-----BEGIN PRIVACY-ENHANCED MESSAGE-----
Proc-Type: 2001,MIC-CLEAR
Originator-Name: webmaster@www.sec.gov
Originator-Key-Asymmetric:
MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen
TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB
MIC-Info: RSA-MD5,RSA,
WE67/MuSwM+HeOn398G4Hr5CjyOYqD0P+h2clNRjFdASNqtD3Fa788vNMZSgy8Tj
1knpOJOpoZ/0l8GyKASZWQ==

<SEC-DOCUMENT>0001012870-99-004767.txt : 20000202
<SEC-HEADER>0001012870-99-004767.hdr.sgml : 20000202
ACCESSION NUMBER: 0001012870-99-004767
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 11
CONFORMED PERIOD OF REPORT: 19991001
FILED AS OF DATE: 19991223

FILER:

COMPANY DATA:
COMPANY CONFORMED NAME: VARIAN MEDICAL SYSTEMS INC
CENTRAL INDEX KEY: 0000203527
STANDARD INDUSTRIAL CLASSIFICATION: 3559
IRS NUMBER: 942359345
STATE OF INCORPORATION: DE
FISCAL YEAR END: 0930

FILING VALUES:
FORM TYPE: 10-K405
SEC ACT:
SEC FILE NUMBER: 001-07598
FILM NUMBER: 99779599

BUSINESS ADDRESS:
STREET 1: 3050 HANSEN WAY
STREET 2: MAIL STOP E 224
CITY: PALO ALTO
STATE: CA
ZIP: 94304-1000
BUSINESS PHONE: 6504934000

MAIL ADDRESS:
STREET 1: 3050 HANSEN WAY
STREET 2: MAIL STOP E 224
CITY: PALO ALTO
STATE: CA
ZIP: 94304-1000

FORMER COMPANY:
FORMER CONFORMED NAME: VARIAN ASSOCIATES INC /DE/
DATE OF NAME CHANGE: 19920703

FORMER COMPANY:
FORMER CONFORMED NAME: VARIAN DELAWARE INC
DATE OF NAME CHANGE: 19761123
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<DESCRIPTION>FORM 10-K405
<TEXT>

<PAGE>

- - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------
- - - - - - - - - - - - - - - - - -------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

---------------

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended October 1, 1999

[_] TRANSITION REPORTING PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number : 1-7598

VARIAN MEDICAL SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware 94-2359345
(I.R.S. Employer Identification Number)
(State or other jurisdiction of
Incorporation or Organization)

3100 Hansen Way,
Palo Alto, California 94304-1030
(Address of principal executive (Zip Code)
offices)

Registrant's telephone number, including area code: (650) 493-4000

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

<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
------------------- -----------------------
<S> <C>
Common Stock, $1 par value New York Stock Exchange
Preferred Stock Purchase Rights Pacific Exchange
</TABLE>

Securities registered pursuant to Section 12(g) of the Act: None

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

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

At December 20, 1999, the aggregate market value of the Common Stock held by
non-affiliates of the registrant was approximately $856,866,000.

At December 20, 1999, the number of shares of Common Stock outstanding was
30,680,918.

DOCUMENTS INCORPORATED BY REFERENCE

Definitive Proxy Statement for the Company's 2000 Annual Meeting of
Stockholders--Part III of this Form 10-K.

Varian Medical Systems, Inc.

Index to Annual Report on Form 10-K
For the fiscal year ended October 1, 1999

<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I
Item 1. Business...................................................... 4

Item 2. Properties.................................................... 16

Item 3. Legal Proceedings............................................. 16

Item 4. Submission of Matters to a Vote of Security Holders........... 18

PART II

Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................... 19

Item 6. Selected Financial Data....................................... 20

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 20

Item 7A. Quantitative and Qualitative Disclosure About Market Risk..... 38

Item 8. Financial Statements and Supplementary Data................... 40

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 40

PART III

Item 10. Directors and Executive Officers of the Registrant............ 41

Item 11. Executive Compensation........................................ 41

Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... 41

Item 13. Certain Relationships and Related Transactions................ 41

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K........................................................... 42
</TABLE>

2
<PAGE>

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act
of 1995 which provides a "safe harbor" for these types of statements. These
forward-looking statements are subject to risks and uncertainties that could
cause the actual results of Varian Medical Systems, Inc. (the "Company" or
"VMS") to differ materially from management's current expectations. These
risks and uncertainties include, without limitation, product demand and market
acceptance risks; the effect of general economic conditions and foreign
currency fluctuations; the impact of competitive products and pricing; new
product development and commercialization; reliance on sole source suppliers;
the Company's ability to attract and retain key employees; the Company's
ability to collect amounts owed in a timely manner; the Company's ability to
increase operating margins on higher sales; the impact of managed care
initiatives in the U.S. on capital expenditures and resulting pricing
pressures on medical equipment; fluctuations in the market for capital
equipment; successful implementation by the Company and certain third parties
of corrective actions to address the impact of the Year 2000; successful
consolidation of the Company's x-ray tube manufacturing operations; the
Company's ability to operate as a smaller and less diversified business entity
following the recent reorganization; the Company's ability to realize
anticipated cost savings from the reorganization; the Company's potential
responsibility for liabilities arising out of or relating to the
reorganization; the Company's potential responsibility for liabilities arising
out of or relating to the reorganization which were not expressly assumed by
the Company; the possibility that indemnification for certain liabilities
arising out of or relating to the reorganization will not be available to the
Company due to the indemnifying party's insolvency or legal prohibition;
increased debt leverage resulting from the reorganization impacting the
Company's ability to obtain future financing for working capital, capital
expenditures, product development, acquisitions and general corporate
purposes; the effect of increased debt leverage on cash flow, vulnerability to
economic downturns and flexibility in responding to changing business and
economic conditions; possible exposure to fraudulent conveyance allegations
arising out of the reorganization; possible exposure to additional tax
obligations in connection with the reorganization; and other risks detailed
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Certain Factors Affecting the Company's Business" and, from
time to time, in the Company's other filings with the Securities and Exchange
Commission. The Company assumes and undertakes no obligation to update or
revise any forward-looking statement, whether as a result of new information,
future events or otherwise.

3
<PAGE>

PART I

Item 1. Business

General

In August 1998, the Company (then known as Varian Associates, Inc.,
"Varian") announced its intention to spin off its instruments business and its
semiconductor equipment business to its stockholders. The Company subsequently
transferred its instruments business to Varian, Inc. ("VI"), then a wholly
owned subsidiary, and transferred its semiconductor equipment business to
Varian Semiconductor Equipment Associates, Inc. ("VSEA"), then a wholly owned
subsidiary. On April 2, 1999, the Company distributed to its stockholders all
of the outstanding shares of common stock of VI and VSEA (the "Distribution").
The business retained by the Company consists of its medical systems business,
principally the sales and service of oncology systems, and the sales of x-ray
tubes and imaging subsystems. The Company has been engaged in aspects of the
medical systems business since 1959.

These transactions were accomplished under the terms of an Amended and
Restated Distribution Agreement dated as of January 14, 1999 by and among the
Company, VI and VSEA (the "Distribution Agreement"). In addition, for purposes
of governing certain ongoing relationships between and among the Company, VI
and VSEA after the Distribution, the Company, VI and VSEA entered into certain
other agreements, including an Employee Benefits Allocation Agreement, an
Intellectual Property Agreement, a Tax Sharing Agreement and a Transition
Services Agreement (the "Distribution Related Agreements").

Overview

VMS is a world leader in the design and production of equipment for treating
cancer with radiation, as well as high-quality, cost-effective x-ray tubes for
original equipment manufacturers, replacement x-ray tubes and imaging
subsystems.

In serving the market for advanced medical systems (primarily for cancer
care), VMS continues to broaden its offerings to address the unrelenting
demand for cost containment and enhanced efficacy which are driving this
sector. Its oncology systems line encompasses a fully integrated system of
products embracing not only linear accelerators but sophisticated ancillary
products and services to extend their capabilities and efficiency. These
ancillary offerings now account for almost half of all oncology systems sales.

In addition to developing leading-edge medical hardware, VMS also develops
clinical software products and devices that enhance productivity and quality.
These developments, while particularly valuable in helping U. S. hospitals and
clinics cope with the challenges of managed care, are finding use in markets
around the world as health care providers search for new ways to reduce costs,
improve efficiency and bring improved levels of care to more patients.

In the X-ray Products business, VMS provides a broad selection of diagnostic
tubes capable of delivering more scans with excellent resolution and imaging
more patients than its competitors. VMS is also developing a solid state
system for digital imaging in collaboration with imaging system manufacturers
in several related markets.

Cancer-Care Market

Approximately 50% of all cancer patients in the U. S. receive radiation
therapy at some point during the course of their disease. An important
advantage of radiation therapy is that the radiation acts with some
selectivity on cancer cells. The absorption of radiation by a cell affects its
genetic structure and inhibits the replication of the cell, leading to its
gradual death. Cancerous cells are fast replicating and thereby are
disproportionately damaged by the radiation absorbed.

4
<PAGE>

Currently, the most common type of radiotherapy uses x-rays delivered by
external beams and is administered using linear accelerators ("LINACS").
LINACS are conventionally used for multiple, or "fractionated," treatments of
a tumor in up to 30 radiation sessions, or, as used more recently in the
brain, to deliver a single high dose of radiation in a procedure referred to
as stereotactic radiosurgery ("SRS"). In addition to external radiation
therapy, radioactive seeds, wires or ribbons are sometimes inserted into a
tumor ("interstitially") or into a body cavity ("intracavitary"). These
modalities, known as "brachytherapy," do not require the radiation to pass
through surrounding healthy tissue.

Products

VMS's products can be broadly classified into three principal categories:
oncology systems, x-ray products, and breakthrough technologies.

Oncology Systems

VMS Oncology Systems designs, manufactures, sells and services hardware and
software products for radiation treatment of cancer, including linear
accelerators, simulators and computer systems for planning cancer treatments
and data management systems for radiation oncology centers. VMS Oncology
Systems offers an integrated system of products embracing both linear
accelerators and sophisticated ancillary products and services to extend their
capabilities and efficiency. VMS's CLINAC(TM) series of medical linear
accelerators, marketed to hospitals and clinics worldwide, generate
therapeutic x-rays and radiation beams for cancer treatment.

Linear accelerators are also used for industrial radiographic applications.
VMS's Linatron linear accelerators are used for nondestructive examination of
objects, such as cargo or luggage and to x-ray heavy metallic structures for
quality control.

VMS also manufactures and markets related radiotherapy products such as
imaging systems, information management systems, multi-leaf collimators,
simulators and radiosurgery products. VMS has received U.S. Food and Drug
Administration ("FDA") approval of new oncology products including a three-
dimensional cancer treatment planning system, and an advanced multileaf
collimator used to more precisely direct electron beams for cancer treatment.
VMS continually works with physicians and technicians to develop the latest
technology and treatments.

X-Ray Products

VMS is a world leader in the design and manufacture of subsystems for
diagnostic radiology, including x-ray-generating tubes and imaging subsystems,
for the estimated worldwide $7 billion diagnostic imaging market. Its tubes
are a key component of x-ray imaging subsystems, including both new system
configurations and replacement tubes for the installed base. VMS conducts an
active research and development program to address new technology and
applications in both the medical and industrial x-ray tube markets. VMS's
extensive scientific and engineering expertise in glass and metal center
section tubes is considered to be state-of-the-art.

