VARIAN ASSOCIATES INC /DE/, DEF 14A, 1999-01-15

VARIAN ASSOCIATES INC /DE/
DEF 14A, 1999-01-15
SPECIAL INDUSTRY MACHINERY, NEC

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SCHEDULE 14A
(RULE 14A-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
1934

Filed by the Registrant [X]

Filed by a Party other than the Registrant [_]

Check the appropriate box:

[_] Confidential, for Use of the
[_]Preliminary Proxy Statement Commission Only (as Permitted by
Rule 14a-6(e)(2))

[X]Definitive Proxy Statement

[_]Definitive Additional Materials

[_]Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

VARIAN ASSOCIATES, INC.
-----------------------------------------------------
(Name of Registrant as Specified In Its Charter)

-----------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[_]No fee required.

[_]Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and 0-11.

(1) Title of each class of securities to which transaction applies:

(2) Aggregate number of securities to which transaction applies:

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

[X]Fee paid previously with preliminary materials: $69,344.00

[_]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

(2) Form, Schedule or Registration Statement no.:

(3) Filing Party:

(4) Date Filed:
<PAGE>

[LOGO OF VARIAN]
VARIAN ASSOCIATES, INC.
WORLD HEADQUARTERS
3050 HANSEN WAY
PALO ALTO, CALIFORNIA 94304-1000
(650) 493-4000

January 14, 1999

Dear Stockholder:

You are cordially invited to attend a Combined Annual and Special Meeting of
Stockholders (the "Meeting") of the Company to be held on Thursday, February
18, 1999, at 1:30 p.m., local time, at the SRI International Auditorium, 333
Ravenswood Avenue, Menlo Park, California. At the Meeting, you will be asked
to consider and vote upon a proposal to divide the Company into its three
separate businesses: (i) the manufacture and sale of analytical and research
instruments and vacuum products, (ii) the manufacture and sale of ion
implantation processing systems used in the manufacture of integrated circuits
and (iii) the manufacture and sale of health care systems, including linear
accelerators, simulators, brachytherapy systems and related data management
systems and x-ray components.

This important proposal, and nine related proposals, provide for the
distribution to the Company's stockholders of the outstanding shares of the
common stock of each of (i) Varian, Inc. ("IB"), a wholly owned subsidiary of
the Company, and (ii) Varian Semiconductor Equipment Associates, Inc. ("SEB"),
a wholly owned subsidiary of the Company. The distribution would separate the
Company into three publicly owned companies. After the distribution, the
Company will change its name to Varian Medical Systems, Inc. ("HCS") and will
continue to conduct the health care systems business, IB will conduct the
instruments business and SEB will conduct the semiconductor equipment
business.

In the distribution, a holder of shares of the Company's common stock would
receive one share of IB common stock and one share of SEB common stock for
each share of the Company's common stock held by such holder on the record
date for the distribution and would retain the shares of the Company's common
stock held by such holder immediately prior to the distribution.

Prior to the distribution, the Company will effectuate certain internal
mergers and stock and asset transfers intended to allocate assets and
liabilities relating to the instruments business to IB, assets and liabilities
relating to the semiconductor equipment business to SEB and assets and
liabilities relating to the health care systems business to the Company. In
addition, IB, SEB and the Company have entered or will enter into various
agreements among such companies to effectuate the distribution and to provide
an orderly transition, all as described in the accompanying Proxy Statement.

The Board of Directors of the Company believes that the Company's three
diverse businesses will be better positioned as three independent public
companies. The businesses have different dynamics and business cycles, serve
different markets and customers, are subject to different competitive forces
and must be managed with different long-term and short-term strategies and
goals. The distribution will allow the management of each company to focus on
its own business, organize its capital structure, evaluate its growth
opportunities, achieve market recognition, rationalize its organizational
structure and design equity-based compensation programs targeted to its own
performance. Accordingly, the Board has approved the distribution and
recommends that stockholders vote for each of the distribution proposals.
<PAGE>

In addition, you will be asked to elect five members of the Company's Board
of Directors. Details of the proposals to be considered at the Meeting, as
well as important information relating to the distribution, including a
description of the businesses, directors and management of HCS, SEB and IB
after the distribution, are set forth in the accompanying Proxy Statement and
should be considered carefully.

We hope that you will be able to attend the Meeting in person. However, if
you cannot attend, or if you plan to be present but want the proxy holders to
vote your shares, please complete, sign and return the enclosed proxy at your
earliest convenience.

Sincerely,

/s/ J. Tracy O'Rourke

J. TRACY O'ROURKE
Chairman of the Board and
Chief Executive Officer
<PAGE>

[LOGO OF VARIAN]

VARIAN ASSOCIATES, INC.

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

NOTICE OF COMBINED ANNUAL AND SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FEBRUARY 18, 1999

The Combined Annual and Special Meeting of Stockholders (the "Meeting") of
Varian Associates, Inc., a Delaware corporation (the "Company"), will be held
on Thursday, February 18, 1999, at 1:30 p.m., local time, at the SRI
International Auditorium, 333 Ravenswood Avenue, Menlo Park, California.

The Meeting will be conducted:

1. To consider and to vote upon ten related proposals (collectively, the
"Distribution Proposals") described in the attached Proxy Statement:

PROPOSAL ONE: Approval of (i) the internal mergers and stock and asset
transfers intended to allocate the assets and liabilities relating to (a)
the manufacture and sale of analytical and research instruments and vacuum
products to the Company's wholly owned subsidiary, Varian, Inc., a Delaware
corporation ("IB"), (b) the manufacture and sale of ion implantation
processing systems used in the manufacture of integrated circuits to the
Company's wholly owned subsidiary, Varian Semiconductor Equipment
Associates, Inc., a Delaware corporation ("SEB") and (c) the manufacture
and sale of health care systems, including linear accelerators, simulators,
brachytherapy systems and related data management systems and x-ray
components to the Company; (ii) a special dividend, consisting of the
distribution to the holders of the Company's outstanding shares of common
stock, par value $1 per share (the "Company's Common Stock"), of all the
outstanding shares of common stock, par value $.01 per share, of IB (the
"IB Common Stock") and of all the outstanding shares of common stock, par
value $.01 per share, of SEB (the "SEB Common Stock"), on the basis
described in the attached Proxy Statement (such two dividends being
collectively referred to as the "Distribution") and (iii) the Distribution
Agreement, dated as of January 14, 1999, among the Company, IB and SEB, as
the same may be amended, supplemented or modified from time to time;

PROPOSAL TWO: Approval of an amendment to the Certificate of
Incorporation of the Company to change the name of the Company to Varian
Medical Systems, Inc. after the Distribution;

PROPOSAL FOUR: Approval of an amendment to the Certificate of
Incorporation of the Company to (i) provide that directors may only be
removed for cause upon the affirmative vote of at least a majority of the
outstanding shares of the Company's Common Stock entitled to vote for such
directors; (ii) provide that vacancies in the Board of Directors and newly
created directorships on the Board may be filled only by the affirmative
vote of a majority of the remaining directors; (iii) eliminate action by
written consent of stockholders; (iv) remove cumulative voting for
directors and (v) require the vote of stockholders holding at least 66 2/3%
of the outstanding shares of the Company's Common Stock to amend, alter or
repeal the By-Laws and certain provisions of the Company's Certificate of
Incorporation, including the provisions described in the foregoing clauses
(i) through (iii) and this clause (v);

PROPOSAL FIVE: Approval of the adoption by IB of the IB Omnibus Stock
Plan;

PROPOSAL SIX: Approval of the adoption by IB of the IB Management
Incentive Plan;

PROPOSAL SEVEN: Approval of the adoption by SEB of the SEB Omnibus Stock
Plan;
<PAGE>

PROPOSAL EIGHT: Approval of the adoption by SEB of the SEB Management
Incentive Plan;

PROPOSAL NINE: Approval of the amendment and restatement by the Company
of the Company Omnibus Stock Plan; and

PROPOSAL TEN: Approval of the amendment and restatement by the Company of
the Company Management Incentive Plan.

2. To consider and to vote upon the following additional proposal described
in the attached Proxy Statement:

PROPOSAL ELEVEN: The election of five directors. If the Distribution
occurs, it is expected that nine of the Company's directors will resign,
the Board will fix the number of directors at seven and one new director
will be appointed by the six remaining directors.

3. To transact such other business as may properly come before the Meeting.

THE EFFECTIVENESS OF EACH OF THE DISTRIBUTION PROPOSALS IS CONDITIONED UPON
THE APPROVAL OF ALL THE DISTRIBUTION PROPOSALS. IF ANY OF THE DISTRIBUTION
PROPOSALS IS NOT APPROVED, THE BOARD OF DIRECTORS WILL REEVALUATE ITS
INTENTION TO EFFECT THE DISTRIBUTION. AFTER SUCH REVIEW, THE BOARD OF
DIRECTORS COULD DETERMINE TO REVISE THE TERMS OF THE DISTRIBUTION, EFFECT THE
DISTRIBUTION ESSENTIALLY AS PROPOSED OR AS REVISED DESPITE SUCH LACK OF
APPROVAL, PROCEED WITH ONE OR MORE OF THE DISTRIBUTION PROPOSALS APPROVED BY
THE STOCKHOLDERS OR ABANDON THE DISTRIBUTION. THE EFFECTIVENESS OF THE
ELECTION OF DIRECTORS UNDER PROPOSAL ELEVEN IS NOT CONDITIONED ON THE APPROVAL
OF THE DISTRIBUTION PROPOSALS.

The Company has further retained discretion, even if stockholder approval of
the Distribution Proposals is obtained and the other conditions to the
Distribution are satisfied, to abandon, defer or modify the Distribution or
other elements contained in the Distribution Proposals, provided that
following stockholder approval the Company will not make any change in the
terms of the Distribution or the other elements of the Distribution Proposals
unless such changes would not be materially adverse to the Company's
stockholders.

The Company has conditioned the Distribution on, among other things, receipt
of a ruling from the Internal Revenue Service to the effect, among other
things, that receipt of shares of IB Common Stock and SEB Common Stock by
stockholders of the Company will be tax-free.

The Board of Directors has fixed December 21, 1998 as the record date for
the Meeting, and only stockholders of record at the close of business on that
date are entitled to receive notice of and vote at the Meeting and any
adjournment or postponement thereof. In accordance with Delaware law, a list
of the Company's stockholders entitled to vote at the Meeting will be
available for examination by any stockholder for any purpose germane to the
Meeting during normal business hours at the Company's offices at 3050 Hansen
Way, Palo Alto, California, for ten days prior to the Meeting.

It is important that your stock be represented at the Meeting to assure a
quorum. Whether or not you now expect to be present at the Meeting, please
complete, sign and date the enclosed proxy and mail it promptly in the
accompanying addressed envelope that requires no postage if mailed in the
United States. The proxy is revocable at any time before it is voted in the
manner described in the accompanying Proxy Statement, and submitting your
proxy now will not affect your right to vote in person if you attend the
Meeting.

By Order of the Board of
Directors

/s/ Joseph B. Phair
JOSEPH B. PHAIR
Secretary
January 14, 1999
Palo Alto, California
<PAGE>

VARIAN ASSOCIATES, INC.

3050 HANSEN WAY
PALO ALTO, CALIFORNIA 94304-1000

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

PROXY STATEMENT

COMBINED ANNUAL AND SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON FEBRUARY 18, 1999

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

This Proxy Statement (this "Proxy Statement") is being furnished to the
stockholders of Varian Associates, Inc., a Delaware corporation (the
"Company"), in connection with the solicitation of proxies by the Board of
Directors of the Company for use at the Combined Annual and Special Meeting of
Stockholders (the "Meeting") of the Company to be held on Thursday, February
18, 1999, at 1:30 p.m., local time, at the SRI International Auditorium, 333
Ravenswood Avenue, Menlo Park, California, and any adjournment or postponement
thereof.

At the Meeting, the stockholders of the Company will be asked to consider
and to vote upon the following ten related proposals (collectively, the
"Distribution Proposals"):

PROPOSAL ONE: Approval of (i) the internal mergers and stock and asset
transfers intended to allocate the assets and liabilities relating to (a)
the manufacture and sale of analytical and research instruments and vacuum
products (the "Instruments Business") to the Company's wholly owned
subsidiary, Varian, Inc., a Delaware corporation ("IB"), (b) the
manufacture and sale of ion implantation processing systems used in the
manufacture of integrated circuits (the "Semiconductor Equipment Business")
to the Company's wholly owned subsidiary, Varian Semiconductor Equipment
Associates, Inc., a Delaware corporation ("SEB") and (c) the manufacture
and sale of health care systems, including linear accelerators, simulators,
brachytherapy systems and related data management systems and x-ray
components (the "Health Care Systems Business") to the Company; (ii) a
special dividend, consisting of the distribution to the holders of the
Company's outstanding shares of common stock, par value $1 per share (the
"Company's Common Stock"), of all the outstanding shares of common stock,
par value $.01 per share, of IB (the "IB Common Stock") and of all the
outstanding shares of common stock, par value $.01 per share, of SEB (the
"SEB Common Stock"), on the basis described herein (such two dividends
being collectively referred to as the "Distribution") and (iii) the
Distribution Agreement, dated as of January 14, 1999, among the Company, IB
and SEB, as the same may be amended, supplemented or modified from time to
time (the "Distribution Agreement");

PROPOSAL TWO: Approval of an amendment to the Certificate of
Incorporation of the Company to change the name of the Company to Varian
Medical Systems, Inc. after the Distribution;

PROPOSAL THREE: Approval of an amendment to the Certificate of
Incorporation of the Company to provide that the specific number of
directors comprising the Company's Board of Directors be fixed by
resolution of the Board of Directors (the Company after the Distribution
being referred to herein as "HCS" and the Company's Common Stock after the
Distribution being referred to herein as the "HCS Common Stock");

PROPOSAL FOUR: Approval of an amendment to the Certificate of
Incorporation of the Company to (i) provide that directors may only be
removed for cause upon the affirmative vote of at least a majority of the
outstanding shares of the Company's Common Stock entitled to vote for such
directors; (ii) provide that vacancies in the Board of Directors and newly
created directorships on the Board may be filled only by the affirmative
vote of a majority of the remaining directors; (iii) eliminate action by
written consent of stockholders; (iv) remove cumulative voting for
directors and (v) require the vote of stockholders holding at least 66 2/3%
of the outstanding shares of the Company Common Stock to amend, alter or
repeal the By-Laws and certain provisions of the Company's Certificate of
Incorporation, including the provisions described in the foregoing clauses
(i) through (iii) and this clause (v);

PROPOSAL FIVE: Approval of the adoption by IB of the IB Omnibus Stock
Plan;

PROPOSAL SIX: Approval of the adoption by IB of the IB Management
Incentive Plan;
<PAGE>

PROPOSAL SEVEN: Approval of the adoption by SEB of the SEB Omnibus Stock
Plan;

PROPOSAL EIGHT: Approval of the adoption by SEB of the SEB Management
Incentive Plan;

PROPOSAL NINE: Approval of the amendment and restatement by the Company
of the Company Omnibus Stock Plan; and

PROPOSAL TEN: Approval of the amendment and restatement by the Company of
the Company Management Incentive Plan.

In addition, stockholders will also be asked to vote upon the following
proposal:

THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
EACH OF THE DISTRIBUTION PROPOSALS AND FOR THE NOMINEES FOR DIRECTOR OF THE
COMPANY.

Each stockholder of record as of the Meeting Record Date (as defined) is
entitled at the Meeting to one vote for each share of the Company's Common
Stock held by such stockholder, except that cumulative voting will apply with
respect to the election of directors pursuant to Proposal Eleven. Under the
cumulative voting method of election, the stockholder computes the number of
votes available to him or her by multiplying the number of shares he or she
owned on the Meeting Record Date by the number of directors to be elected, and
the stockholder may cast the votes all for a single nominee or may distribute
them in any manner among the nominees. Discretionary authority to cumulate
votes in the manner determined by the proxy holders is hereby solicited.

The presence in person or by proxy of persons entitled to vote a majority of
the shares of the Company's Common Stock at the Meeting constitutes a quorum.
The affirmative vote of the holders of a majority of the outstanding shares of
the Company's Common Stock is required to approve each of Proposals One, Two,
Three and Four. The affirmative vote of the holders of a majority of the
outstanding shares of the Company's Common Stock that are present in person or
by proxy at the Meeting is required to approve each of Proposals Five, Six,
Seven, Eight, Nine and Ten. The affirmative vote of the holders of a plurality
of shares of the Company's Common Stock that are present in person or by proxy
at the Meeting is required to elect the directors nominated pursuant to
Proposal Eleven. The Board of Directors of the Company has fixed the close of
business on December 21, 1998 (the "Meeting Record Date") as the record date
for determining the holders of outstanding shares of the Company's Common
Stock entitled to receive notice of, and to vote at, the Meeting. On that
date, there were 29,909,061 shares of the Company's Common Stock issued and
outstanding and entitled to vote at the Meeting. The Notice of Combined Annual
and Special Meeting, this Proxy Statement and the form of proxy are first
being mailed to stockholders of the Company on or about January 15, 1999. Any
stockholder who executes and returns a proxy may revoke it at any time prior
to the voting of the proxies by filing a written notice of revocation with the
Secretary of the Company, by executing and delivering a later-dated proxy or
by attending and voting at the Meeting.

ii
<PAGE>

AVAILABLE INFORMATION

The Company is (and, after the Distribution, each of IB, SEB and HCS will
be) subject to the informational requirements of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files
(and, after the Distribution, each of IB, SEB and HCS will file) reports and
other information with the Securities and Exchange Commission (the
"Commission"). The reports and other information filed by the Company (and,
after the Distribution, to be filed by IB, SEB and HCS) with the Commission in
accordance with the Exchange Act may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, DC 20549, and at the following
regional offices of the Commission: Seven World Trade Center, Suite 1300, New
York, New York 10048, and Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material or any part
thereof may also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, DC 20549, at prescribed rates
or may be accessed electronically on the Commission's Web site at
http://www.sec.gov. The Company's Common Stock is listed on the New York Stock
Exchange, Inc. (the "NYSE") and the Pacific Exchange (the "PE"), and reports
and other information concerning the Company can be inspected at the offices
of the NYSE, 20 Broad Street, New York, New York, 10005, and of the PE,
301 Pine Street, San Francisco, California, 94104.

SEB and IB will each file with the Commission a Registration Statement on
Form 10 with respect to the shares of SEB Common Stock (and related SEB
Rights, as defined) and IB Common Stock (and related IB Rights, as defined),
respectively, to be received by the stockholders of the Company in the
Distribution. It is expected that SEB and IB will each file with the
Commission a Registration Statement on Form 10 (collectively, the
"Registration Statements") prior to the Meeting and request effectiveness of
such Registration Statements prior to the Distribution. The respective
Registration Statements and the exhibits thereto, once filed by SEB and IB,
may be inspected and copied at the public reference facilities of the
Commission listed above.

Applications will be made for quotation of the shares of SEB Common Stock
(and related SEB Rights) and IB Common Stock (and related IB Rights) on the
Nasdaq National Market.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

This Proxy Statement incorporates documents by reference with respect to the
Company that are not presented herein or delivered herewith. These documents
(excluding exhibits thereto, unless such exhibits are specifically
incorporated by reference into such documents) are available without charge to
any person, including any holder of the Company's Common Stock, to whom this
Proxy Statement is delivered, upon written or oral request to the Secretary,
Varian Associates, Inc., 3050 Hansen Way, Palo Alto, California 94304-1000,
telephone (650) 493-4000. In order to ensure timely delivery of the documents
before the Meeting, any such request should be made by February 4, 1999. In
addition, documents incorporated herein are made available by the Commission
to any person through (i) the public reference facilities maintained by the
Commission by calling the Commission at (800) SEC-0330 and (ii) the
Commission's Internet site at http://www.sec.gov.

The following documents filed by the Company with the Commission pursuant to
Section 13 of the Exchange Act are incorporated herein by reference: (i) the
Annual Report on Form 10-K for the fiscal year ended October 2, 1998 and (ii)
the Current Report on Form 8-K filed with the Commission on November 24, 1998.

