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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number: 1-7598

Varian Medical Systems, Inc.

(650) 493-4000

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

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

      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 þ           No o

      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.     o

      At November 25, 2002, the aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $3,227,806,450.

      At November 25, 2002, the number of shares of Common Stock outstanding was 67,953,820.

DOCUMENTS INCORPORATED BY REFERENCE

      Definitive Proxy Statement for the Company’s 2003 Annual Meeting of Stockholders —

www.varian.com (NYSE: VAR)

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VARIAN MEDICAL SYSTEMS, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

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FORWARD-LOOKING STATEMENTS

      Except for historical information, this Annual Report on Form 10-K contains “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 which provides a “safe harbor” for statements about future events, products and future financial performance that are based on the beliefs of, estimates made by and information currently available to our management. The outcome of the events described in these forward-looking statements is subject to risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in these forward-looking statements and reported results should not be considered an indication of future performance due to the factors listed below, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors Affecting Our Business” and from time to time in our other filings with the Securities and Exchange Commission. For this purpose, statements concerning industry or market segment outlook; market acceptance of or transition to new products or technology such as Intensity Modulated Radiation Therapy, or IMRT, brachytherapy, software, treatment techniques, and advanced X-ray products; growth drivers; Varian Medical Systems, Inc.’s (“VMS,” “we” or “our”) orders, sales, backlog or earnings growth; future financial results and any statements using the terms “believe,” “expect,” “anticipate,” “can,” “should,” “will,” “hopeful,” “continued,” “could,” “estimating,” “optimistic,” “intend” or similar statements are forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from those projected or management’s current expectations. Such risks and uncertainties include:

	•	market acceptance and demand for our products;
	•	our ability to anticipate and keep pace with changes in the marketplace and technological innovation;
	•	our ability to successfully develop and commercialize new products and new product enhancements;
	•	our ability to meet U.S. Food and Drug Administration and other domestic or foreign regulatory requirements or product clearances, which might limit the products we can sell, subject us to fines or other regulatory actions, and/or increase costs;
	•	the impact of managed care initiatives or other healthcare reforms and/or limitations on third party reimbursements, including resulting pressure on pricing and demand for our products;
	•	the possibility that material product liability claims could harm our future sales or require us to pay uninsured claims, and the availability and adequacy of our insurance to cover any such liabilities;
	•	the highly competitive nature of the markets in which we compete, and the impact of competition on our sales, margins and market share;
	•	our ability to maintain or increase operating margins;
	•	our ability to protect our intellectual property and the competitive position of our products;
	•	the possibility of intellectual property infringement claims against us;
	•	our reliance on sole source or a limited number of suppliers for some key components;
	•	our ability to provide the significant education and training required for the health care market to accept our products;
	•	the effect of environmental claims and clean-up expenses on our costs;
	•	the effect on our profit margins of product recycling and related regulatory requirements in European and other countries;
	•	our ability to attract and retain qualified employees;
	•	economic, political and other risks associated with our significant international operations, including the enforceability of obligations, the extent of taxes and trade restrictions and licensing and other requirements, and protection of intellectual property;
	•	the effect of foreign currency exchange rates;

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	•	our ability to match manufacturing capacity with demand for our products;
	•	our reliance on a limited number of original equipment manufacturer customers for our X-ray computed tomography tubes, and the potential for continued consolidation in the X-ray tubes market;
	•	our ability to successfully integrate acquired businesses into our existing operations and to realize anticipated benefits;
	•	our use of distributors for a portion of our sales, the loss of which could reduce sales;
	•	our ability to make our products interoperate with one another or compatible with widely used third party products;
	•	the effect of fluctuations in our operating results, including as a result of changes in accounting policies, may have on the price of our common stock;
	•	the risk of loss or interruption to our operations or increased costs due to natural disasters, which may not be adequately covered by insurance, the availability and cost of power and energy supplies, strikes and other events beyond our control;
	•	our potential responsibility for additional tax obligations and other liabilities arising out of the spin-off of segments of our former businesses; and
	•	the possibility that provisions of our Certificate of Incorporation and stockholder rights plan might discourage a takeover and therefore limit the price of our common stock.

