	$	0.38		$	0.34

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

	Fiscal Quarter Ended
	December 31, 2004		January 2, 2004
(in thousands)
Net earnings	$	14,938	$	13,589
Other comprehensive income:
Currency translation adjustment		20,317		11,593
Minimum pension liability adjustment, net of tax of $478		1,116		—
Total other comprehensive income		21,433		11,593
Total comprehensive income	$	36,371	$	25,182

Note 4.    Balance Sheet Detail

	December 31, 2004		October 1, 2004
(In thousands)
Inventories
Raw materials and parts	$	75,382	$	70,660
Work in process		29,112		12,076
Finished goods		60,996		52,608
	$	165,490	$	135,344

7

VARIAN, INC. AND SUBSIDIARY COMPANIES

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

Note 5.    Forward Exchange Contracts

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

From time to time, the Company also enters into foreign exchange forward contracts to minimize the impact of foreign currency fluctuations on forecasted transactions. These contracts are designated as cash flow hedges under SFAS 133. At December 31, 2004, there were no outstanding foreign exchange forward contracts designated as cash flow hedges of forecasted transactions.

The Company’s foreign exchange forward contracts generally range from one to 12 months in original maturity. A summary of all foreign exchange forward contracts that were outstanding as of December 31, 2004 follows:

	Notional Value Sold		Notional Value Purchased
(in thousands)
Euro	$	—	$	54,265
Australian dollar		—		11,800
Japanese yen		4,216		—
British pound		220		—
Danish krona		1,178		—
Canadian dollar		5,730		—
Swedish krona		717		—
	$	12,061	$	66,065

Note 6.    Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for each of the Company’s reporting segments in the first quarter of fiscal year 2005 were as follows:

	Scientific Instruments		Vacuum Technologies		Electronics Manufacturing		Total Company
(in thousands)
Balance as of October 1, 2004	$	128,373	$	966	$	2,102	$	131,441
Fiscal year 2005 acquisition (Note 15)		15,984		—		—		15,984
Foreign currency impacts and other adjustments		523		—		—		523
Balance as of December 31, 2004	$	144,880	$	966	$	2,102	$	147,948

8

VARIAN, INC. AND SUBSIDIARY COMPANIES

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

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

	December 31, 2004
	Gross		Accumulated Amortization			Net
(in thousands)
Intangible assets
Existing technology	$	10,172	$	(3,344	)	$	6,828
Patents and core technology		18,547		(1,571	)		16,976
Trade names and trademarks		2,176		(721	)		1,455
Customer lists		9,305		(2,313	)		6,992
Other		2,653		(1,412	)		1,241
	$	42,853	$	(9,361	)	$	33,492
	October 1, 2004
	Gross		Accumulated Amortization			Net
(in thousands)
Intangible assets
Existing technology	$	10,172	$	(2,988	)	$	7,184
Patents and core technology		6,777		(1,066	)		5,711
Trade names and trademarks		2,176		(654	)		1,522
Customer lists		7,505		(1,806	)		5,699
Other		2,445		(1,282	)		1,163
	$	29,075	$	(7,796	)	$	21,279

Amortization expense relating to intangible assets was $1.5 million and $0.7 million during the fiscal quarters ended December 31, 2004 and January 2, 2004, respectively. At December 31, 2004, estimated amortization expense for the remainder of fiscal 2005 and for each of the five succeeding fiscal years and thereafter follows:

	Estimated Amortization Expense
(in thousands)
Nine months ending September 30, 2005	$	4,949
Fiscal year 2006		6,319
Fiscal year 2007		5,719
Fiscal year 2008		4,896
Fiscal year 2009		4,100
Fiscal year 2010		3,776
Thereafter		3,733
Total	$	33,492

9

VARIAN, INC. AND SUBSIDIARY COMPANIES

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

Note 7.    Restructuring Activities

Fiscal Year 2005 Plan. During the first quarter of fiscal year 2005, the Company undertook certain restructuring actions to rationalize its Scientific Instruments field support administration in the United Kingdom following the completion of the Company’s acquisition of Magnex Scientific Limited (“Magnex”). These actions were undertaken to achieve operational efficiencies and eliminate redundant costs resulting from the acquisition which involved the termination of approximately 20 employees, the consolidation of certain field support administrative functions currently located in the Company’s Walton, U.K. location to Magnex’s location in Oxford, U.K., and the closure of the Walton facility. Restructuring and other-related costs relating to this plan are expected to be recorded and included in general and administrative expenses.

The following table sets forth changes in the Company’s liability relating to the foregoing restructuring plan during the first quarter of fiscal year 2005:

	Employee- Related		Facilities- Related		Total
(in thousands)
Balance at October 1, 2004	$	—	$	—	$	—
Charges to expense		270		—		270
Balance at December 31, 2004	$	270	$	—	$	270

In addition to the foregoing restructuring costs, the Company incurred approximately $0.1 million in other costs relating directly to the consolidation of certain field support administrative functions from the Company’s Walton location to Magnex’s location in Oxford during the first quarter of fiscal year 2005. This amount was comprised of non-cash charges for accelerated depreciation of assets to be disposed of upon the closure of the Walton facility and employee retention costs which will be settled in cash.

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

The following table sets forth changes in the Company’s liability relating to the foregoing restructuring plan during the first quarter of fiscal year 2005:

	Employee- Related			Facilities- Related		Total
(in thousands)
Balance at October 1, 2004	$	665		$	—	$	665
Charges to expense		335			—		335
Cash payments		(23	)		—		(23	)
Foreign currency impacts and other adjustments		21			—		21
Balance at December 31, 2004	$	998		$	—	$	998

10

VARIAN, INC. AND SUBSIDIARY COMPANIES

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

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

The following table sets forth changes in the Company’s liability relating to the foregoing restructuring plan during the first quarter of fiscal year 2005:

	Employee- Related			Facilities- Related		Total
(in thousands)
Balance at October 1, 2004	$	859		$	—	$	859
Reversals of expense, net		(11	)		—		(11	)
Cash payments		(224	)		—		(224	)
Balance at December 31, 2004	$	624		$	—	$	624

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

The following table sets forth changes in the Company’s liability relating to the foregoing restructuring activities during the first quarter of fiscal year 2005:

	Employee- Related			Facilities- Related			Total
(in thousands)
Balance at October 1, 2004	$	149		$	830		$	979
Charges to expense, net		—			402			402
Cash payments		(63	)		(296	)		(359	)
Foreign currency impacts and other adjustments		1			16			17
Balance at December 31, 2004	$	87		$	952		$	1,039

The non-cash portion of restructuring costs recorded by the Company in connection with these restructuring actions was not significant, either in the aggregate or for any single period.

11

VARIAN, INC. AND SUBSIDIARY COMPANIES

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

In addition to the foregoing restructuring costs, the Company incurred approximately $0.1 million in other costs relating directly to the Southern California facility consolidation during the first quarter of fiscal year 2005. These costs primarily related to non-cash charges for accelerated depreciation of assets to be disposed of upon the closure of the facilities.

Note 8.    Net Earnings Per Share

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

For the fiscal quarters ended December 31, 2004 and January 2, 2004, options to purchase approximately 618,000 and 73,000 shares, respectively, were excluded from the calculation of diluted earnings per share as their effect was anti-dilutive.

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

	Fiscal Quarter Ended
	December 31, 2004	January 2, 2004
(in thousands)
Weighted-average basic shares outstanding	34,965	34,440
Net effect of dilutive stock options	739	1,218
Weighted-average diluted shares outstanding	35,704	35,658

Note 9.    Debt and Credit Facilities

Credit Facilities. During fiscal year 2003, the Company established a short-term bank credit facility in Japan in the amount of 300 million yen (approximately $2.9 million at December 31, 2004). The credit facility is available to the Company’s wholly owned Japanese subsidiary for working capital purposes. As of December 31, 2004, no amounts were outstanding under this credit facility and 300 million yen (approximately $2.9 million) was available for future borrowing. This credit facility contains certain covenants that limit future borrowings from this facility, with which the Company was in compliance at December 31, 2004.

In addition to these bank credit facilities, as of December 31, 2004, the Company and its subsidiaries had a total of $87.4 million in other uncommitted and unsecured credit facilities for working capital purposes with interest rates to be established at the time of borrowing. No borrowings were outstanding under these credit facilities as of December 31, 2004. All of these credit facilities contain certain customary conditions and events of default, with which the Company was in compliance at December 31, 2004. Of the $87.4 million in uncommitted and unsecured credit facilities, a total of $52.9 million was limited for use by, or in favor of, certain subsidiaries at December 31, 2004, and a total of $15.4 million of this $52.9 million was being utilized in the form of bank guarantees or short-term standby letters of credit. These guarantees and letters of credit related primarily to advance payments or deposits made to the Company’s subsidiaries by customers for which separate liabilities were recorded in the unaudited condensed consolidated financial statements at December 31, 2004. No amounts had been drawn by beneficiaries under these or any other outstanding guarantees or letters of credit as of that date.

12

VARIAN, INC. AND SUBSIDIARY COMPANIES

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

Long-term Debt. As of December 31, 2004, the Company had $31.2 million in term loans outstanding compared to $32.5 million at October 1, 2004. As of both December 31, 2004 and October 1, 2004, fixed interest rates on the term loans ranged from 6.7% to 7.2%. The weighted-average interest rate on the term loans was 6.8% at both December 31, 2004 and October 1, 2004. The term loans contain certain covenants that limit future borrowings and the payment of cash dividends and require the maintenance of certain levels of working capital and operating results. The Company was in compliance with all restrictive covenants of the term loan agreements at December 31, 2004. The Company also had other long-term notes payable of $4.5 million as of December 31, 2004 with a weighted-average interest rate of 0.0% and $4.2 million as of October 1, 2004 with a weighted-average interest rate of 0.0%.

The following table summarizes future principal payments on borrowings under long-term debt outstanding as of December 31, 2004:

	Nine Months Ending Sept. 30, 2005		Fiscal Years
			2006		2007		2008		2009		2010		Thereafter		Total
(in thousands)
Long-term debt (including current portion)	$	5,709	$	2,500	$	2,500	$	6,250	$	—	$	6,250	$	12,500	$	35,709

Note 10.    Warranty and Indemnification Obligations

Product Warranties. The Company’s products are generally subject to warranties. Liabilities for the estimated future costs of repair or replacement are established and charged to cost of sales at the time the related sale is recognized. The amount of liability to be recorded is based on management’s best estimates of future warranty costs after considering historical and projected product failure rates and product repair costs. Changes in the Company’s estimated liability for product warranty during the fiscal quarters ended December 31, 2004 and January 2, 2004 follow:

	Fiscal Quarter Ended
	December 31, 2004			January 2, 2004
(in thousands)
Beginning balance	$	10,475		$	10,261
Charges to costs and expenses		2,496			1,373
Warranty expenditures		(1,865	)		(1,290	)
Acquired warranty liabilities (Note 15)		1,742			—
Ending balance	$	12,848		$	10,344

Indemnification Obligations. FASB Interpretation No. (“FIN”) 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, requires a guarantor to recognize a liability for and/or disclose obligations it has undertaken in relation to the issuance of the guarantee. Under this guidance, arrangements involving indemnification clauses are subject to the disclosure requirements of FIN 45 only.

13

VARIAN, INC. AND SUBSIDIARY COMPANIES

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

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

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

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

Note 11.    Common Stock

Stock-Based Compensation. In November 2004, the Company granted 24,850 shares of unvested common stock to its executive officers under the Company’s Omnibus Stock Plan. These shares, which were issued upon grant, remain restricted for three years from the grant date and will vest only if the employee is still actively employed by the Company on the vesting date. An aggregate of approximately $0.9 million, representing the fair market value of the unvested shares on the date of the grant, was recorded as deferred compensation (included as a component of stockholders’ equity) and is being recognized by the Company as stock-based compensation expense ratably over the three-year vesting period. During the fiscal quarter ended December 31, 2004, the Company recognized approximately $40,000 in stock-based compensation expense relating to these unvested stock grants.

Stock Repurchase Program. During fiscal year 2004, the Company’s Board of Directors authorized the Company to repurchase up to 1,000,000 shares of its common stock until September 30, 2007. During the fiscal quarter ended December 31, 2004, there were no shares repurchased under this authorization. As of December 31, 2004, the Company had remaining authorization for future repurchases of approximately 808,000 shares.

14

VARIAN, INC. AND SUBSIDIARY COMPANIES

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

Note 12.    Contingencies

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

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

For certain of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further environmental-related activities or to estimate the future costs of such activities if undertaken. As of December 31, 2004, it was nonetheless estimated that the Company’s share of the future exposure for environmental-related costs for these sites and facilities ranged in the aggregate from $1.3 million to $2.6 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 13 years as of December 31, 2004. No amount in the foregoing range of estimated future costs is believed to be more probable of being incurred than any other amount in such range, and the Company therefore had an accrual of $1.3 million as of December 31, 2004.

As to certain sites and facilities, sufficient knowledge has been gained to be able to better estimate the scope and certain costs of future environmental-related activities. As of December 31, 2004, it was estimated that the Company’s share of the future exposure for these environmental-related costs for these sites and facilities ranged in the aggregate from $4.7 million to $15.8 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of December 31, 2004. As to each of these sites and facilities, it was determined that a particular amount within the range of certain estimated costs was a better estimate of the future environmental-related cost than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, the undiscounted amounts for these sites totaled $6.8 million at December 31, 2004. The Company therefore had an accrual of $4.6 million as of December 31, 2004, which represents the best estimate of its share of these future environmental-related costs discounted at 4%, net of inflation. This accrual is in addition to the $1.3 million described in the preceding paragraph.

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

15

VARIAN, INC. AND SUBSIDIARY COMPANIES

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

An insurance company has agreed to pay a portion of certain of VAI’s (now VMS’) future environmental-related costs for which the Company has an indemnification obligation, and the Company therefore has a short-term receivable of $0.1 million in accounts receivable and a $1.1 million receivable (discounted at 4%, net of inflation) in other assets as of December 31, 2004 for the Company’s share of such recovery. The Company has not reduced any environmental-related liability in anticipation of recoveries from third parties.