VMS manufactures tubes for four primary medical x-ray imaging applications:
CT scanner; radiographic/fluoroscopic; special procedures; and mammography.
VMS x-ray tube products have over time substantially increased the heat
storage capacity of CT tubes. These high heat unit tubes were developed in
response to customers who needed rapid, continuous scanning to accommodate
continuous CT scanning techniques over large regions of the patient, and to
reduce examination times. Innovative design and process improvements have
increased tube life such that VMS's current tubes last twice as long as tubes
did five years ago, resulting in significant savings for customers.

VMS mammography tubes produce high quality images at low doses. Today,
almost half the mammography systems and nearly a quarter of the CT scanner
systems worldwide employ VMS tubes. VMS also offers a

5
<PAGE>

complete line of industrial x-ray tubes. The industrial product line consists
of analytical x-ray tubes used for x-ray fluorescence and diffraction as well
as tubes used for non-destructive imaging and gauging.

VMS also designs, manufactures and markets imaging products. The imaging
product line was launched in September 1996. Amorphous silicon imaging
technologies developed by VMS can be broadly applied as an alternative to
image intensifiers or film. The new products are expected to increase the
efficiency of diagnostic x-ray imaging while decreasing costs. An amorphous
silicon imaging subsystem is compact and weighs only about 10 pounds,
replacing a 100-lb. image intensifier used in fluoroscopic imaging and the TV
camera connected to it. It is expected that imaging equipment based on
amorphous silicon semiconductors may be more stable and reliable, have far
fewer adjustments, and suffer less degradation over time.

Ginzton Technology Center

In addition to pursuing growth opportunities in existing markets, VMS,
through its premier research facility, the Ginzton Technology Center ("GTC")
is pursuing the potential in combining advances in focused energy with the
latest breakthroughs in biotechnology. The GTC manufactures and sells the
Company's brachytherapy products. VariSource(TM) , VMS's high dose rate
brachytherapy system, treats tumors internally by delivering radiation to the
tumor by means of a radioactive source on the end of a wire in a catheter. It
is a cost-effective and efficacious adjunct to linear accelerator-based
therapy.

Subsequent to the end of fiscal year 1999, VMS entered into a contract with
Cordis Corporation, a subsidiary of Johnson and Johnson Company, for the
development, supply and servicing of products and radioactive sources for
coronary intravascular radiotherapy treatment to prevent restenosis following
angioplasty. The product has not yet received U.S. FDA approval.

VMS is also evaluating the application of radiation to treat other diseases.
Such efforts are designed to yield a whole new range of products and
technologies that allow VMS to take full advantage of its reputation for
technology innovation leadership in the health care field.

Marketing and Sales

Historically, VMS has sold a significant proportion of its products in any
particular period to a limited number of customers. Sales to VMS's ten largest
customers in fiscal years 1999, 1998 and 1997 accounted for approximately 24%,
24% and 28% of sales, respectively. VMS expects that sales of its products to
relatively few customers will continue to account for a high percentage of its
sales in the foreseeable future. No single customer accounted for 10% or more
of VMS's sales in fiscal year 1999.

VMS sells its products throughout the world through direct sales forces in
North America, Australia and major parts of Asia, Europe and Latin America.
VMS has 20 sales offices in the United States and 20 sales offices in other
countries. Sales in other areas are generally handled by distributors. Sales
to customers located in Japan were $75 million in fiscal 1999, $68 million in
fiscal 1998, and $67 million in fiscal 1997.

VMS sells its oncology system products primarily to hospitals, clinics,
private and governmental institutions and health care agencies and doctors'
offices. Total sales for oncology systems and services were $459 million, $405
million and $337 million for fiscal years 1999, 1998 and 1997, respectively.
VMS divides its markets for oncology systems, components and accessories by
region into North America, Europe, Asia and rest of the world, and these
regions constituted 50%, 33%, 12% and 5% of VMS's sales during fiscal year
1999 and 50%, 36%, 8% and 6% during fiscal year 1998, respectively.

VMS sells approximately 80% of its x-ray tube products to original equipment
manufacturers ("OEM's") and 20% to replacement tube distributors. VMS has
supplied tubes to such industry leaders as Toshiba, Marconi, and Shimadzu,
each of which accounted for 5% or more of x-ray tube product sales in fiscal
year 1999.

6
<PAGE>

Total sales for X-ray Products were $123 million, $131 million and $130
million for fiscal years 1999, 1998 and 1997, respectively. VMS divides its
markets for its x-ray tube products, components and accessories by region into
Asia, North America, Europe and rest of the world, and these regions
constituted 31%, 23%, 44% and 3% of VMS's sales during fiscal year 1999 and
29%, 25%, 43% and 3% during fiscal year 1998, respectively.

VMS believes that in the foreseeable future there will be world-wide growth
in the markets for oncology systems and related services because of the
underserved market outside the U.S. With the transition from analog to digital
systems, the demand for products and services related to networking, archiving
and electronic distribution of digital images will grow in industrialized
countries. VMS also believes there will be continuous growth in the markets
for information technology.

VMS's marketing strategy is to offer to its customers a complete package of
products and services in the fields of radiotherapy, including equipment,
accessories and related services such as consulting and after-sales services.
VMS's marketing efforts include the development of relationships with current
and prospective customers, participation in annual professional meetings for
clinicians and hospitals, advertisement in trade journals, direct mail and
telephone marketing. VMS's growth strategy is to add products in its existing
markets, expand in new high-potential markets, add product offerings through
acquisitions and internal development and grow its international market.

Customer Support and Services

VMS maintains service support centers in Milpitas, California; Buc, France;
and Tokyo, Japan; as well as field service forces throughout the world for its
oncology systems. VMS's network of service engineers and customer support
specialists provide installation, warranty, repair, training and support
services. VMS generates service revenue by providing service to customers on a
time and materials basis and through comprehensive service contracts and the
sale of parts.

VMS warrants most of its oncology systems for hardware parts and labor for
12 months. Under the terms of the warranty, the customer is assured of service
and parts so that the equipment will operate in accordance with
specifications. VMS warrants that software will perform in accordance with
specifications at the delivery date and up to three months thereafter if the
customer gives notice of any nonconformance. VMS offers a variety of post-
warranty service agreements that permit customers to contract for the level of
equipment maintenance they require. In addition, VMS has begun to offer
specific software support agreements, reflecting the growing use in VMS's
products of software that can be updated. Service is provided at rates
competitive with those offered by VMS's competitors.

Systems under warranty or service contract receive periodic maintenance by
VMS service engineers, who also install new system capabilities or software
upgrades and respond to customer service requests. These services may be
purchased from VMS's service organization by customers who do not have a
service contract with VMS.

Oncology Systems' customers receive installation, technical training,
clinical in-service and documentation support appropriate for the product
type. Customers receive both emergency and routine maintenance from a
worldwide network of field engineers. These individuals are available to
handle service requests 24-hours a day to satisfy VMS's customer requirements.
Most of these engineers are employees of VMS, but a few are employees of
dealers and/or agents of VMS. Customers can access VMS's extensive service
network by calling any of VMS's service centers located throughout North
America, Europe, Asia, Australia and Latin America.

VMS believes that its customer service and support are an integral part of
its competitive strategy. Service capability, availability and responsiveness
play an important role in marketing and selling medical equipment

7
<PAGE>

and systems, particularly as the technological complexity of the products
increases. Nevertheless, many hospitals use their own biomedical engineering
departments and/or independent service organizations to service equipment
after the warranty period expires. Therefore, VMS cannot depend on conversion
of all maintenance to service contracts after the warranty period. However,
after-warranty service does provide an on-going source of revenue for VMS.

VMS provides technical advice and consultation for x-ray tube products to
major OEM customers from offices in Tokyo, Japan; Houten, The Netherlands; and
Salt Lake City, Utah and Charleston, South Carolina. VMS applications
specialists and engineers make recommendations to meet the customer's
technical requirements within the customer's budgetary constraints. VMS often
develops specifications for a unique product, which will be designed and
manufactured to meet a specific customer's requirements. VMS also maintains a
technical customer support group in Charleston, South Carolina to meet the
technical support requirements of independent tube installers using VMS's x-
ray tube products.

Research and Development

Developing products, systems and services based on advanced technological
concepts is essential to VMS's ability to compete effectively. VMS maintains a
product research and development and engineering staff responsible for product
design and engineering. Research and development expenditures totaled $40
million, $39 million and $31 million in fiscal years 1999, 1998 and 1997,
respectively.

VMS's GTC maintains technical competencies in accelerator physics, image
processing, electronic design, and materials science for the purpose of
proving feasibility of new product concepts and to improve current products.
Present research topics include improved accelerator concepts, imaging-based
radiotherapy treatment planning, targeting and verification tools, combined
modality therapy, manufacturing process improvements, and improved x-ray
tubes.

Although VMS intends to continue to conduct extensive research and
development activities, there can be no assurance that it will be able to
successfully develop and market new products on a cost-effective and timely
basis, or at all; that such products will compete favorably with products or
product enhancements developed by others, or that VMS's existing technology
will not be superseded by new discoveries or developments.

Competition

The health care equipment markets are characterized by rapidly evolving
technology, intense competition and pricing pressure. VMS competes with
companies worldwide, some of which have greater financial, marketing and
management resources than VMS. These competitors could develop technologies
and products that are more effective than those currently used or produced by
VMS or that could render VMS's products obsolete or noncompetitive. Smaller
competitors of VMS could be acquired by companies with greater financial
strength enabling them to compete more aggressively. Certain distributors of
VMS could also be acquired by competitors thereby disrupting certain
distribution arrangements of VMS. Management believes, however, that VMS
competes favorably with its competitors on the basis of its continued
commitment to global distribution and customer service, value-added
manufacturing, technological leadership and new product innovation. VMS
believes that the key to success in its markets is to provide technologically
superior products that deliver cost-effective, high quality clinical outcomes
and that meet or exceed customer quality and service expectations. VMS's
ability to compete successfully depends on its ability to commercialize new
products ahead of its competitors. In its sales of oncology systems, VMS
competes with Siemens, Nucletron, Elekta and Mitsubishi. In addition, VMS
competes with independent service organizations in its service and maintenance
business and with a variety of companies in its software systems and
accessories business.

The market place for x-ray tube products is extremely competitive. All of
the major diagnostic imaging systems companies, which are the primary
customers of VMS's x-ray tube business also manufacture x-ray tubes for use in
their own products. VMS must compete with these in-house x-ray tube
manufacturing operations that

8
<PAGE>

are naturally favored by their parent company. As a result, VMS must have a
competitive advantage in one or more significant areas which may include lower
product cost, better product quality, or technological superiority. VMS sells
a significant volume of its x-ray tube products to companies such as Toshiba
Medical Systems, Hitachi Medical Systems, Shimadzu Medical Systems, Philips
Medical Systems and General Electric Medical Systems, all of which have in-
house x-ray tube production capability. In addition, VMS competes against
other stand-alone x-ray tube manufacturers such as Comet, located in
Switzerland and IAE, located in Italy. These companies compete with VMS for
both the OEM business of major diagnostic imaging equipment manufacturers as
well as independent servicers of x-ray tube equipment.