      By making forward-looking statements, we have not assumed any obligation to, and you should not expect us to, update or revise those statements because of new information, future events or otherwise.

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PART I

Item 1.     Business

General

      In August 1998, we (then known as Varian Associates, Inc.) announced our intention to spin off our instruments business and our semiconductor equipment business to our stockholders. We later transferred our instruments business to Varian, Inc., or VI, a wholly owned subsidiary, and transferred our semiconductor equipment business to Varian Semiconductor Equipment Associates, Inc., or VSEA, a wholly owned subsidiary. We retained the medical systems business, principally the sales and service of oncology systems and the sales of X-ray tubes and imaging subsystems. On April 2, 1999, we spun off VI and VSEA to our common stockholders, which we refer to as the spin-offs in this Form 10-K. Immediately after the spin-offs, we changed our name to Varian Medical Systems, Inc., or VMS. We have been engaged in aspects of the medical systems business since 1959.

      An Amended and Restated Distribution Agreement dated as of January 14, 1999 and other agreements govern our ongoing relationships with VI and VSEA.

Overview

      We are a world leader in the design and production of integrated systems of equipment and software 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), we continue to broaden our offerings to address the concerns driving this sector, including the continuing demand to contain costs and enhance efficacy of health care. In addition to developing medical equipment, we also develop software products and devices designed to enhance the productivity and quality of our equipment, devices manufactured by other companies and the general delivery of health care services.

      Our Oncology Systems business produces and sells a fully integrated system of products for treating cancer with radiation, including not only linear accelerators and treatment simulation and verification products but also information management and treatment planning software and other sophisticated ancillary products and services. Our linear accelerators and treatment simulation and verification products are sold and are in service around the world. Our X-ray Products business manufactures and sells X-ray tubes that cover a range of applications including computed tomography, or CT, scanning, radioscopic/fluoroscopic imaging, special procedures and mammography, and are sold to most major diagnostic equipment manufacturers as well as directly to end-users for replacement purposes. We also manufacture and sell advanced brachytherapy products through Ginzton Technology Center, or GTC, our research facility for identifying and addressing new and potential new markets. Our brachytherapy business, which was successfully incubated within GTC, is now ready to move into its next phase of development, and subsequent to September 27, 2002, we announced that the management for the brachytherapy business will now report directly to our chief executive officer, but their operations will still be reported as part of the “other” category of our industry segments, see Note 18 “Industry Segments” of the Notes to the Consolidated Financial Statements. Through GTC, we are also pursuing other potential new business areas, including next generation digital X-ray imaging technology, digital X-ray fluoroscopic imagers and the potential of combining advances in focused energy and imaging technology with the latest breakthroughs in biotechnology. In addition, we are pursuing technologies and products that promise to improve disease management by employing targeted energy to enhance the effectiveness of molecular medicine.

      Our business is subject to various risks and uncertainties. You should carefully consider the factors described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors Affecting Our Business”, in conjunction with the description of our business set forth below and the other information included in this Form 10-K.

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Cancer-Care Market

      Radiation therapy is commonly used in the treatment of cancer, either alone or in combination with surgery or chemotherapy. An important advantage of radiation therapy is that the radiation acts with some selectivity on cancer cells. When a cell absorbs radiation, the radiation affects the cell’s genetic structure and inhibits its replication, leading to its gradual death. Cancerous cells replicate very fast and therefore the radiation they absorb can disproportionately damage them.

      Currently, the most common type of radiotherapy uses X-rays delivered by external beams and is administered using linear accelerators. Linear accelerators are conventionally used for multiple, or fractionated, treatments of a tumor in up to 40 radiation sessions. Linear accelerators can also be employed for very small lesions, for example, in the brain, to deliver a single high dose of radiation in a procedure referred to as stereotactic radiosurgery. In addition to external radiation therapy, radioactive seeds, wires or ribbons are sometimes inserted into a tumor or into a body cavity. These modalities, known as brachytherapy, do not require the radiation to pass through surrounding healthy tissue in order to reach the tumor.