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

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

Note 13.    Defined Benefit Retirement Plans

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

	Fiscal Quarter Ended
	December 31, 2004			January 2, 2004
(in thousands)
Service cost, net of plan participant contributions	$	289		$	724
Interest cost		810			750
Expected return on plan assets		(806	)		(712	)
Amortization of prior service cost and actuarial gains and losses		50			157
Settlement loss		1,477			—
Net periodic pension cost	$	1,820		$	919

Defined Benefit Pension Plan Settlement. During the first quarter of fiscal year 2005, the Company settled a defined benefit pension plan in Australia, which resulted in a settlement loss of approximately $1.5 million. This loss offset a net curtailment gain of approximately $1.2 million recorded relating to this pension plan in the third and fourth quarters of fiscal year 2004.

Employer Contributions. During the first quarter of fiscal year 2005, the Company made contributions totaling $0.2 million to its defined benefit pension plans. The Company currently anticipates contributing an additional $0.7 million to these plans in fiscal year 2005.

16

VARIAN, INC. AND SUBSIDIARY COMPANIES

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

Note 14.    Industry Segments

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

These segments were determined based on how management views and evaluates the Company’s operations as required by SFAS 131, Disclosures about Segments of an Enterprise and Related Information. Management also views and evaluates as its “core business” the combined operations of the Company’s Scientific Instruments and Vacuum Technologies segments.

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

	Sales				Pretax Earnings
	Fiscal Quarter Ended				Fiscal Quarter Ended
	December 31, 2004		January 2, 2004		December 31, 2004			January 2, 2004
(in millions)
Scientific Instruments	$	156.0	$	134.1	$	11.2		$	12.7
Vacuum Technologies		35.0		31.3		6.2			4.8
Electronics Manufacturing		44.9		47.1		4.6			5.1
Total industry segments		235.9		212.5		22.0			22.6
General corporate		—		—		(3.6	)		(1.6	)
Interest income		—		—		0.9			0.5
Interest expense		—		—		(0.6	)		(0.6	)
Total	$	235.9	$	212.5	$	18.7		$	20.9

17

VARIAN, INC. AND SUBSIDIARY COMPANIES

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

Note 15.    Acquisitions

Magnex Scientific Limited. In November 2004, the Company acquired Magnex for approximately $32.3 million in cash and assumed net debt, subject to certain net asset adjustments. The transaction also includes an opportunity for additional purchase price payments of up to $6.0 million over a three-year period, depending on the performance of the Magnex business relative to certain financial targets. Magnex designs, develops, manufactures, sells, and services superconducting magnets for human and other magnetic resonance (“MR”) imaging, NMR, and Fourier Transform mass spectroscopy, and gradients for MR microscopy. These magnets are used in the Company’s NMR and MR imaging systems, and are also sold to original equipment manufacturers and end-users. The Magnex business became part of the Company’s Scientific Instruments segment.

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

	Amount Allocated
(in millions)
Accounts receivable, net	$	6.0
Inventories		23.5
Other current assets		1.7
Property, plant, and equipment		3.1
Goodwill		16.0
Identified intangible assets		12.6
Total assets acquired		62.9
Liabilities assumed		(31.3	)
Net assets acquired		31.6
Purchased in-process research and development		0.7
Total consideration	$	32.3

The amounts allocated to identified intangible assets are based upon a preliminary analysis which utilized the income approach, the royalty savings approach, and the cost approach to determine the fair value of significant identified intangible assets acquired in the transaction. The identified intangible assets are being amortized using the straight-line method over their respective estimated useful lives (weighted average of 6.0 years). The amount allocated to in-process research and development (which was immediately expensed) related to MR imaging products that were in the research and development stage at the time of the acquisition. Risk-adjusted discount rates ranging from 15.0% to 18.0% were applied to cash flow projections to determine the present value of the different intangible assets including the in-process research and development.

The Magnex acquisition was accounted for using the purchase method of accounting. Accordingly, the unaudited condensed consolidated statement of earnings for the fiscal quarter ended December 31, 2004 includes the results of operations of Magnex since the effective date of its purchase. Significant purchase accounting adjustments were made to conform Magnex’s revenue recognition policy with the Company’s policy under U.S. GAAP (these adjustments are reflected in purchase price allocation set forth above). Pro forma sales, earnings from operations, net earnings, and net earnings per share have not been presented because the effect of this acquisition was not material.

18

VARIAN, INC. AND SUBSIDIARY COMPANIES

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

The purchase price allocation for Magnex is preliminary pending finalization of the intangible asset valuation, which is expected during the fiscal quarter ending April 1, 2005. Upon completion of this matter, any necessary adjustments will be made to the preliminary purchase price allocation and will result in corresponding adjustments to goodwill.

Digilab Business. In September 2004, the Company acquired certain assets of Digilab, LLC (the “Digilab Business”) for approximately $14.0 million in cash, subject to certain net asset adjustments. The transaction also includes an opportunity for an additional purchase price payment of up to $10.0 million if the acquired product lines reach specific financial performance targets during the 12-month period following closing.

As a result of the completion of the final intangible asset valuation and certain other tasks completed during the first quarter of fiscal year 2005, certain adjustments were made to the initial purchase price allocation to reflect the Company’s final determination of the fair value of significant intangible assets acquired and to adjust certain other assets and liabilities. These adjustments, which primarily impacted inventories, identified intangible assets and liabilities assumed had no impact on net assets acquired. After reflecting these adjustments, the allocation of the purchase price paid for this acquisition is now as follows:

	Amount Allocated
(in millions)
Accounts receivable, net	$	4.2
Inventories		3.1
Other current assets		0.1
Property, plant, and equipment		0.1
Goodwill		3.7
Identified intangible assets		6.3
Total assets acquired		17.5
Liabilities assumed		(3.6	)
Net assets acquired		13.9
Purchased in-process research and development		0.1
Total consideration	$	14.0

Finalization of the Digilab Business closing balance sheet, which is required for purposes of determining whether any net asset adjustments are necessary, has not yet been completed. This is expected to take place during the fiscal quarter ending April 1, 2005. Upon completion of this matter, any necessary adjustments will be made to the preliminary purchase price allocation and will result in corresponding adjustments to goodwill.

19

VARIAN, INC. AND SUBSIDIARY COMPANIES

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

In connection with the Magnex and Digilab Business acquisitions, the Company has accrued but not yet paid a portion of the purchase price amounts that have been retained pending the final determination of the closing balance sheet and/or to secure the sellers’ indemnification obligations. As of December 31, 2004, retained amounts for the Magnex acquisition included $1.0 million relating to the closing balance sheet (which was paid during the second quarter of fiscal year 2005) and $6.0 million relating to the sellers’ indemnification obligations, which is due to be paid (or received in the form of notes payable by the Company at the payees’ election) in two equal installments on the first and second anniversaries of the closing of that acquisition (net of any indemnification claims). The retained amount for the Digilab Business acquisition, which is due to be paid during fiscal year 2005 (net of any indemnification claims), totaled approximately $2.1 million at December 31, 2004. In addition to these retained payments, the Company is, from time to time, obligated to pay additional cash purchase price amounts in the event that certain financial or operational milestones are met by the acquired businesses. As of December 31, 2004, up to a maximum of approximately $25.5 million could be payable through fiscal year 2007 under these contingent consideration arrangements. Of this maximum amount, a total of $10.0 million relates to the Digilab Business acquisition and can be earned if acquired product lines reach specific financial performance targets through fiscal year 2005, and $6.0 million relates to the Magnex acquisition and can be earned over a three-year period, depending on the performance of the Magnex business relative to certain financial targets. The balance of approximately $9.5 million relates to the acquisition of Bear Instruments, Inc. in fiscal year 2001 and can be earned if acquired product lines reach specific financial performance targets through fiscal year 2006. Any contingent payments made will be recorded as additional goodwill at the time they are earned.

Note 16.    Income Taxes

During the first quarter of fiscal year 2005, the Company recorded a discrete, one-time reduction in income tax expense of approximately $3.0 million as a result of a change in the treatment of foreign tax credits under new U.S. law enacted during the quarter. This reduction was partially offset by approximately $0.2 million increase in tax expense relating to a non-deductible purchased in-process research and development charge recorded during the same period.

Note 17.    Recent Accounting Pronouncements

In December 2003, the FASB issued a proposed amendment to SFAS 128, Earnings per Share, to make it consistent with International Accounting Standard 33, Earnings per Share, so as to make earnings per share computations comparable on a global basis. As currently drafted, the amendment would require companies to use the year-to-date average stock price to compute the number of treasury shares that could theoretically be purchased with the proceeds from exercise of share contracts such as options or warrants. The current method of calculating earnings per share requires companies to calculate an average of the potential incremental common shares computed for each quarter when computing year-to-date incremental shares. The proposed amendment would also change other aspects of SFAS 128 that would not impact the Company’s earnings per share calculations. The amended standard is expected to be issued in 2005 and when issued, the provisions of the final standard will be effective in 2005 and will require retrospective application for all prior periods presented. Should the proposed statement be finalized in its current form (including the proposed effective date), its adoption is not expected to have a material impact on the Company’s financial condition or results of operations.

20

VARIAN, INC. AND SUBSIDIARY COMPANIES

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

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95, which addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of that company or liabilities that are based on the fair value of that company’s equity instruments, or that may be settled by the issuance of such equity instruments. The standard eliminates the Companies’ ability to account for share-based compensation transactions using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and requires that such transactions be accounted for using a fair value-based method and recognized as expense in the Consolidated Statement of Earnings. Under SFAS 123, the Company is required to determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The Company currently uses the Black-Scholes option-pricing model to value options for financial statement disclosure purposes. The use of a different model to value options may result in a different fair value than the use of the Black-Scholes option-pricing model. In addition, the adoption of SFAS 123 will require additional accounting related to the tax benefit on employee stock options and for stock issued under the Company’s employee stock purchase plan. The Company is required to adopt SFAS 123 in the fourth quarter of fiscal year 2005. The Company is evaluating the requirements of SFAS 123 and expects its adoption could have a material impact on the Company’s results of operations.

In November 2004, the FASB issued SFAS 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. The amendments made by SFAS 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect the adoption of SFAS 151 to have a material impact on its financial condition or results of operations.

In December 2004, the FASB issued FASB Staff Position No. (“FSP”) 109-1, Application of FASB 109, Accounting for Incomes Taxes, to the Tax Deduction on Qualified Production Activities provided by the American Jobs Creation Act of 2004 (the “Act”). The Act, which became law in October 2004, provides for a special tax deduction on qualified domestic production activities income that is defined by the Act. The FASB has decided that these amounts should be recorded as a special deduction, and recorded in the year earned. The Company has not yet determined the impact that the adoption of FSP 109-1 will have on its financial condition or results of operations.

Note 18.    Subsequent Events

Agreement to Sell Electronics Manufacturing Business. On February 4, 2005, the Company and Jabil Circuit, Inc. (“Jabil”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) providing for the sale of substantially all of the assets of the Company’s Electronics Manufacturing segment (the “Electronics Manufacturing Business”) to Jabil. Under the terms of the Purchase Agreement, Jabil will pay to the Company $195 million in cash (subject to a working capital adjustment) and assume certain liabilities and obligations of the Electronics Manufacturing Business at the closing of the transactions contemplated by the Purchase Agreement (the “Closing”). In addition, effective as of the Closing, the Company and Jabil will enter into a four-year Supply Agreement pursuant to which Jabil will continue to supply certain products to the Company that are currently manufactured by the Electronics Manufacturing Business for the Company and its affiliates. Completion of the Purchase Agreement and Closing are subject to customary closing conditions, including expiration of the applicable waiting period under the Hart-Scott-Rodino Act, which is expected to occur within 30 days.

21

VARIAN, INC. AND SUBSIDIARY COMPANIES

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

For purposes of these unaudited condensed consolidated financial statements, the Electronics Manufacturing Business has been classified and treated as held and used under SFAS 144, Accounting for the Disposal or Impairment of Long-Lived Assets. However, the Company expects to reclassify the Electronics Manufacturing Business as discontinued operations under SFAS 144 for disclosure purposes in future periods. As of December 31, 2004, the carrying amounts of major classes of assets and liabilities included in these unaudited condensed consolidated financial statements relating to the Electronics Manufacturing Business were as follows:

	Carrying Amount
(in millions)
Assets
Accounts receivable	$	30.5
Inventories		37.8
Other current assets		0.5
Total current assets		68.8
Property, plant, and equipment		22.9
Goodwill		2.1
Total assets	$	93.8
Liabilities
Accounts payable	$	16.6
Accrued liabilities		2.1
Total current liabilities		18.7
Long-term liabilities		—
Total liabilities	$	18.7

Stock Repurchase Program. On February 4, 2005, the Company’s Board of Directors conditionally approved a new authorization under which the Company may repurchase up to $145 million of its common stock. That repurchase authorization is contingent upon the closing of the sale of the Electronics Manufacturing Business, and is effective until September 30, 2006. If that condition is satisfied, this new repurchase authorization will replace the prior repurchase authorization approved in May 2004 (purchases under which will not count toward the $145 million authorized under the new repurchase program).

22

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

Caution Regarding Forward-Looking Statements

Throughout this Report, and particularly in this Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations, there are forward-looking statements that are based upon our current expectations, estimates, and projections, and that reflect our beliefs and assumptions based upon information available to us at the date of this Report. In some cases, you can identify these statements by words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” and other similar terms. These forward-looking statements include those relating to the timing and amount of anticipated restructuring costs and related costs savings, our current expectations relating to our effective income tax rate, anticipated capital expenditures and anticipated Sarbanes-Oxley Act Section 404 compliance costs.