All reports and other documents filed by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Proxy Statement and prior to the date of the Meeting shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of
filing of such reports and other documents. Any statement contained herein or
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Proxy
Statement, to the extent that a statement contained herein or in any other
subsequently filed document which also is incorporated or deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy Statement.

iii
<PAGE>

CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Proxy Statement contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 concerning, among
other things, SEB's, HCS's and IB's prospects, developments and business
strategies for their respective operations, all of which are subject to risks
and uncertainties. These forward-looking statements are identified by their
use of such terms and phrases as "intends," "intend," "intended," "goal,"
"estimate," "estimates," "expects," "expect," "expected," "project,"
"projects," "projected," "projections," "plans," "anticipates," "anticipate,"
"anticipated," "should," "designed to," "foreseeable future," "believe,"
"believes" and "scheduled" and in many cases are followed by a cross reference
to "Risk Factors."

When a forward-looking statement includes a statement of the assumptions or
bases underlying the forward-looking statement, the management of the Company,
SEB, HCS or IB, as the case may be, cautions that, while it believes such
assumptions or bases to be reasonable and makes them in good faith, assumed
facts or bases almost always vary from actual results, and the differences
between assumed facts or bases and actual results can be material, depending
upon the circumstances. Where, in any forward-looking statement, the Company,
SEB, HCS or IB or their management expresses an expectation or belief as to
future results, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.

The actual results of SEB, HCS or IB may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include (i) the factors discussed under "Risk Factors" and
particularly, in cases where the forward-looking statement is followed by a
cross reference to "Risk Factors," the factors discussed in the section or
sections under "Risk Factors" that are referred to in the cross reference,
(ii) the factors discussed under "Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Instruments Business,"
"The Instruments Business Forecasted Capitalization," "Management's Discussion
and Analysis of Financial Condition and Results of Operations of the
Semiconductor Equipment Business," "The Semiconductor Equipment Business
Forecasted Capitalization," "Management's Discussion and Analysis of Financial
Condition and Results of Operations of HCS," "HCS Forecasted Capitalization,"
"Business of IB," "Business of SEB" and "Business of HCS" and (iii) the
following factors: 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; the impact of managed care initiatives in the United States
on capital expenditures and resulting pricing pressures on medical equipment;
the continued improvement of the various instruments markets; the ability to
increase operating margins on higher sales; the impact of economic conditions
in Korea and other Asian markets on sales in those areas, particularly
semiconductor equipment sales; the timing of renewed growth in worldwide
semiconductor equipment demand; successful implementation by the Company (and,
after the Distribution, each of HCS, SEB and IB) and certain third parties of
corrective actions to address the impact of the Year 2000; completion of the
Distribution on the current schedule within current budgets; the ability to
sell certain surplus assets in connection with the Distribution; the ability
of HCS, SEB and IB to realize anticipated cost savings resulting from the
Distribution; and other risks detailed from time to time in the filings of the
Company (and, after the Distribution, each of HCS, SEB and IB) with the
Commission. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.

iv
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TABLE OF CONTENTS

<TABLE>
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PAGE
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<S> <C>
Proxy Statement Summary................................................... 1
Risk Factors.............................................................. 14
The Meeting............................................................... 35
THE DISTRIBUTION PROPOSALS................................................ 37
Proposal One: The Distribution........................................... 37
Proposal Two: Approval of Amendment to the Certificate of Incorporation
of the Company to Change the Name of the Company........................ 54
Proposal Three: Approval of Amendment to the Certificate of Incorporation
to Specify That the Number of Directors Shall be Fixed by Resolution of
the Board of Directors.................................................. 55
Proposal Four: Approval of Amendment to the Certificate of Incorporation
of the Company to Change Certain Corporate Governance Provisions ....... 55
Proposal Five: Approval of the Adoption by IB of the IB Omnibus Stock
Plan.................................................................... 58
Proposal Six: Approval of the Adoption by IB of the IB Management
Incentive Plan ......................................................... 58
Proposal Seven: Approval of the Adoption by SEB of the SEB Omnibus Stock
Plan.................................................................... 58
Proposal Eight: Approval of the Adoption by SEB of the SEB Management
Incentive Plan.......................................................... 59
Proposal Nine: Approval of the Amendment and Restatement by the Company
of the Company Omnibus Stock Plan....................................... 59
Proposal Ten: Approval of the Amendment and Restatement by the Company of
the Company Management Incentive Plan................................... 59
THE INSTRUMENTS BUSINESS
The Instruments Business Selected Financial Data......................... 61
Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Instruments Business............................... 62
IB Market Risk........................................................... 69
The Instruments Business Forecasted Capitalization....................... 71
The Instruments Business Pro Forma Condensed Combined Financial
Statements.............................................................. 72
Business of IB........................................................... 75
Management of IB......................................................... 81
The IB Omnibus Stock Plan................................................ 87
The IB Management Incentive Plan......................................... 92
Ownership of IB Common Stock............................................. 95
THE SEMICONDUTOR EQUIPMENT BUSINESS
The Semiconductor Equipment Business Selected Financial Data............. 97
Management's Discussion and Analysis of Financial Condition and Results
of Operations of the Semiconductor Equipment Business................... 98
SEB Market Risk.......................................................... 106
The Semiconductor Equipment Business Forecasted Capitalization........... 108
The Semiconductor Equipment Business Pro Forma Condensed Combined
Financial Statements.................................................... 109
Business of SEB.......................................................... 112
Management of SEB........................................................ 122
The SEB Omnibus Stock Plan............................................... 129
The SEB Management Incentive Plan........................................ 134
Ownership of SEB Common Stock............................................ 137
THE HEALTH CARE SYSTEMS BUSINESS
HCS Forecasted Capitalization............................................ 140
HCS Pro Forma Consolidated Financial Statements.......................... 141
Management's Discussion and Analysis of Financial Condition and Results
of Operations of HCS.................................................... 146
Business of HCS.......................................................... 154
Management of HCS........................................................ 166
</TABLE>

v
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TABLE OF CONTENTS--(CONTINUED)

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Amendment and Restatement of the Company Omnibus Stock Plan.............. 173
Amendment and Restatement of the Company Management Incentive Plan....... 178
Ownership of HCS Common Stock............................................ 181
OTHER INFORMATION
Financing................................................................ 183
Description of the Capital Stock......................................... 184
Price Range of the Company's Common Stock and Dividends.................. 188
Limitation of Liability and Indemnification Matters...................... 189
Delaware Law and Certain Charter and By-Law Provisions................... 189
ANNUAL MEETING
Proposal Eleven: Election of Directors................................... 195
Organization and Compensation of the Board of Directors.................. 198
Stock Ownership ......................................................... 200
Certain Executive Officer Compensation and Other Information............. 204
Management Indebtedness and Certain Transactions......................... 207
Change in Control and Other Agreements................................... 207
Report of the Organization and Compensation Committee of the Board of
Directors on Executive Compensation..................................... 210
Comparison of Five-Year Cumulative Total Return Among the Company,
Standard & Poor's 500 Composite Index and Standard & Poor's High
Technology Composite Index.............................................. 214
Performance Graph........................................................ 214
Section 16(a) Beneficial Ownership Reporting Compliance.................. 215
Annual Report............................................................ 215
Stockholder Proposals.................................................... 215
Independent Accountants.................................................. 215
Index to Financial Statements............................................. F-1
</TABLE>

ANNEXES
<TABLE>
<C> <S> <C>
A Form of Certificate of Amendment to the Company's Certificate of
Incorporation
B Opinion of Warburg Dillon Read LLC
C IB Omnibus Stock Plan
D IB Management Incentive Plan
E SEB Omnibus Stock Plan
F SEB Management Incentive Plan
G Amended and Restated Company Omnibus Stock Plan
H Amended and Restated Company Management Incentive Plan
I Distribution Agreement
</TABLE>

vi
<PAGE>

PROXY STATEMENT SUMMARY

This summary is qualified by the more detailed information set forth
elsewhere in this Proxy Statement, which should be read in its entirety.

THE MEETING

Date, Time and Place of The Combined Annual and Special Meeting of
Meeting....................... Stockholders of the Company will be held at
1:30 p.m., local time, at the SRI
International Auditorium, 333 Ravenswood
Avenue, Menlo Park, California, on Thursday,
February 18, 1999.

Matters for Consideration at
the
Meeting....................... At the Meeting, the stockholders of the
Company will be asked to consider and vote
upon the Distribution Proposals.

THE EFFECTIVENESS OF EACH OF THE DISTRIBUTION
PROPOSALS IS CONDITIONED UPON THE APPROVAL OF
ALL THE DISTRIBUTION PROPOSALS. IF ANY OF THE
DISTRIBUTION PROPOSALS IS NOT APPROVED, THE
BOARD OF DIRECTORS WILL REEVALUATE ITS
INTENTION TO EFFECT THE DISTRIBUTION. AFTER
SUCH REVIEW, THE BOARD OF DIRECTORS COULD
DETERMINE TO REVISE THE TERMS OF THE
DISTRIBUTION, EFFECT THE DISTRIBUTION
ESSENTIALLY AS PROPOSED OR AS REVISED DESPITE
SUCH LACK OF APPROVAL, PROCEED WITH ONE OR
MORE OF THE DISTRIBUTION PROPOSALS APPROVED
BY THE STOCKHOLDERS OR ABANDON THE
DISTRIBUTION.

The Company has further retained discretion,
even if stockholder approval of the
Distribution Proposals is obtained and the
other conditions to the Distribution are
satisfied, to abandon, defer or modify the
Distribution or other elements contained in
the Distribution Proposals, provided that
following stockholder approval the Company
will not make any change in the terms of the
Distribution or the other elements of the
Distribution Proposals unless such changes
would not be materially adverse to the
Company's stockholders.

THE BOARD OF DIRECTORS OF THE COMPANY
RECOMMENDS THAT STOCKHOLDERS VOTE FOR EACH OF
THE DISTRIBUTION PROPOSALS.

In addition, the stockholders of the Company
will also be asked to vote upon the election
of five directors. If the Distribution
occurs, it is expected that nine of the
Company's directors will resign, the Board
will fix the number of directors at seven and
one new director will be appointed by the six
remaining directors. The effectiveness of the
election of directors is not conditioned on
the approval of the Distribution Proposals.

THE BOARD OF DIRECTORS OF THE COMPANY
RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE
NOMINEES FOR DIRECTOR OF THE COMPANY.

1
<PAGE>

Meeting Record Date........... December 21, 1998.

Voting........................ Each stockholder of record as of the Meeting
Record Date is entitled at the Meeting to one
vote for each share of the Company's Common
Stock held by such stockholder, except that
cumulative voting will apply with respect to
the election of directors. As of the Meeting
Record Date, there were 29,909,061 shares of
the Company's Common Stock issued and
outstanding and entitled to vote at the
Meeting.

THE DISTRIBUTION

General....................... If the Distribution is consummated, the
Company will be divided into three separate,
publicly traded companies: HCS, SEB and IB.

Shares to be Distributed...... In the Distribution, each stockholder of
record of the Company as of the close of
business on the Distribution Record Date (as
defined) will receive one share of IB Common
Stock and one share of SEB Common Stock for
each share of the Company's Common Stock held
on the Distribution Record Date and would
retain the shares of the Company's Common
Stock held by such stockholder immediately
prior to the Distribution. Accordingly, each
such stockholder will own the same percentage
of the outstanding common stock of each of
HCS, SEB and IB as such stockholder owns of
the outstanding Company's Common Stock on the
Distribution Record Date.

Distribution Record Date...... The "Distribution Record Date," is the record
date for determining stockholders entitled to
the special dividend of IB Common Stock and
SEB Common Stock and will be established by
the Board of Directors of the Company
following the Meeting.

Distribution Date............. The "Distribution Date," is the date on which
shares of IB Common Stock and SEB Common
Stock will be distributed to the Company's
stockholders, and will be established by the
Board of Directors of the Company following
the Meeting. On or prior to the Distribution
Date, the shares of IB Common Stock and SEB
Common Stock to be distributed in the
Distribution will be delivered to First
Chicago Trust Company of New York, as
Distribution Agent (the "Distribution
Agent"). The Distribution Agent will mail
stock distribution statements reflecting
ownership of shares of IB Common Stock and
SEB Common Stock as soon as practicable after
the Distribution. See "The Distribution
Proposals--Proposal One: The Distribution--
Manner of Effecting the Distribution."

Conditions to the Under the terms of the Distribution
Distribution.................. Agreement, the Distribution is conditioned
upon, among other things, (i) the Internal
Revenue

2
<PAGE>

Service having issued a ruling (the "Tax
Ruling") in response to the Company's request
in form and substance satisfactory to the
Board of Directors of the Company (see "--Tax
Consequences" below) and (ii) stockholder
approval of the Distribution Proposals at the
Meeting. Even if all conditions are
satisfied, the Company has reserved the right
to abandon, defer or modify the Distribution
or the other elements of the Distribution
Proposals at any time prior to the
Distribution Date. The Board will not waive
the requirement of receipt of a favorable Tax
Ruling unless, in the Board's judgment, based
on an opinion of counsel, no gain or loss
will be recognized by the holders of the
Company's Common Stock as a result of the
Distribution and no gain or loss will be
recognized by the Company upon the
Distribution under the Internal Revenue Code
of 1986, as amended (the "Code"). In
addition, the Board will not waive any other
condition to the Distribution or make any
changes in the terms of the Distribution or
the other elements of the Distribution
Proposals after the Distribution Proposals
are approved by the Company's stockholders
unless the Board determines that such waivers
or changes would not be materially adverse to
the Company's stockholders. In determining
whether any such waivers or changes would be
materially adverse to the Company's
stockholders, the Board will consider, as
appropriate, advice from its outside
financial and legal advisors as well as the
recommendation of management as to the
potential impact of such waivers or changes
on the Company and the Company's
stockholders. See "The Distribution
Proposals--Proposal One: The Distribution--
Conditions; Termination. "

Reasons for the The Distribution is designed to separate
Distribution.................. three types of businesses that have different
dynamics and business cycles, serve different
markets and customers, are subject to
different competitive forces and must be
managed with different long-term and short-
term strategies and goals. The Distribution
will allow the management of each company to
focus on its own business, organize its
capital structure, evaluate its growth
opportunities, achieve market recognition,
rationalize its organizational structure and
design equity-based compensation programs
targeted to its own performance.

Internal Transfers............ On or prior to the Distribution Date and
subject to stockholder approval of the
Distribution Proposals, the Company intends
to consummate certain internal mergers and
stock and asset transfers intended to
allocate assets and liabilities relating to
(i) the Health Care Systems Business to HCS,
(ii) the Semiconductor Equipment Business to
SEB and (iii) the Instruments Business to IB
(i.e., the Internal Transfers). See "The
Distribution Proposals--Proposal One: The
Distribution--Internal Mergers and
Transfers," "HCS Pro Forma Consolidated
Financial

3
<PAGE>

Statements," "The Instruments Business Pro
Forma Condensed Combined Financial
Statements" and "The Semiconductor Equipment
Business Pro Forma Condensed Combined
Financial Statements."

Relationship among HCS, IB
and SEB
After the Distribution........ For purposes of governing certain ongoing
relationships among HCS, SEB and IB after the
Distribution and to provide mechanisms for an
orderly transition, the Company, IB and SEB
have entered into or will enter into certain
agreements. Such agreements include: (i) the
Distribution Agreement, providing for, among
other things, the Internal Transfers, the
Distribution and cross-indemnification
provisions, (ii) the Tax Sharing Agreement
(as defined), (iii) the Employee Benefits
Allocation Agreement (as defined), (iv) the
Transition Services Agreement (as defined)
and (v) the Intellectual Property Agreement
(as defined) (such agreements other than the
Distribution Agreement are referred to herein
collectively as the "Ancillary Agreements").
See "The Distribution Proposals--Proposal
One: The Distribution--Relationship Among
HCS, SEB and IB after the Distribution."

Financing..................... The Company is required to renegotiate the
terms of its outstanding unsecured term loans
(the "Term Loans") to permit 50% of these
loans to be assumed by IB in connection with
the Distribution. 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 of the
borrower. In addition, certain short-term
notes payable of the Company and its
subsidiaries (the "Notes Payable") will, as a
result of the Internal Transfers and debt
allocation provisions of the Distribution
Agreement, remain outstanding as direct and
indirect obligations of HCS (and IB or SEB,
if required) as of the Distribution Date.
Based on the outstanding indebtedness of the
Company under the Term Loans and Notes
Payable as of October 2, 1998 and the
Company's projected operating results,
certain other transactions and scheduled debt
repayments through the Distribution Date, it
is anticipated that at the Distribution Date,
each of HCS and IB will have between $50
million and $100 million of outstanding
indebtedness under the Term Loans and Notes
Payable. In connection with the Distribution,
the Company will contribute cash to SEB so
that at the Distribution Date, SEB will have
approximately $100 million in cash and cash
equivalents and its consolidated debt,
expected to be comprised of Notes Payable,
will not exceed $5 million. Based on the
assumptions stated therein, the allocation of
indebtedness at the Distribution Date should
approximate the amounts reflected in "The
Instruments Business Forecasted
Capitalization," "The Semiconductor Equipment
Business

4
<PAGE>

Forecasted Capitalization," and "HCS
Forecasted Capitalization." See "The
Distribution Proposals--Proposal One: The
Distribution" and "Financing."

The Company, IB and SEB may enter into
separate credit facilities for working
capital and other general corporate purposes.
The credit facilities may contain certain
representations and warranties; conditions;
affirmative, negative and financial
covenants; and events of default customary
for such facilities. The Company may borrow
amounts under its credit facility on or prior
to the Distribution in order to fund a
portion of the cash contribution to be made
to SEB (and IB, if required), to pay
transaction expenses or for general corporate
purposes. It is not expected that IB or SEB
will have any outstanding borrowings under
their separate credit facilities as of the
Distribution. See "Financing."

Tax Consequences.............. The Company has conditioned the Distribution
on receipt of the Tax Ruling from the
Internal Revenue Service to the effect, among
other things, that receipt of shares of IB
Common Stock and SEB Common Stock by
stockholders of the Company will be tax-free.
The Board will not waive the requirement of
receipt of a favorable Tax Ruling from the
Internal Revenue Service unless the Company
receives an opinion of counsel that no gain
or loss will be recognized by the holders of
the Company's Common Stock as a result of the
Distribution and no gain or loss will be
recognized by the Company upon the
Distribution. For a description of the
consequences to the Company, IB, SEB and the
holders of the Company's Common Stock if the
Distribution were not to qualify as tax-free,
see "Risk Factors--Risks Relating to the
Distribution--Federal Income Tax
Considerations."

Accounting Treatment.......... If the stockholders of the Company approve
the Distribution at the Meeting and the
Company receives a favorable Tax Ruling or an
opinion of counsel that the Distribution will
qualify for non-recognition treatment, as
described above, the Company will thereafter
present the businesses of IB and SEB as
discontinued operations to the extent
financial information for periods prior to
the Distribution is required to be included
in the Company's historical financial
statements. After the Distribution, the
businesses of IB and SEB will each present
separate financial statements.

Expenses...................... The after-tax expenses expected to be
incurred in connection with the Distribution
are estimated to be approximately
$50 million.

No Appraisal Rights........... Stockholders of the Company will not be
entitled to appraisal rights under Delaware
law in connection with the Distribution.

5
<PAGE>

IB AFTER THE DISTRIBUTION

Business...................... IB is a newly formed, wholly owned subsidiary
of the Company. Following the Internal
Transfers and the Distribution, IB will
conduct the Instruments Business now
conducted by the Company and certain of its
subsidiaries. IB will be a major supplier of
analytical and research instruments and
related equipment for studying the chemical
composition of substances. The Instruments
Business also includes the vacuum products
operations, which produces pumps and
accessories for industrial and scientific
applications, as well as a facility that
fabricates circuit boards and electronic
subassemblies for customers inside and
outside the Instruments Business. The
Instruments Business had sales of
approximately $558 million for the fiscal
year ended October 2, 1998.