Products

      Our products can be broadly classified into three principal categories: Oncology Systems, X-ray Products, including X-ray tubes and imaging subsystems and brachytherapy and other technologies developed by our Ginzton Technology Center. All figures, for fiscal year 2000, given below and elsewhere in this Form 10-K are based on actual reported results, unless otherwise stated as being on a pro forma basis assuming that the Securities and Exchange Commission’s, or SEC, Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” or SAB 101, was applied retroactively to prior years.

      Our Oncology Systems business designs, manufactures, sells and services hardware and software products for radiation treatment of cancer. We offer a fully integrated system of products consisting of linear accelerators and sophisticated ancillary products and services to extend their capabilities and efficiency. Our products include linear accelerators and accessories, treatment simulators and treatment verification products as well as software systems for planning cancer treatments and managing information and images for radiation oncology.

      Our recent product introductions have focused on enabling a new form of radiation therapy, called Intensity Modulated Radiation Therapy, or IMRT Using IMRT, the intensity and angle of the radiation beams are varied, or modulated, across the target area of the patient being treated. This conforms the radiation beams more closely to the tumor and allows doctors to deliver higher doses of radiation to tumors while limiting the amount of radiation directed at nearby healthy tissue. In this way, clinicians can design and deliver an individualized treatment plan for each patient, targeting the patient’s tumor as closely as possible. IMRT can be used to treat head and neck, breast, prostate, pancreatic, lung, liver, gynecological and central nervous system cancers. IMRT is being adopted by more clinics every year, from university hospitals to local community clinics.

      The radiotherapy process consists of examining the patient, planning the therapeutic approach, delivering treatment, verifying that the treatments are being delivered correctly, providing quality assurance for all the devices involved in the treatment process, recording the history and results of treatment and obtaining reimbursement for the radiotherapy services provided. We provide products that help perform most of these tasks. We have also integrated our individual products into a complete system that automates and enhances the entire process of treating a patient. In addition, we store data and images into a single database shared by each of our products, which enables effective communication among products.

      Our Clinac® series of medical linear accelerators are used to treat cancer by producing therapeutic electrons and X-rays in shaped radiation beams that target tumors and other abnormalities in a patient. We produce a variety of versions of these devices to suit various facility requirements.

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      We also manufacture and market ancillary treatment delivery products that enhance the capabilities and efficiency of our linear accelerators in delivering radiotherapy treatment. Our Millennium^TM series of multi-leaf collimators are devices that are used with a linear accelerator to define the size, shape and intensity of the radiation beams generated by the linear accelerator. We also offer an innovative real time patient position monitoring software product, the RPM^TM respiratory gating system, which allows the Clinac to be synchronized with patient breathing to help compensate for tumor motion during the course of treatment.

      Verification and documentation of all treatment procedures are also critical to treatment delivery. Our VARiS® information management software system, records and verifies treatment procedures carried out on the linear accelerator, performs patient charting and manages patient information. Our Vision^TM product line is integrated with the VARiS product and manages patient image data.