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

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

23

Results of Operations

First Quarter of Fiscal Year 2005 Compared to First Quarter of Fiscal Year 2004

Segment Results

Our operations are grouped into three reportable business segments: Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing. The following table presents comparisons of our sales and operating earnings for each of our segments and in total for the first quarters of fiscal years 2005 and 2004:

	Fiscal Quarter Ended										Increase (Decrease)
	December 31, 2004					January 2, 2004
	$			% of Sales		$			% of Sales		$			%
(dollars in millions)
Sales by Segment:
Scientific Instruments	$	156.0				$	134.1				$	21.9		16.3	%
Vacuum Technologies		35.0					31.3					3.7		11.8
Electronics Manufacturing		44.9					47.1					(2.2	)	(4.6	)
Total company	$	235.9				$	212.5				$	23.4		11.0	%
Operating Earnings by Segment:
Scientific Instruments	$	11.2		7.2	%	$	12.7		9.5	%	$	(1.5	)	(11.8	)%
Vacuum Technologies		6.2		17.6			4.8		15.4			1.4		27.4
Electronics Manufacturing		4.6		10.2			5.1		10.8			(0.5	)	(9.8	)
Total segments		22.0		9.3			22.6		10.7			(0.6	)	(2.7	)
General corporate		(3.6	)	(1.5	)		(1.6	)	(0.8	)		2.0		114.0
Total company	$	18.4		7.8	%	$	21.0		9.9	%	$	(2.6	)	(12.4	)%

Scientific Instruments. The increase in Scientific Instruments sales was primarily attributable to higher volume, particularly in Europe. Increased customer demand for our information rich detection products, particularly NMR and spectroscopy products, as well as those obtained through the acquisitions of Magnex Scientific Limited (“Magnex”) in November 2004 and of a product line from Digilab LLC (the “Digilab Business”) in September 2004, drove higher sales volume in both life science and industrial applications.

Scientific Instruments operating earnings for the first quarters of fiscal years 2005 and 2004 reflect pretax restructuring and other related costs of $1.2 million and $0.2 million, respectively (see Restructuring Activities below), and acquisition-related intangible amortization of $1.5 million and $0.7 million, respectively. In addition, operating earnings for the first quarter of fiscal year 2005 include the impact of an in-process research and development charge of $0.7 million as well as amortization of $1.6 million related to inventory written up in connection with the acquisitions of Magnex and the Digilab Business. Excluding the impact of these items, the increase in operating earnings as a percentage of sales resulted primarily from a favorable shift in overall product mix and efficiency improvements. The increase from these positive factors was partially offset by the adverse impact of higher sales of lower margin high-field NMR and MR imaging systems due in part to the Magnex acquisition and transition costs relating to the Magnex and Digilab Business acquisitions on operating profit margins.

Vacuum Technologies. The increase in Vacuum Technologies sales resulted primarily from an increase in the volume of products sold, particularly those serving life science applications. The increase in Vacuum Technologies operating earnings as a percentage of sales was primarily attributable to the positive impact of sales volume leverage and cost reduction initiatives on manufacturing costs and operating expenses and a shift in product mix toward higher-margin products.

24

Electronics Manufacturing. The decrease in Electronics Manufacturing sales was due to inventory adjustments made by a large customer during the first quarter of fiscal year 2005. Excluding the impact of this customer’s inventory adjustments, sales increased primarily as a result of higher volume from industrial customers. The decrease in Electronics Manufacturing operating earnings as a percentage of sales was primarily due to higher start-up costs relating to new business from both existing and new customers and a shift in product mix toward some lower-margin industrial equipment products.

Consolidated Results

The following table presents comparisons of our sales and other selected consolidated financial results for the first quarter of fiscal years 2005 and 2004:

	Fiscal Quarter Ended										Increase (Decrease)
	December 31, 2004					January 2, 2004
	$			% of Sales		$			% of Sales		$			%
(dollars in millions, except per share data)
Sales	$	235.9		100.0	%	$	212.5		100.0	%	$	23.4		11.0	%
Gross profit	$	87.8		37.2		$	79.8		37.5		$	8.0		10.1
Operating expenses:
Sales and marketing		39.9		16.9			37.2		17.5			2.7		7.3
Research and development		12.8		5.4			11.1		5.2			1.7		15.1
General and administrative		16.0		6.8			10.5		4.9			5.5		52.8
Purchased in-process research and development		0.7		0.3			—		—			0.7		100
Total operating expenses		69.4		29.4			58.8		27.6			10.6		18.1
Operating earnings		18.4		7.8			21.0		9.9			(2.6	)	(12.4	)
Interest income		0.9		0.3			0.5		0.2			0.4		69.7
Interest expense		(0.6	)	(0.2	)		(0.6	)	(0.3	)		—		—
Income tax expense		(3.8	)	(1.6	)		(7.3	)	(3.4	)		(3.5	)	(48.0	)
Net earnings	$	14.9		6.3	%	$	13.6		6.4	%	$	1.3		9.9	%
Net earnings per diluted share	$	0.42				$	0.38				$	0.04

Sales. As shown above, sales by the Scientific Instruments, Vacuum Technologies, and Electronics Manufacturing segments increased (decreased) by 16.3%, 11.8%, and (4.6%), respectively, compared to the prior-year quarter. The overall improvement in sales was primarily attributable to continued acceptance of our newer products for both life science and industrial applications, including those obtained through the Magnex and Digilab Business acquisitions.

Geographically, sales in North America of $121.6 million, Europe of $77.3 million, and the rest of the world of $37.0 million in the first quarter of fiscal year 2005 represented increases of 1.3%, 29.1%, and 13.4%, respectively, compared to the first quarter of fiscal year 2004. Sales by all three segments increased across all major geographic regions that they served except for sales by the Vacuum Technologies and Electronics Manufacturing segments into North America, which were flat and slightly lower, respectively. The decrease in Electronics Manufacturing sales in North America in the first quarter of fiscal year 2005 was due to a large customer’s inventory adjustments in that period. These factors were more than offset by higher sales in North America by the Scientific Instruments segment. The increase in Europe was driven by increased Scientific Instruments and Vacuum Technologies sales volume; in part, this reflects the currency effect of the stronger Euro in the first quarter of fiscal year 2005.

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Gross Profit. Gross profit for the first quarter of fiscal year 2005 reflects the impact of $1.6 million in amortization expense related to inventory written up in connection with the Magnex and the Digilab Business acquisitions (this amount was included in cost of sales). Excluding the impact of this amortization, the increase in gross profit percentage resulted from a shift in sales mix toward the Scientific Instruments and Vacuum Technologies segments, which have significantly higher gross profit margins than the Electronics Manufacturing segment, as well as sales volume leverage and a shift in product mix to higher-margin products in the Vacuum Technologies segment. The increase in the gross profit percentage due to these factors was between one-half and one percent. This increase was partially offset by the impact of higher sales of lower-margin leading edge NMR and MR imaging products within the Scientific Instruments segment in the first quarter of fiscal year 2005 due in part to the Magnex acquisition. The decrease in gross profit percentage from this was less than one-half of one percent.

Sales and Marketing. The decrease in sales and marketing expenses as a percentage of sales resulted primarily from higher sales volume leverage and the positive effects of efficiency improvements in the first quarter of fiscal year 2005. In absolute dollars, the increase in sales and marketing expenses primarily related to the acquisitions of Magnex and the Digilab Business and the impact of the weaker U.S. dollar, which increased costs for most of our non-U.S. operations.

Research and Development. The increase in research and development as a percentage of sales was due primarily to our continued focus within the Scientific Instruments and Vacuum Technologies segments on new product development with an emphasis on life science applications, including costs relating to the acquisitions of Magnex and the Digilab Business. The weaker U.S. dollar also contributed to the increase, as the costs of certain non-U.S. based research and development resources were higher.

General and Administrative. General and administrative expenses for the first quarter of fiscal year 2005 included approximately $1.2 million in pretax restructuring and other related costs, approximately $1.5 in amortization expense relating to acquisition-related intangible assets, and a pretax loss of approximately $1.5 million relating to the settlement of a defined benefit pension plan in Australia (this settlement loss offset a related defined benefit plan curtailment gain of approximately $1.2 million recorded in second half of fiscal year 2004). In comparison, general and administrative expenses for the first quarter of fiscal year 2004 included approximately $0.2 million in pretax restructuring costs and approximately $0.7 million in acquisition-related intangible amortization. Excluding the impact of these items, the increase in general and administrative expenses as a percentage of sales was primarily due to general and administrative costs relating to the acquisitions of Magnex and the Digilab Business, higher Sarbanes-Oxley compliance costs, and the impact of the weaker U.S. dollar, which increased costs for most of our non-U.S. operations.

We currently anticipate that general and administrative expenses will continue to be adversely impacted for the remainder of fiscal year 2005 by high initial costs to comply with the requirements of Section 404 of the Sarbanes-Oxley Act.

Purchased In-Process Research and Development. In connection with the Magnex acquisition in November 2004, we recorded a one-time charge of approximately $0.7 million for purchased in-process research and development relating to several MR imaging products that were in process at the time the acquisition was completed. No such charges were recorded in the first quarter of fiscal year 2004.

Restructuring Activities.

Fiscal Year 2005 Plan. During the first quarter of fiscal year 2005, we undertook certain restructuring actions to rationalize our Scientific Instruments field support administration in the United Kingdom following the completion of our acquisition of Magnex. These actions were undertaken to achieve operational efficiencies and eliminate redundant costs resulting from the acquisition which involved the termination of approximately 20 employees, the consolidation of certain field support administrative functions currently located in our Walton, U.K. location to Magnex’s location in Oxford, U.K. and the closure of the Walton facility. Restructuring and other-related costs relating to this plan are expected to be included in general and administrative expenses.

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The following table sets forth changes in our liability relating to the foregoing restructuring plan during the first quarter of fiscal year 2005:

	Employee- Related		Facilities- Related		Total
(in thousands)
Balance at October 1, 2004	$	—	$	—	$	—
Charges to expense		270		—		270
Balance at December 31, 2004	$	270	$	—	$	270

In addition to the foregoing restructuring costs, we incurred approximately $0.1 million in other costs relating directly to the consolidation of certain field support administrative functions from our Walton location to Magnex’s Oxford location during the first quarter of fiscal year 2005. This amount was comprised of non-cash charges for accelerated depreciation of assets to be disposed of upon the closure of the Walton facility and employee retention costs which will be settled in cash.

We currently anticipate that general and administrative expenses for the second quarter of fiscal year 2005 will include approximately $1.6 million in pretax restructuring costs and approximately $0.6 million in other related costs in connection with the Walton facility consolidation and closure. Substantially all of the $0.6 million in other related costs is comprised of anticipated facility and employee relocation and employee training costs. Substantially all actions under the plan are expected to be completed by the end of the second quarter of fiscal year 2005.

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

The following table sets forth changes in our liability relating to the foregoing restructuring plan during the first quarter of fiscal year 2005:

	Employee- Related			Facilities- Related		Total
(in thousands)
Balance at October 1, 2004	$	665		$	—	$	665
Charges to expense		335			—		335
Cash payments		(23	)		—		(23	)
Foreign currency impacts and other adjustments		21			—		21
Balance at December 31, 2004	$	998		$	—	$	998

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

The following table sets forth changes in our liability relating to the foregoing restructuring plan during the first quarter of fiscal year 2005:

	Employee- Related			Facilities- Related		Total
(in thousands)
Balance at October 1, 2004	$	859		$	—	$	859
Reversals of expense, net		(11	)		—		(11	)
Cash payments		(224	)		—		(224	)
Balance at December 31, 2004	$	624		$	—	$	624

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

The following table sets forth changes in our liability relating to the foregoing restructuring activities during the first quarter of fiscal year 2005:

	Employee- Related			Facilities- Related			Total
(in thousands)
Balance at October 1, 2004	$	149		$	830		$	979
Charges to expense, net		—			402			402
Cash payments		(63	)		(296	)		(359	)
Foreign currency impacts and other adjustments		1			16			17
Balance at December 31, 2004	$	87		$	952		$	1,039

The non-cash portion of restructuring costs recorded by the Company in connection with these restructuring actions was not significant, either in the aggregate or for any single period.

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In addition to the foregoing restructuring costs, the Company incurred approximately $0.1 million in other costs relating directly to the Southern California facility consolidation during the first quarter of fiscal year 2005. These costs primarily related to non-cash charges for accelerated depreciation of assets to be disposed of upon the closure of facilities.

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

Restructuring Plan	Estimated Annual Cost Savings
Fiscal Year 2003 Plan (Scientific Instruments resource realignment including employee terminations, sales office closures, and Southern California consumable product factory consolidation)	$9.0 million - $11.0 million
Fiscal Year 2004 Plan (Scientific Instruments factory management)	$0.6 million - $0.8 million
Fiscal Year 2004 Plan (Scientific Instruments and corporate marketing organizations; Scientific Instruments administrative functions)	$1.0 million - $1.5 million
Fiscal Year 2005 Plan (Scientific Instruments U.K. field support administration)	$0.8 million - $1.2 million

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

Income Tax Expense. The effective income tax rate was 20.3% for the first quarter of fiscal year 2005, compared to 35.0% for the first quarter of fiscal year 2004. The lower rate in the first quarter of fiscal year 2005 was due to a discrete, one-time reduction in income tax expense of $3.0 million recorded during the period as a result of a change in the treatment of foreign tax credits under new U.S. law enacted during the quarter. This reduction was partially offset as a result of the purchased in-process research and development charge recorded during the same period, which increased the effective income tax rate because it was not tax deductible. Excluding the impact of these two discrete items, the effective income tax rate was the same in the first quarters of fiscal years 2005 and 2004.

Net Earnings. Net earnings for the first quarter of fiscal year 2005 reflect the impact of approximately $1.2 million in pretax restructuring and other related costs, approximately $1.5 million in pretax acquisition-related intangible amortization, approximately $1.6 million in pretax amortization related to inventory written up in connection with acquisitions, an in-process research and development charge of approximately $0.7 million related to the Magnex acquisition, a pretax loss of approximately $1.5 million relating to the settlement of a defined benefit pension plan in Australia (this settlement loss offset a related defined benefit plan curtailment gain of approximately $1.2 million recorded in fiscal year 2004), and a discrete, one-time reduction in income tax expense of $3.0 million recorded during the period as a result of a change in the treatment of foreign tax credits under new U.S. law enacted during the quarter. Net earnings for the first quarter of fiscal year 2004 reflect the impact of approximately $0.2 million in pretax restructuring costs and other related costs and approximately $0.7 million in pretax acquisition-related intangible amortization. Excluding the impact of these items, the increase in net earnings resulted primarily from increased sales and improved operating profit margins in our Scientific Instruments and Vacuum Technologies segments in the first quarter of fiscal year 2005.