Manufacturing and Supplies

Oncology systems manufactures its linear accelerators in Palo Alto,
California, and its treatment simulator systems and accelerator subsystems in
Crawley, England. In addition, oncology systems manufactures certain of its
ancillary products in Baden, Switzerland and Helsinki, Finland. X-ray tube
products are manufactured at VMS's manufacturing facilities in Salt Lake City,
Utah and Charleston, South Carolina. GTC manufactures its brachytherapy
systems in Crawley, England and other of its products in Charlottesville,
Virginia. These facilities employ state-of-the-art manufacturing techniques,
and several have been honored by the press, governments, and trade
organizations for their commitment to quality improvement. They are registered
to ISO 9001 (or ISO 9002, in the case of the Charleston facility), the most
rigorous of the international quality standards.

Production processes at VMS facilities include machining, fabrication,
subassembly, system assembly and final testing. VMS has invested in various
automated and semi-automated equipment for the fabrication and machining of
parts and assemblies incorporated in its products. VMS may from time to time
further invest in such equipment when cost justified. VMS's quality assurance
program includes various quality control measures from inspection of raw
material, purchased parts and assemblies through on-line inspection.

VMS's manufacturing activities consist primarily of assembling and testing
components and subassemblies, which are acquired from third-party suppliers
and then integrated into a finished system by VMS. VMS utilizes an outsourcing
strategy for the manufacture of major subassemblies and performs system
design, assembly and testing in-house. VMS believes outsourcing enables it to
minimize its fixed costs and capital expenditures while also providing it with
the flexibility to increase production capacity. VMS purchases material and
components from various suppliers that are either standard products or built
to VMS specifications. Certain components used in existing products of VMS, as
well as products under development, are frequently purchased from single
sources.

Backlog

Backlog for VMS amounted to $400 million at the end of fiscal 1999, of which
$286 million is expected to be filled within fiscal year 2000. Backlog at the
end of fiscal 1998 amounted to $352 million of which $206 million was filled
in fiscal year 1999. Backlog for fiscal 1997 amounted to $344 million of which
$179 million was filled in fiscal year 1998. VMS includes in backlog only
orders for products scheduled to be shipped within two years. Orders may be
revised or canceled, either pursuant to their terms or as a result of
negotiations; consequently, it is impossible to predict with certainty the
amount of backlog orders that will result in sales.

Product Liability

VMS's business exposes it to potential product liability claims which are
inherent in the manufacture and sale of medical devices and, as such, VMS may
face substantial liability to patients for damages resulting from the faulty
design or manufacture of products. Because these products involve the delivery
of radiation to the human body or are involved in diagnostic imaging of the
human body, the possibility for significant injury and/or death exists with
any of VMS's products. Therefore, the design, manufacture, sale or service of
the medical products manufactured by VMS involve the risk of product liability
claims and expose VMS to substantial liability to patients for damages
resulting from the faulty design, manufacture or servicing of such products.
Although VMS maintains limited product liability insurance coverage in an
amount that it deems sufficient for

9
<PAGE>

its business, there can be no assurance that such coverage will ultimately
prove to be adequate or that such coverage will continue to remain available
on acceptable terms, if at all.

On December 5, 1997, VMS purchased General Electric's Radiotherapy Service
Business (the "RS Business"). In connection with that transaction, VMS agreed
to assume liability for certain product defects and personal injury matters
which might arise with respect to RS Business products, and obtained insurance
for these matters. The insurance provides that in each annual period VMS is
responsible for the first $5,000,000 of expenses or liabilities related to any
such claims. VMS has been notified of three potential claims related to these
RS Business products for which VMS may have an indemnity obligation.

Government Regulation

Domestic Regulation

VMS's products are regulated by the FDA. The FDA regulates the design,
development, testing, manufacturing, packaging, labeling, distribution and
marketing of medical devices under the U.S. Food, Drug and Cosmetic Act (the
"FDC Act") and regulations promulgated by the FDA. The State of California
(through its Department of Health Services), where VMS maintains one of its
manufacturing facilities, as well as other states, also regulates the
manufacture of medical devices.

In general, these laws require that manufacturers adhere to certain
standards designed to ensure the safety and effectiveness of medical devices.
Under the FDC Act, each medical device manufacturer must comply with
requirements applicable to manufacturing practices, clinical investigations
involving humans, sale and marketing of medical devices, post-market
surveillance, repairs, replacements and refunds, recalls and other matters.
The FDA is authorized to obtain and inspect devices and their labeling and
advertising, and to inspect the facilities in which they are manufactured.

The FDC Act also requires compliance with specific manufacturing and quality
assurance standards, including regulations promulgated by the FDA with respect
to good manufacturing practices. FDA regulations require that each
manufacturer establish a quality assurance program by which the manufacturer
monitors the manufacturing process and maintains records that show compliance
with FDA regulations and the manufacturer's written specifications and
procedures relating to the devices. Compliance is necessary to receive FDA
clearance to market new products and is necessary for a manufacturer to be
able to continue to market cleared product offerings. Among other things,
these regulations require that manufacturers establish performance
requirements before production, ensure that device components are compatible,
select adequate packing materials, and, if appropriate, do risk analyses.

The FDA makes announced and unannounced inspections of medical device
manufacturers and may issue reports of observations where the manufacturer has
failed to comply with applicable regulations and/or procedures. Failure to
comply with applicable regulatory requirements can, among other things, result
in warning letters, civil penalties, injunctions, suspensions or losses of
regulatory clearances, product recalls, seizure or administrative detention of
products, operating restrictions through consent decrees or otherwise, and
criminal prosecution.

There has been a trend in recent years, both in the United States and
abroad, toward more stringent regulation and enforcement of requirements
applicable to medical device manufacturers. The continuing trend of more
stringent regulatory oversight in product clearance and enforcement activities
may cause medical device manufacturers to experience longer approval cycles,
more uncertainty, greater risk and higher expenses.

The FDA requires that a new medical device or a new indication for use of or
other significant change in an existing medical device obtain either 510(k)
pre-market notification clearance or an approved Pre-Market Approval
Application ("PMAA") before orders can be obtained and the product distributed
in the United States. The 510(k) clearance process is applicable when the new
product being submitted is substantially equivalent to

10
<PAGE>

an existing commercially available product. The process of obtaining 510(k)
clearance may take at least three months from the date of filing of the
application and generally requires the submission of supporting data, which
can be extensive and extend the process for a considerable period of time.
Under the PMAA process, the applicant must generally conduct at least one
clinical investigation and submit extensive supporting data and clinical
information in the PMAA, which typically takes from one to two years, but
sometimes longer for the FDA to review. Generally, VMS has not been required
to resort to the PMAA process for approval of its products.

Software deemed to be a medical device, such as VMS's treatment planning
software, is reviewed by the FDA in connection with the agency's clearance of
the pre-market notification for the related device. Computer health
information system or stand-alone software may also be subject to FDA
regulations. A draft policy issued by the FDA in 1989 has been the applicable
guidance for the regulation of computer products intended to affect the
diagnosis or treatment of patients. The 1989 draft policy exempts certain
software from regulation on the basis of "competent human intervention"
occurring with the use of the software before any impact on human health would
occur. The FDA is considering a revised policy, which is expected to eliminate
this exemption and to base the level of regulation on the level of risk
imposed by the product. It is not clear what impact such regulatory policies,
if adopted, will have on clinical information systems or other medical
software offered by VMS.

VMS believes that it is in material compliance with all applicable federal,
state and most foreign regulations regarding the manufacture and sale of its
products. Such regulations and their enforcement are, however, constantly
undergoing change, and VMS cannot predict what effect, if any, such change may
have on its business. Approvals may be withdrawn for failure to comply with
regulatory standards or due to the occurrence of unforeseen problems. Failure
to comply with FDA regulations could result in warning letters, product
approval delays or other sanctions being imposed, including restrictions on
the marketing or the recall of VMS's products, injunction or civil penalties.
Delays in the receipt of or failure to receive necessary regulatory approvals
or the loss of existing approvals could have a material adverse effect on VMS.
VMS believes that its products substantially comply with all applicable
electrical safety and environmental standards, such as those of Underwriters
Laboratories and IEC 601.

VMS is also subject to FDA and Federal Trade Commission restrictions on
advertising and numerous foreign, federal, state and local laws relating to
such matters as safe working conditions and manufacturing practices. Changes
in existing requirements, adoption of new requirements or failure to comply
with applicable requirements could have a material adverse effect on VMS.

The design, manufacture, sale or service of the medical products
manufactured by VMS involve the risk of product liability claims and exposes
VMS to substantial liability to patients for damages resulting from the faulty
design, manufacture or servicing of such products. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Certain Factors Affecting the Company's Business--Product Recalls, Product
Liability and Insurance."

Medicare and Medicaid Reimbursement

The U.S. federal government regulates reimbursement for diagnostic
examinations furnished to Medicare beneficiaries, including related physician
services and capital equipment acquisition costs. For example, Medicare
reimbursement for operating costs for radiation treatment performed on
hospital inpatients generally is set under the Medicare prospective payment
system ("PPS") diagnosis-related group ("DRG") regulations. Under PPS,
Medicare pays hospitals a fixed amount for services provided to an inpatient
based on his or her DRG, rather than reimbursing for the actual costs incurred
by the hospital. Patients are assigned to a DRG based on their principal and
secondary diagnoses, procedures performed during the hospital stay, age,
gender and discharge status.

11
<PAGE>

On October 1, 1991, Medicare began to phase in over a ten-year period a
prospective payment system for capital costs which incorporates an add-on to
the DRG-based payment to cover capital costs and which replaces the reasonable
cost-based methodology. The Balanced Budget Act of 1997 ("BBA"), enacted into
law on August 5, 1997, further reduces capital payments to hospitals by 2.1%
between October 1, 1997 and September 30, 2002.

For certain hospital outpatient services, including radiation treatment,
reimbursement currently is based on the lesser of the hospital's costs or
charges, or a blended amount, 42% of which is based on the hospital's
reasonable costs and 58% of which is based on the fee schedule amount that
Medicare reimburses for such services when furnished in a physician's office.
Because the Health Care Financing Administration ("HCFA") has not yet proposed
regulations to implement the outpatient PPS, it is unclear what impact changes
will have on payment for radiation treatment. Until January 2000, capital
acquisition costs for services furnished to hospital outpatients will be
reimbursed on the basis of 90% of the reasonable costs actually incurred by
the hospital.

Until January 1, 1992, Medicare generally reimbursed physicians on the basis
of their reasonable charges or, for certain physicians, including
radiologists, on the basis of a "charge-based" fee schedule. On January 1,
1992, Medicare began to phase in over a five-year period a new system that
reimburses all physicians, based on the lower of their actual charges or a fee
schedule amount based on a "resource-based relative value scale." Relative
value units representing practice expenses, such as equipment costs, currently
account for approximately 42% of a physician's Medicare fee schedule payment
for a particular service. Under the BBA, HCFA is required to implement by July
1, 2000, a revised methodology for calculating practice expense relative value
units from the current historical basis to a resource basis. HCFA already has
proposed to establish two separate practice expense values for each physician
service, one for when a service is furnished in a facility setting and another
for when the service is performed in a physician's office. Typically, for a
service that could be provided in either setting, the practice expense value
would be higher when the service is performed in a physician's office as it
would cover a physician's costs such as for equipment, supplies, and overhead.
At this time, HCFA has yet to revise guidelines setting new practice expense
values. The revisions that HCFA might make in these values could have a
positive or negative affect on physician reimbursement for oncology system
services provided in a facility and a positive or negative effect on physician
reimbursement for oncology system services provided directly in a physician's
office.