      Prior to treatment delivery, clinicians must plan the course of radiation therapy for the patient. To assist clinicians with developing these treatment plans, we offer a range of treatment planning products. Our Eclipse^TM treatment planning system provides doctors with 3D image viewing, treatment simulation, radiation dosage calculation and verification and other tools for generating treatment plans for the patient, which can be reviewed and analyzed using our SomaVision^TM workstations. Our Helios^TM software module utilizes a recently developed technique known as inverse planning to enable the clinician to rapidly develop optimal IMRT treatment plans based on a desired radiation dose outcome to the tumor and surrounding tissue. We offer a variety of additional products related to radiotherapy treatment. Our treatment simulators enable physicians to simulate radiation therapy treatments prior to treatment delivery. We also manufacture and sell an electronic portal imaging product, PortalVision^TM, which is used to verify a patient’s treatment position, a critical component for accurate delivery of radiotherapy treatment. During fiscal year 2002, we acquired Argus Software, and added the Argus line of software products for the management of quality control data for radiation therapy products. At the end of fiscal year 2002, we introduced Acuity^TM, which is a new model of our simulator which uses advanced amorphous silicon imaging technology and has been designed to facilitate IMRT treatments by integrating simulation more closely with treatment planning and facilitate and helping physicians deal better with tumor motions caused by breathing.

      In addition to offering our own integrated suite of hardware and software products for planning and delivering radiation therapy treatments, we have partnered with General Electric Medical Systems in North America and established a See and Treat Cancer Care^TM program for radiation therapy. Through See and Treat Cancer Care, we can offer radiation oncology facilities an integrated suite of cancer treatment tools that combines our comprehensive set of radiation therapy products with GE’s advanced diagnostic imaging systems.

      We also manufacture and sell a line of linear accelerators that are also used for industrial radiographic applications. Our Linatron-M® linear accelerators are used for nondestructive examination of objects, such as cargo or luggage, and to X-ray heavy metallic structures for nondestructive quality control testing. They can also be used to sterilize food and medical products.

      Revenues from the Oncology Systems business represented 83% of total sales in fiscal 2002 and represented 79% of total sales in fiscal 2001. Revenues from the Oncology Systems business represented 77% of total sales in fiscal 2000, as restated to reflect the adoption of SAB 101. For a discussion of SAB 101, see Note 17 “Adoption of SAB 101” of the Notes to the Consolidated Financial Statements. For a discussion of segment financial information, see Note 18 “Industry Segments” of the Notes to the Consolidated Financial Statements.

      Our X-ray Products business, or X-ray Products, is a world leader in designing and manufacturing subsystems for diagnostic radiology, including X-ray-generating tubes and imaging subsystems for the diagnostic imaging market. X-ray tubes are a key component of X-ray imaging subsystems, including new system configurations and replacement tubes for installed systems. We conduct an active research and development program to focus on new technology and applications in both the medical and industrial X-ray tube markets.

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      We manufacture tubes for four primary medical X-ray imaging applications: CT scanners; radiographic/fluoroscopic; special procedures; and mammography.

      We also offer a large line of industrial X-ray tubes, which consist of analytical X-ray tubes used for X-ray fluorescence and diffraction, as well as tubes used for non-destructive imaging and gauging and airport baggage inspection systems.

      In addition to X-ray tubes, we also design, manufacture and market imaging products. Our amorphous silicon imaging technologies can be broadly applied as an alternative to image intensifiers or film. We expect that imaging equipment based on amorphous silicon semiconductors may be more stable and reliable, have fewer adjustments, and suffer less degradation over time than image intensifiers or film.

      Revenues from the X-ray Products business represented 14%, 18% and 20% of total sales in fiscal years 2002, 2001 and 2000, respectively. SAB 101 had no impact on our existing revenue recognition practices related to product sales in the X-ray Products business because these products do not include any installation obligations or acceptance clauses. For a discussion of segment financial information, see Note 18 “Industry Segments” of the Notes to the Consolidated Financial Statements.