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Liquidity and Capital Resources

We generated $24.8 million of cash from operating activities in the first quarter of fiscal year 2005, which compares to $15.7 million generated in the first quarter of fiscal year 2004. The increase in cash from operating activities resulted primarily from a higher cash inflows resulting from decreases in accounts receivable ($15.2 million) and inventories ($8.0 million), partially offset by higher cash outflows resulting from decreases in accounts payable ($6.7 million). The relative increase in cash provided by accounts receivable was primarily attributable to stronger cash collections in the first quarter of fiscal year 2005. The average number of days that accounts receivable were outstanding was 67 and 69 in the first quarters of fiscal year 2005 and 2004, respectively. The relative decrease in cash used for inventory during the first quarter of fiscal year 2005 was primarily due to the timing of inventory purchases and deliveries for NMR and MR imaging systems, partially offset by an increase in inventory to support an anticipated increase in shipments by the Electronics Manufacturing segment in the second quarter of fiscal year 2005. Inventory turnover was 3.9 and 4.1 in the first quarters of fiscal year 2005 and 2004, respectively. The decrease in cash from operating activities relating to these changes in accounts receivable and inventories was partially offset by the cash flow impact of a larger decrease in accounts payable in the first quarter of fiscal year 2005. This decrease was primarily due to the timing of payments to vendors.

We used $31.6 million of cash for investing activities in the first quarter of fiscal year 2005, which compares to $4.3 million used for investing activities in the first quarter of fiscal year 2005. The increase in cash used for investing activities was primarily due to the acquisition of Magnex in the first quarter of fiscal year 2005. No significant acquisition-related cash payments were made in the first quarter of fiscal year 2004.

We generated $2.1 million of cash from financing activities in the first quarter of fiscal year 2005, which compares to $6.5 million generated from financing activities in the first quarter of fiscal year 2004. The decrease in cash generated from financing activities was primarily due to fewer stock option exercises, which resulted in a decrease in proceeds from the issuance of common stock.

During fiscal year 2003, we established a short-term bank credit facility in Japan in the amount of 300 million yen (approximately $2.9 million at December 31, 2004). The credit facility is available to our wholly owned Japanese subsidiary for working capital purposes. As of December 31, 2004, no amounts were outstanding under this credit facility and 300 million yen (approximately $2.9 million) was available for future borrowing. This credit facility contains certain covenants that limit future borrowings under this facility, with which we were in compliance at December 31, 2004.

In addition to these bank credit facilities, as of December 31, 2004, we had a total of $87.4 million in other uncommitted and unsecured credit facilities for working capital purposes with interest rates to be established at the time of borrowing. No borrowings were outstanding under these credit facilities as of December 31, 2004. All of these credit facilities contain certain customary conditions and events of default, with which we were in compliance at December 31, 2004. Of the $87.4 million in uncommitted and unsecured credit facilities, a total of $52.9 million was limited for use by, or in favor of, certain subsidiaries at December 31, 2004, and a total of $15.4 million of this $52.9 million was being utilized in the form of bank guarantees or short-term standby letters of credit. These guarantees and letters of credit related primarily to advance payments or deposits made to our subsidiaries by customers for which separate liabilities were recorded in the unaudited condensed consolidated financial statements at December 31, 2004. No amounts had been drawn by beneficiaries under these or any other outstanding guarantees or letters of credit as of that date.

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As of December 31, 2004, we had $31.2 million in term loans outstanding compared to $32.5 million at October 1, 2004. As of both December 31, 2004 and October 1, 2004, fixed interest rates on the term loans ranged from 6.7% to 7.2%. The weighted-average interest rate on the term loans was 6.8% at both December 31, 2004 and October 1, 2004. The term loans contain certain covenants that limit future borrowings and the payment of cash dividends and require the maintenance of certain levels of working capital and operating results. We were in compliance with all restrictive covenants of the term loan agreements at December 31, 2004. We also had other long-term notes payable of $4.5 million as of December 31, 2004 with a weighted-average interest rate of 0.0% and $4.2 million as of October 1, 2004 with a weighted-average interest rate of 0.0%.

In connection with the Magnex and Digilab Business acquisitions, the Company has accrued but not yet paid a portion of the purchase price amounts that have been retained pending the final determination of the closing balance sheet and/or to secure the sellers’ indemnification obligations. As of December 31, 2004, retained amounts for the Magnex acquisition included $1.0 million relating to the closing balance sheet (which was paid during the second quarter of fiscal year 2005) and $6.0 million relating to the sellers’ indemnification obligations, which is due to be paid (or received in the form of notes payable by the Company at the payees’ election) in two equal installments on the first and second anniversaries of the closing of that acquisition (net of any indemnification claims). The retained amount for the Digilab Business acquisition, which is due to be paid during fiscal year 2005 (net of any indemnification claims), totaled approximately $2.1 million at December 31, 2004. In addition to these retained payments, the Company is, from time to time, obligated to pay additional cash purchase price amounts in the event that certain financial or operational milestones are met by the acquired businesses. As of December 31, 2004, up to a maximum of approximately $25.5 million could be payable through fiscal year 2007 under these contingent consideration arrangements. Of this maximum amount, a total of $10.0 million relates to the Digilab Business acquisition and can be earned if acquired product lines reach specific financial performance targets through fiscal year 2005, and $6.0 million relates to the Magnex acquisition and can be earned over a three-year period, depending on the performance of the Magnex business relative to certain financial targets. The balance of approximately $9.5 million relates to the acquisition of Bear Instruments, Inc. in fiscal year 2001 and can be earned if acquired product lines reach specific financial performance targets through fiscal year 2006. Any contingent payments made will be recorded as additional goodwill at the time they are earned.

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

As of December 31, 2004, we had cancelable commitments to a contractor for capital expenditures totaling approximately $1.2 million relating to the ongoing consolidation of three consumable products factories into one in Southern California. In the event that these commitments are canceled for reasons other than the contractor’s default, we may be responsible for reimbursement of actual costs incurred by the contractor. We had no material non-cancelable commitments for capital expenditures as of December 31, 2004. In the aggregate, we currently anticipate that our capital expenditures will be between $20 million and $25 million during the remaining nine months of fiscal year 2005.

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

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Contractual Obligations and Other Commercial Commitments

The following table summarizes future principal payments on outstanding debt and minimum rentals due for certain facilities and other leased assets under long-term, non-cancelable operating leases as of December 31, 2004:

	Nine Months Ending Sept. 30, 2005		Fiscal Years												Total
			2006		2007		2008		2009		2010		Thereafter
(in thousands)
Operating leases	$	8,129	$	6,713	$	4,598	$	3,734	$	3,456	$	3,001	$	30,815	$	60,446
Long-term debt (including current portion)		5,709		2,500		2,500		6,250		—		6,250		12,500		35,709
Total contractual cash obligations	$	13,838	$	9,213	$	7,098	$	9,984	$	3,456	$	9,251	$	43,315	$	96,155

In addition to the non-cancelable contractual obligations included in the above table and the cancelable commitments for capital expenditures of approximately $1.2 million described under Liquidity and Capital Resources above, we had cancelable commitments to purchase certain superconducting magnets intended for use with leading-edge NMR systems totaling approximately $16.8 million, net of deposits paid, as of December 31, 2004. In the event that these commitments are canceled for reasons other than the supplier’s default, we may be responsible for reimbursement of actual costs incurred by the supplier.

As of December 31, 2004, we did not have any off-balance sheet commercial commitments that could result in a significant cash outflow upon the occurrence of some contingent event, except for contingent payments of up to a maximum of $25.5 million related to acquisitions as discussed under Liquidity and Capital Resources above, the specific timing and amounts of which are not currently determinable.

Recent Accounting Pronouncements

In December 2003, the FASB issued a proposed amendment to SFAS 128, Earnings per Share, to make it consistent with International Accounting Standard 33, Earnings per Share, so as to make earnings per share computations comparable on a global basis. As currently drafted, the amendment would require companies to use the year-to-date average stock price to compute the number of treasury shares that could theoretically be purchased with the proceeds from exercise of share contracts such as options or warrants. The current method of calculating earnings per share requires companies to calculate an average of the potential incremental common shares computed for each quarter when computing year-to-date incremental shares. The proposed amendment would also change other aspects of SFAS 128 that would not impact our earnings per share calculations. The amended standard is expected to be issued in 2005 and when issued, the provisions of the final standard will be effective in 2005 and will require retrospective application for all prior periods presented. Should the proposed statement be finalized in its current form (including the proposed effective date), its adoption is not expected to have a material impact on our financial condition or results of operations.

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In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment, an amendment of FASB Statements Nos. 123 and 95, which addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of that company or liabilities that are based on the fair value of that company’s equity instruments, or that may be settled by the issuance of such equity instruments. The standard eliminates the Companies’ ability to account for share-based compensation transactions using the intrinsic value method as prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and requires that such transactions be accounted for using a fair value-based method and recognized as expense in our Consolidated Statement of Earnings. Under SFAS 123, we are required to determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. We currently uses the Black-Scholes option-pricing model to value options for financial statement disclosure purposes. The use of a different model to value options may result in a different fair value than the use of the Black-Scholes option-pricing model. In addition, the adoption of SFAS 123 will require additional accounting related to the tax benefit on employee stock options and for stock issued under our employee stock purchase plan. We are required to adopt SFAS 123 in the fourth quarter of fiscal year 2005. We are evaluating the requirements of SFAS 123 and expects its adoption could have a material impact on the Company’s results of operations.

In November 2004, the FASB issued SFAS 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. The amendments made by SFAS 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not expect the adoption of SFAS 151 to have a material impact on our financial condition or results of operations.

In December 2004, the FASB issued FASB Staff Position No. (“FSP”) 109-1, Application of FASB 109, Accounting for Incomes Taxes, to the Tax Deduction on Qualified Production Activities provided by the American Jobs Creation Act of 2004 (the “Act”). The Act, which became law in October 2004, provides for a special tax deduction on qualified domestic production activities income that is defined by the Act. The FASB has decided that these amounts should be recorded as a special deduction, and recorded in the year earned. We have not yet determined the impact that the adoption of FSP 109-1 will have on our financial condition or results of operations.

Risk Factors

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

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

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

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

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

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

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

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

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

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

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

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

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

Our employees based in certain foreign countries are subject to factory-specific and/or industry-wide collective bargaining agreements. Of these, certain of our employees in Australia are subject to a collective bargaining agreement that will need to be renewed in April 2006. A work stoppage, strike, or other labor action at this or other of our facilities could have an adverse effect on our financial condition or results of operations.

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

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

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

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

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

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

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

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

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

We also maintain defined benefit pension plans for our employees in several foreign countries. In accordance with SFAS 87, Employers’ Accounting for Pensions, we utilize a number of assumptions including the expected long-term rate of return on plan assets and the discount rate in order to determine our defined benefit pension plan costs each year. These assumptions are set based on relevant debt, equity, and other market conditions in the countries in which the plans are maintained. We adjust these assumptions each year in response to corresponding changes in the underlying market conditions. Changes in these market conditions result in corresponding changes in our defined benefit pension plan assumptions and costs. These changes could have an adverse effect on our financial condition or results of operations.

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

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

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For certain of these sites and facilities, various uncertainties make it difficult to assess the likelihood and scope of further environmental-related activities or to estimate the future costs of such activities if undertaken. As of December 31, 2004, it was nonetheless estimated that our share of the future exposure for environmental-related costs for these sites and facilities ranged in the aggregate from $1.3 million to $2.6 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 13 years as of December 31, 2004. No amount in the foregoing range of estimated future costs is believed to be more probable of being incurred than any other amount in such range, and we therefore had an accrual of $1.3 million as of December 31, 2004.

As to certain sites and facilities, sufficient knowledge has been gained to be able to better estimate the scope and certain costs of future environmental-related activities. As of December 31, 2004, it was estimated that our share of the future exposure for these environmental-related costs for these sites and facilities ranged in the aggregate from $4.7 million to $15.8 million (without discounting to present value). The time frame over which these costs are expected to be incurred varies with each site and facility, ranging up to approximately 30 years as of December 31, 2004. As to each of these sites and facilities, it was determined that a particular amount within the range of certain estimated costs was a better estimate of the future environmental-related cost than any other amount within the range, and that the amount and timing of these future costs were reliably determinable. Together, the undiscounted amounts for these sites totaled $6.8 million at December 31, 2004. We therefore had an accrual of $4.6 million as of December 31, 2004, which represents the best estimate of our share of these future environmental-related costs discounted at 4%, net of inflation. This accrual is in addition to the $1.3 million described in the preceding paragraph.

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

An insurance company has agreed to pay a portion of certain of VAI’s (now VMS’) future environmental-related costs for which we have an indemnification obligation, and we therefore have a short-term receivable of $0.1 million in accounts receivable and a $1.1 million receivable (discounted at 4%, net of inflation) in other assets as of December 31, 2004 for our share of such recovery. We have not reduced any environmental-related liability in anticipation of recoveries from third parties.

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

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

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk

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

At December 31, 2004, there were no outstanding forward contracts designated as cash flow hedges of forecasted transactions. During the fiscal quarter ended December 31, 2004, no foreign exchange gains or losses from cash flow hedge ineffectiveness were recognized.

Our foreign exchange forward contracts generally range from one to 12 months in original maturity. A summary of all foreign exchange forward contracts that were outstanding as of December 31, 2004 follows:

	Notional Value Sold		Notional Value Purchased
(in thousands)
Euro	$	—	$	54,265
Australian dollar		—		11,800
Japanese yen		4,216		—
British pound		220		—
Danish krona		1,178		—
Canadian dollar		5,730		—
Swedish krona		717		—
	$	12,061	$	66,065

Interest Rate Risk. We have no material exposure to market risk for changes in interest rates. We invest any excess cash primarily in short-term U.S. Treasury securities and money market funds, and changes in interest rates would not be material to our financial condition or results of operations. We enter into debt obligations principally to support general corporate purposes, including working capital requirements, capital expenditures, and acquisitions. At December 31, 2004, our debt obligations had fixed interest rates.