Reimbursement for services rendered to Medicaid beneficiaries is determined
pursuant to each state's Medicaid plan which is established by state law and
regulations, subject to requirements of federal law and regulations. The BBA
has revised the Medicaid program to allow states even more control over
coverage and payment issues. In addition, the HCFA already has granted many
states waivers to allow for greater control of the Medicaid program at the
state level. The impact on VMS of this greater state control on Medicaid
payment for diagnostic services is uncertain.

The sale of medical devices, the referral of patients for diagnostic
examinations utilizing such devices, and the submission of claims to third-
party payors (including Medicare and Medicaid) seeking reimbursement for such
services, are subject to various federal and state laws pertaining to health
care "fraud and abuse," including physician self-referral prohibitions, anti-
kickback laws, and false claims laws. Subject to certain enumerated
exceptions, the federal physician self-referral law, also known as Stark II,
prohibits a physician from referring Medicare or Medicaid patients to an
entity in which the physician (or a family member) has an ownership interest
or compensation relationship if the referral is for a "designated health
service," which is defined explicitly to include radiology services. Although
final regulations implementing Stark II have not yet been issued by the United
States Department of Health and Human Services, proposed regulations were
issued in January 1998. Under the proposed regulations, the definition of
radiology services subject to the Stark II restriction would expressly exclude
screening mammography services (i.e., mammography services furnished to
asymptomatic patients), but not diagnostic mammography (i.e., mammography
services furnished to symptomatic patients). The Stark II law, as well as
physician self-referral restrictions that exist in a number of states and
which apply regardless of whether Medicare or Medicaid patients are involved,
may result in lower utilization of certain

12
<PAGE>

diagnostic procedures, which may affect the demand for VMS's products. Anti-
kickback laws make it illegal to solicit, offer, receive, or pay any
remuneration in exchange for, or to induce, the referral of business,
including the purchase of medical devices from a particular manufacturer or
the referral of patients to a particular supplier of diagnostic services
utilizing such devices. False claims laws prohibit anyone from knowingly and
willfully presenting, or causing to be presented, claims for payment to third
party payers (including Medicare and Medicaid) that are false or fraudulent,
for services not provided as claimed, or for medically unnecessary services.
Violations of fraud and abuse laws are prosecuted by the Office of the
Inspector General and are punishable by criminal and/or civil sanctions
including, in some instances, imprisonment and exclusion from participation in
federal health care programs such as Medicare and Medicaid.

The executive branch of the federal government and the Congress from time to
time consider various Medicare and other health care reform proposals that
could significantly affect both private and public reimbursement for health
care services. Some of these proposals, if enacted into law, could reduce
reimbursement for or the incentive to use, diagnostic devices and procedures
and thus could adversely affect the demand for diagnostic devices, including
VMS's products.

Foreign Regulation

Sales of medical devices outside the United States are subject to regulatory
requirements that vary from country to country. Specifically, certain foreign
regulatory bodies have adopted various regulations governing product
standards, packaging requirements, labeling requirements, import restrictions,
tariff regulations, duties and tax requirements. For example, in July 1998,
the European Union implemented a Medical Device Directive, pursuant to which
VMS is required to obtain ISO 9001 certification and affix the required CE
mark to its products. The CE mark is an international symbol of adherence to
certain quality assurance standards and compliance with applicable European
medical device directives which, once affixed, enables a product to be sold in
member countries of the European Union. Several Asian countries are reviewing
the possibility of adopting similar regulatory schemes. In addition, several
countries are reviewing proposed regulations that would require manufacturers
to dispose of their products at the end of their useful lives. There can be no
assurance that VMS will not be required to incur significant costs in
obtaining or maintaining its non-U.S. regulatory approvals. Delays in receipt
of or failure to receive such approvals, the loss of previously obtained
approvals, or failure to comply with existing or future regulatory
requirements could have a material adverse effect on VMS's business, financial
condition and results of operation.

Patent and Other Proprietary Rights

As a leader in the manufacture and sale of oncology systems and x-ray tubes,
VMS has pursued a policy of seeking patent, copyright, trademark and trade
secret protection in the United States and other countries for developments,
improvements, and inventions originating within its organization that are
incorporated in VMS's products or that fall within its fields of interest. As
of October 1, 1999, VMS owned approximately 67 patents in the United States
and approximately 111 patents throughout the rest of the world, and had
approximately 115 patent applications on file with various patent agencies
worldwide. VMS intends to file additional patent applications as appropriate.

VMS relies on a combination of copyright, trade secret and other laws, and
contractual restrictions on disclosure, copying and transferring title to
protect its proprietary rights. VMS has trademarks, both registered and
unregistered, that are maintained and enforced to provide customer recognition
for its products in the marketplace. VMS also has agreements with third
parties that provide for licensing of patented or proprietary technology.
These agreements include royalty-bearing licenses and technology cross-
licenses. While VMS places considerable importance on its licensed technology,
VMS does not believe that the loss of any license would have a material
adverse effect on VMS's business.

VMS's competitors, like companies in many high technology businesses,
routinely review the products of others for possible conflict with their own
patent rights. Although VMS has from time to time received notices

13
<PAGE>

of claims from others alleging patent infringement, VMS believes that there
are no pending patent infringement claims that might have a material adverse
effect on the business of VMS.

Environmental Matters

For a discussion of environmental matters, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Environmental
Matters."

Employees

At October 1, 1999, VMS had a total of approximately 2,350 full-time and
temporary employees worldwide, 1,710 in the United States and 640 elsewhere.
This total includes 50 employees performing transition services for VSEA and
VI in order to complete the separation and distribution of the information
technology infrastructure.

None of VMS's employees based in the United States are unionized or subject
to collective bargaining agreements. Employees based in certain foreign
countries may, from time to time, be subject to collective bargaining
agreements. VMS currently considers its employee relations to be good.

VMS's success depends to a significant extent upon a limited number of key
employees and other members of senior management of VMS. The loss of the
service of one or more of these key employees could have a material adverse
effect on VMS. The success of VMS's future operations depends in large part on
VMS's ability to recruit and retain engineers and technicians, as well as
marketing, sales, service and other key personnel, who in each case are in
great demand. VMS's inability to attract and retain the personnel it requires
could have a material adverse effect on VMS's results of operations.

14
<PAGE>

EXECUTIVE OFFICERS

Certain information regarding the executive officers of VMS as of December
15, 1999 is set forth below:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Richard M. Levy........... 61 Dr. Levy became President and Chief Executive
President and Chief Officer of VMS on April 3, 1999. Prior to April
Executive Officer 2, 1999, he was the Executive Vice President of
the Company responsible for the medical systems
business. Dr. Levy also oversaw the Company's
Edward L. Ginzton Technology Center in Palo
Alto. He joined the Company in 1968, and was
elevated to Executive Vice President in 1990.

Timothy E. Guertin........ 50 Mr. Guertin became Corporate Vice President of
Corporate Vice President VMS on April 3, 1999. Prior to April 2, 1999, he
was Corporate Vice President and President of
Varian's Oncology Systems business, positions he
held from 1992 and 1990, respectively. Mr.
Guertin has held various other positions in the
medical systems business during his 24 years
with the Company.

John C. Ford.............. 55 Dr. Ford became Corporate Vice President of VMS
Corporate Vice President on April 3, 1999. Prior to April 2, 1999, he was
Senior Vice President, Business Development, for
the Company's medical systems business, a
position he held from 1992. Dr. Ford has held
various other positions in the medical systems
business during his 27 years with the Company.

Robert H. Kluge........... 53 Mr. Kluge became Corporate Vice President of VMS
Corporate Vice President on April 3, 1999. Prior to April 2, 1999, he was
Vice President and General Manager of Varian's
x-ray tube products business, positions he held
from 1993. Before joining the Company in 1993,
he held various positions with Picker
International (an x-ray systems manufacturer).

Elisha W. Finney.......... 38 Ms. Finney became Corporate Vice President and
Corporate Vice President, Chief Financial Officer of VMS on April 3, 1999.
Chief Financial Officer She has been Treasurer of the Company since
and Treasurer January 1998. From 1988 to 1998, she was the
Company's Risk Manager and from 1995 to 1998,
Ms. Finney also served as Assistant Treasurer.
Ms. Finney held various other positions during
her 11 years with the Company.

Joseph B. Phair........... 52 Mr. Phair became Corporate Vice President,
Corporate Vice President, Administration of VMS on August 20, 1999.
Administration, General Between April 2, 1999 and August 20, 1999, he
Counsel and Secretary was a consultant to the Company. Mr. Phair has
been General Counsel of the Company since 1990
and Secretary since 1991. Mr. Phair was a Vice
President of the Company from 1990 until April
2, 1999, and has held various other positions in
the Company's legal department during his 20
years with the Company.

Duane A. Walstrom......... 48 Mr. Walstrom became Corporate Controller of VMS
Corporate Controller on April 3, 1999. Prior to April 2, 1999, he was
Director, Accounting of the Company, a position
he held since 1985. Mr. Walstrom held various
other accounting and finance positions during
his 17 years with the Company.
</TABLE>

15
<PAGE>

Item 2. Properties

VMS's executive offices and oncology management and manufacturing facilities
are located in Palo Alto, California on 30 acres of land under a leasehold
which expires from 2012 through 2058. These facilities are owned by the
Company and contain an aggregate floor space of 248,902 square feet. The
Ginzton Technology Center is located in Mountain View, California under a
lease that expires in 2004. VMS manufacturing facilities are located in Salt
Lake City, Utah; Charleston, South Carolina; Crawley, England; Baden,
Switzerland; and Helsinki, Finland. VMS's 40 service and sales facilities also
are located throughout the world, with 20 located outside of the United
States, including Australia, Brazil, China, Denmark, Finland, France, Germany,
Hong Kong, Italy, Japan, The Netherlands, Spain, Switzerland, Thailand and the
United Kingdom.

The following is a summary of the Company's properties at October 1, 1999:

<TABLE>
<CAPTION>
Land (Acres) Buildings (000's Sq. Ft.) Number of Buildings
------------ --------------------------- ---------------------
Owned Leased Owned Leased Owned Leased
----- ------ ------------ ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States........... 38 30 521 340 7 26
International........... 2 -- 46 118 1 26
--- --- ------------ ------------ --------- ---------
40 30 567 458 8 52
</TABLE>

Utilization of facilities by segment is shown in the following table:

<TABLE>
<CAPTION>
Buildings (000's Sq. Ft.)
--------------------------------------------
Manufacturing,
Administrative and
Research & Development
--------------------------
Non- Marketing
U.S. U.S. Total and Service Total
------- ------- -------- ----------- -----
<S> <C> <C> <C> <C> <C>
Oncology Systems.................... 215 65 280 211 491
X-ray Products...................... 386 3 389 9 397
Ginzton Technology Center........... 26 2 28 4 32
------- ------- ------- --- -----
Total Operations.................. 627 70 697 223 920
Other Operations.................... 88 17 105 -- 105
------- ------- ------- --- -----
Total............................. 715 87 802 223 1,025
</TABLE>

Other Operations includes manufacturing support.

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

Item 3. Legal Proceedings

Set forth below is information on the current status of previously reported
legal proceedings.