      In addition to pursuing growth opportunities in existing markets, we are also identifying and addressing new and potential new markets for the company through our research facility, the Ginzton Technology Center, or GTC. In fiscal year 2002, GTC managed the manufacturing and sale of our products for the growing brachytherapy market, including our high dose rate brachytherapy afterloader VariSource^TM, and our brachytherapy treatment planning products, BrachyVision^TM and VariSeed^TM. During fiscal year 2002, we acquired MDS Nordion Inc.’s high dose brachytherapy business. The acquisition added the GammaMed^TM line of afterloaders, applicators and the associated ABACUSTM treatment planning system to our brachytherapy product offering. Subsequent to September 27, 2002, we announced that the management for the brachytherapy business will now report directly to our chief executive officer, but their operations will still be reported as part of the “other” category, see Note 18 “Industry Segments” of the Notes to the Consolidated Financial Statements. Through GTC, we are also pursuing other potential new business areas, including next generation digital X-ray imaging technology, digital X-ray fluoroscopic imagers and the potential of combining advances in focused energy and imaging technology with the latest breakthroughs in biotechnology. In addition, we are pursuing technologies and products that promise to improve disease management by employing targeted energy to enhance the effectiveness of molecular medicine. These efforts are designed to develop new products and technologies for our future business.

      Revenues from the GTC managed businesses represented 3% of total sales in both fiscal years 2002 and 2001. Revenues from the GTC business represented 3% of total sales in fiscal 2000, as restated to reflect the adoption of SAB 101. For a discussion of SAB 101, see Note 17 “Adoption of SAB 101” of the Notes to the Consolidated Financial Statements. For a discussion of segment financial information, see Note 18 “Industry Segments” of the Notes to the Consolidated Financial Statements.

Marketing and Sales

      Sales to our ten largest customers in fiscal years 2002, 2001 and 2000 accounted for approximately 12%, 18% and 19% of total sales, respectively. However, we did not have a single customer in any of those years that represented 10% or more of our total sales.

      We maintain direct sales forces in North America, Australia and major parts of Asia, Europe and Latin America. We make all of our North American sales in the Oncology Systems business and all of our North American and international sales in GTC through our direct sales forces. We sell through a combination of direct sales forces and independent distributors in the international markets for the Oncology Systems business as well as in the North American and international markets for our X-ray Products business.

      We sell our Oncology Systems products primarily to hospitals, clinics, private and governmental institutions and health care agencies and doctors’ offices. Total sales for Oncology Systems, including services,

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      Reimbursement rates for IMRT, which are higher than the reimbursement rates for standard radiotherapy treatments, and continued demand for IMRT are contributing to the growth of our Oncology Systems business in the U.S. While we believe the increased reimbursement rates may have had some effect on the adoption of IMRT, we also believe that IMRT would have been a big driver in our growth even without the increase in the reimbursement rates. Although we have seen the strongest growth to date in North America, we believe that in the foreseeable future there will be worldwide growth in the markets for oncology systems and related services because of the under-served market outside North America. With the transition from analog to digital systems, the demand for products and services related to networking, archiving and electronic distribution of digital images should grow in industrialized countries. We also believe there will be continued growth in the demand for information technology in the radiation oncology market.

      Our marketing strategy is to offer to customers a complete package of products and services in the fields of radiotherapy, including equipment, accessories, software and related services such as education and after-sales services. Our marketing efforts include developing relationships with current and prospective customers, participating in annual professional meetings for clinicians and hospitals, advertising in trade journals, sending direct mail and marketing over the telephone. Our growth strategy is to add products in existing markets, expand in new high-potential markets, add product offerings through internal research and development and alliances with other companies and grow our international market. For example, we currently have an agreement with General Electric to act as a sales representative for sales of their diagnostic radiology equipment, which we can package with our products to provide customers with products aimed at accurately imaging tumors together with our products for radiation therapy, treatment planning and delivery.

      Historically, we have sold a high proportion of our X-ray Products to a limited number of customers and we expect that sales of these products to relatively few customers will continue to account for a high percentage of sales in the foreseeable future. We supply tubes to such companies as Toshiba Corporation, Hitachi Medical Corporation, Shimadzu Corporation, Philips Medical Systems and GE Medical Systems, each of which accounted for 5% or more of X-ray tube product sales in fiscal years 2002 and 2001. These five OEMs represent 68% of our total business with the other 32% of sales going to a large number of small OEMs and independent services companies. Total sales for our X-ray Products business were $122 million, $139 million and $136 million for fiscal years 2002, 2001 and 2000, respectively. We divide our market segments for X-ray Products sales by region into North America, Europe, Asia and rest of the world, and these regions constituted 39%, 15%, 42% and 4% of sales during fiscal year 2002, 41%, 12%, 45% and 2% of sales during fiscal year 2001 and 32%, 15%, 51% and 2% of sales during fiscal year 2000, respectively.