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

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

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Debt Obligations.

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

	Nine Months Ending Sept. 30, 2005			Fiscal Years																		Total
				2006			2007			2008			2009			2010			Thereafter
(dollars in thousands)
Long-term debt (including current portion)	$	5,709		$	2,500		$	2,500		$	6,250		$	—		$	6,250		$	12,500		$	35,709
Average interest rate		1.6	%		7.2	%		7.2	%		6.7	%		—	%		6.7	%		6.7	%		6.0	%

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

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

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

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

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Item 4.    Controls and Procedures

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

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

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PART II

OTHER INFORMATION

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

(c)    During fiscal year 2004, the Company’s Board of Directors authorized the Company to repurchase up to 1,000,000 shares of its common stock until September 30, 2007. No shares were repurchased under this authorization during the fiscal quarter ended December 31, 2004. As of December 31, 2004, the Company had remaining authorization for future repurchases of 807,897 shares.

On February 4, 2005, the Company’s Board of Directors conditionally approved a new authorization under which the Company may repurchase up to $145 million of its common stock. That repurchase authorization is contingent upon the closing of the sale of the Electronics Manufacturing business, and is effective until September 30, 2006. If that condition is satisfied, this new repurchase authorization will replace the prior repurchase authorization approved in May 2004 (purchases under which will not count toward the $145 million authorized under the new repurchase program).

Item 5.    Other Information

Exhibit 10.6, Varian, Inc. Omnibus Stock Plan. On February 3, 2005, the Company’s stockholders approved the amended and restated Varian, Inc. Omnibus Stock Plan (the “Plan”). A total of 10,200,000 shares of the Company’s common stock are authorized for issuance under the Plan, plus however many shares are necessary for stock options as were required to be granted by the Company to (a) Varian Associates, Inc. (“VAI”) employees and directors who became employees or directors of the Company as part of the Company’s spin-off from VAI, (b) VAI employees whose employment with VAI terminated as part of the spin-off from VAI, and (c) VAI directors who did not become directors of the Company, in each case to replace options previously granted by VAI to those employees and directors to acquire VAI shares. Employees of the Company and its affiliates and non-employee directors of the Company may receive awards under the Plan. The Plan permits awards of stock options, stock appreciation rights, restricted stock, stock units, performance units and performance shares (each, an “award”). The Plan is administered by a committee of at least two directors appointed by the board of directors. Awards granted under the Plan generally have terms, such as vesting and exercise or purchase price, determined by the Plan administrator at the time of grant.

Under the terms of the Plan, each non-employee director (other than the Chairman of the board of directors) automatically is granted an option to purchase 10,000 shares of the Company’s common stock on the date of his or her appointment or election as a non-employee director, and is thereafter annually granted an option to purchase 5,000 shares of the Company’s common stock if he or she remains a non-employee director on the grant date. The non-employee Chairman of the board of directors automatically is granted an option to purchase 50,000 shares of the Company’s common stock on the date he or she becomes Chairman. On the first business day following each annual meeting of the Company’s stockholders, each person then serving as a non-employee director automatically is granted stock units having an initial value of $25,000, which vests upon the director’s termination of service as a director and is paid out as soon as possible thereafter.

The Board generally is authorized to amend, suspend or terminate the Plan at any time, but no amendment, suspension or termination of the Plan may adversely affect any award previously granted under the Plan without the written consent of the holder of the award.

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Exhibit 10.21, Description of Compensatory Arrangements Between Varian, Inc. and Non-employee Directors. This exhibit explains the compensation arrangements, which include both cash and equity compensation, between the Company and its non-employee directors. Non-employee directors other than the Chairman of the Board each receive an annual retainer fee of $30,000, cash compensation for each board meeting attended in person ($2,000 per meeting) or by telephone ($1,000 per meeting), and for each board committee meeting attended in person or by telephone ($1,500 per meeting). The non-employee director who chairs the Audit Committee is paid an additional annual retainer of $15,000, the non-employee directors who chair the Compensation and the Nominating and Governance committees of the board are each paid an additional annual retainer of $7,500, and the non-employee Chairman of the Board is paid an annual retainer of $120,000. Employee directors also receive equity compensation under the Plan as described above under the heading Exhibit 10.6, Varian, Inc. Omnibus Stock Plan.

Exhibit 10.23, Stock Unit Agreement for Non-employee Directors under the Plan. On February 4, 2005, the Board of Directors adopted the form of Stock Unit Agreement for non-employee directors under the Plan. The number of stock units granted will represent $25,000 of value as of the grant date, and the stock units will vest upon the director’s termination of service as a director and will be paid out as soon as possible thereafter. Under the terms of the Stock Unit Agreement, the stock units will be paid out in shares. The non-employee director will not have rights as a stockholder with respect to the shares until such shares are paid out. The stock units are not transferable, except to the non-employee director’s designated beneficiary or estate in the event of his or her death. The terms of the Stock Unit Agreement require that the non-employee director make satisfactory arrangements for the payment of any applicable taxes for which the Company is required to withhold.

Item 6.    Exhibits

(a)    Exhibits.

		Incorporated by Reference
Exhibit No.	Exhibit Description	Form	Date	Exhibit Number	Filed Herewith
10.6  *	Amended and Restated Varian, Inc. Omnibus Stock Plan				X
10.21*	Description of Compensatory Arrangements Between Varian, Inc. and Non-Employees Directors				X
10.23*	Varian, Inc. Stock Unit Agreement				X
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X
32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Management contract or compensatory plan or arrangement.

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SIGNATURES

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

	VARIAN, INC. (Registrant)
Date: February 7, 2005	By:	/s/ G. EDWARD MCCLAMMY
		G. Edward McClammy Senior Vice President, Chief Financial Officer and Treasurer (Duly Authorized Officer and Principal Financial Officer)

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EX-10.6

Exhibit 10.6

VARIAN, INC.

OMNIBUS STOCK PLAN

(as amended and restated effective December 2, 2004)

SECTION 1

BACKGROUND, PURPOSE AND DURATION

1.1 Effective Date. The Plan, as amended and restated, is effective as of November 11, 2004, subject to the approval of the amended and restated Plan by a majority of the shares of the Company’s common stock which are present in person or by proxy and entitled to vote at the 2005 Annual Meeting of Stockholders of the Company.

1.2 Purpose of the Plan. The Plan is intended to increase shareholder value and the success of the Company by motivating employees of the Company and its Affiliates and directors of the Company who are employees of neither the Company nor any Affiliate. The Plan is intended to permit the grant of Awards that qualify as performance-based compensation under section 162(m) of the Code.

SECTION 2

DEFINITIONS

The following words and phrases shall have the following meanings unless a different meaning is plainly required by the context:

2.1 “1934 Act” means the Securities Exchange Act of 1934, as amended. Reference to a specific section of the 1934 Act or regulation thereunder shall include such section or regulation, any valid regulation promulgated under such section, and any comparable provision of any future legislation or regulation amending, supplementing or superseding such section or regulation.

2.2 “Affiliate” means any corporation or any other entity (including, but not limited to, partnerships and joint ventures) controlling, controlled by, or under common control with the Company.

2.3 “Award” means, individually or collectively, a grant under the Plan of Non-qualified Stock Options, Incentive Stock Options, SARs, Restricted Stock, Stock Units, Performance Units or Performance Shares.

2.4 “Award Agreement” means the written agreement setting forth the terms and provisions applicable to each Award granted under the Plan.

2.5 “Board” means the Board of Directors of the Company.

2.6 “Code” means the Internal Revenue Code of 1986, as amended. Reference to a specific section of the Code or regulation thereunder shall include such section or regulation, any

valid regulation promulgated thereunder, and any comparable provision of any future legislation or regulation amending, supplementing or superseding such section or regulation.

2.7 “Committee” means the committee appointed by the Board (pursuant to Section 3.1) to administer the Plan.

2.8 “Company” means Varian, Inc., a Delaware corporation, or any successor thereto.

2.9 “Director” means any individual who is a member of the Board.

2.10 “Disability” means a permanent and total disability within the meaning of section 22(e)(3) of the Code, provided that in the case of Awards other than Incentive Stock Options, the Committee in its sole discretion may determine whether a permanent and total disability exists in accordance with uniform and non-discriminatory standards adopted by the Committee from time to time.

2.11 “EBIT” means as to any Performance Period, the Company’s or a business unit’s income before reductions for interest and taxes, determined in accordance with generally accepted accounting principles.

2.12 “EBITA” means as to any Performance Period, the Company’s or a business unit’s income before reductions for interest, taxes and acquisition-related intangible amortization, determined in accordance with generally accepted accounting principles.

2.13 “EBITDA” means as to any Performance Period, the Company’s or a business unit’s income before reductions for interest, taxes, depreciation and amortization, determined in accordance with generally accepted accounting principles.

2.14 “Earnings Per Share” means as to any Performance Period, the Company’s or a business unit’s diluted earnings per share, determined in accordance with generally accepted accounting principles.

2.15 “Employee” means any employee of the Company or of an Affiliate, whether such employee is so employed at the time the Plan is adopted or becomes so employed subsequent to the adoption of the Plan.

2.16 “Exchange Program” means a program established by the Committee under which outstanding Awards are amended to provide for a lower Exercise Price or surrendered or cancelled in exchange for (a) Awards with a lower Exercise Price, (b) a different type of Award, (c) cash, or (d) a combination of (a), (b) and/or (c). Notwithstanding the preceding, the term Exchange Program does not include any (i) program under which an outstanding Award is surrendered or cancelled in exchange for a different type of Award and/or cash having a total value equal to or less than the value of the surrendered or cancelled Award, nor (ii) action described in Section 4.3.

2.17 “Exercise Price” means the price at which a Share may be purchased by a Participant pursuant to the exercise of an Option.

2

2.18 “Fair Market Value” means the last quoted per share selling price for Shares on the relevant date, or if there were no sales on such date, the arithmetic mean of the highest and lowest quoted selling prices on the nearest day before and the nearest day after the relevant date, as determined by the Committee. Notwithstanding the preceding, for federal, state and local income tax reporting purposes, fair market value shall be determined by the Committee in accordance with uniform and nondiscriminatory standards adopted by it from time to time.

2.19 “Fiscal Year” means any fiscal year of the Company.

2.20 “Grant Date” means, with respect to an Award, the date that the Award was granted.

2.21 “Incentive Stock Option” means an Option to purchase Shares which is designated as an Incentive Stock Option and is intended to meet the requirements of section 422 of the Code.

2.22 “Net Income” means as to any Performance Period, the Company’s or a business unit’s income after taxes, determined in accordance with generally accepted accounting principles.

2.23 “Non-employee Director” means a Director who is an employee of neither the Company nor of any Affiliate.

2.24 “Non-qualified Stock Option” means an option to purchase Shares which is not intended to be an Incentive Stock Option.

2.25 “Operating Cash Flow” means as to any Performance Period, the Company’s or a business unit’s net cash provided by operating activities, determined in accordance with generally accepted accounting principles, less net capital expenditures.

2.26 “Option” means an Incentive Stock Option or a Non-qualified Stock Option.

2.27 “Participant” means an Employee who has been selected by the Committee for participation in the Plan or a Non-employee Director who has an outstanding Award.

2.28 “Performance Goals” means the goal(s) (or combined goal(s)) determined by the Committee (in its sole discretion) to be applicable to a Participant with respect to an Award. As determined by the Committee, the Performance Goals applicable to an Award may provide for a targeted level or levels of achievement using one or more of the following measures: (a) EBIT, (b) EBITA, (c) EBITDA, (d) Earnings Per Share, (e) Net Income, (f) Operating Cash Flow, (g) Return on Net Assets, (h) Return on Equity, (i) Return on Sales, (j) Revenue, and (k) Shareholder Return. The Performance Goals may differ from Participant to Participant and from Award to Award. Prior to the Determination Date, the Committee shall determine whether any significant element(s) shall be included in or excluded from the calculation of any Performance Goal with respect to any Participant. “Determination Date” means the latest possible date that will not jeopardize an Award’s qualification as performance-based compensation under section 162(m) of the Code. Notwithstanding the previous sentence, for Awards not intended to qualify as

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performance-based compensation, “Determination Date” shall mean such date as the Committee may determine in its sole discretion.

2.29 “Performance Period” means any fiscal period not to exceed three consecutive Fiscal Years, as determined by the Committee in its sole discretion.

2.30 “Performance Share” means a Performance Share granted to a Participant pursuant to Section 8.

2.31 “Performance Unit” means a Performance Unit granted to a Participant pursuant to Section 8.

2.32 “Period of Restriction” means the period during which shares of Restricted Stock are subject to forfeiture and/or restrictions on transferability.

2.33 “Plan” means the Varian, Inc. Omnibus Stock Plan, as set forth in this instrument and as hereafter amended from time to time.

2.34 “Restricted Stock” means an Award granted to a Participant pursuant to Section 7.

2.35 “Retirement” means, with respect to any Participant, “Retirement” as defined pursuant to the Company’s or the Board’s Retirement Policies, as they may be established from time to time.

2.36 “Return on Net Assets” means as to any Performance Period, the percentage equal to the Company’s or a business unit’s EBIT before incentive compensation, divided by the Company’s or business unit’s average net assets, determined in accordance with generally accepted accounting principles.

2.37 “Return on Equity” means as to any Performance Period, the percentage equal to the Company’s Net Income divided by average stockholder’s equity, determined in accordance with generally accepted accounting principles.

2.38 “Return on Sales” means as to any Performance Period, the percentage equal to the Company’s or a business unit’s EBIT (after incentive compensation), divided by the Company’s or the business unit’s, as applicable, Revenue, determined in accordance with generally accepted accounting principles.

2.39 “Revenue” means as to any Performance Period, the Company’s or a business unit’s net sales, determined in accordance with generally accepted accounting principles.

2.40 “Rule 16b-3” means Rule 16b-3 promulgated under the 1934 Act, as amended, and any future regulation amending, supplementing or superseding such regulation.