VMS is a party to three related federal actions involving claims by
independent service organizations ("ISOs") that its policies and business
practices relating to replacement for Oncology Systems' parts violate the
antitrust laws (the "ISOs Litigation"). The ISOs purchase replacement parts
from VMS and compete with it for the servicing of linear accelerators made by
VMS. In response to several threats of litigation regarding the legality of
VMS's parts policy, VMS filed a declaratory judgment action in a U. S.
District Court in 1996 seeking a determination that its new policies are legal
and enforceable and damages against two of the ISOs for misappropriation of
VMS's trade secrets, unfair competition, copyright infringement and related
claims. Subsequently, four of the defendants filed separate claims in other
jurisdictions raising issues allegedly related to those in the declaratory
relief action and seeking injunctive relief against VMS and damages against
VMS in the

16
<PAGE>

amount of $10 million for each plaintiff. The defendants' motion for a
preliminary injunction in U. S. District Court in Texas with respect to the
VMS's was defeated. The ISOs defendants amended the complaint to include class
action allegations, allege a variety of other anti-competitive business
practices and filed a motion for class certification, which was heard by the
U. S. District Court in Texas in July 1999. No decision, however, has been
entered.

Following the Distribution, VMS retained the liabilities related to the
medical systems business prior to the Distribution, including the ISOs
Litigation. In addition, under the terms of the Distribution Agreement, the
Company agreed to manage and defend liabilities related to legal proceedings
and environmental matters arising from corporate or discontinued operations of
the Company prior to the Distribution. Under the terms of the Distribution
Agreement, VI and VSEA generally are each obligated to indemnify VMS for one-
third of these liabilities (after adjusting for any insurance proceeds
realized or tax benefits recognized by VMS), including certain environmental-
related liabilities described below, and to fully indemnify VMS for
liabilities arising from the operations of the business transferred to each
prior to the Distribution. The availability of such indemnities will depend
upon the future financial strength of VI and VSEA. No assurance can be given
that the relevant company will be in a position to fund such indemnities. It
is also possible that a court would disregard this contractual allocation of
indebtedness, liabilities and obligations among the parties and require VMS to
assume responsibility for obligations allocated to another party, particularly
if such other party were to refuse or was unable to pay or perform any of its
allocated obligations. In addition, the Distribution Agreement generally
provides that if a court prohibits a company from satisfying its
indemnification obligations, then such indemnification obligations will be
shared equally between the two other companies.

VMS is also involved in certain other legal proceedings arising in the
ordinary course of its business. While there can be no assurances as to the
ultimate outcome of any litigation involving VMS, management does not believe
any pending legal proceeding will result in a judgment or settlement that will
have a material adverse effect on VMS's financial position or results of
operations.

The Company 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
eight sites where Varian is alleged to have shipped manufacturing waste for
recycling or disposal. The Company is also involved in various stages of
environmental investigation and/or remediation under the direction of, or in
consultation with, federal, state and/or local agencies at certain current VMS
or former Varian facilities (including facilities disposed of in connection
with Varian's sale of its Electron Devices business during 1995 and the sale
of its Thin Film Systems business during 1997). Under the terms of the
Distribution Agreement, VI and VSEA are each obligated to indemnify VMS for
one-third of these environmental-related investigation and remediation costs
(after adjusting for any insurance proceeds realized or tax benefits
recognized by VMS). Expenditures for environmental investigation and
remediation amounted to $0.9 million in fiscal year 1999, $1.7 million in
fiscal year 1998 and $0.8 million in fiscal year 1997, net of amounts that
would have been borne by VI and VSEA.

For certain of these sites and facilities, various uncertainties make it
difficult to assess the likelihood and scope of further investigation or
remediation activities or to estimate the future costs of such activities if
undertaken. As of October 1, 1999, VMS nonetheless estimated that VMS's future
exposure (net of VI and VSEA's indemnification obligations) for environmental-
related investigation and remediation costs for these sites ranged in the
aggregate from $12.4 million to $29.8 million. The time frame over which VMS
expects to incur such costs varies with each site, ranging up to approximately
30 years as of October 1, 1999. Management believes that no amount in the
foregoing range of estimated future costs is more probable of being incurred
than any other amount in such range and therefore accrued $12.4 million in
estimated environmental costs as of October 1, 1999. The amount accrued has
not been discounted to present value.

17
<PAGE>

(net of VI and VSEA's indemnification obligations) for environmental-related
investigation and remediation costs for these sites and facilities ranged in
the aggregate from $22.9 million to $39.0 million. The time frame over which
these costs are expected to be incurred varies with each site and facility,
ranging up to approximately 30 years as of October 1, 1999. As to each of
these sites and facilities, management determined that a particular amount
within the range of estimated costs was a better estimate of the future
environmental liability than any other amount within the range, and that the
amount and timing of these future costs were reliably determinable. Together,
these amounts totaled $26.7 million at October 1, 1999. VMS accordingly
accrued $11.9 million, which represents its best estimate of the future costs
discounted at 4%, net of inflation. This accrual is in addition to the $12.4
million described in the preceding paragraph.

The foregoing amounts are only estimates of anticipated future
environmental-related costs, and the amounts actually spent may be greater or
less than such estimates. The aggregate range of cost estimates reflects
various uncertainties inherent in many environmental investigation and
remediation activities and the large number of sites and facilities involved.
VMS believes that most of these cost ranges will narrow as investigation and
remediation activities progress. VMS believes that its reserves are adequate,
but as the scope of its obligations becomes more clearly defined, these
reserves (and the associated indemnification obligations of VI and VSEA) may
be modified and related charges against earnings may be made.

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

VMS evaluates its liability for environmental-related investigation and
remediation in light of the liability and financial wherewithal of potentially
responsible parties and insurance companies with respect to which VMS believes
that it has rights to contribution, indemnity and/or reimbursement (in
addition to the obligations of VI and VSEA). Claims for recovery of
environmental investigation and remediation costs already incurred, and to be
incurred in the future, have been asserted against various insurance companies
and other third parties. In 1992, Varian filed a lawsuit against 36 insurance
companies with respect to most of the above-referenced sites and facilities.
Varian received certain cash settlements during fiscal years 1995, 1996, 1997
and 1998 from defendants in that lawsuit. The Company has also reached an
agreement with another insurance company under which the insurance company has
agreed to pay a portion of the Company's past and future environmental-related
expenditures, and VMS therefore has a $3.6 million receivable in Other Assets
at October 1, 1999. VMS believes that this receivable is recoverable because
it is based on a binding, written settlement agreement with a solvent and
financially viable insurance company. Although VMS intends to aggressively
pursue additional insurance and other recoveries, VMS has not reduced any
liability in anticipation of recovery with respect to claims made against
third parties.

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

Inapplicable.

18
<PAGE>

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters

The Company's common stock is traded on the New York Stock Exchange and
Pacific Exchange under the symbol VAR. The following table sets forth, for the
periods indicated, the highest and lowest closing sales prices for Varian's
common stock as reported in the consolidated transaction reporting system for
the New York Stock Exchange in fiscal year 1998 and for the first half of
fiscal year 1999.
<TABLE>
<CAPTION>
High Low
---- ----
<S> <C> <C>
Fiscal Year 1998
First Quarter.......................................... $66 3/4 $47 3/4
Second Quarter......................................... 58 3/8 47 1/2
Third Quarter.......................................... 53 15/16 38 3/16
Fourth Quarter......................................... 43 31 13/16
Fiscal Year 1999
First Quarter.......................................... 41 1/16 32 7/16
Second Quarter......................................... 43 31 3/4
</TABLE>

On April 2, 1999, the end of the first half of fiscal year 1999, Varian
distributed to its stockholders all of the outstanding shares of common stock
of each of VI and VSEA. Following the Distribution, the highest and lowest
closing sales prices for VMS's common stock as so reported were:

<TABLE>
<CAPTION>
High Low
---- ----
<S> <C> <C>
Fiscal Year 1999
Third Quarter............................................ $25 1/4 $16 5/8
Fourth Quarter........................................... 24 3/16 19 7/16
</TABLE>

Varian declared cash dividends of $0.09 in the first quarter of fiscal year
1998, and $0.10 in each quarter thereafter through the first quarter of fiscal
year 1999. Since the Distribution, the Company has not paid any dividends on
the common stock and does not currently anticipate paying dividends on the
common stock for the foreseeable future. Further, the existing financing
arrangements of the Company contain provisions that limit the ability of the
Company to pay dividends.

As of December 15, 1999, there were approximately 5,184 holders of record of
the Company's common stock.

19
<PAGE>

Item 6. Selected Financial Data

The following selected statements of earnings and balance sheet data of the
Company as of and for the fiscal years ended September 29, 1995, September 27,
1996, September 26, 1997, October 2, 1998 and October 1, 1999 have been
derived from the Company's audited consolidated financial statements. The
financial data set forth below should be read in conjunction with the
consolidated financial statements of the Company and related notes thereto,
the supplemental data and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.

<TABLE>
<CAPTION>
Fiscal Years
------------------------------------------------
1999 1998 1997 1996 1995
------------------ --------- --------- ---------
(Dollars in millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
Summary of Operations:
Sales........................ $ 590.4 $ 541.5 $ 474.3 $ 467.5 $ 500.1
------- --------- --------- --------- ---------
Earnings from Continuing Op-
erations before Taxes....... $ 18.2 $ 36.0 $ 29.2 $ 25.0 $ 50.3
Taxes on earnings.......... $ 10.0 $ 9.9 $ 9.2 $ 7.4 $ 16.4
------- --------- --------- --------- ---------
Earnings from Continuing Op-
erations.................... $ 8.2 $ 26.1 $ 20.0 $ 17.6 $ 33.9
Earnings from Discontinued
Operations, Net of Taxes.... $ (32.4) $ 47.7 $ 95.6 $ 104.5 $ 105.4
------- --------- --------- --------- ---------
Net Earnings (Loss).......... $ (24.2) $ 73.8 $ 115.6 $ 122.1 $ 139.3
======= ========= ========= ========= =========
Net Earnings (Loss) Per
Share-Basic
Continuing Operations...... $ 0.27 $ 0.87 $ 0.66 $ 0.57 $ 1.01
Discontinued Operations.... $ (1.07) $ 1.60 $ 3.13 $ 3.36 $ 3.13
------- --------- --------- --------- ---------
Net Earnings (Loss) Per
Share-Basic................. $ (0.80) $ 2.47 $ 3.79 $ 3.93 $ 4.14
======= ========= ========= ========= =========
Net Earnings (Loss) Per
Share-Diluted
Continuing Operations...... $ 0.27 $ 0.86 $ 0.64 $ 0.55 $ 0.97
Discontinued Operations.... $ (1.06) $ 1.57 $ 3.03 $ 3.26 $ 3.00
------- --------- --------- --------- ---------
Net Earnings (Loss) Per
Share-Diluted............... $ (0.79) $ 2.43 $ 3.67 $ 3.81 $ 3.97
======= ========= ========= ========= =========
Dividends Declared Per
Share....................... $ 0.10 $ 0.39 $ 0.35 $ 0.31 $ 0.27
======= ========= ========= ========= =========
Financial Position at Year
End:
Working capital.............. $ 112.4 $ 334.9 $ 349.2 $ 293.9 $ 257.0
Total assets................. $ 539.2 $ 1,218.3 $ 1,104.3 $ 1,018.9 $ 1,003.8
Short-term borrowings........ $ 35.6 $ 46.8 $ 18.7 $ 4.4 $ 1.8
Long-term borrowings......... $ 58.5 $ 111.1 $ 73.2 $ 60.3 $ 60.3
Stockholders' equity......... $ 185.0 $ 557.5 $ 524.6 $ 467.9 $ 394.9
</TABLE>

The Summary of Operations data presented above for all periods has been
restated to reflect as discontinued operations the activities associated with
the Company's former semiconductor equipment business and its instrument
business which were transferred to VSEA and VI, respectively, and the shares
of those entities distributed to the Company's stockholders on April 2, 1999.
The balance sheet data as of October 1, 1999 also reflects the Distribution.
Fiscal year 1999 results from continuing operations include net reorganization
related charges of $29.7 million ($25.7 million after-tax or $0.84 per diluted
share.) This selected financial data should be read in conjunction with the
related consolidated financial statements and notes thereto.