Customer Support and Services

      We maintain service centers in Milpitas, California; DesPlaines, Illinois; Clark, New Jersey; Marietta, Georgia; Richardson, Texas; Corona, California; Buc, France; Crawley, England; Zug, Switzerland; Tokyo, Japan; and Hong Kong, China; as well as field service forces throughout the world, for Oncology Systems service support. Due to the growth in our Oncology Systems customer support and service business, we have completed the relocation of key logistics and education operations to Las Vegas, Nevada. Our network of service engineers and customer support specialists provide installation, warranty, repair, training and support services. We generate service revenue by providing service to customers on a time-and-materials basis and through comprehensive service contracts. Most of the field service engineers are our employees, but in a few foreign countries, field services are provided by employees of dealers and/or agents. Customers can access our

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      We warrant most of our oncology systems hardware and software for parts and labor for twelve months. We offer a variety of post-warranty equipment service agreements and software support agreements that permit customers to contract for the level of equipment maintenance and/or software support they require.

      We believe customer service and support are an integral part of our competitive strategy. Service capability, availability and responsiveness play an important role in marketing and selling medical equipment 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, we cannot depend on conversion of all maintenance to service contracts after the warranty period.

      We provide technical advice and consultation for X-ray tubes and imaging subsystems products to major OEM customers from our offices in Tokyo, Japan; Houten, The Netherlands; Salt Lake City, Utah; and Charleston, South Carolina. Our applications specialists and engineers make recommendations to meet the customer’s technical requirements within the customer’s budgetary constraints. We often develop specifications for a unique product, which will be designed and manufactured to meet a specific customer’s requirements. We also maintain a technical customer support group in Charleston, South Carolina to meet the technical support requirements of independent tube installers that use our X-ray tube products.

Research and Development

      Developing products, systems and services based on advanced technological concepts is essential to our ability to compete effectively. We maintain a product research and development and engineering staff responsible for product design and engineering. Research and development expenditures totaled $48 million, $44 million and $42 million in fiscal years 2002, 2001 and 2000, respectively.

      Our research and development is conducted both within the relevant product groups and through GTC. GTC maintains technical competencies in X-ray technology, imaging physics and applications, algorithms and software, electronic design, materials science and biosciences to prove feasibility of new product concepts and to improve current products. Present research topics include new imaging concepts, image-based radiotherapy treatment planning, real time, accommodation of moving targets and verification tools, combined modality therapy, manufacturing process improvements, improved X-ray tubes and multi-modality, targeted therapy. GTC accepts some sponsored research contracts from external agencies such as the government or other private sources. Changes in government priorities and our ability to attract such funding may affect our overall research effort and ultimately, our ability to develop successful new products and product enhancements. Within Oncology Systems, we conduct research to improve the reliability and performance of existing products and to develop new products. This research is conducted primarily in the U.S., Switzerland, the United Kingdom and Finland. In addition, we support selected research programs at selected hospitals and clinics. Current research areas within Oncology Systems include linear accelerator systems and accessories for medical and industrial applications, information systems, treatment planning software, imaging devices, simulation, patient positioning and equipment diagnosis and maintenance tools. Within X-ray Products, we conduct research at our Salt Lake City facility that is primarily focused on developing and improving X-ray products in the near term. Current research areas include product improvement technologies such as bearing coating and ceramic design.