2.41 “Section 16 Person” means a person who, with respect to the Shares, is subject to section 16 of the 1934 Act.

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2.42 “Shareholder Return” means as to any Performance Period, the total return (change in share price plus reinvestment of any dividends) of a Share.

2.43 “Shares” means shares of the Company’s common stock, $.01 par value.

2.44 “Stock Appreciation Right” or “SAR” means an Award, granted alone, in connection or in tandem with a related Option, that pursuant to Section 6 is designated as a SAR.

2.45 “Stock Unit” means a bookkeeping entry initially representing an amount equal to the Fair Market Value of one Share. Stock Units represent an unfunded and unsecured obligation of the Company.

2.46 “Subsidiary” means any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

2.47 “Termination of Service” means (a) in the case of an Employee, a cessation of the employee-employer relationship between an Employee and the Company or an Affiliate for any reason, including, but not by way of limitation, a termination by resignation, discharge, death, Disability, Retirement, or the disaffiliation of an Affiliate, but excluding any such termination where there is a simultaneous reemployment by the Company or an Affiliate; and (b) in the case of a Non-employee Director, a cessation of the Non-employee Director’s service on the Board for any reason.

SECTION 3

ADMINISTRATION

3.1 The Committee. The Plan shall be administered by the Committee. The Committee shall consist of not less than two (2) Directors. The members of the Committee shall be appointed from time to time by, and serve at the pleasure of, the Board. Each member of the Committee shall qualify as (a) a “non-employee director” under Rule 16b-3, and (b) an “outside director” under section 162(m) of the Code. If it is later determined that one or more members of the Committee do not so qualify, actions taken by the Committee prior to such determination shall be valid despite such failure to qualify.

3.2 Authority of the Committee. It shall be the duty of the Committee to administer the Plan in accordance with the Plan’s provisions. The Committee shall have all powers and discretion necessary or appropriate to administer the Plan and to control its operation, including, but not limited to, the power to (a) determine which Employees and shall be granted Awards, (b) prescribe the terms and conditions of the Awards (other than the Options granted to Non-employee Directors pursuant to Section 9), (c) interpret the Plan and the Awards, (d) adopt such procedures and subplans as are necessary or appropriate to permit participation in the Plan by Employees and Directors who are foreign nationals or employed outside of the United States, (e) adopt rules for the administration, interpretation and application of the Plan as are consistent therewith, and (f) interpret, amend or revoke any such rules. Notwithstanding any contrary provision of the Plan, the Committee may reduce the amount payable under any Award (other than an Option) after the grant of such Award. Notwithstanding the preceding, the Committee

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shall not implement an Exchange Program without the approval of the holders of a majority of the Shares that are present in person or by proxy and entitled to vote at any annual or special meeting of the stockholders of the Company.

3.3 Delegation by the Committee. The Committee, in its sole discretion and on such terms and conditions as it may provide, may delegate all or any part of its authority and powers under the Plan to one or more directors and/or officers of the Company; provided, however, that the Committee may not delegate its authority and powers (a) with respect to Section 16 Persons, (b) in any way which would jeopardize the Plan’s qualification under Rule 16b-3, or (c) with respect to awards which are intended to qualify as performance-based compensation under section 162(m) of the Code.

3.4 Non-employee Directors. Notwithstanding any contrary provision of this Section 3, the Board shall administer Section 9 of the Plan, and the Committee shall exercise no discretion with respect to Section 9. In the Board’s administration of Section 9 and the Options and any Shares granted to Non-employee Directors, the Board shall have all of the authority and discretion otherwise granted to the Committee with respect to the administration of the Plan.

3.5 Decisions Binding. All determinations and decisions made by the Committee, the Board, and any delegate of the Committee pursuant to the provisions of the Plan shall be final, conclusive, and binding on all persons, and shall be given the maximum deference permitted by law.

SECTION 4

SHARES SUBJECT TO THE PLAN

4.1 Number of Shares. Subject to adjustment as provided in Section 4.3, the total number of Shares available for issuance under the Plan shall not exceed 10,200,000, plus such number of Shares as were issued pursuant to substitute Options under Sections 5.3.3 and 9.3 in connection with the distribution of Shares to the stockholders of Varian Associates, Inc. Shares issued under the Plan may be either authorized but unissued Shares or treasury Shares.

4.2 Lapsed Awards. If an Award terminates, expires, or lapses for any reason, any Shares subject to such Award again shall be available to be the subject of an Award, unless otherwise determined by the Committee.

4.3 Adjustments in Awards and Authorized Shares. In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, split-up, Share combination, or other change in the corporate structure of the Company affecting the Shares, the Committee shall adjust the number and class of Shares which may be delivered under the Plan, the number, class, and price of Shares subject to outstanding Awards, and the numerical limit of Sections 5.1, 6.1, 7.1 and 8.1 in such manner as the Committee (in its sole discretion) shall determine to be appropriate to prevent the dilution or diminution of such Awards. In the case of Options granted to Non-employee Directors pursuant to Section 9, the foregoing adjustments shall be made by the Board, and any such adjustments also shall apply to the future grants provided by Section 9. Notwithstanding the preceding, the number of Shares subject to any Award always shall be a whole number.

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SECTION 5

STOCK OPTIONS

5.1 Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to Employees at any time and from time to time as determined by the Committee in its sole discretion. The Committee, in its sole discretion, shall determine the number of Shares subject to each Option, provided that during any Fiscal Year, no Participant shall be granted Options covering more than 500,000 Shares. The Committee may grant Incentive Stock Options, Non-qualified Stock Options, or a combination thereof.

5.2 Award Agreement. Each Option shall be evidenced by an Award Agreement that shall specify the Exercise Price, the expiration date of the Option, the number of Shares to which the Option pertains, any conditions to exercise of the Option, and such other terms and conditions as the Committee, in its sole discretion, shall determine. The Award Agreement shall specify whether the Option is intended to be an Incentive Stock Option or a Non-qualified Stock Option.

5.3 Exercise Price. Subject to the provisions of this Section 5.3, the Exercise Price for each Option shall be determined by the Committee in its sole discretion.

5.3.1 Non-qualified Stock Options. In the case of a Non-qualified Stock Option, the Exercise Price shall be not less than one hundred percent (100%) of the Fair Market Value of a Share on the Grant Date.

5.3.2 Incentive Stock Options. In the case of an Incentive Stock Option, the Exercise Price shall be not less than one hundred percent (100%) of the Fair Market Value of a Share on the Grant Date; provided, however, that if on the Grant Date, the Employee (together with persons whose stock ownership is attributed to the Employee pursuant to section 424(d) of the Code) owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any of its Subsidiaries, the Exercise Price shall be not less than one hundred and ten percent (110%) of the Fair Market Value of a Share on the Grant Date.

5.3.3 Substitute Options. Notwithstanding the provisions of Sections 5.3.1 and 5.3.2, in the event that the Company or an Affiliate consummates a transaction described in section 424(a) of the Code (e.g., the acquisition of property or stock from an unrelated corporation), persons who become Employees on account of such transaction may be granted Options in substitution for options granted by their former employer. If such substitute Options are granted, the Committee, in its sole discretion and consistent with section 424(a) of the Code, shall determine the exercise price of such substitute Options.

5.4 Expiration of Options.

5.4.1 Expiration Dates. Each Option shall terminate no later than the first to occur of the following events:

(a) The expiration of ten (10) years from the Grant Date; or

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(b) The expiration of three (3) months from the date of the Participant’s Termination of Service for a reason other than the Participant’s death, Disability or Retirement; or

(c) The expiration of one (1) year from the date of the Participant’s Termination of Service by reason of Disability; or

(d) The expiration of three (3) years from the date of the Participant’s Retirement (subject to Section 5.8.2 regarding Incentive Stock Options); or

(e) The date of the Participant’s Termination of Service by the Company for cause (as determined by the Company); or

(f) The date for termination of the Option determined by the Committee in its sole discretion and set forth in the written Award Agreement.

5.4.2 Death of Participant. Notwithstanding Section 5.4.1, if a Participant who is an Employee dies prior to the expiration of his or her Options, his or her Options shall be exercisable until the expiration of three (3) years after the date of death.

5.4.3 Committee Discretion. Subject to the limits of Sections 5.4.1 and 5.4.2, the Committee, in its sole discretion, (a) shall provide in each Award Agreement when each Option expires and becomes unexercisable, and (b) may, after an Option is granted and before such Option expires, extend the maximum term of the Option (subject to Section 5.8.4 regarding Incentive Stock Options).

5.5 Exercisability of Options. Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall determine in its sole discretion. After an Option is granted, the Committee, in its sole discretion, may accelerate the exercisability of the Option. If a Participant dies while an Employee, the exercisability of his or her Options shall be fully accelerated to the date of Termination of Service.

5.6 Payment. Options shall be exercised by the Participant’s delivery of a written notice of exercise to the Secretary of the Company (or its designee), setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares.

Upon the exercise of any Option, the Exercise Price shall be payable to the Company in full in cash or its equivalent. The Committee, in its sole discretion, also may permit exercise (a) by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total Exercise Price, or (b) by any other means which the Committee, in its sole discretion, determines to both provide legal consideration for the Shares, and to be consistent with the purposes of the Plan.

As soon as practicable after receipt of a written notification of exercise and full payment for the Shares purchased, the Company shall deliver to the Participant (or the Participant’s designated broker), Share certificates (which may be in book entry form) representing such

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Shares.

5.7 Restrictions on Share Transferability. The Committee may impose such restrictions on any Shares acquired pursuant to the exercise of an Option as it may deem advisable, including, but not limited to, restrictions related to applicable Federal securities laws, the requirements of any national securities exchange or system upon which Shares are then listed or traded, or any blue sky or state securities laws.

5.8 Certain Additional Provisions for Incentive Stock Options.

5.8.1 Exercisability. The aggregate Fair Market Value (determined on the Grant Date(s)) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by any Employee during any calendar year (under all plans of the Company and its Subsidiaries) shall not exceed $100,000.

5.8.2 Termination of Service. If any portion of an Incentive Stock Option is exercised more than three (3) months after the Participant’s Termination of Service for any reason other than Disability or death (unless (a) the Participant dies during such three-month period, and (b) the Award Agreement or the Committee permits later exercise), the portion so exercised shall be deemed a Non-qualified Stock Option.

5.8.3 Company and Subsidiaries Only. Incentive Stock Options may be granted only to persons who are employees of the Company or a Subsidiary on the Grant Date.

5.8.4 Expiration. No Incentive Stock Option may be exercised after the expiration of ten (10) years from the Grant Date; provided, however, that if the Option is granted to an Employee who, together with persons whose stock ownership is attributed to the Employee pursuant to section 424(d) of the Code, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of the stock of the Company or any of its Subsidiaries, the Option may not be exercised after the expiration of five (5) years from the Grant Date.

5.9 Grant of Reload Options. The Committee may provide in an Award Agreement that a Participant who exercises all or part of an Option by payment of the Exercise Price with already-owned Shares, shall be granted an additional option (a “Reload Option”) for a number of shares of stock equal to the number of Shares tendered to exercise the previously granted Option plus, if the Committee so determines, any Shares withheld or delivered in satisfaction of any tax withholding requirements. As determined by the Committee, each Reload Option shall (a) have a Grant Date which is the date as of which the previously granted Option is exercised, and (b) be exercisable on the same terms and conditions as the previously granted Option, except that the Exercise Price shall be determined as of the Grant Date.

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SECTION 6

STOCK APPRECIATION RIGHTS

6.1 Grant of SARs. Subject to the terms and conditions of the Plan, SARs may be granted to Employees at any time and from time to time as shall be determined by the Committee, in its sole discretion. The Committee shall have complete discretion to determine the number of SARs granted to any Participant, provided that during any Fiscal Year, no Participant shall be granted SARs covering more than 500,000 Shares.

6.2 Exercise Price and Other Terms. The Committee, subject to the provisions of the Plan, shall have complete discretion to determine the terms and conditions of SARs granted under the Plan. However, the exercise price of an SAR shall be not less than one hundred percent (100%) of the Fair Market Value of a Share on the Grant Date.

6.3 SAR Agreement. Each SAR grant shall be evidenced by an Award Agreement that shall specify the exercise price, the term of the SAR, the conditions of exercise, and such other terms and conditions as the Committee, in its sole discretion, shall determine.

6.4 Expiration of SARs. A SAR granted under the Plan shall expire upon the date determined by the Committee, in its sole discretion, and set forth in the Award Agreement. Notwithstanding the foregoing, the rules of Section 5.4 also shall apply to SARs.

6.5 Payment of SAR Amount. Upon exercise of a SAR, a Participant shall be entitled to receive payment from the Company in an amount determined by multiplying:

(a) The difference between the Fair Market Value of a Share on the date of exercise over the exercise price; times

(b) The number of Shares with respect to which the SAR is exercised.

6.6 Payment Upon Exercise of SAR. At the sole discretion of the Committee, payment for a SAR may be in cash, Shares or a combination thereof.

SECTION 7

RESTRICTED STOCK

7.1 Grant of Restricted Stock. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Shares of Restricted Stock to Employees in such amounts as the Committee, in its sole discretion, shall determine. The Committee, in its sole discretion, shall determine the number of Shares to be granted to each Participant, provided that pursuant to the Plan no more than 250,000 Shares in the aggregate may be (a) granted as Restricted Stock, and (b) issued pursuant to Performance Units, Performance Shares and Stock Units.

7.2 Restricted Stock Agreement. Each Award of Restricted Stock shall be evidenced by an Award Agreement that shall specify the Period of Restriction, the number of Shares granted, any price to be paid for the Shares, and such other terms and conditions as the Committee, in its sole discretion, shall determine. Unless the Committee determines otherwise,

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Shares of Restricted Stock shall be held by the Company as escrow agent until the restrictions on such Shares have lapsed.

7.3 Transferability. Shares of Restricted Stock may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the end of the applicable Period of Restriction.

7.4 Other Restrictions. The Committee, in its sole discretion, may impose such other restrictions on Shares of Restricted Stock as it may deem advisable or appropriate, in accordance with this Section 7.4.