Principal Offices............. The principal executive offices of IB will be
located at 3120 Hansen Way, Palo Alto,
California 94304-1030. Its telephone number
at that address will be determined prior to
the Distribution.

Board of Directors............ The following five individuals are expected
to be the members of the Board of Directors
of IB as of the close of business on the
Distribution Date: Allen J. Lauer, John G.
McDonald, Wayne R. Moon, D. E. Mundell and
Elizabeth E. Tallett. Certain of the
foregoing currently serve as directors of the
Company and will resign from the Company's
Board of Directors effective as of the
Distribution Date. See "Management of IB--
Board of Directors of IB."

Trading Market................ There is currently no public market for the
IB Common Stock. IB intends to apply for
quotation of the IB Common Stock on the
Nasdaq National Market under the symbol
"VARI." See "Risk Factors--Risks Relating to
the Distribution--No Current Public Market
for IB Common Stock or SEB Common Stock" and
"The Distribution Proposals--Proposal One:
The Distribution--Listing and Trading of IB
Common Stock and SEB Common Stock."

Certain Provisions of
Certificate of
Incorporation, By-Laws and Certain provisions of the Certificate of
Rights Plan................... Incorporation and By-Laws of IB which will be
in effect at the time of the Distribution may
have the effect of making more difficult an
acquisition of control of IB in a transaction
not approved by IB's Board of Directors. In
addition, IB intends to adopt a stockholder
rights plan (the "IB Rights Plan"), which,
under certain circumstances, would
significantly dilute the interest in IB of
persons seeking to acquire control of IB
without the prior approval of IB's Board of
Directors. See "Risk Factors--Risks Relating
to the Distribution--Certain Anti-takeover
Features," "Description of the Capital
Stock--Rights Plans" and "Delaware Law and
Certain Charter and By-Law Provisions."

6
<PAGE>

SEB AFTER THE DISTRIBUTION

Business...................... SEB is a newly formed, wholly owned
subsidiary of the Company. Following the
Internal Transfers and the Distribution, SEB
will conduct the Semiconductor Equipment
Business now conducted by the Company and
certain of its subsidiaries. SEB will be a
leading supplier of ion implantation systems,
key pieces of capital equipment used to
manufacture semiconductor chips. SEB has
shipped more than 2,500 systems worldwide,
and more SEB ion implanters are at work than
those from all other manufacturers combined.
The Semiconductor Equipment Business had
revenue of approximately $343 million for the
fiscal year ended October 2, 1998.

Principal Offices............. The principal executive offices of SEB will
be located at 35 Dory Road, Gloucester,
Massachusetts 01930. Its telephone number at
that address will be (978) 282-2000.

Board of Directors............ The following five individuals are expected
to be the members of the Board of Directors
of SEB as of the close of business on the
Distribution Date: Richard A. Aurelio, Ruth
M. Davis, Robert W. Dutton, Angus A.
MacNaughton and J. Tracy O'Rourke. Certain of
the foregoing currently serve as directors of
the Company and will resign from the
Company's Board of Directors effective as of
the Distribution Date. See "Management of
SEB--Board of Directors of SEB."

Trading Market................ There is currently no public market for the
SEB Common Stock. SEB intends to apply for
quotation of the SEB Common Stock on the
Nasdaq National Market under the symbol
"VSEA." See "Risk Factors--Risks Relating to
the Distribution--No Current Public Market
for IB Common Stock or SEB Common Stock" and
"The Distribution Proposals--Proposal One:
The Distribution--Listing and Trading of IB
Common Stock and SEB Common Stock."

Certain Provisions of
Certificate of
Incorporation, By-Laws and Certain provisions of the Certificate of
Rights Plan................... Incorporation and By-Laws of SEB which will
be in effect at the time of the Distribution
may have the effect of making more difficult
an acquisition of control of SEB in a
transaction not approved by SEB's Board of
Directors. In addition, SEB intends to adopt
a stockholder rights plan (the "SEB Rights
Plan"), which, under certain circumstances,
would significantly dilute the interest in
SEB of persons seeking to acquire control of
SEB without the prior approval of SEB's Board
of Directors. See "Risk Factors--Risks
Relating to the Distribution--Certain Anti-
takeover Features," "Description of the
Capital Stock--Rights Plans" and "Delaware
Law and Certain Charter and By-Law
Provisions."

7
<PAGE>

THE COMPANY AFTER THE DISTRIBUTION

Business...................... Following the Internal Transfers and the
Distribution, the Company will be renamed
Varian Medical Systems, Inc. and will
continue to conduct the Health Care Systems
Business currently conducted by the Company.
HCS will be a leading worldwide supplier of
integrated cancer-care systems, including
CLINAC medical linear accelerators and
brachytherapy systems for treatment;
simulators for therapy planning and
verification; and ancillary equipment,
software and networking systems to improve
both therapeutic efficacy and administrative
efficiency. HCS will also be a premier
supplier of x-ray tubes for the world's
diagnostic imaging industry, including tubes
expressly designed for the most advanced
mammography and CT scanning applications. The
Health Care Systems Business had sales of
approximately $542 million for the fiscal
year ended October 2, 1998.

Principal Offices............. The principal executive offices of HCS
following the Distribution will be located at
3100 Hansen Way, Palo Alto, California 94304-
1030. Its telephone number at that address
will be (650) 493-4000.

Board of Directors............ Effective as of the Distribution Date,
following the resignations of nine of the
Company's directors (most of whom are or will
become directors of IB or SEB) and the
appointment of one new director, the Board of
Directors of HCS is expected to consist of
the following seven persons: John Seely
Brown, Samuel Hellman, Terry R. Lautenbach,
Richard M. Levy, David W. Martin, Jr., Burton
Richter and Richard W. Vieser. See
"Management of HCS--Board of Directors of
HCS."

Trading Market................ The HCS Common Stock is expected to continue
to be listed on the NYSE following the
Distribution under the ticker symbol "VAR."
The trading price of the HCS Common Stock
will be substantially affected by the
Distribution. See "Risk Factors--Risks
Relating to the Distribution--Changes in
Trading Prices."

Certain Provisions of
Certificate of
Incorporation, By-Laws and Certain provisions of the Certificate of
Rights Plan................... Incorporation and By-Laws of HCS as well as
the proposed amendments to the Company's
Certificate of Incorporation set forth in
Proposals Three and Four may have the effect
of making more difficult an acquisition of
control of HCS in a transaction not approved
by HCS's Board of Directors. In addition, the
Company has adopted a stockholder rights plan
(the "HCS Rights Plan"), which, under certain
circumstances, would significantly dilute the
interest in HCS of persons seeking to acquire
control of

8
<PAGE>

HCS without the prior approval of HCS's Board
of Directors. See "The Distribution
Proposals--Proposal Three: Approval of
Amendment to the Certificate of Incorporation
of the Company to Specify That the Number of
Directors Shall be Fixed by Resolution of the
Board of Directors," "--Proposal Four:
Approval of Amendment to the Certificate of
Incorporation of the Company to Change
Certain Corporate Governance Provisions,"
"Description of the Capital Stock--Rights
Plans" and "Delaware Law and Certain Charter
and By-Law Provisions."

RISK FACTORS

Stockholders should consider carefully the specific investment considerations
set forth under "Risk Factors," as well as the other information set forth in
this Proxy Statement.

9
<PAGE>

THE COMPANY

SUMMARY FINANCIAL DATA

The following table presents summary historical financial data of the
Company. The information set forth below should be read in conjunction with the
historical consolidated financial statements and notes thereto of the Company
incorporated herein by reference and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in the Company's
Annual Report to Stockholders for the fiscal year ended October 2, 1998 which
is incorporated herein by reference. The consolidated statement of earnings
data set forth below for the fiscal years ended October 2, 1998, September 26,
1997 and September 27, 1996 and the consolidated balance sheet data at October
2, 1998 and September 26, 1997 are derived from, and are qualified by reference
to, the audited consolidated financial statements of the Company incorporated
herein by reference. The consolidated statement of earnings data for fiscal
years 1995 and 1994 and the consolidated balance sheet data at fiscal year end
1996, 1995 and 1994 are derived from audited consolidated financial statements
of the Company not included in this Proxy Statement.

<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------------------------
1998 1997(1) 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA
Sales............................ $1,422.1 $1,425.8 $1,599.4 $1,575.7 $1,313.4
Earnings from Continuing
Operations before Taxes....... $ 112.7 $ 177.8 $ 189.2 $ 165.3 $ 109.1
Taxes on earnings.............. 38. 9 62.2 67.1 59.5 41.5
-------- -------- -------- -------- --------
Earnings from Continuing
Operations...................... 73.8 115.6 122.1 105.8 67.6
Earnings from Discontinued
Operations, Net of Taxes........ -- -- -- 33.5 11.8
-------- -------- -------- -------- --------
Net Earnings..................... $ 73.8 $ 115.6 $ 122.1 $ 139.3 $ 79.4
======== ======== ======== ======== ========
Net Earnings Per Share--Basic
Net Earnings from Continuing
Operations.................... $ 2.47 $ 3.79 $ 3.93 $ 3.14 $ 1.97
Net Earnings from Discontinued
Operations.................... -- -- -- 1.00 0.34
-------- -------- -------- -------- --------
Net Earnings Per Share........... $ 2.47 $ 3.79 $ 3.93 $ 4.14 $ 2.31
======== ======== ======== ======== ========
Net Earnings Per Share--Diluted
Net Earnings from Continuing
Operations.................... $ 2.43 $ 3.67 $ 3.81 $ 3.02 $ 1.90
Net Earnings from Discontinued
Operations.................... -- -- -- 0.95 0.33
-------- -------- -------- -------- --------
Net Earnings Per Share........... $ 2.43 $ 3.67 $ 3.81 $ 3.97 $ 2.23
======== ======== ======== ======== ========
Dividends Declared Per Share..... $ 0.39 $ 0.35 $ 0.31 $ 0.27 $ 0.23
======== ======== ======== ======== ========
BALANCE SHEET DATA AT YEAR END
Total assets..................... $1,218.3 $1,104.3 $1,018.9 $1,003.8 $ 962.4
Long-term debt (excluding current
portion)........................ $ 111.1 $ 73.2 $ 60.3 $ 60.3 $ 60.4
</TABLE>
- --------
(1) Fiscal year 1997 results include a $51.0 million pre-tax gain ($33.2
million after-tax or $1.06 per share) on the sale of the Thin Film Systems
business.

10
<PAGE>

THE INSTRUMENTS BUSINESS
(WHICH WILL BECOME VARIAN, INC. FOLLOWING THE DISTRIBUTION)

SUMMARY FINANCIAL DATA

The following table presents summary historical financial data of the
Instruments Business. The information set forth below should be read in
conjunction with "The Instruments Business Pro Forma Condensed Combined
Financial Statements," "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Instruments Business" and the
historical financial statements and notes thereto of the Instruments Business
included elsewhere in this Proxy Statement. The unaudited pro forma statement
of earnings data for the year ended October 2, 1998, set forth below was
prepared to give effect to the Distribution as if it had occurred on September
27, 1997, and the unaudited pro forma balance sheet data was prepared to give
effect to the Distribution as if it had occurred on October 2, 1998, and does
not purport to represent what the Instruments Business' operating results or
financial position would have been or to project its operating results or
financial position for any future date or period. The statement of earnings
data set forth below for the fiscal years ended October 2, 1998, September 26,
1997 and September 27, 1996 and the balance sheet data at October 2, 1998 and
September 26, 1997 are derived from, and are qualified by reference to, the
audited financial statements of the Instruments Business included elsewhere in
this Proxy Statement. The statement of earnings data for the fiscal years 1995
and 1994 and the balance sheet data at fiscal year end 1996, 1995 and 1994 are
derived from unaudited financial data of the Instruments Business not included
in this Proxy Statement.

The historical financial information may not be indicative of the Instruments
Business' future performance and does not necessarily reflect what the
financial position and results of operations of the Instruments Business would
have been had the Instruments Business operated as a separate, stand-alone
entity during the periods presented.

<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------------------------------
PRO FORMA
1998 1998 1997 1996 1995 1994
--------- ------- ------- ------- ------- -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA
Sales....................... $557.8 $557.8 $541.9 $504.4 $459.4 $425.7
Operating Earnings before
Taxes...................... $ 35.1 $ 39.2 $ 26.8 $ 11.5 $ 2.7 $ 20.3
Taxes on earnings........... $ 14.2 $ 15.8 $ 12.6 $ 5.3 $ 0.7 $ 10.0
Net Earnings................ $ 20.9 $ 23.4 $ 14.2 $ 6.2 $ 2.0 $ 10.3
Pro Forma Net Earnings Per
Share(1)................... $ 0.70 $ 0.78 $ 0.47 $ 0.20 $ 0.06 $ 0.30
BALANCE SHEET DATA AT YEAR
END
Total assets................ $412.1 $404.1 $357.9 $301.0 $282.0 $272.6
Long-term debt (excluding
current portion)........... $ 52.0 $ -- $ -- $ -- $ -- $ --
</TABLE>
- --------
(1) The computation of pro forma net earnings per share is based on the
weighted average number of shares of the Company's Common Stock outstanding
during the respective periods, reflecting the anticipated ratio of one
share of IB Common Stock for each share of the Company's Common Stock
outstanding at the time of the Distribution.

11
<PAGE>

THE SEMICONDUCTOR EQUIPMENT BUSINESS
(WHICH WILL BECOME VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC. FOLLOWING
THE DISTRIBUTION)

SUMMARY FINANCIAL DATA

The following table presents summary historical financial data of the
Semiconductor Equipment Business. The information set forth below should be
read in conjunction with "The Semiconductor Equipment Business Pro Forma
Condensed Combined Financial Statements," "Management's Discussion and Analysis
of Financial Condition and Results of Operations of the Semiconductor Equipment
Business" and the historical financial statements and notes thereto of the
Semiconductor Equipment Business included elsewhere in this Proxy Statement.
The unaudited pro forma statement of earnings data for the year ended October
2, 1998, set forth below was prepared to give effect to the Distribution as if
it had occurred on September 27, 1997, and the unaudited pro forma balance
sheet data was prepared to give effect to the Distribution as if it had
occurred on October 2, 1998, and does not purport to represent what the
Semiconductor Equipment Business' operating results or financial position would
have been or to project its operating results or financial position for any
future date or period. The statement of earnings data set forth below for the
fiscal years ended October 2, 1998, September 26, 1997 and September 27, 1996
and the balance sheet data at October 2, 1998 and September 26, 1997 are
derived from, and are qualified by reference to, the audited financial
statements of the Semiconductor Equipment Business included elsewhere in this
Proxy Statement. The statement of earnings data for the fiscal years 1995 and
1994 and the balance sheet data at fiscal year end 1996, 1995 and 1994 are
derived from unaudited financial data of the Semiconductor Equipment Business
not included in this Proxy Statement.

The historical financial information may not be indicative of the
Semiconductor Equipment Business' future performance and does not necessarily
reflect what the financial position and results of operations of the
Semiconductor Equipment Business would have been had the Semiconductor
Equipment Business operated as a separate, stand-alone entity during the
periods presented.

<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------------------------------
PRO FORMA
1998 1998 1997(1) 1996 1995 1994
--------- ------- ------- ------- ------- -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA
Revenue..................... $342.9 $342.9 $448.3 $667.2 $660.7 $476.6
Operating Earnings before
Taxes...................... $ 16.1 $ 16.3 $105.9 $122.3 $ 92.5 $ 39.2
Taxes on earnings........... $ 4.8 $ 4.9 $ 34.9 $ 43.0 $ 33.8 $ 12.8
Net Earnings................ $ 11.3 $ 11.4 $ 71.0 $ 79.3 $ 58.7 $ 26.4
Pro Forma Net Earnings Per
Share(2)................... $ 0.38 $ 0.38 $ 2.33 $ 2.56 $ 1.74 $ 0.77
BALANCE SHEET DATA AT YEAR
END
Total assets................ $324.6 $224.6 $233.3 $312.1 $275.8 $242.2
</TABLE>
- --------
(1) Fiscal year 1997 results include a $51.0 million pre-tax gain ($33.2
million after-tax or $1.09 pro forma per share) on the sale of the Thin
Film Systems business.
(2) The computation of pro forma net earnings per share is based on the
weighted average number of shares of the Company's Common Stock outstanding
during the respective periods, reflecting the anticipated ratio of one
share of SEB Common Stock for each share of the Company's Common Stock
outstanding at the time of the Distribution.

12
<PAGE>

HCS
(VARIAN ASSOCIATES, INC., TO BE RENAMED
VARIAN MEDICAL SYSTEMS, INC. FOLLOWING THE DISTRIBUTION)

PRO FORMA SUMMARY FINANCIAL DATA

The following table presents unaudited pro forma summary financial data of
HCS prepared to give effect to the Distribution. The unaudited pro forma
summary financial data should be read in conjunction with "HCS Pro Forma
Consolidated Financial Statements," "Management's Discussion and Analysis of
Financial Condition and Results of Operations of HCS" and the historical
consolidated financial statements of the Company and the notes thereto
incorporated herein by reference. The unaudited pro forma statement of earnings
data set forth below was prepared to give effect to the Distribution for each
of the most recent three fiscal years as if the Distribution had occurred on
the first day of the earliest period presented, and does not purport to
represent what the operations actually would have been, or to project HCS's
operating results for any future period. The unaudited pro forma balance sheet
data set forth below was prepared to give effect to the Distribution as if it
had occurred at October 2, 1998, and does not purport to represent what the
financial position actually would have been, or to project HCS's financial
position for any future date.

<TABLE>
<CAPTION>
PRO FORMA FOR THE FISCAL
YEARS
------------------------
1998 1997 1996
---------- ------ ------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
STATEMENT OF EARNINGS DATA
Sales................................................. $541.5 $476.3 $467.5
Operating Earnings before Taxes....................... $ 55.4 $ 44.8 $ 54.2
Taxes on earnings..................................... $ 17.4 $ 14.7 $ 18.3
Net Earnings.......................................... $ 38.0 $ 30.1 $ 35.9
Pro Forma Net Earnings Per Share--Basic(1)............ $ 1.27 $ 0.99 $ 1.16
Pro Forma Net Earnings Per Share--Diluted(2).......... $ 1.25 $ 0.96 $ 1.12
<CAPTION>
PRO FORMA
AS OF
OCTOBER 2,
1998
----------
(DOLLARS
IN
MILLIONS)
<S> <C> <C> <C>
BALANCE SHEET DATA AT YEAR END
Total assets.......................................... $503.1
Long-term debt (excluding current portion)............ $ 59.1
</TABLE>
- --------
(1) The computation of pro forma net earnings per share--basic is based on the
weighted average number of shares of the Company's Common Stock outstanding
during the respective periods.
(2) The computation of pro forma net earnings per share--diluted is based on
the sum of the weighted average number of shares of the Company's Common
Stock outstanding and the Company's dilutive potential Common Stock during
the respective periods.

13
<PAGE>

RISK FACTORS

The following factors, in conjunction with the other information included in
this Proxy Statement (including the documents incorporated by reference
herein), should be carefully considered by the stockholders of the Company in
evaluating the matters presented in this Proxy Statement.

RISKS RELATING TO THE DISTRIBUTION

LACK OF RECENT OPERATING HISTORY AS SEPARATE ENTITIES

Upon consummation of the Distribution, HCS will own and operate the Health
Care Systems Business, SEB will own and operate the Semiconductor Equipment
Business and IB will own and operate the Instruments Business. None of these
businesses has a recent operating history as a separate entity.

After the Distribution, each of HCS, SEB and IB will be a smaller and less
diversified company than the Company was prior to the Distribution. The
ability of each of HCS, SEB and IB to satisfy its respective obligations and
maintain profitability will be solely dependent upon its own future
performance, and each company will not be able to rely on the capital
resources and cash flows of the other two businesses. The future performance
and cash flows of each company will be subject to prevailing economic
conditions and to financial, business and other factors affecting the business
operations of such company, including factors beyond its control.