Competition

      The markets for radiation therapy equipment and software are characterized by rapidly evolving technology, intense competition and pricing pressure. We compete with companies worldwide. Some of our competitors have greater financial, marketing and management resources than we do. These competitors could develop technologies and products that are more effective than those we currently use or produce or that could render our products obsolete or noncompetitive. Our smaller competitors could be acquired by companies with greater financial strength, which could enable them to compete more aggressively. Some of our suppliers or

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      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 our X-ray Products business, also manufacture X-ray tubes for use in their own products. We must compete with these in-house X-ray tube manufacturing operations for business from their affiliated companies. As a result, we must have a competitive advantage in one or more significant areas, which may include lower product cost, better product quality or superior technology. We sell a significant volume of our X-ray tube products to companies such as Toshiba Corporation, Hitachi Medical Corporation, Shimadzu Corporation, Philips Medical Systems and GE Medical Systems, all of which have in-house X-ray tube production capability. In addition, we compete against other stand-alone X-ray tube manufacturers such as Comet AG, located in Switzerland, and IAE Industria Applicazioni Elettroniche Spa, located in Italy. These companies compete with us for both the OEM business of major diagnostic imaging equipment manufacturers and independent services of X-ray tubes.

Manufacturing and Supplies

      We manufacture our linear accelerators in Palo Alto, California, and our treatment simulator systems and some accelerator subsystems in Crawley, England. In addition, we manufacture some of our ancillary oncology systems products in Baden, Switzerland, Helsinki, Finland and Buc, France. In 2002, we began manufacturing some industrial radiographic products in Las Vegas, Nevada. We manufacture our X-ray tube products in Salt Lake City, Utah and Charleston, South Carolina. We manufacture our high dose rate brachytherapy systems in Crawley, England and Haan, Germany and our brachytherapy treatment planning 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.

      Manufacturing processes at our various facilities include machining, fabrication, subassembly, system assembly and final testing. We have invested in various automated and semi-automated equipment for the fabrication and machining of the parts and assemblies that we incorporate into our products. We may, from time to time, invest further in such equipment. Our quality assurance program includes various quality control measures from inspection of raw material, purchased parts and assemblies through on-line inspection. We also get subassemblies from third-party suppliers and integrate them into a finished system. We outsource the manufacturing of many major subassemblies and perform system design, assembly and testing in-house. We believe outsourcing enables us to reduce fixed costs and capital expenditures while also providing us with the flexibility to increase production capacity. We purchase material and components from various suppliers that are either standard products or built to our specifications. We obtain some of the components included in our products from a limited group of suppliers, or in some cases a single-source supplier; for example, the source wires for high-dose afterloaders, klystrons for linear accelerators, imaging panels, non-coated array sensors and coating for array sensors for the flat panels, specialized integrated circuits for imaging subassemblies, and some targets, housings and glass bulbs for X-ray tubes.

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Backlog

      Our backlog at the end of fiscal year 2002 was $698 million, of which we expect to recognize approximately 55% to 60% into sales in fiscal year 2003. Our backlog at the end of fiscal year 2001, as restated to reflect the impact of SAB 101, was $598 million (including $51 million applicable to systems shipped but not yet installed and/or accepted as of fiscal year end 2001), of which $336 million was recognized as sales in fiscal year 2002. Backlog at the end of fiscal year 2000, under SAB 101, was $513 million (including $41 million of systems shipped but not yet installed and/or accepted as of fiscal year end 2000), of which $312 million was recognized as sales in fiscal year 2001. Reported backlog at the end of fiscal year 2000, under the previous accounting method, amounted to $473 million, of which $317 million shipped in fiscal year 2001. We include in backlog orders for products scheduled to be shipped within two years. Subsequent to the adoption of SAB 101, we include in backlog the contract amount associated with the portion of the orders equal to the greater of the fair value of the installation services or the portion of the payment that is contractually linked to the installation or acceptance clause; and for a small number of products the entire sale price applicable to products shipped but for which installation and/or final acceptance have not been completed. Orders may be revised or canceled, either according to their terms or as a result of negotiations; consequently, it is impossible to predict with certainty the backlog that will result in sales.