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

Overview

20
<PAGE>

subsequently transferred its instruments business to Varian, Inc. ("VI"), a
wholly owned subsidiary, and transferred its semiconductor equipment business
to Varian Semiconductor Equipment Associates, Inc. ("VSEA"), a wholly owned
subsidiary. On April 2, 1999, the Company distributed to holders of shares of
the common stock of the Company all of the outstanding shares of common stock
of VI and VSEA (the "Distribution").

The business retained by the Company consists of its medical systems
business, principally the sales and service of oncology systems, and the sales
of x-ray tubes and imaging subsystems. Immediately following the Distribution,
the Company changed its name to Varian Medical Systems, Inc. ("VMS").

The financial statements included in this report present VI and VSEA as
discontinued operations pursuant to Accounting Principles Board Opinion No. 30
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." The net operating results of VI and VSEA are
reported as "Earnings (Loss) from Discontinued Operations-Net of Taxes." In
determining the items attributable to these businesses, the Company, among
other things, allocated certain Varian corporate assets (including pension
assets), liabilities (including profit-sharing and pension benefits), and
expenses (including legal, accounting, employee benefits, insurance,
information technology services, treasury and other corporate overhead) to VI
and VSEA. While management believes the methods used to allocate the amount of
these items to VI and VSEA are reasonable, the balances retained by the
Company are not necessarily indicative of the amounts that would have been
recorded by the Company had the Distribution occurred prior to the dates of
the financial statements affected by these allocations, or that have been
recorded by the Company after the Distribution or that will be recorded in the
future. The following discussion and analysis pertains to the continuing
operations of the Company, unless otherwise noted.

This discussion and analysis of financial condition and results of
operations is based upon and should be read in conjunction with the
consolidated financial statements and the notes thereto included elsewhere in
this report, as well as the information contained under "Certain Factors
Affecting the Company's Business" below.

Results of Operations

Fiscal Year

VMS's fiscal year is the 52- or 53-week period ending on the Friday nearest
September 30. Fiscal year 1999 comprises the 52-week period ended on October
1, 1999. Fiscal years 1998 and 1997 comprise the 53- and 52-week periods ended
on October 2, 1998 and September 26, 1997, respectively.

Fiscal Year 1999 Compared to Fiscal Year 1998

Sales. VMS's sales of $590 million in fiscal year 1999 were 9% higher than
its sales of $541 million in fiscal year 1998. International sales were $318
million, or 54% of sales, in fiscal year 1999, compared to $299 million, or
55% of sales, in fiscal year 1998. Sales to customers in Japan were $75
million in fiscal year 1999 compared to $68 million in fiscal year 1998.

Oncology Systems sales increased 13%, amounting to $459 million, or 78% of
VMS's sales, in fiscal year 1999, compared to $405 million, or 75% of sales,
in fiscal year 1998. Oncology Systems sales in North America, Europe, Asia and
the rest of the world amounted to $229 million, $155 million, $54 million and
$21 million in fiscal year 1999, and $202 million, $149 million, $31 million
and $23 million in fiscal year 1998, respectively. Fourth quarter sales
represented 34% of total sales in fiscal year 1999 and 33% in fiscal year
1998.

21
<PAGE>

X-ray Products sales were $123 million, or 21% of VMS's sales, in fiscal
year 1999, compared to $131 million, or 24% of sales, in fiscal year 1998.
Sales of x-ray tubes and imaging subsystems in North America, Europe, Asia and
the rest of the world amounted to $38 million, $28 million, $54 million and
$3 million in fiscal year 1999 and $38 million, $33 million, $56 million and
$4 million in fiscal year 1998, respectively. The 6% decrease in x-ray tubes
and imaging subsystems sales between fiscal year 1999 and fiscal year 1998
reflected continuing decrease in x-ray tube sales volumes due in part to
continued consolidation of original equipment manufacturer customers.

GTC sales were $8 million in fiscal year 1999, compared to $5 million in
fiscal year 1998. The increase was due to an increase in brachytherapy sales.

Gross Profit. VMS recorded gross profit of $210 million in fiscal year 1999
and $195 million in fiscal year 1998. As a percentage of sales, gross profit
was 36% of sales in both fiscal year 1999 and in fiscal year 1998. Gross
profit as a percentage of sales of Oncology Systems and X-ray Products which
includes imaging subsystems were 37% and 34%, respectively, in both fiscal
year 1999 and fiscal year 1998.

Research and Development. VMS's research and development expenses were $40
million in fiscal year 1999 compared to $39 million in fiscal year 1998,
amounting to 7% of sales in both years.

Selling, General and Administrative. VMS's selling, general and
administrative expenses were $116 million, or 20% of sales, in fiscal year
1999 compared to $118 million, or 22% of sales, in fiscal year 1998. The
decrease relates primarily to the inclusion of allocated general overhead
costs for all of fiscal year 1998 compared to only the first six months of
fiscal year 1999. These expenses consist primarily of corporate costs incurred
prior to the Distribution which cannot be allocated to discontinued operations
under generally accepted accounting principles. Selling expenses increased
proportionally to the increase in sales from fiscal year 1998 to fiscal year
1999.

Reorganization Costs. Fiscal year 1999 expenses included net reorganization
charges of $29.7 million, of which $24.9 million was incurred as a result of
the Distribution and $4.8 million was incurred as a result of VMS's
restructuring of its X-ray Products segment by the closing of a manufacturing
facility in Arlington Heights, Illinois to consolidate manufacturing at VMS's
existing facilities in Salt Lake City, Utah. The $29.7 million net charge
includes $34.3 million for retention bonuses for employee services provided
prior to October 1, 1999, employee severance and executive compensation; $21.0
million for legal, accounting, printing and investment banking fees; $1.7
million for foreign taxes (excluding income taxes) resulting from the
international reorganization of the Company's subsidiaries in connection with
the Distribution; and $6.8 million in other costs associated with the
Distribution and restructuring; partially offset by a $34.1 million gain on
the sale of the Company's aircraft and long-term leasehold interests in
certain of its Palo Alto facilities, together with the related buildings, and
other corporate assets.

The following table sets forth certain details associated with these net
reorganization charges (in thousands of dollars):

<TABLE>
<CAPTION>
Reorganization Cash
Costs as of (Payments) Non-Cash Accrual at
October 1, 1999 Receipts Transactions October 1, 1999
--------------- ---------- ------------ ---------------
<S> <C> <C> <C> <C>
Retention bonuses,
severance, and
executive
compensation........... $ 34,307 $(29,800) $ -- $4,507
Legal, accounting,
printing and investment
banking fees........... 20,982 (19,190) -- 1,792
Gain on sale of real
estate and corporate
assets................. (34,098) 50,948 (16,850) --
Foreign taxes (excluding
income taxes).......... 1,700 (18) (1,006) 676
Other................... 6,777 (4,393) (1,016) 1,368
-------- -------- -------- ------
$ 29,668 $ (2,453) $(18,872) $8,343
======== ======== ======== ======
</TABLE>

22
<PAGE>

It is anticipated that a majority of the remaining accrual will be paid
during fiscal year 2000.

Taxes on Earnings. The Company's effective tax rate was 55% in fiscal year
1999, compared to 27% in fiscal year 1998. The fiscal year 1999 rate is
significantly higher than the fiscal year 1998 rate principally due to the
non-deductibility of certain reorganization costs related to the Distribution.

Interest expense, net. VMS's net interest expense was $6.1 million in fiscal
year 1999 compared to $2.4 million in fiscal year 1998. In connection with the
Distribution, the Company contributed $119 million to VSEA and VI, resulting
in lower cash balances and lower interest income. In addition, interest
expense increased due primarily to higher levels of short-term borrowings.

Net Earnings. The Company's net earnings from continuing operations were $8
million in fiscal year 1999, compared to net earnings of $26 million in fiscal
year 1998. The decrease in net earnings is primarily attributable to
reorganization-related net expenses associated with the Distribution.

Fiscal Year 1998 Compared to Fiscal Year 1997

Sales. VMS's sales of $541 million in fiscal year 1998 were 14% higher than
its sales of $474 million in fiscal year 1997. Fourth fiscal quarter sales
were significant in both years, accounting for $179 million of sales in fiscal
year 1998 and $158 million of sales in fiscal year 1997, amounting to 33% of
sales in each fiscal year.

Oncology Systems sales were $405 million, or 75% of total sales, in fiscal
year 1998, compared to $337 million, or 71% of sales, in fiscal year 1997. X-
ray Products sales were $131 million, or 24% of VMS's sales, in fiscal year
1998, compared to $130 million, or 27% of sales, in fiscal year 1997. Oncology
Systems sales accounted for essentially all of the increase in sales in fiscal
year 1998. The 20% increase in sales of Oncology Systems between fiscal year
1997 and fiscal year 1998 reflects both an increase in volume of products and
services sold and the acquisition of the radiotherapy services business from
the General Electric Company ("the RS Business") in December 1997. GTC sales
were $5 million in fiscal year 1998, compared to sales of $7 million in fiscal
year 1997 due to the slight decrease in revenues from customer-funded research
projects in fiscal year 1998.

By product line, Oncology Systems sales in North America, Europe, Asia and
the rest of the world amounted to $202 million, $149 million, $31 million and
$23 million in fiscal year 1998, and $190 million, $89 million, $43 million
and $15 million of sales in fiscal year 1997, respectively, while sales of x-
ray tubes and imaging subsystems in North America, Europe, Asia and the rest
of the world amounted to $38 million, $33 million, $56 million and $4 million
in fiscal year 1998, and $34 million, $31 million, $63 million and $2 million
in fiscal year 1997, respectively. The economic difficulties in Asia were
responsible for the reduction in Asian sales between fiscal year 1997 and
1998, however sales to customers in Japan were relatively flat representing
$68 million in fiscal year 1998 compared to $67 million in fiscal year 1997.

Gross Profit. VMS's gross profit of $195 million in fiscal year 1998 was 36%
of sales, compared to $164 million, or 34.5% of sales, in fiscal year 1997.
The increase in gross profit as a percentage of sales from fiscal year 1997 to
fiscal year 1998 was primarily attributable to the increase in Oncology
Systems sales relative to the fixed components of overhead and, to a lesser
extent, a shift in oncology systems sales to a higher mix of ancillary
products that bear a higher margin. In addition, gross profit was positively
influenced by a favorable LIFO adjustment in 1998. Gross profit as a
percentage of sales of Oncology Systems amounted to 37% in fiscal year 1998,
compared to 35% in fiscal year 1997. Gross profit as a percentage of sales of
x-ray tubes and imaging subsystems was flat at 34% in both fiscal year 1998
and fiscal year 1997, despite production start-up costs for new digital
imaging products.

Research and Development. VMS's research and development expenses of $39
million in fiscal year 1998, were 26% higher than the $31 million of such
expenses in fiscal year 1997, representing approximately 7% of sales in both
fiscal years 1998 and 1997. The increase on an absolute basis was primarily
attributable to the Company's investments in new digital radiographic imaging
products, new oncology administrative and imaging software, improvements in
oncology systems multileaf collimator products and new x-ray tube platforms.