7.4.1 General Restrictions. The Committee may set restrictions based upon the achievement of specific performance objectives (Company-wide, business unit or individual), applicable federal or state securities laws, or any other basis determined by the Committee in its sole discretion.

7.4.2 Section 162(m) Performance Restrictions. For purposes of qualifying grants of Restricted Stock as “performance-based compensation” under section 162(m) of the Code, the Committee, in its sole discretion, may set restrictions based upon the achievement of Performance Goals. The Performance Goals shall be set by the Committee on or before the latest date permissible to enable the Restricted Stock to qualify as “performance-based compensation” under section 162(m) of the Code. In granting Restricted Stock which is intended to qualify under section 162(m) of the Code, the Committee shall follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Restricted Stock under section 162(m) of the Code (e.g., in determining the Performance Goals).

7.4.3 Legend on Certificates. The Committee, in its sole discretion, may legend the certificates representing Restricted Stock to give appropriate notice of such restrictions. For example, the Committee may determine that some or all certificates representing Shares of Restricted Stock shall bear the following legend:

“The sale or other transfer of the shares of stock represented by this certificate, whether voluntary, involuntary, or by operation of law, is subject to certain restrictions on transfer as set forth in the Varian, Inc. Omnibus Stock Plan, and in a Restricted Stock Agreement. A copy of the Plan and such Restricted Stock Agreement may be obtained from the Secretary of Varian, Inc.”

7.5 Removal of Restrictions. Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall be released from escrow as soon as practicable after the last day of the Period of Restriction. The Committee, in its sole discretion, may accelerate the time at which any restrictions shall lapse, and remove any restrictions. After the restrictions have lapsed, the Participant shall be entitled to have any legend or legends under Section 7.4 removed from his or her Share certificate, and the Shares shall be freely transferable by the Participant.

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7.6 Voting Rights. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares, unless otherwise provided in the Award Agreement.

7.7 Dividends and Other Distributions. During the Period of Restriction, Participants holding Shares of Restricted Stock shall be entitled to receive all dividends and other distributions paid with respect to such Shares unless otherwise provided in the Award Agreement. If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same restrictions on transferability and forfeitability as the Shares of Restricted Stock with respect to which they were paid.

7.8 Return of Restricted Stock to Company. On the date set forth in the Award Agreement, the Restricted Stock for which restrictions have not lapsed shall revert to the Company and again shall become available for grant under the Plan.

SECTION 8

PERFORMANCE UNITS, PERFORMANCE SHARES AND STOCK UNITS

8.1 Grant of Performance Units, Performance Shares and Stock Units. Performance Units, Performance Shares and Stock Units may be granted to Employees at any time and from time to time, as shall be determined by the Committee, in its sole discretion. The Committee shall have complete discretion in determining the number of Performance Units, Performance Shares and Stock Units granted to any Participant, provided that pursuant to the Plan no more than 250,000 Shares in the aggregate may be (a) issued pursuant to Performance Units, Performance Shares and Stock Units, and (b) granted as Restricted Stock.

8.2 Initial Value. Each Performance Unit shall have an initial value that is established by the Committee on or before the Grant Date, provided that such value shall not exceed the Fair Market Value of a Share on the Grant Date. Each Performance Share shall have an initial value equal to the Fair Market Value of a Share on the Grant Date.

8.3 Performance Objectives and Other Terms. The Committee, in its sole discretion, shall set performance objectives and/or other vesting criteria which, depending on the extent to which they are met or satisfied, will determine the number or value of Performance Units, Performance Shares or Stock Units that will be paid out to the Participants. The Committee may set performance objectives or other vesting criteria based upon the achievement of Company-wide, business unit, or individual goals, or any other basis (including continued employment) determined by the Committee in its sole discretion. The time period during which performance objectives must be met shall be called the “Performance Period.” Each Award of Performance Units, Performance Shares or Stock Units shall be evidenced by an Award Agreement that shall specify the Performance Period, and such other terms and conditions as the Committee, in its sole discretion, shall determine.

8.3.1 General Performance Objectives. The Committee may set performance objectives based upon the achievement of Company-wide, business unit or individual goals, or any other basis determined by the Committee in its sole discretion.

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8.3.2 Section 162(m) Performance Objectives. For purposes of qualifying grants of Performance Units, Performance Shares or Stock Units as “performance-based compensation” under section 162(m) of the Code, the Committee, in its sole discretion, may determine that the performance objectives applicable to Performance Units, Performance Shares or Stock Units shall be based on the achievement of Performance Goals. The Performance Goals shall be set by the Committee on or before the latest date permissible to enable the Performance Units, Performance Shares or Stock Units to qualify as “performance-based compensation” under section 162(m) of the Code. In granting Performance Units, Performance Shares or Stock Units which are intended to qualify under section 162(m) of the Code, the Committee shall follow any procedures determined by it from time to time to be necessary or appropriate to ensure qualification of the Performance Units, Performance Shares or Stock Units under section 162(m) of the Code (e.g., in determining the Performance Goals).

8.4 Earning of Performance Units, Performance Shares and Stock Units. After the applicable Performance Period has ended, the Participant shall be entitled to receive a payout of the number of Performance Units, Performance Shares or Stock Units earned during the Performance Period, depending upon the extent to which the applicable performance objectives have been achieved. After the grant of a Performance Unit, Performance Share or Stock Unit, the Committee, in its sole discretion, may reduce or waive any performance objectives for the Award.

8.5 Terms of Stock Units.

8.5.1 Award Agreement. Each Award of a Stock Unit shall be evidenced by an Award Agreement (satisfactory to the Committee), which shall be executed by the Participant and the Company.

8.5.2 Vesting. Each Award of a Stock Unit shall vest upon the Participant’s Termination of Service.

8.5.3 Dividends and Other Distributions. Any dividends or other distributions paid on the Shares underlying an Award of Stock Units shall be deemed reinvested in Stock Units (the “Dividend Stock Units”). Dividend Stock Units shall be subject to the same terms and conditions as the underlying Award, including any deferral election made pursuant to Section 8.7.

8.6 Form and Timing of Payment.

8.6.1 Performance Shares and Units. Payment of earned Performance Units or Performance Shares shall be made as soon as practicable after the expiration of the applicable Performance Period or satisfaction of any other vesting criteria. The Committee, in its sole discretion, may pay such earned Awards in cash, Shares or a combination thereof.

8.6.2 Stock Units. Payment of Stock Units shall be made by issuance of Shares as soon as administratively practicable following an individual’s Termination of Service. Notwithstanding the preceding, a Participant may, at the sole discretion of, and in accordance with rules established by the Committee, elect to defer delivery of the proceeds of an Award of Stock Units. A Participant’s election as provided in the preceding sentence shall be irrevocable

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and shall comply will all applicable provisions of the Code (including, but not by way of limitation, Section 409A).

8.7 Cancellation. On the date set forth in the Award Agreement, all unearned or unvested Performance Units, Performance Shares or Stock Unit shall be forfeited to the Company, and again shall be available for grant under the Plan.

8.8 Elections by Participants. At the sole discretion of the Committee, and pursuant to such procedures as the Committee (in its sole discretion) may adopt from time to time, each Participant may elect to forego receipt of all or a portion of cash compensation otherwise due to the Participant in exchange for Shares and/or Stock Units. The number of Shares and/or Stock Units received by a Participant shall equal the amount of foregone compensation divided by the Fair Market Value of a Share on the date that the compensation otherwise would have been paid to the Participant, rounded up to the nearest whole number of Shares.

SECTION 9

NON-EMPLOYEE DIRECTORS

9.1 Granting of Options.

9.1.1 Non-employee Directors. Each Non-employee Director shall be granted an Option to purchase 10,000 Shares (an “Initial Grant”) on the later of (a) ten (10) business days after the Effective Date of the Plan or (b) the date of the Non-employee Director’s appointment or election as a Non-employee Director. Thereafter, for so long as the Non-employee Director serves as such, he or she annually shall be granted an Option for an additional 5,000 Shares (each a “Subsequent Grant”). Each such Subsequent Grant shall be made on the first business day after each Annual Meeting of Stockholders occurring after the date of the Initial Grant or previous Subsequent Grant, but only if the Non-employee Director has continuously served as such through the Grant Date.

9.1.2 Chairman. Each Chairman of the Company who is a Non-employee Director shall be granted an Option to purchase 50,000 Shares (an “Initial Chairman’s Grant”) on the later of (a) ten (10) business days after the Effective Date of the Plan or (b) the date such individual becomes Chairman. Any Initial Chairman’s Grant shall be in lieu of any Initial Grant or Subsequent Grant the Chairman otherwise would be entitled to under Section 9.1.1 while he or she serves as Chairman. If a Chairman ceases to serve as such but remains a Non-employee Director, he or she shall be entitled to Subsequent Grants under Section 9.1.1, provided he or she has continuously served as a Non-employee Director through the applicable Grant Date.

9.2 Terms of Options.

9.2.1 Option Agreement. Each Option granted pursuant to this Section 9 shall be evidenced by a written stock option agreement which shall be executed by the Non-employee Director and the Company.

9.2.2 Exercise Price. The Exercise Price for the Shares subject to each Option granted pursuant to this Section 9 shall be one hundred percent (100%) of the Fair Market Value of such Shares on the Grant Date.

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9.2.3 Exercisability. Each Option granted pursuant to this Section 9 shall be fully exercisable on the Grant Date.

9.2.4 Expiration of Options. Each Option shall terminate upon the first to occur of the following events:

(a) The expiration of ten (10) years from the Grant Date; or

(b) The expiration of three (3) months from the date of the Non-employee Director’s Termination of Service for a reason other than death, Disability, resignation or Retirement; or

(c) The expiration of three (3) years from the date of the Non-employee Director’s Termination of Service by reason of completion of the Participant’s term as a Director, Disability or Retirement; or

(d) The expiration of one (1) month from the date of the Non-employee Director’s Termination of Service by reason of resignation.

9.2.5 Death of Director. Notwithstanding Section 9.2.4, if a Non-employee Director dies prior to the expiration of his or her options in accordance with Section 9.2.4, his or her options shall terminate three (3) years after the date of his or her death.

9.2.6 Not Incentive Stock Options. Options granted pursuant to this Section 9 shall not be designated as Incentive Stock Options.

9.2.7 Other Terms. All provisions of the Plan not inconsistent with this Section 9 shall apply to Options granted to Non-employee Directors; provided, however, that Section 5.2 (relating to the Committee’s discretion to set the terms and conditions of Options) shall be inapplicable with respect to Non-employee Directors.

9.3 Grant of Stock Units. On the first business day after each Annual Meeting of Stockholders, each individual then serving as a Non-employee Director shall be granted Stock Units with an initial value of $25,000, rounded up to the nearest whole number of Shares.

9.4 Terms of Stock Units.

9.4.1 Award Agreement. Each Award granted pursuant to Section 9.3 shall be evidenced by an Award Agreement (satisfactory to the Board), which shall be executed by the Non-Employee Director and the Company.

9.4.2 Vesting. Each Award granted pursuant to Section 9.3 shall vest upon the Non-Employee Director’s Termination of Service.

9.4.3 Dividends and Other Distributions. Any dividends or other distributions paid on the Shares underlying an Award granted under Section 9.3 shall be deemed reinvested in Stock Units (the “Dividend Stock Units”). Dividend Stock Units shall be subject to the same

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terms and conditions as the underlying Award, including any deferral election made pursuant to Section 9.4.4.

9.4.4 Form and Timing of Payment. Payment of Stock Units shall be made by issuance of Shares as soon as administratively practicable following an individual’s Termination of Service. Notwithstanding the preceding, a Non-employee Director may, at the sole discretion of, and in accordance with rules established by the Board, elect to defer delivery of the proceeds of an Award of Stock Units granted pursuant to Section 9.3. A Non-employee Director’s election as provided in the preceding sentence shall be irrevocable and shall comply with all applicable provisions of the Code (including, but not by way of limitation, Section 409A).

9.5 Substitute Options. Notwithstanding the provisions of Section 9.2.2, in the event that the Company or an Affiliate consummates a transaction described in section 424(a) of the Code (e.g., the acquisition of property or stock from an unrelated corporation), persons who become Non-employee Directors on account of such transaction may be granted Options in substitution for options granted by their former employer. If such substitute Options are granted, the Committee, in its sole discretion and consistent with section 424(a) of the Code, shall determine the exercise price of such substitute Options.

9.6 Elections by Non-employee Directors. Pursuant to such procedures as the Board (in its sole discretion) may adopt from time to time, each Non-employee Director may elect to forego receipt of all or a portion of the annual retainer, committee chair fees, meeting attendance fees and other cash compensation otherwise due to the Non-employee Director in exchange for Shares and/or Stock Units. The number of Shares and/or Stock Units received by any Non-employee Director shall equal the amount of foregone compensation divided by the Fair Market Value of a Share on the date that the compensation otherwise would have been paid to the Non-employee Director, rounded up to the nearest whole number of Shares.

SECTION 10

MISCELLANEOUS

10.1 No Effect on Employment or Service. Nothing in the Plan shall interfere with or limit in any way the right of the Company to terminate any Participant’s employment or service at any time, with or without cause. For purposes of the Plan, transfer of employment of a Participant between the Company and any one of its Affiliates (or between Affiliates) shall not be deemed a Termination of Service. Employment with the Company and its Affiliates is on an at-will basis only.

10.2 Participation. No Employee shall have the right to be selected to receive an Award under this Plan, or, having been so selected, to be selected to receive a future Award.

10.3 Indemnification. Each person who is or shall have been a member of the Committee, or of the Board, shall be indemnified and held harmless by the Company against and from (a) any loss, cost, liability, or expense that may be imposed upon or reasonably incurred by him or her in connection with or resulting from any claim, action, suit, or proceeding to which he or she may be a party or in which he or she may be involved by reason of any action taken or failure to act under the Plan or any Award Agreement, and (b) from any and all amounts paid by

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him or her in settlement thereof, with the Company’s approval, or paid by him or her in satisfaction of any judgment in any such claim, action, suit, or proceeding against him or her, provided he or she shall give the Company an opportunity, at its own expense, to handle and defend the same before he or she undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company’s Certificate of Incorporation or Bylaws, by contract, as a matter of law, or otherwise, or under any power that the Company may have to indemnify them or hold them harmless.