Product Liability

      Our business exposes us to potential product liability claims that are inherent in the manufacture and sale of medical devices. Because our products involve the delivery of radiation to the human body, the possibility for significant injury and/or death exists with any of these products. As a result, we may face substantial liability to patients for damages resulting from any faulty, or alleged faulty, design, manufacture and servicing of our products.

      On December 5, 1997, we purchased General Electric’s Radiotherapy Services Business, or the RS Business. In connection with that transaction, we agreed to assume liability for product defects and bodily injury matters that might arise from RS Business products, and obtained a stand-alone insurance program for those matters. Effective April 2, 2001, we retired the stand-alone insurance program and simultaneously replaced it with new insurance policies. As of fiscal year end 2002, we have settled the only claim asserted to date, to our knowledge, related to the RS Business for which we had an indemnity obligation.

Government Regulation

      We and some of our suppliers and distributors are subject to extensive regulation by federal, state and local governmental authorities, such as the United States Food and Drug Administration, or 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, or the FDC Act, and regulations promulgated by the FDA. The State of California, where we maintain one of our manufacturing facilities, as well as other states, also regulates the manufacture of medical devices. Our Oncology Systems equipment and software, with the exception of industrial products, and our flat panel imaging products, constitute medical devices subject to this regulation. In general, our X-ray tubes are not considered medical devices, but are indirectly subject to this regulation when they are included in medical devices. Future products in any of our business segments may constitute medical devices and be subject to regulation as such.

      In general, these laws require that manufacturers adhere to certain standards designed to ensure that the medical devices are safe and effective. 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, recalls and other matters. The FDA is authorized to inspect the facilities in which they are manufactured.

      Our manufacturing operations for medical devices are required to comply with the FDA’s Quality System Regulation, or QSR, which incorporates the requirements of good manufacturing practices and relate to

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      The FDA requires that the manufacturer of 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, or PMA, before the manufacturer may take orders and distribute the product in the United States. The 510(k) clearance process is applicable when the new product being submitted is substantially equivalent to an existing commercially available product. The process of obtaining 510(k) clearance generally takes at least one to three months from the date of the application filing and generally requires submitting supporting data, which can be extensive and can extend the process for a considerable period of time beyond three months. After a product receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a major change in the intended use of the device, technology, materials, packaging, or manufacturing process may require a new 510(k) clearance. The FDA requires each manufacturer to make this determination in the first instance, but the FDA can review any such decision. If the FDA disagrees with the manufacturer’s decision, it may retroactively require the manufacturer to submit a request for 510(k) premarket notification clearance and can require the manufacturer to cease marketing and/or recall the product until 510(k) clearance is obtained. If we cannot establish that a proposed product is substantially equivalent to a legally marketed device, we must seek premarket approval through a PMA application. Under the PMA process, the applicant must generally conduct at least one clinical protocol and submit extensive supporting data and clinical information in the PMA to prove the safety and effectiveness of the product. This process typically takes at least one to two years from the date the pre-market approval is accepted for filing, but can take longer for the FDA to review. To date, we have only produced Class 2 medical devices, which only require 510(k) clearance.

      The FDA reviews software submissions for software contained in a medical device in connection with its pre-market notification clearance for the related device. Computer health information systems 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 patient treatment and diagnosis. The 1989 draft policy exempts some 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 the clinical information systems or other medical software we offer. The FDA has increasingly focused on the regulation of computer products and computer-assisted products such as software as medical devices under the FDA Act. If the FDA chooses to expand its regulation of these products, it may increase the cost and time to market of new or existing software products or may prevent or restrict us from marketing our software products.

      Failure to comply with FDA and other applicable regulations could result in a wide variety of actions against us, such as:

	•	investigations, 483 reports of non-compliance or warning letters;
	•	fines, injunctions, and civil penalties;
	•	partial suspensions or total shutdown of production, or the imposition of operating restrictions;

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	•	losses of clearances or approvals already granted, or delays in or refusals of requests for clearance or approval;
	•