Selling, General and Administrative. VMS's selling, general and
administrative expenses of $118 million were 22% of sales in fiscal year 1998,
compared to $100 million, or 21% of sales, in fiscal year 1997. The increase,
in absolute terms, resulted from the acquisition of a Japanese distributor,
higher international

23
<PAGE>

commission expenses, the expansion of VMS's sales and marketing forces and
amortization of goodwill and trade receivables write-offs.

Taxes on Earnings. The Company's effective tax rate was 27% in fiscal year
1998, compared to 31.5% in fiscal year 1997. The fiscal year 1998 and fiscal
year 1997 rates were lower than the U.S. federal statutory rate due to the tax
benefits arising from the use of a foreign sales corporation. In addition, the
fiscal year 1998 rate was lower than the fiscal year 1997 rate due to the
impact of higher earnings in low-tax foreign countries.

Net Earnings. The Company's net earnings from continuing operations in
fiscal year 1998 were $26 million, or 4.8% of sales, an increase of 31% over
the $20 million of net earnings, or 4% of sales, in fiscal year 1997. The
increase in net earnings was primarily the result of increased sales volume.

Liquidity and Capital Resources

Prior to the Distribution, the Company historically incurred or managed debt
at the parent level. Under the Distribution Agreement, (1) the Company was
required to contribute to VSEA such cash and cash equivalents so that VSEA
would have $100 million in cash and cash equivalents, net worth (as defined in
the Distribution Agreement) of at least $150 million and consolidated debt (as
defined in the Distribution Agreement) of no more than $5 million and (2) VI
was required to assume 50% of the outstanding indebtedness under the Company's
term loans and have transferred to it such portion of the indebtedness under
the Company's notes payable and such amount of cash and cash equivalents so
that as of the time of the Distribution, VMS and VI would each have net debt
(defined in the Distribution Agreement as the amount outstanding under the
term loans and the notes payable, less cash and cash equivalents) equal to
approximately 50% of the net debt of the Company. As a result, the Company
transferred $119 million in cash and cash equivalents to VSEA and VI, and VSEA
and VI assumed $69 million in debt. Certain future adjustments or payments may
be required under the provisions of the Distribution Agreement or the
Distribution Related Agreements. VMS may be required to make cash payments to
VI or VSEA, or may be entitled to receive cash payments from VI or VSEA. The
amounts of such adjustments, if any, are not expected to be material.

At October 1, 1999, long-term debt amounted to $58.5 million of term loans
and $35.6 million of short-term notes payable. Interest rates on the Company's
outstanding term loans on this date ranged from 6.70% to 7.15% and the
weighted average interest rate on these term loans was 6.82%. As of October 1,
1999, the weighted average interest rate on the Company's notes payable was
6.1%. The term loans contain covenants that limit future borrowings and the
payment of cash dividends and require the maintenance of certain levels of
working capital and operating results.

At October 1, 1999, the Company had $25.1 million in cash and cash
equivalents, the majority of which was held abroad, compared to $149.7 million
at October 2, 1998. Operating activities used cash of $33.6 million in fiscal
year 1999, compared to providing cash of $127.8 million in fiscal year 1998
and $44.9 in fiscal year 1997. The largest difference between fiscal year 1998
and fiscal year 1999 relates to the decrease in net income, including
discontinued operations, from a $24.2 million loss in fiscal year 1999,
compared to $73.8 million in earnings in fiscal year 1998. Operating
activities provided cash of $127.8 million in fiscal year 1998 compared to
$44.9 million in fiscal year 1997. The increase in cash provided by operating
activities was due primarily to a decrease in accounts receivable. Investing
activities provided $12.9 million of cash in fiscal year 1999, including the
proceeds of $54.3 million from the sale of the Company's long-term leasehold
interests in certain of its Palo Alto facilities, related buildings and
certain other corporate assets, which was partially offset by $39.4 million
used to purchase property, plant and equipment. In contrast, investing
activities in fiscal year 1998 used $143.1 million of cash, with $47.0 million
used to purchase property, plant and equipment and $105.5 million used to
acquire businesses, including the purchase of the RS Business. Investing
activities in fiscal year 1997 provided $49.7 million of cash, including
$145.5 million in proceeds from the sale of VSEA's Thin Film System business,
partially offset by $34.3 million used to purchase various businesses and
$55.1 to purchase property and equipment. Financing activities, primarily the
aggregate of $119.3 million contributed to VI and VSEA in connection with the
Distribution, somewhat offset by $15.7 million in proceeds received from
employees to

24
<PAGE>

purchase common stock, used net cash of $104.7 million in fiscal year 1999.
Financing activities in fiscal year 1998 provided $19.3 million of cash.
Additional long-term borrowings of $38.0 million and net borrowings of $27.6
million on short-term obligations were offset by $34.5 million used to
repurchase shares of the Company's stock (net of $19.7 million of proceeds
received from employees to purchase common stock) and $14.3 million used to
pay dividends. Financing activities in fiscal year 1997, in which the Company
increased long-term borrowings by $25.0 million, used $40.0 million of cash.
In fiscal year 1997, the Company used $56.5 million to repurchase shares of
the Company's stock (net of $38.2 million of proceeds received from employees
to purchase common stock) and $10.4 million to pay dividends.

Total debt as a percentage of total capital increased to 33.7% at fiscal
year end 1999 from 22.1% at fiscal year end 1998. The ratio of current assets
to current liabilities was 1.42 to 1 at fiscal year end 1999 compared to 1.66
to 1 at fiscal year end 1998. VMS had $78.2 million available in unused,
uncommitted lines of credit at October 1, 1999. Following the end of fiscal
year 1999, VMS added an additional $50 million committed revolving credit
facility.

VMS expects that its future capital expenditures will continue to
approximate 2.5% of sales in each fiscal year. The Company anticipates
spending less than $1 million to complete the split of the jointly owned
information technology infrastructure and $2.7 million in spin-related capital
expenditures related to changes in facilities during the first three quarters
of fiscal year 2000. Further, in May 1999, the VMS agreed to invest $5 million
over the following twelve months in a consortium to participate in the
consortium's acquisition of a majority interest in an entity that supplies VMS
with amorphous silicon thin-film transistor arrays for its imaging products of
which $2.5 million was funded in July 1999, and of which $2.5 million will be
funded in fiscal year 2000 and VMS may recognize a loss beginning in fiscal
year 2000 or in future fiscal years of up to $5 million on its equity
investment.

The Company is a party to three related federal actions involving claims by
independent service organizations ("ISOs") that the Company's policies and
business practices relating to replacement parts violate the antitrust laws
(the "ISOs Litigation"). The ISOs purchase replacement parts from VMS and
compete with it for the servicing of linear accelerators made by VMS. In
response to several threats of litigation regarding the legality of VMS's
parts policy, the Company filed a declaratory judgment action in a U.S.
District Court in 1996 seeking a determination that its new policies are legal
and enforceable and damages against two of the ISOs for misappropriation of
VMS's trade secrets, unfair competition, copyright infringement and related
claims. Subsequently, four of the defendants filed separate claims in other
jurisdictions raising issues allegedly related to those in the declaratory
relief action and seeking injunctive relief against the Company and damages
against the Company in the amount of $10 million for each plaintiff. The
defendants' motion for a preliminary injunction in U.S. District Court in
Texas with respect to the VMS's policies was defeated. The ISOs defendants
amended the complaint to include class action allegations, allege a variety of
other anti-competitive business practices and filed a motion for class
certification, which was heard by the U.S. District Court in Texas in July
1999. No decision, however, has been entered.

25
<PAGE>

unable to pay or perform any of its allocated obligations. In addition, the
Distribution Agreement generally provides that if a court prohibits a company
from satisfying its indemnification obligations, then such indemnification
obligations will be shared equally between the two other companies.

VMS's liquidity is affected by many factors, some related to the normal
ongoing operations of the business and others related to the markets for its
products and conditions in the U.S. and global economies generally. Although
the Company's cash requirements will fluctuate as a result of the shifting
influence of these factors, management believes that existing cash, cash
generated from operations and the Company's borrowing capability will be
sufficient to satisfy anticipated commitments for capital expenditures and
other cash requirements for fiscal year 2000.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting and Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 requires derivatives
to be measured at fair value and to be recorded as assets or liabilities on
the balance sheet. The accounting for gains or losses resulting from changes
in the fair values of those derivatives would be dependent upon the use of the
derivative and whether it qualifies for hedge accounting. SFAS 133 is
effective for VMS's fiscal year 2001. VMS has not yet determined the impact of
its implementation on the Company's consolidated financial statements.

Environmental Matters

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

The Company 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
("CERCLA"), at nine sites where Varian is alleged to have shipped
manufacturing waste for recycling or disposal. The Company is also involved in
various stages of environmental investigation and/or remediation under the
direction of, or in consultation with, federal, state and/or local agencies at
certain current VMS or former Varian facilities (including facilities disposed
of in connection with the Company's sale of its Electron Devices business
during 1995, and the sale of its Thin Film Systems business during 1997).
Under the terms of the Distribution Agreement, VI and VSEA are each obligated
to indemnify VMS for one-third of these environmental-related investigation
and remediation costs (after adjusting for any insurance proceeds realized or
tax benefits recognized by the Company). Expenditures for environmental
investigation and remediation amounted to $0.9 million in fiscal year 1999,
$1.7 million in fiscal year 1998 and $0.8 million in fiscal year 1997, net of
amounts that were, or would have been, borne by VI and VSEA.

26
<PAGE>

incur such costs varies with each site, ranging up to approximately 30 years
as of October 1, 1999. Management believes that no amount in the foregoing
range of estimated future costs is more probable of being incurred than any
other amount in such range and therefore accrued $12.4 million in estimated
environmental costs as of October 1, 1999. The amount accrued has not been
discounted to present value.

As to other sites and facilities, VMS has gained sufficient knowledge to be
able to better estimate the scope and costs of future environmental
activities. As of October 1, 1999, VMS estimated that VMS's future exposure
(net of VI and VSEA's indemnification obligations) for environmental-related
investigation and remediation costs for these sites and facilities ranged in
the aggregate from $22.9 million to $39.0 million. The time frame over which
these costs are expected to be incurred varies with each site and facility,
ranging up to approximately 30 years as of October 1, 1999. As to each of
these sites and facilities, management determined that a particular amount
within the range of estimated costs was a better estimate of the future
environmental liability than any other amount within the range, and that the
amount and timing of these future costs were reliably determinable. Together,
these amounts totaled $26.7 million at October 1, 1999. VMS accordingly
accrued $11.9 million, which represents its best estimate of the future costs
discounted at 4%, net of inflation. This accrual is in addition to the $12.4
million described in the preceding paragraph.