The division of the Company may result in some temporary dislocation and
inefficiencies to the business operations, as well as the organization and
personnel structure, of each company, and will also result in the duplication
of certain personnel, administrative and other expenses required for the
operation of independent companies. In addition, although after the
Distribution each business will continue to be managed by its current
operating management, the managements of HCS, SEB and IB have not previously
operated their businesses as separate public companies. Accordingly, there can
be no assurance that the transition will not alter or disrupt the management
and/or operations of one or more of the businesses.

POTENTIAL RESPONSIBILITY FOR LIABILITIES NOT EXPRESSLY ASSUMED

The Distribution Agreement and the Ancillary Agreements allocate among HCS,
SEB and IB responsibility for various indebtedness, liabilities and
obligations. See "The Distribution Proposals--Proposal One: The Distribution--
Relationship Among HCS, SEB and IB after the Distribution." It is possible
that a court would disregard this contractual allocation of indebtedness,
liabilities and obligations among the parties and require HCS, SEB or IB or
their respective subsidiaries 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.

POTENTIAL INDEMNIFICATION LIABILITIES

Under the terms of the Distribution Agreement and certain of the Ancillary
Agreements, each of HCS, SEB and IB has agreed to indemnify the other parties
(and certain related persons) from and after consummation of the Distribution
with respect to certain indebtedness, liabilities and obligations, which
indemnification obligations could be significant. The availability of such
indemnities will depend upon the future financial strength of the companies.
No assurance can be given that the relevant company will be in a position to
fund such indemnities. 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. See "The Distribution
Proposals--Proposal One: The Distribution--Relationship Among HCS, SEB and IB
after the Distribution."

DEBT LEVERAGE AFTER THE DISTRIBUTION

Immediately following the Distribution, SEB will have significantly less
debt leverage, and IB and HCS will have somewhat greater debt leverage, than
the Company had prior to the Distribution. As of October 2,

14
<PAGE>

1998, the Company had total long and short-term debt of approximately $158
million and total stockholders' equity of approximately $558 million. Based on
the Company's outstanding indebtedness as of October 2, 1998 and projected
operating results, certain other transactions and scheduled debt repayments
through the anticipated Distribution Date, on a pro forma basis giving effect
to the Distribution: (i) HCS would have total long and short-term debt of
approximately $88 million and total stockholders' equity of approximately
$136 million; (ii) IB would have total long-term debt (including current
portion) of approximately $58 million and total stockholders' equity of
approximately $205 million and (iii) SEB would have total short-term debt of
approximately $5 million and total stockholders' equity of approximately $190
million. The allocation of indebtedness among the three companies reflects, in
substantial part, the relative expected capital requirements and cash flows of
the three businesses. See "The Instruments Business Forecasted
Capitalization," "The Semiconductor Equipment Business Forecasted
Capitalization" and "HCS Forecasted Capitalization."

The degree to which each company is leveraged could have important
consequences, including the following: (i) each company'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 each company's and its
subsidiaries' cash flow from operations must be dedicated to the payment of
the principal of and interest on its indebtedness; (iii) the Term Loans of HCS
and IB will contain, and any credit agreement of IB, SEB or HCS following the
Distribution may contain, certain restrictive financial and operating
covenants, including, among others, requirements that the company satisfy
certain financial ratios; (iv) a portion of each company's borrowings may be
at floating rates of interest, causing each company to be vulnerable to
increases in interest rates; (v) each company's degree of leverage may make it
more vulnerable in a downturn in general economic conditions and (vi) each
company'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 SEB Common Stock and/or IB Common Stock to the
Company or require each of the companies to fund certain liabilities of the
other companies for the benefit of creditors. See "--Fraudulent Transfer
Considerations; Legal Dividend Requirements."

FEDERAL INCOME TAX CONSIDERATIONS

The Company has conditioned the Distribution on the receipt of a favorable
Tax Ruling. The Board of Directors of the Company will not waive the
requirement of receipt of a favorable Tax Ruling, unless the Company receives
an opinion of counsel that no gain or loss will be recognized by the holders
of the Company's Common Stock as a result of the Distribution and no gain or
loss will be recognized by the Company upon the Distribution. See "The
Distribution Proposals--Proposal One: The Distribution--Federal Income Tax
Aspects of the Distribution." Such rulings, while generally binding upon the
Internal Revenue Service (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. The Company is not aware of any facts or circumstances that would
cause such representations and assumptions to be untrue. The Company, IB and
SEB have agreed to certain restrictions on their future actions to provide
further assurances that the Distribution will qualify as tax-free. See "The
Distribution Proposals--Proposal One: The Distribution--Relationship Among
HCS, SEB and IB after the Distribution--Tax Sharing Agreement."

If one or both of the distributions comprising the Distribution fail to
qualify as a tax-free spin-off under Section 355 of the Code, then HCS 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 HCS were to recognize gain on one or both of the
distributions, such gain and the resulting tax liability likely would be very
substantial.

15
<PAGE>

Stock in the Distribution would be treated as if such stockholder received a
taxable distribution in an amount equal to the fair market value of the IB
Common Stock or SEB Common Stock received, which would result in (i) a
dividend to the extent of such stockholder's pro rata share of the Company's
current and accumulated earnings and profits, (ii) a reduction in such
stockholder's basis in the Company's Common Stock to the extent the amount
received exceeds such stockholder's share of earnings and profits and (iii)
gain from the exchange of the Company's Common Stock to the extent the amount
received exceeds both such stockholder's share of earnings and profits and
such stockholder's basis in such common stock.

Section 355(e), which was added to the Code in 1997, generally provides that
a company that distributes shares of a subsidiary in a spin-off that is
otherwise tax-free will incur federal income tax liability if 50% or more, by
vote or value, of the capital stock of either the company making the
distribution or the spun-off subsidiary is acquired (a "50% Ownership Shift")
by one or more persons acting pursuant to a plan or series of related
transactions that includes the spin-off. There is a presumption that any
acquisition of 50% or more, by vote or value, of the capital stock of the
company or the subsidiary that occurs within two years before or after the
spin-off is pursuant to a plan that includes the spin-off. However, the
presumption may be rebutted by establishing that the spin-off and the
acquisition are not part of a plan or series of related transactions. Among
the factual representations made by the Company to the IRS in connection with
the requested Tax Ruling is the representation that each of the distributions
is not part of such a plan or series of related transactions. If HCS, IB or
SEB were to undergo a 50% Ownership Shift, particularly if such 50% Ownership
Shift occurred within two years after the Distribution Date, there can be no
assurance that the IRS will not assert that such ownership shift occurred
pursuant to a plan or series of related transactions and therefore that the
Distribution is taxable under Section 355(e).

If a distribution is taxable solely under Section 355(e), HCS will recognize
gain equal to the difference between the fair market value of the stock of SEB
and IB and the Company's adjusted tax basis in such stock. However, holders of
the Company's Common Stock would not recognize gain or loss as a result of the
Distribution. If HCS were to recognize gain on the distributions, such gain
and the resulting tax liability likely would be very substantial.

The Tax Sharing Agreement will allocate responsibility for the possible
corporate tax burden resulting from the Distribution. Each of HCS, IB and SEB
will be responsible for any corporate taxes resulting from the Distribution
attributable to action taken or permitted by that entity or its affiliates
after the Distribution. If the Distribution is found to be taxable but none of
HCS, IB and SEB has done anything to cause the Distribution to be taxable,
each company generally will be liable for one-third of those taxes. See "The
Distribution Proposals--Proposal One: The Distribution--Relationship Among
HCS, SEB and IB after the Distribution--Tax Sharing Agreement."

NO CURRENT PUBLIC MARKET FOR IB COMMON STOCK OR SEB COMMON STOCK

There is not currently a public market for the IB Common Stock or the SEB
Common Stock and there can be no assurance as to the prices at which trading
in such stock will occur after the Distribution. Until each of the IB Common
Stock and SEB Common Stock is fully distributed and an orderly market
develops, the prices at which trading in such stock occurs may fluctuate
significantly. IB intends to apply for quotation of the IB Common Stock on the
Nasdaq National Market and SEB intends to apply for quotation of the SEB
Common Stock on the Nasdaq National Market. Management expects that the market
will characterize SEB Common Stock as a semiconductor equipment stock, which
category of stock has historically experienced relatively greater price
volatility than broader market indices. See "The Distribution Proposals--
Proposal One: The Distribution--Listing and Trading of IB Common Stock and SEB
Common Stock. "

CHANGES IN TRADING PRICES

It is expected that the HCS Common Stock will continue to be listed and
traded on the NYSE after the Distribution. The trading price of the HCS Common
Stock will be substantially affected by the Distribution. The

16
<PAGE>

combined trading prices of the HCS Common Stock, the SEB Common Stock and the
IB Common Stock held by stockholders after the Distribution may be less than,
equal to or greater than the trading price of the Company's Common Stock prior
to the Distribution. See "The Distribution Proposals--Proposal One: The
Distribution--Listing and Trading of HCS Common Stock."

NO DIVIDENDS ANTICIPATED

The Company pays dividends on the Company's Common Stock at the current
annualized rate of $0.40 per share. Following the Distribution, none of HCS,
SEB or IB anticipates paying dividends on its common stock. The Term Loans of
HCS and IB will contain, and any credit agreement of HCS, SEB or IB following
the Distribution may contain, provisions that limit the ability of such
company (and/or its subsidiaries) to pay cash dividends. Any determination to
pay cash dividends in the future will be at the discretion of the Board of
Directors of each of HCS, SEB and IB and will be dependent upon the respective
company's results of operations, financial condition, contractual restrictions
and other factors deemed relevant at that time by the respective company's
Board of Directors. See "Financing."

CERTAIN ANTI-TAKEOVER FEATURES

IB and SEB

The Certificate of Incorporation and By-Laws of each of IB and SEB that will
be in effect at the time of the Distribution will contain several provisions
that may make the acquisition of control of IB or SEB more difficult or
expensive. Such Certificates of Incorporation and By-Laws, among other things,
will (i) classify the Board of Directors into three classes, with directors of
each class serving for a staggered three-year period, (ii) provide that
directors may be removed only for cause and only upon the affirmative vote of
the holders of at least a majority of the outstanding shares of common stock
entitled to vote for such directors, (iii) permit the remaining directors (but
not the company's stockholders) to fill vacancies and newly created
directorships on the Board, (iv) eliminate the ability of stockholders to act
by written consent and (v) require the vote of stockholders holding at least
66 2/3% of the outstanding shares of common stock to amend, alter or repeal
the By-Laws and certain provisions of the Certificate of Incorporation,
including the provisions described in the foregoing clauses (i) through (iv)
and this clause (v). Such provisions would make the removal of incumbent
directors more difficult and time-consuming and may have the effect of
discouraging a tender offer or other takeover attempt not previously approved
by the Board of Directors. Under the Certificate of Incorporation of each of
IB and SEB which will be in effect at the time of the Distribution, the Board
of Directors of the company also has the authority to issue shares of
preferred stock in one or more series and to fix the powers, preferences and
rights of any such series without stockholder approval. The Board of Directors
of IB or SEB, as the case may be, could, therefore, issue, without stockholder
approval, preferred stock with voting and other rights that could adversely
affect the voting power of the holders of common stock of the company and
could make it more difficult for a third party to gain control of the company.
In addition, each of IB and SEB will adopt a stockholder rights plan prior to
the Distribution Date, which, under certain circumstances, would significantly
dilute the equity interest in the company of persons seeking to acquire
control of the company without the prior approval of that company's Board of
Directors. See "Description of the Capital Stock--Rights Plans" and "Delaware
Law and Certain Charter and By-Law Provisions."

HCS

The Company has adopted a stockholder rights plan which, under certain
circumstances, would significantly dilute the equity interest in the Company,
or HCS following the Distribution, of persons seeking to acquire control of
the Company, or HCS following the Distribution, without the prior approval of
the Board of Directors. See "Description of the Capital Stock--Rights Plans."
Proposals Three and Four include amendments to the Company's Certificate of
Incorporation that may make more difficult an acquisition of control of HCS
following the Distribution, without the approval of the Board of Directors.
See "The Distribution Proposals--Proposal Three: Approval of Amendment to the
Certificate of Incorporation of the Company to Specify That the Number of
Directors Shall be Fixed by Resolution of the Board of Directors" and "--
Proposal Four: Approval of Amendment to the Certificate of Incorporation of
the Company to Change Certain Corporate Governance Provisions."

17
<PAGE>

CERTAIN CONSENT REQUIREMENTS

The Company has reviewed its existing debt and other contractual
arrangements to determine whether consummation of the Distribution and related
transactions would result in a violation of these obligations or require the
consent of a third party to effect the necessary transfers. In a substantial
number of situations, an amendment, consent or waiver from third parties will
be required. It is a condition of the Distribution that these amendments,
consents or waivers have been obtained, except for those the failure of which
to be obtained would not have a material adverse effect on HCS, SEB or IB.
Although the Company believes that no single agreement for which an amendment,
consent or waiver is being sought is material, the failure of the Company to
receive a significant number of such amendments, waivers or consents could
have a material adverse effect on the ability of HCS, SEB or IB, as the case
may be, to continue to conduct its respective business as currently being
conducted.

FRAUDULENT TRANSFER CONSIDERATIONS; LEGAL DIVIDEND REQUIREMENTS

If a court in a lawsuit by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy, were to find that at the time the
Company effected the Distribution, the Company, HCS, SEB or IB, as the case
may be, (i) was insolvent, (ii) was rendered insolvent by reason of the
Distribution, (iii) was engaged in a business or transaction for which the
Company's, HCS's, SEB's or IB's, as the case may be, remaining assets
constituted unreasonably small capital or (iv) intended to incur, or believed
it would incur, debts beyond its ability to pay such debts as they matured,
such court may be asked to void the Distribution (in whole or in part) as a
fraudulent conveyance and require that the stockholders return some or all of
the shares of SEB Common Stock and IB Common Stock to the Company, or require
HCS, SEB or IB, as the case may be, to fund certain liabilities of the other
companies for the benefit of creditors. The measure of insolvency for purposes
of the foregoing will vary depending upon the jurisdiction whose law is being
applied. Generally, however, each of the Company, HCS, SEB and IB, as the case
may be, would be considered insolvent if the fair value of its assets were
less than the amount of its liabilities or if it incurred debt beyond its
ability to repay such debt as it matures. In addition, under Section 170 of
the Delaware General Corporation Law (the "DGCL") (which is applicable to the
Company in the Distribution), a corporation generally may make distributions
to its stockholders only out of its surplus (net assets minus capital) and not
out of capital.

The Company's Board of Directors and management believe that (i) the
Company, and each of HCS, SEB and IB, will be solvent before and after the
Distribution (in accordance with the foregoing definitions), will be able to
repay its debts as they mature following the Distribution and will have
sufficient capital to carry on its businesses and (ii) the Distribution will
be made entirely out of surplus, as provided under Section 170 of the DGCL.

TRANSITIONING TO NEW INFORMATION TECHNOLOGY INFRASTRUCTURES

HCS, IB and SEB currently share a common information technology ("IT")
infrastructure. This IT infrastructure is essential to the daily operation of
the companies' marketing, manufacturing, distribution, billing and collections
and financial reporting processes.

After the Distribution, each of HCS, IB and SEB will establish separate IT
infrastructures as appropriate for their separate businesses and will
transition to these new IT infrastructures from the currently shared IT
infrastructure. These transitions are not unlike transitions carried out
previously by the Company in the process of divesting discontinued operations
and/or integrating the operations of newly acquired companies. Consequently,
management believes that HCS, IB and SEB possess the skills and resources to
design and implement and transition to the new IT infrastructures. However,
these activities are inherently complex and because of their significance to
the businesses, unforeseen problems or errors in the transitions to these new
IT infrastructures could adversely affect the business and results of
operations of each of HCS, IB and SEB. Assessment and correction of Year 2000
problems could complicate transition to these new infrastructures. See "Risk
Factors--Additional Risks Relating to Each of the Businesses--Potential Impact
of the Year 2000 Issue."

18
<PAGE>

RISKS RELATING TO THE BUSINESS OF HCS

UNCERTAIN MARKET ACCEPTANCE OF PRODUCTS; PRODUCT OBSOLESCENCE

There can be no assurance that HCS's future products will gain any
significant market acceptance and market share among physicians, patients and
health care payors, even if required regulatory approvals are obtained. Market
acceptance may depend on a variety of factors, including educating physicians
regarding the use of a new procedure, overcoming physician objections to
certain effects of the product or its related treatment regimen and convincing
health care payors that the benefits of the product and its related treatment
regimen outweigh its costs. Market acceptance and market share are also
affected by the timing of market introduction of competitive products.
Accordingly, the relative speed with which HCS can develop products, gain
regulatory approval and reimbursement acceptance and supply commercial
quantities of the product to the market are expected to be important factors
in market acceptance and market share.

In addition, the marketplace for medical products is characterized by rapid
change and technological innovation. As a result, HCS is subject to the risk
of product obsolescence, whether from long development or government approval
cycles or the development of improved products or processes by competitors. In
addition, the marketplace could conclude that the task for which HCS's product
was designed is no longer an element of a generally accepted diagnostic or
treatment regimen. Any development adversely affecting the market for
equipment manufactured by HCS would result in its having to reduce production
volumes or to discontinue manufacturing, which could have an adverse effect on
HCS's business, results of operations and financial condition. There can be no
assurance that HCS's products or proprietary technologies will not become
uncompetitive or obsolete.

TECHNOLOGICAL CHANGE AND NEW PRODUCTS

The market for HCS's products is characterized by rapid and significant
technological change, evolving industry standards and new product
introductions. Many of HCS's products are technologically innovative and
require significant planning, design, development and testing at the
technological, product and manufacturing process levels. These activities
require significant capital commitments and investment by HCS.

New product developments and new business opportunities in the health care
industry have inherent risks and unpredictability. These include proof of
feasibility; time required from proof of feasibility to routine production;
timing and cost of regulatory approvals; inventory overruns caused by phase-in
of new products and phase-out of old products; manufacturing, installation,
warranty and maintenance cost overruns; customer acceptance and payment;
customer demands for retrofits of both new and old products; and reaction of
competitors. There can be no assurance that HCS will successfully develop,
manufacture and phase in new products or that quarterly or yearly financial
performance dependent upon new product introductions will not be materially
adversely affected. See "Business of HCS--Research and Development."

The high cost of technological innovation is matched by the rapid and
significant change in the technologies governing the products that are
competitive in HCS's market, by industry standards that may change on short
notice and by the introduction of new products and technologies which may
render existing products and technologies uncompetitive. If HCS does not
successfully introduce new products, HCS's results of operations will be
materially adversely affected.

GOVERNMENT REGULATION

HCS's products and manufacturing activities are subject to extensive and
rigorous government regulation, including the provisions of the U.S. Food,
Drug and Cosmetic Act. Commercial distribution in certain foreign countries is
also subject to government regulation. The process of obtaining required
regulatory approvals can be lengthy, expensive and uncertain. Moreover,
regulatory approvals, if granted, may include significant limitations on the
indicated uses for which a product may be marketed. The U.S. Food and Drug
Administration (the "FDA") actively enforces regulations prohibiting marketing
of medical devices without compliance with certain

19
<PAGE>

pre-market approval provisions. A Section 510(k) application is required in
order to market a new or modified medical device, and if specifically required
by the FDA, a pre-market approval application, which is often more costly to
obtain, may be necessary. The FDA review process typically requires extended
proceedings pertaining to the safety and efficacy of new products, which may
delay or hinder a product's timely entry into the marketplace. The FDA and the
FTC also regulate the content of advertising and marketing materials relating
to medical devices. There can be no assurance that HCS's advertising and
marketing materials regarding its products are and will be in compliance with
such regulations.