10.4 Successors. All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business or assets of the Company.

10.5 Beneficiary Designations. If permitted by the Committee, a Participant under the Plan may name a beneficiary or beneficiaries to whom any vested but unpaid Award shall be paid in the event of the Participant’s death. Each such designation shall revoke all prior designations by the Participant and shall be effective only if given in a form and manner acceptable to the Committee. In the absence of any such designation, any vested benefits remaining unpaid at the Participant’s death shall be paid to the Participant’s estate and, subject to the terms of the Plan and of the applicable Award Agreement, any unexercised vested Award may be exercised by the administrator or executor of the Participant’s estate.

10.6 Nontransferability of Awards. No Award granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will, by the laws of descent and distribution, or to the limited extent provided in Section 10.5. All rights with respect to an Award granted to a Participant shall be available during his or her lifetime only to the Participant.

10.7 No Rights as Stockholder. Except to the limited extent provided in Sections 7.6 and 7.7, no Participant (nor any beneficiary) shall have any of the rights or privileges of a stockholder of the Company with respect to any Shares issuable pursuant to an Award (or exercise thereof), unless and until certificates representing such Shares shall have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Participant (or beneficiary).

10.8 Withholding Requirements. Prior to the delivery of any Shares or cash pursuant to an Award (or exercise thereof), the Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy federal, state, local and foreign taxes (including the Participant’s FICA obligation) required to be withheld with respect to such Award (or exercise thereof). Notwithstanding any contrary provision of the Plan, if a Participant fails to remit to the Company such withholding amount within the time period specified by the Committee (in its sole discretion), the Participant’s Award may, in the Committee’s sole discretion, be forfeited and in such case the Participant shall not receive any of the Shares subject to such Award.

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10.9 Withholding Arrangements. The Committee, in its sole discretion and pursuant to such procedures as it may specify from time to time, may permit or require a Participant to satisfy all or part of the tax withholding obligations in connection with an Award by (a) having the Company withhold otherwise deliverable Shares, or (b) delivering to the Company already-owned Shares having a Fair Market Value equal to the amount required to be withheld. The amount of the withholding requirement shall be deemed to include any amount which the Committee determines, not to exceed the amount determined by using the maximum federal, state, local and foreign jurisdiction marginal income tax rates applicable to the Participant with respect to the Award on the date that the amount of tax to be withheld is to be determined. The Fair Market Value of the Shares to be withheld or delivered shall be determined as of the date that the taxes are required to be withheld.

10.10 Deferrals. The Committee, in its sole discretion, may permit a Participant to defer receipt of the payment of cash or the delivery of Shares that would otherwise be delivered to a Participant under the Plan. Any such deferral elections shall be subject to such rules and procedures as shall be determined by the Committee in its sole discretion.

SECTION 11

AMENDMENT, TERMINATION AND DURATION

11.1 Amendment, Suspension or Termination. The Board, in its sole discretion, may amend or terminate the Plan, or any part thereof, at any time and for any reason. The amendment, suspension or termination of the Plan shall not, without the consent of the Participant, alter or impair any rights or obligations under any Award theretofore granted to such Participant. No Award may be granted during any period of suspension or after termination of the Plan.

11.2 Duration of the Plan. The Plan shall commence on the date specified herein, and subject to Section 11.1 (regarding the Board’s right to amend or terminate the Plan), shall remain in effect thereafter. However, without further stockholder approval, no Incentive Stock Option may be granted under the Plan after December 2, 2014.

SECTION 12

LEGAL CONSTRUCTION

12.1 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural.

12.2 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included.

12.3 Requirements of Law. The granting of Awards and the issuance of Shares under the Plan shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required.

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12.4 Governing Law. The Plan and all Award Agreements shall be construed in accordance with and governed by the laws of the State of California, but without regard to its conflict of law provisions.

12.5 Captions. Captions are provided herein for convenience only, and shall not serve as a basis for interpretation or construction of the Plan.

EXECUTION

IN WITNESS WHEREOF, Varian, Inc., by its duly authorized officer, has executed the Plan on the date indicated below.

	VARIAN, INC.
Dated:   December 2, 2004	By:	/s/ A. W. Homan
	Name:	A. W. Homan
	Title:	Vice President, General Counsel
		and Secretary

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EX-10.21

Exhibit 10.21

DESCRIPTION OF COMPENSATORY ARRANGEMENTS

BETWEEN VARIAN, INC. AND NON-EMPLOYEE DIRECTORS

Each director (other than the Chairman of the Board) who is not a Company employee is paid an annual retainer fee of $30,000. Each non-employee director is also paid $2,000 for each Board meeting attended in person, $1,000 for each Board meeting attended by telephone and $1,500 for each Board committee meeting attended in person or by telephone. The non-employee director who chairs the Audit Committee of the Board is paid an additional annual retainer fee of $15,000. The non-employee directors who chair the Compensation and the Nominating and Governance Committees of the Board are each paid an additional annual retainer fee of $7,500. The non-employee Chairman of the Board is paid an annual retainer fee of $120,000 (in lieu of any other annual cash retainer, committee chair retainer and meeting attendance fees).

Under the Company’s Omnibus Stock Plan, each director who is not a Company employee receives upon initial appointment or election to the Board a nonqualified stock option to acquire 10,000 shares of the Company’s common stock, and receives annually thereafter (for so long as he or she continues to serve a non-employee director) a nonqualified stock option to acquire 5,000 shares of the Company’s common stock. In lieu of these grants, the non-employee Chairman of the Board receives upon initial appointment as such a nonqualified stock option to acquire 50,000 shares of the Company’s common stock. All such stock options are granted with an exercise price equal to the fair market value of the Company’s common stock on the grant date, are vested and exercisable beginning on the grant date and have a ten-year term.

Under the Company’s Omnibus Stock Plan, each director who is not a Company employee is also granted annually (for so long as he or she continues to serve a non-employee director) stock units with an initial value equal to $25,000, based on the fair market value of the Company’s common stock on the grant date. The stock units vest and are paid upon termination of the director’s service on the Board of Directors, and are satisfied by issuance of shares of the Company’s common stock.

Directors may elect to receive, in lieu of all or a portion of the retainer, chairman or meeting fees described above, shares of the Company’s common stock based on the fair market value of the Company’s common stock on the date the fees would have been paid.

Each director is reimbursed for all reasonable out-of-pocket expenses that such director and his or her spouse incurs attending Board meetings and functions.

EX-10.23

Exhibit 10.23

VARIAN, INC.

STOCK UNIT AGREEMENT

Varian, Inc. (the “Company”) hereby grants you, [NAME OF DIRECTOR] (the “Director”), an award of Stock Units under the Company’s Omnibus Stock Plan (the “Plan”). The date of this Agreement is [GRANT DATE] (the “Grant Date”). Subject to the provisions of Appendix A and of the Plan, the principal features of this award are as follows:

Number of Stock Units:	[INSERT NUMBER]
Scheduled Vesting Date:	The Stock Units shall vest upon your Termination of Service.

Your signature below indicates your agreement and understanding that this award is subject to all of the terms and conditions contained in Appendix A and the Plan. For example, important additional information on vesting of the Stock Units is contained in Paragraphs 3 and 4 of Appendix A. PLEASE BE SURE TO READ ALL OF APPENDIX A, WHICH CONTAINS THE SPECIFIC TERMS AND CONDITIONS OF THIS AWARD.

VARIAN, INC.		DIRECTOR
By
Name:		Name:
Title:	Vice President

APPENDIX A

TERMS AND CONDITIONS OF STOCK UNITS

1. Grant. The Company hereby grants to the Director under the Plan [NUMBER] Stock Units, on the terms and conditions in this Agreement and the Plan. When the Stock Units are paid to the Director, par value shall be deemed paid by the Director for each Stock Unit by past services rendered by the Director, and shall be subject to the appropriate tax withholdings.

2. Company’s Obligation to Pay. Each Stock Unit represents a bookkeeping entry initially representing an amount equal to the Fair Market Value of a Share on the Grant Date. Unless and until the Stock Units have vested in the manner set forth in Paragraph 3, the Director shall have no right to payment of such Stock Units. Prior to actual payment of any vested Stock Units, such Stock Units shall represent an unfunded and unsecured obligation.

3. Vesting Schedule/Period of Restriction. The Stock Units awarded by this Agreement shall vest upon the Director’s Termination of Service.

4. Payment after Vesting. Any Stock Units that vest in accordance with Paragraph 3 shall be paid to the Director (or in the event of the Director’s death, to his or her estate) in Shares in an amount equal to the number of Stock Units at vesting as soon as practicable following the date of vesting, subject to Paragraph 6.

5. Death of Director. Any distribution or delivery to be made to the Director under this Agreement shall, if the Director is then deceased, be made to the Director’s designated beneficiary, or if either no beneficiary survives the Director or the Board does not permit beneficiary designations, to the administrator or executor of the Director’s estate. Any transferee must furnish the Company with (a) written notice of his or her status as transferee, and (b) evidence satisfactory to the Company to establish the validity of the transfer and compliance with any laws or regulations pertaining to said transfer.

6. Payment of Taxes. The Director (or his or her beneficiary or estate) shall make arrangements satisfactory to the Company for the payment of any federal, state or local income or other taxes that the Company determines must be withheld or collected with respect to the award. Notwithstanding any contrary provision of this Agreement, no certificate representing the Shares may be issued pursuant to Paragraph 4 unless and until the Director shall have delivered to the Company the full amount of any federal, state or local income or other taxes which the Company may be required by law to withhold with respect to such Shares.

7. Rights as Stockholder. Neither the Director nor any person claiming under or through the Director shall have any of the rights or privileges of a stockholder of the Company in respect of any Shares deliverable hereunder unless and until certificates representing such Shares (which may be in book entry form) shall have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Director. After such issuance, recordation and delivery, the Director shall have all the rights of a stockholder of the Company with respect to voting such Shares and receipt of dividends and distributions on such Shares.

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8. Address for Notices. Any notice to be given to the Company under the terms of this Agreement shall be addressed to the Company, in care of its Secretary, at Varian, Inc., 3120 Hansen Way, Palo Alto, CA 94304 or at such other address as the Company may hereafter designate in writing.

9. Award is Not Transferable. Except to the limited extent provided in Paragraph 5, this grant and the rights and privileges conferred hereby may not be transferred, pledged, assigned or otherwise hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment or similar process, until you have been issued the Shares. Upon any attempt to transfer, pledge, assign, hypothecate or otherwise dispose of this grant, or any right or privilege conferred hereby, or upon any attempted sale under any execution, attachment or similar process, this grant and the rights and privileges conferred hereby immediately shall become null and void.

10. Binding Agreement. Subject to the limitation on the transferability of the award contained herein, this Agreement shall be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto.

11. Conditions to Issuance of Certificates. The Company shall not be required to issue any certificate or certificates for Shares under this Agreement prior to fulfillment of all the following conditions: (a) the admission of such Shares to listing on all stock exchanges on which such class of stock is then listed; (b) the completion of any registration or other qualification of such Shares under any state or federal law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; (c) the obtaining of any approval or other clearance from any state or federal governmental agency, which the Board shall, in its absolute discretion, determine to be necessary or advisable; and (d) the lapse of such reasonable period of time following the date of vesting of the Stock Units as the Board may establish from time to time for reasons of administrative convenience.

12. Plan Governs. This Agreement is subject to all terms and provisions of the Plan. In the event of a conflict between one or more provisions of this Agreement and one or more provisions of the Plan, the provisions of the Plan shall govern. Capitalized terms and phrases used and not defined in this Agreement shall have the meaning set forth in the Plan.

13. Board Authority. The Board shall have all discretion, power, and authority to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith. All actions taken and all interpretations and determinations made by the Board in good faith shall be final and binding upon the Director, the Company and all other interested persons, and shall be given the maximum deference permitted by law. No member of the Board shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement.

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14. Governing Law. This Agreement and grant of Stock Units shall be governed by and construed in accordance with the laws of the State of California, without reference to its principles of conflict of laws.

15. Captions. The captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Agreement.

16. Agreement Severable. In the event that any provision in this Agreement shall be held invalid or unenforceable, such provision shall be severable from, and such invalidity or unenforceability shall not be construed to have any effect on, the remaining provisions of this Agreement.

17. Modifications to the Agreement. This Agreement constitutes the entire understanding of the parties on the subjects covered. The Director expressly warrants that he or she is not accepting this Agreement in reliance on any promises, representations, or inducements other than those contained herein. Modifications to this Agreement or the Plan can be made only in an express written contract executed by a duly authorized officer of the Company.

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, Garry W. Rogerson, certify that:

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

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

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

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

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

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 7, 2005

/s/ GARRY W. ROGERSON

Garry W. Rogerson

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, G. Edward McClammy, certify that:

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

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

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

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

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

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 7, 2005

/s/ G. EDWARD MCCLAMMY

G. Edward McClammy

Senior Vice President, Chief Financial Officer

and Treasurer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

In connection with the Quarterly Report on Form 10-Q of Varian, Inc. for the period ended December 31, 2004, as filed with the Securities and Exchange Commission on the date of this certification (the “Report”), the undersigned hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Varian, Inc.

Dated: February 7, 2005

/s/ GARRY W. ROGERSON

Garry W. Rogerson

President and Chief Executive Officer

A signed original of this written statement as required by Section 906 has been provided to Varian, Inc. and will be retained by Varian, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(18 U.S.C. SECTION 1350)

In connection with the Quarterly Report on Form 10-Q of Varian, Inc. for the period ended December 31, 2004, as filed with the Securities and Exchange Commission on the date of this certification (the “Report”), the undersigned hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Varian, Inc.

Dated: February 7, 2005

/s/ G. EDWARD MCCLAMMY

G. Edward McClammy

Senior Vice President, Chief Financial Officer

and Treasurer

A signed original of this written statement as required by Section 906 has been provided to Varian, Inc. and will be retained by Varian, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.