At October 1, 1999, the Company's reserve for environmental liabilities,
based upon future environmental related costs estimated by the Company as of
that date, was calculated as follows:

<TABLE>
<CAPTION>
Non- Total
Recurring Recurring Anticipated
Costs Costs Future costs
--------- --------- ------------
(Dollars in millions)
Fiscal Year:
------------
<S> <C> <C> <C>
2000........................................ $ 1.2 $2.8 $ 4.0
2001........................................ 1.3 1.1 2.4
2002........................................ 1.4 0.0 1.4
2003........................................ 1.3 0.0 1.3
2004........................................ 1.4 0.0 1.4
Thereafter.................................. 27.2 1.4 28.6
----- ---- ------
Total costs................................. $33.8 $5.3 39.1
===== ====
Less imputed interest....................... (14.8)
------
Reserve amount.............................. $ 24.3
======
</TABLE>

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

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

27
<PAGE>

and VSEA). Claims for recovery of environmental investigation and remediation
costs already incurred, and to be incurred in the future, have been asserted
against various insurance companies and other third parties. In 1992, the
Company filed a lawsuit against 36 insurance companies with respect to most of
the above-referenced sites and facilities. The Company received certain cash
settlements during fiscal years 1995, 1996, 1997 and 1998 from defendants in
that lawsuit. The Company has also reached an agreement with another insurance
company under which the insurance company has agreed to pay a portion of the
Company's past and future environmental-related expenditures, and VMS
therefore has a $3.6 million receivable in Other Assets at October 1, 1999.
VMS believes that this receivable is recoverable because it is based on a
binding, written settlement agreement with a solvent and financially viable
insurance company. Although VMS intends to aggressively pursue additional
insurance and other recoveries, VMS has not reduced any liability in
anticipation of recovery with respect to claims made against third parties.

Varian's present and past facilities have been in operation for many years,
and over that time in the course of those operations, such facilities have
used substances which are or might be considered hazardous, and Varian has
generated and disposed of wastes which are or might be considered hazardous.
Therefore, it is possible that additional environmental issues may arise in
the future that VMS cannot now predict.

Year 2000

General. The "Year 2000" problem refers to computer programs and other
equipment with embedded microprocessors ("non-IT systems") which use only the
last two digits to refer to a year, and which, therefore, might not properly
recognize a year that begins with "20" instead of the familiar "19." As a
result, those computer programs and non-IT systems might be unable to operate
or process accurately certain date-sensitive data before or after January 1,
2000. Because VMS relies heavily on computer programs and non-IT systems, and
relies on third parties which themselves rely on computer programs and non-IT
systems, the Year 2000 problem, if not addressed, could adversely effect VMS's
business, results of operations or financial condition.

State of Readiness. VMS previously initiated a comprehensive assessment of
potential Year 2000 problems with respect to (1) the Company's internal
system, (2) the Company's products and (3) significant third parties with
which the Company does business.

VMS has substantially completed its assessment of potential Year 2000
problems in internal systems, which systems have been categorized as follows,
in order of importance: (a) enterprise information systems; (b) enterprise
networking and telecommunications; (c) factory-specific information systems;
(d) non-IT systems; (e) computers and packaged software; and (f) facilities
systems. Upgrade of (a) enterprise information systems, (b) enterprise
networking and telecommunications and item (f) facilities, is complete. As of
October 1, 1999, upgrade of factory specific information was 94% complete;
upgrade of non-IT systems was 95% complete, and upgrade of computers and
packaged software was 95% complete. The Company expects the upgrade of
remaining items to be essentially complete prior to the end of December 1999.

VMS also initiated an assessment of potential Year 2000 problems in its
current and previously-sold products. With respect to current products, that
assessment and corrective actions are substantially complete, and VMS believes
that all of its current products are Year 2000 capable; however, that
conclusion is based in part on Year 2000 assurances or warranties from
suppliers of computer programs and non-IT systems which are integrated into or
sold with VMS's current products.

With respect to previously-sold products, VMS focused its assessments on
products that are subject to regulatory requirements with respect to Year
2000, including FDA requirements for medical devices, rather than assessing
Year 2000 preparedness of every product it has ever sold. VMS also focused its
assessments on products that will be under written warranties or are still
relatively early in their useful lives, are more likely to be dependent on
non-IT systems that are not Year 2000 capable and cannot be easily upgraded
with readily available externally-utilized computers and packaged software
and/or could pose a safety hazard. Where these now completed assessments
identified previously-sold products that were not Year 2000 capable, VMS in
some cases developed and offered to sell upgrades or retrofits, identify
corrective measures which the customer could

28
<PAGE>

itself undertake or identify for the customer other suppliers of upgrades or
retrofits. For a few products VMS decided to perform upgrades at its own
expense. These costs have not been material. Remaining upgrades are expected
to be completed before December 31, 1999.

The Company has substantially completed assessing the potential Year 2000
problems of third parties with which VMS has material relationships, which are
primarily suppliers of products or services. These assessments identified and
prioritized critical suppliers, reviewed those suppliers' written assurances
on their own assessments and correction of Year 2000 problems, and developed
appropriate contingency plans for those suppliers which might not be
adequately prepared for Year 2000 problems.

Costs. VMS estimates that through October 1, 1999 it had incurred
approximately $1.1 million to assess and correct Year 2000 problems. VMS
estimates that it will incur approximately $100,000 in additional costs to
assess and correct Year 2000 problems, which costs are expected to be incurred
in the first half of fiscal year 2000. All of these costs, except for
approximately $70,000 for computer equipment, have been and will continue to
be expensed as incurred.

This estimate of future costs has not been reduced by expected recoveries
from certain third parties, which are subject to indemnity, reimbursement or
warranty obligations for Year 2000 problems. In addition, VMS expects that
certain costs may be offset by revenues generated by the sale of upgrades and
retrofits and other customer support services relating to Year 2000 problems.
However, there can be no assurance that VMS's actual costs to assess and
correct Year 2000 problems will not be higher than the foregoing estimates.

Risks. Failure by VMS and its key suppliers to accurately assess and correct
Year 2000 problems, would likely result in interruption of certain of VMS's
normal business operations, which could have a material adverse effect on
VMS's business, results of operations or financial condition. If VMS does not
adequately identify and correct Year 2000 problems in its information systems,
it could experience an interruption in its operations, including
manufacturing, order processing, receivables collection and accounting, such
that there would be delays in product shipments, lost data and a consequential
impact on revenues, expenditures and financial reporting. If VMS does not
adequately identify and correct Year 2000 problems in its non-IT systems, it
could experience an interruption in its manufacturing and related operations,
such that there would be delays in product shipments and a consequential
impact on revenues. If VMS does not adequately identify and correct Year 2000
problems in previously-sold products, it could experience warranty or product
liability claims by users of products which do not function correctly. If VMS
does not adequately identify and correct Year 2000 problems of the significant
third parties with which it does business, it could experience an interruption
in the supply of key components or services from those parties, such that
there would be delays in product shipments or services and a consequential
impact on revenues.

Management believes that appropriate corrective actions have been or will be
accomplished within the cost and time estimates stated above. Although VMS
does not expect to be 100% Year 2000 compliant by December 31, 1999, VMS does
not currently believe that any Year 2000 non-compliance in VMS's information
systems would have a material adverse effect on VMS's business, results of
operations or financial condition. However, given the inherent complexity of
the Year 2000 problem, there can be no assurance that actual costs will not be
higher than currently anticipated or that corrective actions will not take
longer than currently anticipated to complete. Risk factors which might result
in higher costs or delays include the ability to identify and correct in a
timely fashion Year 2000 problems; regulatory or legal obligations to correct
Year 2000 problems in previously-sold products including the risk of product
recall; possible liability for personal injury if a safety hazard relating to
Year 2000 is not identified and corrected; ability to retain and hire
qualified personnel to perform assessments and corrective actions; the
willingness and ability of critical suppliers to assess and correct their own
Year 2000 problems, including in products they supply to VMS; and the
additional complexity which will likely be caused by undertaking during fiscal
year 1999 and fiscal year 2000 the separation of currently shared enterprise
information systems as a result of the Distribution.

Because of uncertainties as to the extent of Year 2000 problems with VMS's
previously-sold products and the extent of any legal obligation of VMS to
correct Year 2000 problems in those products, VMS cannot yet

29
<PAGE>

assess risks to VMS with respect to those products. Because its assessments
are not yet complete, VMS also cannot yet conclude that the failure of
critical suppliers to assess and correct Year 2000 problems is not reasonably
likely to have a material adverse effect on VMS's results of operations.
Failure of VMS' customers to pay receivables in a timely manner due to their
own year 2000 problems could result in delays in payments and slower cash
flow.

Contingency Plans. With respect to VMS's enterprise information systems, VMS
has executed its contingency plan. That plan primarily involved installation
where necessary of a Year 2000 capable upgrade of existing information systems
pending complete installation of the SAP system. That upgrade is complete.
With respect to products and significant third parties, VMS intends, as part
of its on-going assessment of potential Year 2000 problems, to develop
contingency plans for the more critical problems that might not be corrected
before December 31, 1999. It is currently anticipated that the focus of these
contingency plans will be the possible interruption of the supply of key
components or services from third parties.

Certain Factors Affecting the Company's Business

The following factors, in conjunction with the other information included in
this Annual Report, should be carefully considered.

Lack of Recent Operating History as Separate Entity

VMS is a smaller and less diversified company than Varian was prior to the
Distribution. The Company now owns and operates only the medical systems
business, which does not have a recent operating history as a separate entity.
The ability of VMS to satisfy its obligations and maintain profitability is
now solely dependent upon the future performance of this business. Although
VMS is now managed by its prior operating management, the management of VMS
did not operate its business as a separate public company prior to the
Distribution.

Debt Leverage after the Distribution

Since the Distribution, VMS has had somewhat greater debt leverage than
Varian had prior to the Distribution. As of October 1, 1999, Varian had total
long and short-term debt of approximately $94 million and total stockholders'
equity of approximately $185 million.

The degree to which VMS is leveraged could have important consequences,
including the following: (i) VMS's ability to obtain additional financing in
the future for working capital, capital expenditures, product development,
acquisitions, general corporate purposes or other purposes may be impaired;
(ii) a portion of VMS's and its subsidiaries' cash flow from operations must
be dedicated to the payment of the principal and interest on its indebtedness;
(iii) the term loans of VMS contain certain restrictive financial and
operating covenants, including, among others, requirements that VMS satisfy
certain financial ratios; (iv) a portion of VMS's borrowings are at floating
rates of interest, causing VMS to be vulnerable to increases in interest
rates; (v) VMS's degree of leverage may make it more vulnerable in a downturn
in general economic conditions and (vi) VMS's degree of leverage may limit its
flexibility in responding to changing business and economic conditions. In
addition, in a lawsuit by an unpaid creditor or representative of creditors,
such as a trustee in bankruptcy, a court may be asked to void the Distribution
(in whole or in part) as a fraudulent conveyance and to require that the
stockholders return some or all of the shares of VSEA common stock and/or VI
common stock to VMS or require each of VMS, VSEA or VI to fund certain
liabilities of the other companies for the benefit of creditors.

Federal Income Tax Considerations

The Company received a Tax Ruling from the Internal Revenue Service (the
"IRS") in connection with the Distribution to the effect that, among other
things, no gain or loss would be recognized by the holders of Varian common
stock as a result of the Distribution and no gain or loss would be recognized
by the Company upon the

30
<PAGE>

Distribution. Such rulings, while generally binding upon the IRS, are subject
to certain factual representations and assumptions. If such factual
representations and assumptions were incorrect in any material respect, such
ruling would be jeopardized. VMS is not aware of any facts or circumstances
that would cause such representations and assumptions to be untrue. Varian, VI
and VSEA have agreed to certain restrictions on their future actions to
provide further assurances that the Distribution will qualify as tax-free.

If one or both of the distributions comprising the Distribution failed to
qualify as a tax-free spin-off under Section 355 of the Internal Revenue Code
of 1986, as amended (the "Code"), then the Company will recognize gain equal
to the difference between the fair market value of the stock of the
nonqualifying company or companies and the Company's adjusted tax basis in
such stock. If the Company were to recognize gain on one or both of the
distributions, such gain and the resulting tax liability li