HCS is also subject to other federal, state, local and foreign laws,
regulations and recommendations relating to medical devices, safe working
conditions and laboratory and manufacturing practices. Failure to comply with
applicable regulatory requirements can result in, among other things, fines,
suspensions of approvals, seizures or recalls of products, operating
restrictions and criminal prosecutions. Furthermore, changes in existing
regulations or adoption of new regulations could affect the timing of, or
prevent HCS from obtaining, future regulatory approvals. The effect of
government regulation may be to delay for a considerable period of time or to
prevent the marketing and full commercialization of future products or
services that HCS may develop, and/or to impose costly requirements on HCS.
There can also be no assurance that additional regulations will not be adopted
or current regulations amended in such a manner as will materially adversely
affect HCS. See "Business of HCS--Government Regulation."

UNCERTAINTY OF HEALTH CARE REFORM

The U.S. government has in the past, and may in the future, consider (and
certain state and local as well as a number of foreign governments are
considering or have adopted) health care policies intended to curb rising
health care costs. Such policies include rationing of government-funded
reimbursement for health care services and imposing price controls upon
providers of medical products and services. HCS cannot predict what health
care reform legislation or regulation, if any, will be enacted in the United
States or elsewhere. Significant changes in the health care systems in the
United States or elsewhere would likely have a significant impact on the
demand for HCS's products and services and the manner in which HCS conducts
its business. HCS is unable to predict whether such proposals will be enacted,
whether other health care legislation or regulation affecting HCS's business,
financial condition and results of operations may be proposed or enacted in
the future, or what effect any such legislation or regulation would have on
HCS's business, financial condition and results of operations. See "Business
of HCS--Government Regulation."

UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT

Sales of certain products manufactured by HCS are indirectly dependent in
part on the availability to HCS's customers of adequate reimbursement for the
treatment provided by those products from third-party health care payors, such
as government and private insurance plans, health maintenance organizations
and preferred provider organizations, in that the availability of such
reimbursement affects HCS's customers' capital equipment purchasing decisions.
Third-party payors are increasingly challenging the pricing of medical
products and services. There can be no assurance that adequate levels of
reimbursement to HCS's customers will be available to enable HCS to achieve or
maintain market acceptance of its products. Without adequate support from
third-party payors, the market for the products of HCS may be limited. There
is no uniform policy on reimbursement among third party payors, nor are there
any assurances that any of HCS's products will qualify for reimbursement from
third party payors. Foreign countries also have their own health care
reimbursement systems, and there can be no assurance that third party
reimbursement will be made available with respect to HCS's products under any
foreign reimbursement system. See "Business of HCS--Government Regulation--
Medicare and Medicaid Reimbursement."

In addition, HCS's business, financial condition and results of operations
could be adversely affected by the continuing efforts of many third party
payors to reduce the costs of health care by decreasing reimbursement rates,
or limiting or prohibiting reimbursement for certain services or devices or
through other means. Furthermore, legislative proposals to reform government
health care insurance programs, including the Medicare and Medicaid programs,
could significantly impact the purchase of health care services and products
and could

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result in lower prices and reduced demand for HCS's products. HCS is unable to
predict whether such proposals will be enacted, whether other health care
legislation or regulation affecting HCS's business, financial condition and
results of operations may be proposed or enacted in the future, or what effect
any such legislation or regulation would have on HCS's business, financial
condition and results of operations.

PRODUCT RECALLS, PRODUCT LIABILITY AND INSURANCE

The tolerance for error in the design, manufacture or use of HCS's systems
may be small or nonexistent. If a system designed or manufactured by HCS is
found to be defective, whether due to design or manufacturing defects, to
improper use of the system or to other reasons, the system may need to be
recalled, possibly at HCS's expense. Furthermore, the adverse effect of a
product recall on HCS might not be limited to the cost of the recall. For
example, a product recall could cause a general investigation of HCS by
applicable regulatory authorities as well as cause other customers to review
and potentially terminate their relationships with HCS. Recalls, especially if
accompanied by unfavorable publicity or termination of customer contracts,
could result in substantial costs, loss of revenues and a diminution of HCS's
reputation, each of which would have a material adverse effect on HCS's
business, results of operations and financial condition.

The manufacture and sale of medical products manufactured by HCS involve the
risk of product liability claims and expose HCS to substantial liability to
patients for damages resulting from the faulty design or manufacture of
products. Because these medical 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. Therefore, the design,
manufacture, sale and service of medical products manufactured by HCS involve
the risk of product liability claims and expose HCS to substantial liability
to patients for damages resulting from the faulty design, manufacture or
servicing of such products. See "Business of HCS--Product Liability."

The Company maintains limited product liability insurance coverage in an
amount it deems sufficient for each of its businesses. Such insurance is
subject to deductibles and self-insured retentions. Product liability
insurance is expensive and in the future may not be available on acceptable
terms, in sufficient amounts or may be unavailable. Although HCS will obtain
(or modify existing) insurance coverage after the Distribution, the amount of
such insurance coverage has not yet been determined and no assurance can be
given as to its adequacy. A successful claim brought against HCS in excess of
its insurance coverage or any material claim for which insurance coverage is
denied or limited and for which indemnification is not available could have a
material adverse effect on HCS's business, results of operations and financial
condition. There can be no assurance that HCS would have sufficient resources
to satisfy any liability resulting from these claims.

On December 5, 1997, HCS purchased General Electric's Radiotherapy Service
Business (the "RS Business"). In connection with that transaction, HCS 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 HCS is
responsible for the first $5,000,000 of expenses or liabilities related to any
such claims. HCS has been notified of three potential claims related to these
RS Business products for which HCS may have an indemnity obligation. See
"Business of HCS--Product Liability."

CUSTOMER CONCENTRATION; CUSTOMER FINANCING

Historically, HCS has sold a significant proportion of its systems in any
particular period to a limited number of customers. Sales to HCS's ten largest
customers in fiscal years 1998, 1997 and 1996 accounted for approximately 24%,
28% and 30% of sales, respectively. The composition of the group comprising
HCS's largest customers has varied from year to year. HCS expects that sales
of its products to relatively few customers will continue to account for a
similar percentage of its net sales in the foreseeable future. Similarly, HCS
has significant strategic relationships with a number of key distributors. The
termination of these strategic

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relationships or the loss of a significant customer or any reduction in orders
from any significant customer, including reductions due to customer departures
from recent buying patterns, market, economic or competitive conditions in the
health care industry could adversely affect HCS's business, financial
condition and results of operations. In addition, the ongoing consolidation of
customers who purchase x-ray tube products from HCS, including the
consolidation of such customers into companies that already manufacture x-ray
tubes, may adversely affect HCS's business. See "Business of HCS--Marketing
and Sales."

HCS is experiencing increased demands for customer financing and leasing
arrangements. As of October 2, 1998, HCS had approximately $12 million of
outstanding receivables that HCS has financed, with approximately 96% from
customers outside the United States. The average amount financed for each
customer was approximately $500,000. In order to meet this demand, HCS has
recently entered into a vendor leasing partnership with a finance company to
provide various financing arrangements to these customers. While this
arrangement does in some cases allow the finance company to seek recourse from
HCS in the event of customer default, HCS has mitigated this risk by
purchasing a comprehensive credit and political risk insurance policy for
customers in certain countries. HCS continues to monitor its increased credit
exposure because of the weakened financial conditions in Asia and the impact
that such conditions may have on the worldwide economy. Although HCS has not
to date experienced significant losses as a result of customers failing to
meet their obligations, such losses, if incurred, could have a material
adverse effect on HCS's business, results of operations and financial
condition.

VARIABILITY OF OPERATING RESULTS

HCS has experienced and expects to continue to experience fluctuations in
its quarterly operating results. The timing and amount of revenues are subject
to a number of factors that make estimation of revenues and operational
results prior to the end of any quarter very uncertain. Many of HCS's products
are products that require significant capital expenditures, and the timing of
sales of these products could affect HCS's quarterly earnings. A delay in a
shipment in any quarter due, for example, to an unanticipated shipment
rescheduling, to cancellations by customers or to unexpected manufacturing
difficulties experienced by HCS, may cause sales in such quarter to fall
significantly below HCS's expectations and may thus adversely affect HCS's
operating results for such quarter. Due to the significant size of certain of
HCS's product sales, HCS's operating results may also be affected by an
unexpected change in a customer's financial solvency or ability to obtain
financing for capital expenditures. Further, HCS's quarterly operating results
may also vary significantly depending on a number of other factors, including
changes in pricing by HCS or its competitors, discount levels, seasonality of
revenue, foreign currency exchange rates, the mix of products sold, the timing
of the announcement, introduction and delivery of new product enhancements by
HCS and its competitors, and general economic conditions. Because certain
operating expenses of HCS are based on anticipated capacity levels and a high
percentage of HCS's expenses are fixed for the short term, a small variation
in the timing of recognition of revenue can cause significant variations in
operating results from quarter to quarter. There can be no assurance that any
of these factors will not have a material adverse effect on HCS's business or
results of operations. In addition, HCS's orders and backlog cannot
necessarily be relied upon as an accurate predictor of future revenues as the
timing of such revenues is dependent upon completion of customer site
preparation and construction, installation scheduling, customer capital
budgeting and financing, receipt of applicable regulatory approvals and other
factors. Accordingly, there can be no assurance that the orders will mature
into revenue. See "Business of HCS--Competition."

RISKS RELATING TO THE BUSINESS OF IB

TECHNOLOGICAL CHANGE AND NEW PRODUCTS

The markets for IB's products are characterized by changing technology,
evolving industry standards and new product introductions and enhancements.
While many of IB's products are based on more mature technologies, IB's future
success will depend in part upon its ability to enhance its existing products
with new

22
<PAGE>

technologies, to develop and introduce new products and technologies and to
successfully expand its aftermarket support services for such new or enhanced
products in order to meet changing customer requirements and serve broader
industry segments. IB has devoted significant resources to the enhancement of
its existing products, the development of new products and technologies and
the expansion of its maintenance and aftermarket support activities. Due to
the risks inherent in transitioning to new products, IB will be required to
accurately forecast demand for new products while managing the transition from
older products. If new products have reliability or quality problems, reduced
orders, higher manufacturing costs, delays in acceptance of and payment for
new products and additional service and warranty expenses may result. There
can be no assurance that IB will successfully develop and manufacture new
products, or that new products introduced by it will be accepted in the
marketplace. If IB does not successfully introduce new products, IB's results
of operations will be materially adversely affected. See "Business of IB--
Competition."

PRODUCT LIABILITY

IB's business exposes it to potential product liability claims that are
inherent in the manufacturing, marketing and sale of its products, and IB may
face substantial liability for damages resulting from the faulty design or
manufacture of its products. The Company maintains limited product liability
insurance coverage in an amount it deems sufficient for each of its
businesses. Such insurance is subject to deductibles and self-insured
retentions. Product liability insurance is expensive and in the future may not
be available on acceptable terms or in sufficient amounts or may be
unavailable. Although IB will obtain insurance coverage after the
Distribution, the amount of such insurance coverage has not yet been
determined and no assurance can be given that it will be adequate. A
successful claim brought against IB in excess of its insurance coverage or any
material claim for which insurance coverage is denied or limited and for which
indemnification is not available could have a material adverse effect on IB's
business, results of operations and financial condition. There can be no
assurance that IB would have sufficient resources to satisfy any liability
resulting from these claims.

UNCERTAINTY OF MARKET ACCEPTANCE OF NEW PRODUCTS

Certain of IB's products represent alternatives to traditional instruments
and methods and as a result may be slow to achieve, or may not achieve, market
acceptance, as customers may seek further validation of the efficiency and
efficacy of IB's technology. This is particularly true where the purchase of
the product requires a significant capital commitment. While many of IB's
products are based on more mature technologies, most of the enhancements to
such products are based on relatively new, emerging technologies. IB believes
that, to a significant extent, its growth prospects depend on its ability to
gain acceptance by a broader group of customers of the efficiency and efficacy
of IB's innovative technologies. There can be no assurance that IB will be
successful in obtaining such broad acceptance.

DEPENDENCE ON CAPITAL SPENDING POLICIES AND GOVERNMENT FUNDING

IB products are used in environmental laboratories; pharmaceutical and
chemical industries; chemical, life science and academic research; government
laboratories; and specific areas of the health care industry. The capital
spending policies of these companies and institutions can have a significant
effect on the demand for IB's products. Such policies are based on a wide
variety of factors, including the resources available to make such purchases,
the spending priorities among various types of research equipment and the
policies regarding capital expenditures during recessionary periods. Any
decrease in capital spending by these companies or institutions could have a
material adverse effect on IB's business and results of operations.

A portion of IB's sales are to universities, government research
laboratories, private foundations and other institutions where funding is
dependent on grants from governmental agencies. If government funding
necessary to purchase IB's products were to become unavailable to researchers
for any extended period of time, or if overall research funding were to
decrease, IB's business and results of operations could be adversely affected.
In addition, a portion of sales of IB's products is made to various
governmental agencies. Any decline in purchases by those governmental
agencies, including, without limitation, declines as the result of budgeting
limitations,

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<PAGE>

could have an adverse effect on IB's business and results of operation See
"Business of IB--Marketing and Sales."

VARIABILITY OF OPERATING RESULTS

Certain of IB's products require significant capital expenditures and other
products have short delivery turnaround. The timing of sales of these products
could affect IB's quarterly earnings. A delay in a shipment in any quarter
due, for example, to an unanticipated shipment rescheduling, to cancellations
by customers or to unexpected manufacturing difficulties experienced by IB,
may cause sales in such quarter to fall significantly below IB's expectations
and may thus adversely affect IB's operating results for such quarter.
Further, IB's quarterly operating results may also vary significantly
depending on a number of other factors, including changes in pricing by IB or
its competitors, discount levels, foreign currency exchange rates, the mix of
products sold, the timing of the announcement, introduction and delivery of
new product enhancements by IB and its competitors, and general economic
conditions. Generally IB recognizes product revenues upon shipment of its
products. Because certain operating expenses of IB are based on anticipated
capacity levels and a high percentage of IB's expenses are fixed for the short
term, a small variation in the timing of recognition of revenue can cause
significant variations in operating results from quarter to quarter. There can
be no assurance that any of these factors will not have a material adverse
effect on IB's business or results of operations.

RISKS RELATING TO THE BUSINESS OF SEB

VOLATILITY IN THE SEMICONDUCTOR EQUIPMENT INDUSTRY

The business of SEB depends on the capital equipment expenditures of
semiconductor manufacturers, which in turn depend on the current and
anticipated market demand for integrated circuits and products utilizing
integrated circuits. The semiconductor industry has been cyclical in nature
and has historically experienced periodic downturns. The semiconductor
industry has been experiencing a slowdown of product demand and extreme
volatility in product pricing. This slowdown and volatility have caused the
semiconductor industry to reduce significantly or delay purchases of
semiconductor manufacturing equipment and construction of new fabrication
facilities. This slowdown and volatility are expected to continue throughout
fiscal year 1999 and will continue to adversely affect SEB's results of
operations. Even during periods of reduced revenues, in order to remain
competitive, SEB will be required to continue to invest in research and
development and to maintain extensive ongoing worldwide customer service and
support capability, which could adversely affect its financial results. See
"Business of SEB--Background--The Industry."

VARIABILITY OF OPERATING RESULTS

SEB has experienced and expects to continue to experience significant
fluctuations in its quarterly operating results. The timing and amount of
revenues are subject to a number of factors that make estimation of revenues
and operating results prior to the end of any quarter very uncertain. During
each quarter, SEB customarily sells a relatively small number of ion
implantation systems that typically sell for prices ranging from approximately
$1.8 million to $4 million. SEB's backlog at the beginning of each quarter
does not necessarily include all systems needed to achieve expected revenue
for that quarter. Consequently, SEB will often be dependent on obtaining
orders for shipment in the same quarter that the order is shipped. Because SEB
builds its systems according to forecast, the absence of significant backlog
for an extended period of time could hinder SEB's ability to plan production
and inventory levels, which could adversely affect operating results. SEB's
revenue and operating results could also be adversely affected for a
particular quarter if anticipated orders from even a few customers are not
received in time to permit shipment during that quarter. Moreover, customers
may reschedule or cancel shipments, with, in the case of cancellations, little
or no penalties, and production difficulties could delay shipments. A delay in
a shipment in any quarter due, for example, to an unanticipated shipment
rescheduling, to cancellations by customers or to unexpected manufacturing
difficulties experienced by SEB, may

24
<PAGE>

cause revenue in such quarter to fall significantly below SEB's expectations
and may have a material adverse effect on SEB's operating results for such
quarter.

The timing of new product announcements and releases by SEB may also
contribute to fluctuations in quarterly operating results, particularly in
cases where new product offerings cause customers to defer ordering products
from SEB's existing product lines. SEB's results of operations also could be
affected by new product announcements and releases by SEB's competitors, the
volume, mix and timing of orders received during a period, availability and
pricing of key components, fluctuations in foreign exchange rates and
conditions in the semiconductor equipment industry. SEB's operating results
also fluctuate based on gross profits realized on system sales. Gross profit
as a percentage of revenue may vary based on a variety of factors, including
the mix and average selling prices of products sold and costs to manufacture
upgrades and to customize systems. Because SEB's operating expenses are based
on anticipated capacity levels, and a high percentage of SEB's expenses are
relatively fixed, a variation in the timing of recognition of revenue and the
level of gross profit from a single transaction can cause material variations
in operating results from quarter to quarter.

TECHNOLOGICAL CHANGE AND DEPENDENCE ON NEW PRODUCTS

Rapid technological changes in semiconductor manufacturing processes subject
the semiconductor equipment industry to increased pressure to maintain
technological parity with deep submicron process technology. SEB believes that
its future success will depend in part upon its ability to develop,
manufacture and successfully introduce new systems and product lines with
improved capabilities and to continue to enhance existing products, in
particular, products that respond to the anticipated trend toward single wafer
processing and 300mm wafer processing. The success of SEB in developing,
introducing and selling new and enhanced systems depends upon a variety of
factors, including new product selection, timely and efficient completion of
product design and development, timely and efficient implementation of
manufacturing and assembly processes, product performance in the field and
effective sales and marketing. There can be no assurance that SEB will be
successful in selecting, developing, manufacturing and marketing new products
or in enhancing its existing products. Due to the risks inherent in
transitioning to new products, SEB will be required to accurately forecast
demand for new products while managing the transition from older products.
SEB's inability to complete the development or meet the technical
specifications of any of its new systems or enhancements or to manufacture and
ship these systems or enhancements in volume in a timely manner would
materially and adversely affect SEB's business, financial condition and
results of operations. If new products have reliability or quality problems,
reduced orders, higher manufacturing costs, delays in acceptance of and
payment for new products, then additional service and warranty expenses may
result. In the past, SEB has experienced some delays as well as reliability
and quality problems in connection with product introductions, resulting in
some of these consequences. There can be no assurance that SEB will
successfully develop and manufacture new products, or that new products
introduced by it will be accepted in the marketplace. If SEB does not
successfully introduce new products, SEB's results of operations will be
materially adversely affected. See "Business of SEB--Competition."

SEB expects to continue to make significant investments in research and
development. SEB must manage product transitions successfully, as introduction
of new products could adversely affect sales of existing products. There can
be no assurance that future technologies, processes or product developments
(in particular, alternative doping methods) will not render SEB's current
product offerings obsolete or that SEB will be able to develop and introduce
new products or enhancements to existing products which satisfy customer needs
in a timely manner or achieve market acceptance. The failure to do so could
adversely affect SEB's business. In particular, the inability of SEB's next
generation VIISta(TM) ion implant system, which relies on single wafer
processing for 300mm wafers, to achieve market acceptance could have an
adverse effect on SEB's financial results. If SEB is not successful in the
marketing and selling of advanced processes or equipment to customers with
whom it has formed long-term relationships, selling of its products to those
customers could be adversely affected. In addition, in connection with the
development of SEB's new products, SEB will invest in high levels of pre-
production inventory, and the failure to complete development and
commercialization of these new products in a timely

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<PAGE>

manner could result in inventory obsolescence, which could have an adverse
effect on its financial results. See "Business of SEB--Research and
Development."

PRODUCT CONCENTRATION

SEB derives virtually all of its revenue from sales of its ion implantation
systems and related products, and such systems are expected to continue to
account for a substantial percentage of SEB's revenues. Continued market
acceptance of its systems is therefore critical to the future success of SEB.
Any decline in demand for, or failure to achieve continued market acceptance
of, such systems or any new version of these systems, if any, as a result of
competition, technological change, failure of SEB to release new versions of
these products on time or otherwise, could have a material adverse effect on
the business, operating results, financial condition and cash flows of SEB.

CUSTOMER CONCENTRATION AND LENGTHY SALES CYCLES

Historically, SEB has sold close to half of its systems in any particular
period to its ten largest customers. Sales to SEB's ten largest customers in
fiscal years 1998, 1997 and 1996 accounted for approximately 47%, 46% and 52%
of revenue, respectively. SEB expects that sales to relatively few customers
will continue to account for a high percentage of its revenue in the
foreseeable future. During fiscal year 1998, revenue from Intel Corporation
accounted for 14% of SEB's revenue. None of SEB's customers has entered into a
long-term agreement requiring it to purchase SEB's equipment and other
services. SEB believes that sales to certain of its customers will decrease in
the near future as those customers complete current purchasing requirements
for new or expanded fabrication facilities. Although the composition of the
group comprising SEB's largest customers has varied from year to year, the
loss of a significant customer or any reduction in orders from any significant
customer, including reductions due to customer departures from recent buying
patterns, market, economic or competitive conditions in the semiconductor
industry or in the industries that manufacture products utilizing integrated
circuits, could adversely affect SEB's business, financial condition and
results of operations. The ongoing consolidation of semiconductor
manufacturers may increase the adverse affect of losing a significant
customer.

Sales of SEB's systems depend, in significant part, upon the decision of a
prospective customer to increase manufacturing capacity in an existing
fabrication facility or to transfer a manufacturing process to a new
fabrication facility, both of which typically involve a significant capital
commitment. In addition, SEB has from time to time experienced delays in
finalizing system sales following the initial system's qualifications. Due to
these and other factors, SEB's systems typically have a lengthy sales cycle
during which SEB may expend substantial funds and management effort. SEB
believes that as a result, once a semiconductor manufacturer has selected a
particular supplier's capital equipment, the manufacturer generally relies
upon that equipment for the specific production line application and
frequently will attempt to consolidate its other capital equipment
requirements with the same supplier. Accordingly, SEB would expect to
experience difficulty in selling to a given customer if that customer had
initially selected or selects a competitor's capital equipment. SEB believes
that to remain competitive, significant financial resources are required in
order to offer a broad range of products, to maintain customer service and
support centers worldwide and to invest in product and process research and
development. See "Business of SEB--Marketing and Sales."

LEGAL PROCEEDINGS

In June 1997, Applied Materials Inc. ("Applied Materials") filed a civil
action against the Company in the U.S. District Court for the Northern
District of California alleging infringement of four patents relating to
sputter coating systems (the "Applied Litigation"). Applied Materials contends
that the Applied Materials patents are infringed by the M2i, MB/2/ and Inova
systems that were made and sold by the Company's Thin Film Systems ("TFS")
business prior to the Company's sale of its TFS business to Novellus Systems,
Inc. ("Novellus") effective as of June 13, 1997. The complaint requests
unspecified money damages and an injunction preventing further alleged
infringement and requests that any damages awarded be increased up to three-
fold for the Company's and Novellus' alleged willful infringement. Novellus
was subsequently added as a defendant in this action and, as part of the sale
of the TFS

26
<PAGE>

business, the Company agreed to indemnify Novellus for certain damages it may
suffer as a result of such litigation and to reimburse Novellus for up to $7.5
million of its litigation expenses (of which $1.4 million had been reimbursed
as of October 2, 1998). The Company's answer denied infringement and asserted
that the Applied Materials patents that are the subject of the claims are
invalid and that one of the asserted patents is unenforceable. The Company
also filed a separate suit seeking damages and injunctive relief against
Applied Materials contending that certain of Applied Materials' business
practices violated antitrust laws. That action has been procedurally related
to the infringement case and is pending before the same judge. Novellus has
asserted three of its patents, obtained as part of its purchase of the TFS
business, against Applied Materials. Discovery has begun, but no date has been
set for completion of discovery. During the fourth quarter of fiscal year
1998, the Company and Applied Materials began informal discussions concerning
the possibility of resolving some or all of the issues raised by the Applied
Litigation and the Company's antitrust suit through settlement or mediation.
Discussions regarding a proposed procedure for non-binding mediation are
continuing but have not yet resulted in a definitive mediation arrangement. On
December 9 and 10, 1998, the Company held a "Markman" hearing for the purpose
of determining how the various claims of the four Applied Materials and three
Novellus patents should be interpreted. The parties are awaiting this
decision. SEB has agreed to indemnify HCS and IB for any costs, liabilities or
expenses relating to the Semiconductor Equipment Business, including the
Applied Litigation. In the event of an outcome unfavorable to SEB, SEB might
be liable for damages for past sales up to the June 1997 closing date of the
sale of the TFS business to Novellus and may have to pay Novellus under the
indemnification obligations described above. In connection with the sale of
the TFS business, Novellus has submitted to arbitration a claim against the
Company arising out of a dispute over the closing date balance sheet, for
which SEB has also agreed to indemnify HCS and IB. See "Business of SEB--Legal
Proceedings" and Note 10 to the Notes to Combined Financial Statements of the
Semiconductor Equipment Business of Varian Associates, Inc.

ADDITIONAL RISKS RELATING TO EACH OF THE BUSINESSES

COMPETITION

The markets served by HCS are characterized by rapidly evolving technology,
intense competition and pricing pressure. There are a number of companies that
currently offer, or are in the process of developing, products that compete
with products offered by HCS. HCS's products and services compete with those
of a substantial number of foreign and domestic companies, some with greater
resources, financial or otherwise, than HCS, and the rapid technological
changes occurring in HCS's markets are expected to lead to the entry of new
competitors. HCS's ability to anticipate technological changes and introduce
enhanced products on a timely basis will be a significant factor in HCS's
ability to expand and remain competitive. Existing competitors' actions and
new entrants may have an adverse impact on HCS's sales and profitability.
These competitors could develop technologies and products that are more
effective than those currently used or marketed by HCS or that could render
HCS's products obsolete or noncompetitive. See "Business of HCS--Competition."

The semiconductor equipment manufacturing market is highly competitive.
Significant competitive factors in the ion implantation equipment market
include customer relationships, pricing, technological performance and timing,
distribution capabilities and financial viability. SEB's management believes
that, to remain competitive, SEB will require significant financial resources
in order to offer a broad range of products, to maintain customer service and
support centers worldwide and to invest in product and process research and
development. The semiconductor equipment industry is becoming increasingly
dominated by large manufacturers who have the resources to support customers
on a worldwide basis, and certain of SEB's competitors have substantially
greater financial resources and more extensive engineering, manufacturing,
marketing and customer service and support. In addition, there are smaller,
emerging semiconductor equipment companies that provide innovative technology
which may have performance advantages over systems offered by SEB. Competitors
are expected to continue to improve the design and performance of their
current products and processes and to introduce new products and processes
with improved price and performance characteristics. If competitors enter into
strategic relationships with leading semiconductor manufacturers covering
products similar to those sold or being developed by SEB, its ability to sell
products to those manufacturers could be adversely affected. There can be no
assurance that

27
<PAGE>

SEB will continue to compete successfully with its existing competitors or
that it will be able to compete successfully with new competitors. See
"Business of SEB--Competition."

IB encounters and expects to continue to encounter intense competition in
the sale of its products. Competition in IB's markets is based upon the
performance capabilities of IB's products, technical support and after-market
service, the manufacturer's reputation as a technological leader and the
selling price. Management believes that performance capabilities are the most
important of these criteria. The markets in which IB competes are highly
competitive and are characterized by the application of advanced technology.
There are numerous companies that specialize in, and a number of larger
companies that devote a significant portion of their resources to, the
development, manufacture and sale of products that compete with those
manufactured or sold by IB. Many of IB's competitors are well-known
manufacturers with a high degree of technical proficiency. In addition,
competition is intensified by the ever-changing nature of the technologies in
the industries in which IB is engaged. IB's competitors can be expected to
continue to improve the design and performance of their products and to
introduce new products with competitive price and performance characteristics.
An increase in competition could result in price reductions and loss of market
share, which could have a material adverse effect on IB's business, financial
condition or results of operations. Although IB's management believes that IB
enjoys certain technological and other advantages over its competitors,
realizing and maintaining such advantages will require continued investment by
IB in engineering, research and development, marketing and customer service
and support. There can be no assurance that IB will have sufficient resources
to continue to make such investments or that IB will be successful in
maintaining such advantages. See "Business of IB--Competition."

INTERNATIONAL SALES AND MANUFACTURING

HCS

The markets in which HCS competes are becoming increasingly globalized.
International sales accounted for approximately 55%, 52% and 53% of HCS's
sales in fiscal years 1998, 1997 and 1996, respectively. As a result, HCS's
customers increasingly require service and support on a worldwide basis. HCS
has manufacturing operations in England, Switzerland, Finland and France as
well as sales and service offices located throughout Europe, Asia and Latin
America. HCS has invested substantial financial and management resources to
develop an international infrastructure to meet the needs of its customers
worldwide. HCS intends to continue to expand its presence in international
markets. There can be no assurance that HCS will able to compete successfully
in the international market or to meet the service and support needs of such
customers. International sales are subject to a number of risks, including the
following: agreements may be difficult to enforce and receivables difficult to
collect through a foreign country's legal system; foreign customers may have
longer payment cycles; foreign countries may impose additional withholding
taxes or otherwise tax HCS's foreign income, impose tariffs or adopt other
restrictions on foreign trade; fluctuations in exchange rates may affect
product demand and adversely affect the profitability in U.S. dollars of
products and services provided by HCS in foreign markets where payment for
HCS's products and services is made in the local currency; U.S. export
licenses may be difficult to obtain; and the protection of intellectual
property in foreign countries may be more difficult to enforce.

The economic conditions in certain Asian countries began to deteriorate in
the third quarter of 1997 and, in certain countries, including Japan, such
conditions continue to worsen. HCS derived approximately 17% of its total
sales in fiscal 1998 and approximately 23% of its total sales in fiscal 1997
from sales to customers in Asia, including Japan. Until the Asian economic
uncertainty is resolved, HCS could suffer material reductions in revenue. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of HCS--Results of Operations."

The markets in which IB competes are becoming increasingly globalized.
International sales accounted for approximately 47%, 47% and 50%,
respectively, of IB's sales in fiscal years 1998, 1997 and 1996. As a result,
IB's customers increasingly require service and support on a worldwide basis.
IB has manufacturing operations

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in Australia, Italy and The Netherlands as well as sales and service offices
located throughout Europe, Asia and Latin America. IB has invested substantial
financial and management resources to develop an international infrastructure
to meet the needs of its customers worldwide. IB intends to continue to expand
its presence in international markets. There can be no assurance that IB will
be able to compete successfully in the international market or to meet the
service and support needs of such customers. International sales are subject
to a number of risks, including the following: agreements may be difficult to
enforce and receivables difficult to collect through a foreign country's legal
system; foreign customers may have longer payment cycles; foreign countries
may impose additional withholding taxes or otherwise tax IB's foreign income,
impose tariffs or adopt other restrictions on foreign trade; fluctuations in
exchange rates may affect product demand and adversely affect the
profitability in U.S. dollars of products and services provided by IB in
foreign markets where payment for IB's products and services is made in the
local currency; U.S. export licenses may be difficult to obtain; and the
protection of intellectual property in foreign countries may be more difficult
to enforce. There can be no assurance that any of these factors will not have
a material adverse impact on IB's business and results of operations.

A portion of IB's revenue is derived from sales in Asia. Asia is
experiencing a severe economic crisis, which has been characterized by sharply
reduced economic activity and liquidity, highly volatile foreign-currency
exchange and interest rates and unstable stock markets. Until the Asian
economic uncertainty is resolved, IB's sales to Asia could be adversely
affected by the region's unstable economic conditions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
the Instruments Business--Results of Operations."

SEB

International sales accounted for 70%, 52% and 64%, respectively, of SEB's
revenue in fiscal years 1998, 1997 and 1996. Historically, sales to Asia have
accounted for a substantial portion of international sales. Sales to Asia
accounted for 45%, 39% and 50%, respectively, of SEB's revenue in fiscal years
1998, 1997 and 1996. Recent banking and currency problems in certain Asian
countries have had, and will continue to have, a significant adverse impact on
SEB's revenues and operations. Specifically, the decline in value of the
Korean won, together with Korean customers, difficulties obtaining credit,
have resulted, and may continue to result, in a decline in the purchasing
power of SEB's Korean customers. This in turn has resulted, and may continue
to result, in the cancellation or delay of orders for SEB's products from
Korean customers, further adversely affecting SEB's results of operations. In
addition, if Japan's economy weakens further, investments by Japanese
customers may be negatively affected, and it is possible that economic
conditions in certain Pacific Rim countries, such as Taiwan, may deteriorate
and economic recovery in other Pacific Rim countries could be delayed. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Semiconductor Equipment Business--Results of Operations."

A portion of SEB's products are manufactured or assembled in Korea and
Japan. These foreign operations are subject to the usual risks inherent in
situating operations abroad, including risks with respect to currency exchange
rates, economic and political destabilization, restrictive actions by foreign
governments, nationalizations, the laws and policies of the United States
affecting trade, foreign investment and loans and foreign tax laws.

The impact of these and other factors on SEB's revenues and operating
results in any future period is difficult to forecast. There can be no
assurance that these and other factors relating to international sales and
operations by SEB will not have a material adverse effect on future business
and financial results, or affect future business and financial results in ways
not readily foreseeable.

Euro Conversion

On January 1, 1999, the Euro was adopted as the national currency of certain
members of the European Monetary Union. The existing national currencies of
the participating countries will continue to be acceptable

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until January 1, 2002, after which the Euro will be the sole legal tender for
the participating countries. Because the Company sells its products in Europe,
the Euro conversion raises several economic and operational issues, such as
the modification of information systems to accommodate Euro-denominated
transactions, the recalculation of currency risk, the competitive impact of
cross-border price transparency, the continuity of material contracts and
potential tax and accounting consequences. The Company has chartered a multi-
discipline, multi-national committee that has been evaluating each of these
economic and operational issues. The Company has made changes in its
information systems to be able to conduct Euro-denominated transactions
(although full information system capability for financial reporting in Euro
will not be accomplished until October 2001). Neither IB, HCS nor SEB expect
any change in currency risk due to their existing hedging practices. HCS and
SEB do not expect any significant competitive impact of price transparency
with respect to their systems, due to the fact that most of those systems are
sold in customized configurations, and IB is still evaluating the potential
impact of price transparency for its products. Based on each company's
evaluation to date, none of IB, SEB or HCS expects the Euro conversion to have
a material adverse effect on their respective businesses, results of
operations or financial conditions.

FOREIGN CURRENCY RISKS

The Company has entered into forward exchange contracts to mitigate the
effects of operational (sales orders and purchase commitments) and balance
sheet exposures to fluctuations in foreign currency exchange rates. The
Company's forward exchange contracts generally range from one to three months
in original maturity, and no forward exchange contract has an original
maturity greater than one year. At October 2, 1998, the Company had forward
exchange contracts to sell foreign currencies totaling $123.2 million and to
buy foreign currencies totaling $40.7 million, of which forward exchange
contracts to sell foreign currencies totaling $31.4 million and to buy foreign
currencies totaling $23.5 million related to IB; forward exchange contracts to
sell foreign currencies totaling $78.0 million and to buy foreign currencies
totaling $17.0 million related to HCS, and forward exchange contracts to sell
foreign currencies totaling $13.8 million and to buy foreign currencies
totalling $0.2 million related to SEB. See "IB Market Risk" and "SEB Market
Risk."

UNCERTAIN PROTECTION OF PATENT AND OTHER PROPRIETARY RIGHTS

IB, SEB and HCS place considerable importance on obtaining and maintaining
patent, copyright and trade secret protection for significant new
technologies, products and processes because of the length of time and expense
associated with bringing new products through the development process and to
the marketplace.

IB, SEB and HCS intend to continue to file applications as appropriate for
patents covering new products and manufacturing processes. No assurance can be
given that patents now owned or that will issue from any pending or future
patent applications owned by, or licensed to, IB, SEB or HCS, or that the
claims allowed under any issued patents, will be sufficiently broad to protect
its technology position against competitors. In addition, no assurance can be
given that any issued patents owned by, or licensed to, IB, SEB or HCS will
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will provide competitive advantages to it. IB, SEB or HCS could
incur substantial costs and diversion of management resources in defending
itself in suits brought against it or in suits in which it may assert its
patent rights against others. If the outcome of any such litigation is
unfavorable to IB, SEB or HCS, its business and results of operations could be
materially adversely affected. In addition, the laws of some foreign countries
do not protect proprietary rights to the same extent as do the laws of the
United States.

There may also be pending or issued patents of which IB, SEB or HCS is not
aware held by parties not affiliated with it that relate to its products or
technologies. In the event that a claim relating to proprietary technology or
information is asserted against IB, SEB or HCS, that company may need to
acquire licenses to, or contest the validity of, a competitor's proprietary
technology. There can be no assurance that any license required under any such
competitor's proprietary technology would be made available on acceptable
terms or that IB, SEB or HCS would prevail in any such contest. If the outcome
of any such contest is unfavorable to IB, SEB or HCS, its business and results
of operations could be materially adversely affected. From time to time, IB,
SEB

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<PAGE>

and HCS have received notices from, and have issued notices to, third parties
alleging infringement of patent or other intellectual property rights relating
to their products. Such claims are often, but not always, settled by mutual
agreement on a satisfactory basis without litigation. In June of 1997,
Applied Materials filed suit against the Company alleging that several
products from its former TFS business infringed upon four of Applied
Materials' patents. See "Business of SEB--Legal Proceedings." There can be no
assurance that SEB or its licensors or suppliers will not be subject to
additional claims of patent infringement or that any such claims will not
require that SEB pay substantial damages or delete certain features from its
products or both.

IB, SEB and HCS rely on a combination of copyright, trade secret and other
laws, and contractual restrictions on disclosure, copying and transferring
title, including confidentiality agreements with their vendors, strategic
partners, co-developers, employees, consultants and other third parties, to
protect their proprietary rights. There can be no assurance that such
protections will prove adequate and that contractual agreements will not be
breached, that IB, SEB and HCS will have adequate remedies for any such
breaches, or that their trade secrets will not otherwise become known to or
independently developed by others. IB, SEB and HCS have trademarks, both
registered and unregistered, that are maintained and enforced to provide
customer recognition for their products in the marketplace. There can be no
assurance that their trademarks will not be used by unauthorized third
parties. IB, SEB and HCS also have agreements with third parties that provide
for licensing of patented or proprietary technology. These agreements include
royalty-bearing licenses and technology cross- licenses. The loss by SEB of
its license agreements with Applied Materials and TEL could have a material
adverse effect on SEB's business. See "Business of HCS--Patent and Other
Proprietary Rights," "Business of IB--Patent and Other Proprietary Rights" and
"Business of SEB--Patent and Other Proprietary Rights."

ENVIRONMENTAL LIABILITIES

The Company's operations are, and after the Distribution, IB, SEB and HCS
will be, 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 eight sites where the Company 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, foreign, federal, state and/or local
agencies at certain current or former Company facilities (including facilities
disposed of in connection with the Company's sale of its Electron Devices
business during fiscal year 1995, and the sale of its TFS business during
fiscal year 1997). Expenditures by the Company for environmental investigation
and remediation amounted to $5 million in fiscal year 1998, compared with $2
million in fiscal year 1997 and $5 million in fiscal year 1996.

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 2, 1998, the Company nonetheless estimated that the
future exposure for environmental investigation and remediation costs for
these sites and facilities ranged in the aggregate from $22 million to
$49 million. The time frame over which these costs are expected to be incurred
varies with each site or facility, ranging up to approximately 30 years as of
October 2, 1998. 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 the Company accrued $22 million in
estimated environmental costs as of October 2, 1998. The amount accrued has
not been discounted to present value.

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<PAGE>

As to other sites and facilities, the Company has gained sufficient
knowledge to be able to better estimate the scope and costs of future
environmental activities. As of October 2, 1998, the Company estimated that
the future exposure for environmental investigation and remediation costs for
these sites and facilities ranged in the aggregate from $40 million to $74
million. The time frame over which the Company expects to incur these costs
varies with each site and facility, ranging up to approximately 30 years as of
October 2, 1998. 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 $51 million at
October 2, 1998. The Company accordingly accrued $22 million, which represents
its best estimate of the future costs discounted at 4%, net of inflation. This
reserve is in addition to the $22 million described in the preceding
paragraph.

The Distribution Agreement provides that each of HCS, IB and SEB will
indemnify the others for one-third of these environmental investigation and
remediation costs, as adjusted for any insurance proceeds and tax benefits
expected to be realized upon payment of these costs. For a discussion of each
of IB's, SEB's and HCS's environmental liabilities, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
the Instruments Business--Environmental Matters," "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Semiconductor
Equipment Business--Environmental Matters" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of HCS--
Environmental Matters."

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 where the Company is
undertaking such investigation and remediation activities. The Company
believes that most of these cost ranges will narrow as investigation and
remediation activities progress.

The Company'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 the
Company 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 HCS, IB and SEB cannot now predict.

RELIANCE ON SUPPLIERS

Certain of the components and subassemblies included in HCS's, IB's and
SEB's products are obtained from a limited group of suppliers, or in some
cases a single-source supplier, including: in the case of HCS, the source
wires for high dose afterloaders, klystrons for linear accelerators, solid
state imaging panels and specialized integrated circuits for imaging
subassemblies; in the case of IB, packaging materials, superconducting
magnets, integrated circuits, microprocessors, microcomputers and certain
detector and data analysis modules; and, in the case of SEB, magnets and high-
voltage power supplies/accelerators. The loss of any of these suppliers,
including any single-source supplier, would require obtaining one or more
replacement suppliers as well as potentially requiring a significant level of
product development to incorporate new parts into HCS's, IB's or SEB's
products. HCS, IB and SEB each believe that alternative sources for such
components may generally be obtained when necessary, although the need to
change suppliers or to alternate between suppliers might cause material delays
in delivery or significantly increase its costs. Although HCS, IB and SEB each
have obtained limited insurance to protect against loss due to business
interruption from these and other sources, there can be no assurance that such
coverage will be adequate or that such coverage will continue to remain
available on acceptable terms, if at all. Although HCS, IB and SEB seek to
reduce their dependence on these limited source suppliers, disruptions or loss
of certain of these sources, including the ones referenced above, could have a
material adverse effect on HCS's, IB's or SEB's business and results of
operations and could result in damage to customer relationships. See "Business
of HCS--Manufacturing and Supplies," "Business of IB--Raw Materials" and
"Business of SEB--Manufacturing."

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<PAGE>

DEPENDENCE ON KEY PERSONNEL

HCS's, IB's and SEB's future success depends to a significant extent on the
continued service of certain of their key managerial, technical and
engineering personnel, and their continuing ability to attract, train and
retain highly qualified engineering, technical and managerial personnel.
Competition for such personnel is intense, particularly in the labor markets
around the HCS and IB facilities in Palo Alto, California and the SEB
facilities in the Boston, Massachusetts area. The available pool of qualified
candidates is limited and there can be no assurance that HCS, IB or SEB can
retain its key engineering, technical and managerial personnel or that it can
attract, train, assimilate or retain other highly qualified engineering,
technical and managerial personnel in the future. The loss of any of HCS's,
IB's or SEB's key personnel or the inability of HCS, IB or SEB to hire, train
or retain qualified personnel could have a material adverse effect on HCS's,
IB's and SEB's business, results of operations and financial condition.

RISK OF BUSINESS INTERRUPTION

IB and HCS each conduct a portion of their activities at facilities located
in seismically active areas that have experienced major earthquakes in the
past. The Company currently maintains limited earthquake insurance on these
facilities. After the Distribution, it is likely that neither IB nor HCS will
carry earthquake insurance on its facilities due to its prohibitive cost and
limited available coverage. In the event of a major earthquake or other
disaster affecting IB's or HCS's facilities, the operations and operating
results of IB or HCS, as the case may be, could be adversely affected.

POTENTIAL IMPACT OF THE YEAR 2000 ISSUE

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 IB, SEB and HCS each rely heavily on computer programs and non-IT
systems, and on third parties which themselves rely on computer programs and
non-IT systems, the Year 2000 problem if not addressed could adversely affect
IB's, SEB's and HCS's business, results of operations or financial condition,
respectively.

Failure to accurately assess and correct IB's, SEB's or HCS's Year 2000
problems and/or those of its key suppliers would likely result in interruption
of certain of IB's, SEB's or HCS's normal business operations, which could
have a material adverse effect on IB's, SEB's or HCS's business, results of
operations or financial condition. If IB, SEB or HCS do not adequately
identify and correct Year 2000 problems in their information systems they
could experience interruptions in their 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 IB, SEB or HCS do not
adequately identify and correct Year 2000 problems in their non-IT systems
they could experience interruptions in their manufacturing and related
operations, such that there would be delays in product shipments and a
consequential impact on revenues. If IB, SEB or HCS do not adequately identify
and correct Year 2000 problems in their previously-sold products they could
experience warranty or product liability claims by users of products which do
not function correctly. If IB, SEB or HCS do not adequately identify and
correct Year 2000 problems of the significant third parties with which they do
business they could experience interruptions in the supply of key components
or services from those parties, such that there would be delays in product
shipments or service and a consequential impact on revenues. None of IB, SEB
or HCS expect to be 100% Year 2000 compliant by the end of 1999 and 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;
possible liability for personal injury if a safety hazard relating to

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<PAGE>

Year 2000 problems 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 access and correct their own
Year 2000 problems, including the products they supply to IB, SEB or HCS; 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 IB's,
SEB's and HCS's previously-sold products and the extent of any legal
obligation of IB, SEB and HCS to correct Year 2000 problems in those products,
IB, SEB and HCS cannot yet assess each of their risks with respect to those
products. Because their assessments are not yet complete, neither IB, SEB nor
HCS can 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 each of their results of operations. For a discussion regarding each
of IB's, SEB's and HCS's state of readiness, costs associated with becoming
Year 2000 compliant and contingency plans relating to Year 2000, see
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations of the Instruments Business--Year 2000," "Management's Discussion
and Analysis of Financial Condition and Results of Operations of the
Semiconductor Equipment Business--Year 2000" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations of HCS--Year 2000."

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THE MEETING

This Proxy Statement is being furnished to the stockholders of the Company
in connection with the solicitation of proxies by the Board of Directors of
the Company from holders of record of the Company's Common Stock as of the
close of business on the Meeting Record Date, for use at the Meeting to be
held on Thursday, February 18, 1999, at 1:30 p.m., local time, at the SRI
International Auditorium, 333 Ravenswood Avenue, Menlo Park, California and at
any adjournment or postponement thereof. This Proxy Statement is first being
mailed to the Company's stockholders on or about January 15, 1999. References
in this Proxy Statement to the Company mean Varian Associates, Inc. prior to
the Distribution described below. The principal executive offices of the
Company are located at 3050 Hansen Way, Palo Alto, California 94304-1000.
Following the Distribution, the principal executive offices of IB will be
located at 3120 Hansen Way, Palo Alto, California 94304-1030, the principal
executive offices of SEB will be located at 35 Dory Road, Gloucester,
Massachusetts 01930 and the principal executive offices of HCS will be located
at 3100 Hansen Way, Palo Alto, California 94304-1030.

MATTERS FOR CONSIDERATION AT THE MEETING

At the Meeting, the stockholders of the Company will be asked to consider
and vote upon the ten related Distribution Proposals.

Although stockholder approval of the Distribution may not be required under
Delaware law because the Distribution is a dividend for purposes of Section
170(a) of the DGCL, the Board of Directors has made stockholder approval of
the Distribution (along with stockholder approval of each of the other
Distribution Proposals) a condition to the Distribution because of the
importance of the Distribution to the Company and its stockholders. If
Proposal One is not approved by stockholders, the Board of Directors will
reevaluate its intention to proceed with the Distribution. However, the Board
has no present intention to proceed with the Distribution as currently
proposed absent such stockholder approval. Approval of Proposals Two through
Four is being sought because the provisions of applicable state law require
such approval. Approval of Proposals Five through Eight, while not otherwise
required under applicable state law, is being sought to establish IB's and
SEB's respective abilities, as applicable, to deduct, for federal income tax
purposes, compensation paid pursuant to the exercise of stock options and in
respect of other awards. Approval of Proposals Nine and Ten, while otherwise
not required under applicable state law, is being sought to preserve HCS's
ability to deduct, for federal income tax purposes, compensation paid pursuant
to the exercise of stock options and in respect of other awards. Under Section
162(m) of the Code, stockholder approval of performance-based compensation
plans (including material amendments thereto) is necessary to qualify for the
performance-based compensation exception to the limitation on a company's
ability to deduct compensation paid to certain specified individuals in excess
of $1 million.

It is a condition to the Distribution that the Company receive the Tax
Ruling from the IRS. The Board will not waive the requirement of receipt of a
favorable Tax Ruling from the IRS unless the Company receives an opinion of
counsel that no gain or loss will be recognized by the holders of the
Company's Common Stock as a result of the Distribution and no gain or loss
will be recognized by the Company upon the Distribution. For a description of
the consequences to the Company, IB, SEB and the holders of the Company's
Common Stock if

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<PAGE>

the Distribution were not to qualify as tax-free, see "Risk Factors--Risks
Relating to the Distribution--Federal Income Tax Considerations."

THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
EACH OF THE DISTRIBUTION PROPOSALS.

For a description of the reasons for the Distribution, see "The Distribution
Proposals--Proposal One: The Distribution--Background and Reasons for the
Distribution."

In addition, the stockholders of the Company will also be asked to consider
and to vote upon the election of five directors. If the Distribution occurs,
it is expected that nine of the Company's directors will resign, the Board
will fix the number of directors at seven and one new director will be
appointed by the six remaining directors. The effectiveness of the election of
Directors is not conditioned on the approval of the Distribution Proposals.

THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
THE NOMINEES FOR DIRECTOR OF THE COMPANY.

VOTING RIGHTS AND PROXY INFORMATION

Only holders of record of shares of the Company's Common Stock as of the
close of business on the Meeting Record Date will be entitled to notice of and
to vote at the Meeting or any adjournment or postponement thereof. Such
holders of shares of the Company's Common Stock are entitled to one vote per
share on any matter that may properly come before the Meeting except that
cumulative voting will apply with respect to the election of directors. Under
the cumulative voting method of election, the stockholder computes the number
of votes available to him or her by multiplying the number of shares he or she
owned on the Meeting Record Date by the number of directors to be elected, and
the stockholder may cast the votes all for a single nominee or may distribute
them in any manner among the nominees. Discretionary authority to cumulate
votes in the manner determined by the proxy holders is hereby solicited.

The presence, either in person or by properly executed proxy, of the holders
of a majority of the outstanding shares of the Company's Common Stock is
necessary to constitute a quorum at the Meeting and to permit action to be
taken by the stockholders at the Meeting. The affirmative vote of the holders
of a majority of the outstanding shares of the Company's Common Stock is
required to approve each of Proposals One, Two, Three and Four. The
affirmative vote of the holders of a majority of the outstanding shares of the
Company's Common Stock that are present in person or by proxy at the Meeting
is required to approve each of Proposals Five, Six, Seven, Eight, Nine and
Ten. The affirmative vote of a plurality of shares of the Company's Common
Stock that are present in person or by proxy at the Meeting is required to
elect the directors nominated pursuant to Proposal Eleven. "Plurality" means
that the individuals who receive the largest number of votes cast are elected
as directors up to the maximum number of directors to be chosen at the
Meeting.

Abstentions and broker non-votes are counted as shares present for
determination of a quorum. For purposes of determining whether the
Distribution Proposals are approved by the stockholders, (i) abstentions will
have the same effect as votes against Proposals Five, Six, Seven, Eight, Nine
and Ten, but broker non-votes will have no effect on the outcome of the voting
on any such proposal and (ii) abstentions and broker non-votes will have the
same effect as votes against Proposals One, Two, Three and Four. Any shares
not voted (whether by abstention, broker non-vote or otherwise) will have no
impact in the election of directors, except to the extent that the failure to
vote for an individual results in another individual receiving a larger
proportion of votes. As of the Meeting Record Date, there were 29,909,061
shares of the Company's Common Stock outstanding and entitled to vote at the
Meeting.

All shares of the Company's Common Stock that are represented at the Meeting
by properly executed proxies received prior to or at the Meeting and not
revoked will be voted at the Meeting in accordance with the instructions
indicated in such proxies. If no instructions are indicated for a particular
proposal on a proxy, such proxy will be voted in accordance with the Board of
Directors' recommendations as set forth herein with respect to such proposal.

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<PAGE>

In the event that a quorum is not present at the time the Meeting is
convened, or if for any other reason the Company believes that additional time
should be allowed for the solicitation of proxies, the Company may adjourn the
Meeting with or without a vote of the stockholders with respect to such
adjournment. If the Company proposes to adjourn the Meeting by a vote of the
stockholders, the persons named in the enclosed form of proxy will vote all
shares of the Company's Common Stock for which they have voting authority in
favor of such adjournment.

Any person executing a proxy may revoke it at any time prior to its exercise
by (a) filing with Joseph B. Phair, the Company's Secretary (at the Company's
address set forth above), prior to the Meeting a written notice of revocation,
(b) executing and duly delivering prior to the Meeting a subsequent proxy
bearing a later date or (c) attending the Meeting and voting in person.

The cost of soliciting proxies will be borne by the Company. Copies of
solicitation material will be furnished to brokerage houses, fiduciaries and
custodians to forward to beneficial owners of the Company's Common Stock held
in their names. The Company will reimburse such persons for their reasonable
out-of-pocket expenses in forwarding solicitation materials. In addition to
solicitations by mail, some of the Company's directors, officers and other
employees, without extra remuneration, might supplement this solicitation by
letter, telephone, telecopy or personal interview. The Company has retained
Corporate Investor Communications, Inc., 111 Commerce Road, Carlstadt, New
Jersey 07072-2586, to assist with solicitation of proxies from brokers, bank
nominees and other holders, for a fixed retainer fee of no more than $14,500
plus reasonable out-of-pocket expenses.

PROPOSED AMENDMENTS TO CERTIFICATE OF INCORPORATION

If Proposals Two, Three and/or Four are approved and the Distribution is
consummated, the Company will file with the Secretary of State of the State of
Delaware either an amendment to its Certificate of Incorporation or an Amended
and Restated Certificate of Incorporation setting forth those amendments
approved by stockholders at the Meeting.

NO APPRAISAL RIGHTS

As the Distribution is not within the class of transactions (mergers and
consolidations) to which Section 262 of the DGCL applies, stockholders of the
Company will not be entitled to appraisal rights under Delaware law in
connection with the Distribution Proposals.

THE DISTRIBUTION PROPOSALS

PROPOSAL ONE: THE DISTRIBUTION

GENERAL

The Board of Directors of the Company has approved (subject to the
satisfaction of the conditions to the Distribution discussed under "--
Conditions; Termination" and the actual declaration of the special dividend in
respect of the Distribution) a plan to distribute the outstanding shares of IB
Common Stock and the outstanding shares of SEB Common Stock to all holders of
the outstanding shares of the Company's Common Stock. In the Distribution,
each stockholder of record of the Company as of the Distribution Record Date
will receive as special dividends one share of IB Common Stock and one share
of SEB Common Stock for each share of the Company's Common Stock held on the
Distribution Record Date and would retain the shares of the Company's Common
Stock held by such holder immediately prior to the Distribution.

BACKGROUND AND REASONS FOR THE DISTRIBUTION

The Company is currently comprised of three businesses: the Instruments
Business, the Health Care Systems Business and the Semiconductor Equipment
Business. For several years, the Company's senior management has

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been considering ways to more effectively manage and operate these three
diverse businesses. The Company considered a number of alternatives in
addition to the Distribution, including: (i) certain strategies as an
independent company, (ii) certain strategies to sell control of the Company
including sale of the three major business segments, (iii) certain strategies
to minimize exposure to SEB and (iv) certain other strategies such as the sale
of a minority stake in each business to the public. The Board determined that
the Distribution represented the preferred alternative for the Company to
achieve its financial and strategic objectives. Beginning in early 1998,
senior management and the Company's independent financial advisor, Warburg
Dillon Read LLC, considered various transactions that would separate the three
businesses into two or more companies. The Company's senior management and its
advisors discussed the plan for the Distribution with the Company's Board of
Directors at its meetings on July 20, 1998 and August 21, 1998 and the
Distribution was approved in principle by the Board of Directors on August 21,
1998. The proposal to effect the Distribution, as ultimately developed by
senior management of the Company with advice from its advisors, was presented
to the Board of Directors for its consideration at a meeting on November 20,
1998 and was unanimously approved by the Board.

The Board of Directors approved the Distribution for the following principal
reasons:

MANAGEMENT FOCUS. The Company's three businesses have different dynamics
and business cycles, serve different marketplaces and customer bases, are
subject to different competitive forces and must be managed with different
long-term and short-term strategies and goals. The Company believes that
separating its businesses into independent public companies, each with its
own management team and board of directors, is necessary to address current
and future management issues and considerations that result from operating
these diverse businesses within a single company. The separation will
enable the management of each business to manage that business, and to
adopt and implement strategies for that business, solely with regard to the
needs and objectives of that business. In addition, as a result of the
separation, the management of each business will be able to devote its full
attention to managing that business.

CAPITAL STRUCTURE. The Company believes that the Distribution will allow
each of the companies to organize its capital structure and allocate its
resources to support the very different needs and goals of the particular
business. The stock buy-back program can be discontinued, or dividends
eliminated, freeing cash for acquisition and growth opportunities for IB
and HCS and permitting SEB to conserve cash for use in the cyclical
downturns in its industry. Capital borrowings can be tailored to the
specific needs of the various business units. Each business will be able to
allocate its resources without considering the needs of the other
businesses.

ATTRACTING AND RETAINING KEY EMPLOYEES. The Company's management believes
that the ability to attract and retain key personnel is fundamental to its
ability to further the technology required to maintain a leadership
position in its business. In particular, under the existing corporate
structure, the Company has been unable to offer equity-based compensation
linked specifically to the performance of each separate business. The
Distribution would enable each company to establish focused equity-based
compensation programs that should enable each of them to better attract and
retain key personnel.

ACQUISITION ACTIVITIES. The Company believes that growth through
acquisition is an important ingredient of the future success of IB and HCS.
Such acquisitions and growth would be financed in part through the issuance
of capital stock. It is expected that the Distribution will increase the
availability and decrease the cost of raising equity capital. The Company's
management believes that, as a result of the Distribution, each company
will have a more attractive currency, its stock, through which to make
acquisitions.

INVESTOR UNDERSTANDING. Debt and equity investors and securities analysts
should be able to better evaluate the financial performance of each company
and their respective strategies, thereby enhancing the likelihood that each
will achieve appropriate market recognition. The stock of each of the three
companies will also appeal to investors with differing investment
objectives and risk tolerance, and will allow potential investors to focus
their investments more directly to the areas of their primary interest.

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<PAGE>

COST SAVINGS. Each company should be able to rationalize better its
organizational structure after the Distribution. Accordingly, the
administrative and organizational costs of each company, taken together,
should be reduced from the aggregate levels experienced by the Company
prior to the Distribution.

THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
PROPOSAL ONE.

OPINION OF FINANCIAL ADVISOR

In reaching a decision to recommend the Distribution, the Board of Directors
considered the advice of Warburg Dillon Read LLC ("WDR"). The Company retained
WDR to act as the Company's financial advisor in connection with the
Distribution and related matters based upon WDR's experience and expertise.
WDR rendered to the Board of Directors of the Company its oral opinion on
November 20, 1998, which oral opinion was subsequently confirmed in writing as
of the date of this Proxy Statement, that, as of the date of its opinion and
subject to the considerations set forth in such opinion and recognizing that
the proposed Distribution is pro rata to the holders of shares of the
Company's Common Stock, the proposed Distribution is fair from a financial
point of view to the holders of shares of the Company's Common Stock.

The full text of WDR's written opinion dated January 14, 1999, which sets
forth the assumptions made, matters considered and limitations on the review
undertaken, is attached as Annex B to this Proxy Statement and is incorporated
herein by reference. Stockholders are urged to, and should, read the WDR
opinion carefully and in its entirety. The WDR opinion is directed to the
Board of Directors of the Company and concerns the fairness of the proposed
Distribution from a financial point of view to the holders of shares of the
Company's Common Stock, and it does not address any other aspects of the
Distribution. WDR's opinion does not constitute a recommendation to any
current or prospective stockholder of either the Company, HCS, IB or SEB as to
any action or investment decision such party or person may take. The summary
of the WDR opinion set forth in this Proxy Statement covers all material
analyses performed by WDR, and is qualified in its entirety by reference to
the full text of such opinion. It is a condition to the consummation of the
Distribution that WDR delivers an opinion to the Board, to be dated as of the
date of the Board's declaration of the special dividend, in substantially the
same form as the opinion set forth in Annex B. See "--Conditions;
Termination."

In arriving at its opinion, WDR (i) conducted discussions with members of
the senior management of the Company and with the senior management of HCS, IB
and SEB with regard to the business and prospects of each company; (ii)
analyzed certain historical business and financial information related to the
Company, HCS, IB and SEB prepared by management of the Company, HCS, IB and
SEB, respectively; (iii) reviewed certain financial projections for the
Company, HCS, IB and SEB prepared by management of the Company, HCS, IB and
SEB, respectively; (iv) reviewed public information relating to the Company,
including the Company's Annual Report on Form 10-K for the five fiscal years
ended October 2, 1998 and Quarterly Reports on Form 10-Q for the quarters
ended January 2, April 3, and July 3, 1998; (v) reviewed public information
with respect to certain other companies engaged in businesses which WDR
believed to be generally comparable to certain of the businesses conducted by
the Company, HCS, IB and SEB; (vi) reviewed this Proxy Statement and (vii)
conducted such other studies, analyses and investigations and reviewed such
other economic and market data as WDR deemed necessary or appropriate.

In connection with the delivery of its opinion, WDR considered and discussed
with the Board the financial effects of the Distribution, including (i)
providing the ability to enhance the performance and value of the Company's
businesses as independent companies by issuing equity on more favorable terms
and pursuing independent strategies with a simplified management structure and
more focused management incentives, (ii) providing the ability to position
HCS, IB and SEB as single industry companies to investors, research analysts
and potential acquisition or joint venture candidates, (iii) creating enhanced
acquisition opportunities for HCS, IB and SEB using stock as consideration,
(iv) enhancing the focus of the HCS, IB and SEB management teams and their
ability to independently allocate resources, (v) facilitating a more efficient
capital structure and tailored dividend policy for HCS, IB and SEB and (vi)
the tax free nature of this transaction. WDR also discussed with the Board
WDR's view of potential detriments resulting from the Distribution, including
potential redistribution

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<PAGE>

of HCS Common Stock, IB Common Stock and SEB Common Stock which may, for a
period of time following the Distribution, depress the market prices of such
Common Stock.

In addition, WDR considered and discussed with the Board the possible post-
Distribution market values of HCS Common Stock, IB Common Stock and SEB Common
Stock based on a range of price/earnings multiples of 1999 earnings estimates
for HCS and IB and a range of enterprise value/revenue multiples of 1998
revenues for SEB. The price/earnings multiples and enterprise value/revenue
multiples used were compared to the price/earnings multiples and enterprise
value/revenue multiples for certain publicly-traded companies which WDR deemed
generally comparable to HCS, IB and SEB, respectively. WDR based its analysis
of these comparable companies on publicly available information and various
assumptions and estimates as published by securities analysts and noted that
no single company or group of companies is directly comparable to the Company,
HCS, IB or SEB. The publicly traded companies which WDR deemed generally
comparable to HCS included Acuson Corporation, ADAC Laboratories, C.R. Bard,
Inc., OEC Medical Systems, Inc., and Spacelabs Medical, Inc. Among other
things, this analysis indicated that the current stock price as a multiple of
estimated calender 1999 earnings for companies comparable to HCS ranged from
12.6x to 20.3x, with a median of 16.6x and average of 16.6x. The publicly
traded companies which WDR deemed generally comparable to IB included Beckman
Coulter Inc., Dionex Corporation, Thermo Instrument Systems Inc., and Waters
Corporation. Among other things, this analysis indicated that the current
stock price as a multiple of estimated calender 1999 earnings for companies
comparable to IB ranged from 13.2x to 24.3x, with a median of 16.9x and
average of 17.8x. The publicly traded companies which WDR deemed generally
comparable to SEB included Applied Materials, Inc., Integrated Process
Equipment Corporation, KLA-Tencor Corporation, Lam Research Corporation,
Novellus Systems, Inc., Silicon Valley Group, Inc., and SpeedFam
International, Inc. Among other things, this analysis indicated that the
current enterprise value as a multiple of trailing twelve month revenues for
companies comparable to SEB ranged from 0.4x to 2.8x, with a median of 1.5x
and average of 1.6x.

In rendering its opinion, WDR, with the Board's consent, assumed and relied
upon, without independent verification, the accuracy and completeness of the
information reviewed by WDR for the purposes of its opinion. With respect to
the financial budgets and forecasts, WDR, at the Board's direction, assumed
that they were reasonably prepared on bases reflecting the best currently
available estimates and judgments of the future financial performance of the
Company, HCS, IB and SEB. WDR did not make any independent valuation or
appraisal of the assets or liabilities, contingent or otherwise, of the
Company, HCS, IB or SEB, nor has WDR been furnished with any such appraisals.

WDR noted that the Company, as a condition to the Distribution, expects to
receive a favorable ruling from the IRS or opinion from counsel to the effect,
among other things, that receipt of shares of IB Common Stock and SEB Common
Stock by stockholders of the Company will be tax-free to stockholders of the
Company under federal income tax laws and that the Company will not recognize
income, gain or loss as a result of the Distribution. In that regard, WDR
assumed that the Company will receive such ruling or opinion.

WDR's opinion was rendered on the basis of securities markets, economic and
general business and financial conditions prevailing as of the date of its
opinion and the conditions and prospects, financial and otherwise, of the
Company, HCS, IB and SEB as they were represented to WDR as of the date of its
opinion or as they were reflected in the information and documents reviewed by
WDR. WDR's opinion assumed that the Distribution will be completed
substantially on the basis set out in this Proxy Statement.

WDR was not asked to, and did not, provide any opinion as to the valuation
or long-term viability of HCS, IB or SEB as independent public companies
following the Distribution. In rendering its opinion, WDR did not opine as to
the prices at which the common stock of HCS, IB or SEB will trade after the
Distribution is effected.

As financial advisor to the Company in connection with the Distribution, WDR
has been paid an advisory fee of approximately $1,750,000, which compensated
WDR for the time and efforts expended in rendering advice in connection with
the Distribution and, upon consummation of the Distribution, WDR will be paid
a transaction fee of $6,000,000. The Company has agreed to reimburse WDR for
its out-of-pocket expenses incurred in

40
<PAGE>

connection with its services as financial advisor. The Company has also agreed
to indemnify WDR and its affiliates, their respective directors, officers,
agents and employees and each person, if any, controlling WDR or any of its
affiliates against certain liabilities, including liabilities under the
federal securities laws, and expenses related to WDR's engagement.

In the past, WDR has performed investment banking services for the Company
for which it has received customary fees. During the past two years, WDR
advised the Company in its 1998 acquisition of certain selected assets and
liabilities of Genus, Inc.'s ion implantation systems business. For its
services, WDR received a fee of $1,000,000. In addition, in the ordinary
course of business, WDR, its successors and affiliates may have traded
securities of the Company for their own accounts and, accordingly, may at any
time hold a long or short position in such securities.

WDR was selected by the Company's Board to act as the Company's financial
advisor based upon WDR's qualifications, expertise and reputation. WDR is a
nationally recognized investment banking firm and is regularly engaged in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings and private placements.

MANNER OF EFFECTING THE DISTRIBUTION

If the Company's stockholders approve the Distribution Proposals and all
other conditions thereto are satisfied (or waived by the Board of Directors of
the Company), the distribution of IB Common Stock and SEB Common Stock will be
made on the Distribution Date to stockholders of record as of the Distribution
Record Date. The Distribution Record Date and the Distribution Date will be
established by the Board of Directors of the Company following the Meeting.
The Company will declare special dividends to stockholders of record of the
Company as of the close of business in New York on the Distribution Record
Date of shares of IB Common Stock and of shares of SEB Common Stock.

On or prior to the Distribution Date, all outstanding shares of IB Common
Stock and SEB Common Stock will be delivered to the Distribution Agent. As
soon as practicable after the IB Common Stock and SEB Common Stock have been
distributed, stock distribution statements reflecting ownership of shares of
IB Common Stock and SEB Common Stock will be mailed by the Distribution Agent
to holders of record as of the Distribution Record Date to reflect the
distribution of one share of IB Common Stock and one share of SEB Common Stock
for each share of the Company's Common Stock held on the Distribution Record
Date. All such shares will be fully paid and nonassessable and the holders
thereof will not be entitled to preemptive rights. The shares of IB Common
Stock and SEB Common Stock to be transferred to the Company's stockholders in
the Distribution will be initially issued to the Company as consideration for
the transfer of the Instruments Business and the Semiconductor Equipment
Business, respectively.

No holder of the Company's Common Stock will be required to pay any cash or
other consideration for the shares of IB Common Stock and SEB Common Stock
received in the Distribution or to surrender or exchange shares of the
Company's Common Stock in order to receive shares of IB Common Stock or SEB
Common Stock.

It is expected that the Board of Directors of IB will adopt the IB Rights
Plan before the Distribution. Stock distribution statements evidencing shares
of the IB Common Stock issued in the Distribution will therefore include the
same number of IB Rights issued under the IB Rights Plan. It is also expected
that the Board of Directors of SEB will adopt the SEB Rights Plan before the
Distribution. Stock distribution statements evidencing shares of SEB Common
Stock issued in the Distribution will therefore include the same number of SEB
Rights issued under the SEB Rights Plan. After the Distribution, stock
distribution statements evidencing shares of HCS Common Stock will continue to
include the same number of HCS Rights (as defined below) issued under the HCS
Rights Plan. See "Description of the Capital Stock--Rights Plans."

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<PAGE>

FEDERAL INCOME TAX ASPECTS OF THE DISTRIBUTION

The Company has conditioned the Distribution on the receipt of the Tax
Ruling from the IRS under Sections 355 and 368 of the Code, in form and
substance satisfactory to the Board of Directors of the Company. The Tax
Ruling is expected to be substantially to the following effect:

(1) No gain or loss will be recognized by (and no amount will otherwise
be included in the income of) any holder of the Company's Common Stock as a
result of the Distribution.

(2) The aggregate basis of the Company's Common Stock, the IB Common
Stock and the SEB Common Stock in the hands of each holder of the Company's
Common Stock will be the same as the basis of the Company's Common Stock
held by the holder immediately before the Distribution, allocated in
proportion to the fair market value of each.

(3) The holding period of the SEB Common Stock and IB Common Stock
received in the Distribution by each holder of the Company's Common Stock
will include the period during which such holder held the Company's Common
Stock with respect to which the Distribution is made, provided that such
common stock is held as a capital asset by such holder on the Distribution
Date.

(4) No gain or loss will be recognized by the Company upon the
Distribution.

Application has been made to the IRS for the Tax Ruling. As of the date
hereof, the IRS has not yet issued the Tax Ruling. The Company believes and
has been advised by its outside tax advisors that the positions asserted by
the Company in requesting the Tax Ruling are consistent with the Code and the
rules and regulations promulgated thereunder. However, there is no certainty
that the IRS will issue a favorable ruling. The receipt of the Tax Ruling from
the IRS, in form and substance satisfactory to the Board of Directors of the
Company, is a condition to the Distribution.

The Tax Ruling, while generally binding upon the IRS, will be based on
certain factual representations and assumptions. If such factual
representations and assumptions were incorrect in any material respect, the
holdings of such ruling would be jeopardized. The Company is not aware of any
facts or circumstances that would cause such representations and assumptions
to be incorrect in any material respect. Each of the Company, IB and SEB has
agreed to certain restrictions on their future actions to provide further
assurances that Section 355 of the Code will apply to the Distribution. See
"--Relationship Among HCS, SEB and IB after the Distribution--Tax Sharing
Agreement."

The Board of Directors of the Company has reserved the right to waive the
receipt of such Tax Ruling as a condition to consummation of the Distribution.
The Board of Directors of the Company will not waive the requirement of
receipt of a favorable Tax Ruling from the IRS unless the Company receives an
opinion of counsel that (1) no gain or loss will be recognized by any holder
of the Company's Common Stock as a result of the Distribution and (2) no gain
or loss will be recognized by the Company upon the Distribution (the "Tax
Opinion"). See "--Conditions; Termination." In the event the Board of
Directors of the Company waives the receipt of the Tax Ruling and proceeds to
consummate the Distribution based on the Tax Opinion, the Tax Opinion would
represent that tax counsel's best judgment, but would not be binding on the
IRS or any court. Because certain requirements of Section 355 of the Code,
including those pertaining to business purpose and absence of a device for
distribution of earnings and profits, as well as the requirements of Section
355(e), discussed below, are dependent on factual interpretations, are to a
significant extent subjective in nature and have a relative absence of
authority addressing their application to the particular facts presented by
the Distribution, there can be no absolute assurance that the IRS or a court
would not reach a conclusion different from the conclusion in the Tax Opinion.

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<PAGE>

HCS were to recognize gain on one or more of the distributions, such gain and
the resulting tax liability likely would be very substantial.

Furthermore, if either distribution were not to qualify as a tax-free spin-
off under Section 355 of the Code, each holder of the Company's Common Stock
who receives shares of IB Common Stock and SEB Common Stock in the
Distribution would be treated as if such stockholder received a taxable
distribution in an amount equal to the fair market value of the IB Common
Stock or SEB Common Stock received, which would result in (i) a dividend to
the extent of such stockholder's pro rata share of the Company's current and
accumulated earnings and profits, (ii) a reduction in such stockholder's basis
in the Company's Common Stock to the extent the amount received exceeds such
stockholder's share of earnings and profits and (iii) gain from the exchange
of the Company's Common Stock to the extent the amount received exceeds both
such stockholder's share of earnings and profits and such stockholder's basis
in such common stock.

Section 355(e), which was added to the Code in 1997, generally provides that
a company that distributes shares of a subsidiary in a spin-off that is
otherwise tax-free will incur federal income tax liability if 50% or more, by
vote or value, of the capital stock of either the company making the
distribution or the spun-off subsidiary is acquired (a "50% Ownership Shift")
by one or more persons acting pursuant to a plan or series of related
transactions that includes the spin-off. Stock acquired by certain related
persons is aggregated in determining whether the 50% test is met. There is a
presumption that any acquisition of 50% or more, by vote or value, of the
capital stock of the company or the subsidiary that occurs within two years
before or after the spin-off is pursuant to a plan that includes the spin-off.
However, the presumption may be rebutted by establishing that the spin-off and
the acquisition are not part of a plan or series of related transactions.
Among the factual representations made by the Company to the IRS in connection
with the requested Tax Ruling is the representation that each of the
distributions is not part of such a plan or series of related transactions. If
HCS, IB or SEB were to undergo a 50% Ownership Shift, particularly if such 50%
Ownership Shift occurred within two years after the Distribution Date, there
can be no assurance that the IRS will not assert that such ownership shift
occurred pursuant to a plan or series of related transactions and therefore
that the Distribution is taxable under Section 355(e).

If a distribution is taxable solely under Section 355(e), HCS will recognize
gain equal to the difference between the fair market value of the stock of SEB
and IB and the Company's adjusted tax basis in such stock. However, holders of
the Company's Common Stock would not recognize gain or loss as a result of the
distributions. If HCS were to recognize gain on the distributions, such gain
and the resulting tax liability likely would be very substantial.

HCS, IB and SEB will enter into the Tax Sharing Agreement to allocate
responsibility for the possible corporate tax burden resulting from the
Distribution. Neither HCS, IB, nor SEB has agreed to indemnify holders of the
Company's Common Stock for any taxes or other losses should either or both of
the distributions fail to qualify under Section 355 of the Code. The Tax
Sharing Agreement will provide that each of HCS, IB and SEB will be
responsible for any such corporate taxes to the extent that such taxes are
attributable to action taken or permitted by that entity or its affiliates
after the Distribution that is inconsistent with the tax treatment
contemplated in the Tax Ruling. Under the Tax Sharing Agreement, if either
distribution is found to be taxable but none of HCS, IB and SEB has done
anything to cause the distribution to be taxable, each company generally will
be liable for one-third of those taxes. See "--Relationship Among HCS, SEB and
IB After the Distribution--Tax Sharing Agreement. "

Current Treasury regulations require each holder of the Company's Common
Stock who receives IB Common Stock or SEB Common Stock pursuant to the
Distribution to attach to his or her federal income tax return for the year in
which the Distribution occurs a detailed statement setting forth such data as
may be appropriate in order to show the applicability of Section 355 of the
Code to the Distribution. The Company will convey the appropriate information
to each holder of record of the Company's Common Stock as of the Distribution
Record Date.

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<PAGE>

The foregoing summary of federal income tax consequences does not purport to
cover all federal income tax consequences of the Distribution. The tax
consequences may differ for stockholders that are not U.S. citizens or
residents or that are otherwise subject to special treatment under the Code.
Each stockholder should consult its own tax advisor regarding the federal,
foreign, state and local tax consequences of the Distribution in its
particular circumstances, including the application of state, local and
foreign tax laws.

INTERESTS OF CERTAIN PERSONS IN THE DISTRIBUTION

In the Distribution, stockholders should be aware, and should carefully
consider, that certain members of the Company's management and the Company's
Board of Directors may be deemed to have interests in the Distribution that
are in addition to their interests as holders of the Company's Common Stock
generally and that may create potential conflicts of interest. In this regard,
certain of the directors and executive officers of the Company before the
Distribution will be directors and executive officers of IB or SEB after the
Distribution and IB and SEB, as applicable, will obtain director and officer
insurance and enter into indemnification agreements with respect to such
individuals. In addition, each director of the Company who will become a non-
employee director of either IB or SEB, as the case may be, or remain a non-
employee director of HCS, will receive, as compensation for serving as a
director, certain cash compensation and options to purchase stock of such
company. See "Management of IB," "Management of SEB" and "Management of HCS."

Certain officers of the Company will enter into severance agreements in
connection with the Distribution. See "Change in Control and Other
Agreements." In addition, certain officers of the Company who will become
executive officers of HCS, IB or SEB may enter into new or amended change in
control agreements with HCS, IB or SEB, respectively. See "Management of HCS--
Change in Control Agreements," "Management of IB--Change in Control
Agreements" and "Management of SEB--Change in Control Agreements."

As a result of the Distribution, individuals who are directors and executive
officers of the Company and individuals who will be directors and executive
officers of IB, HCS or SEB will receive IB Common Stock and SEB Common Stock
in respect of the Company's Common Stock held by such individuals. Directors
of the Company who will be directors of IB, HCS or SEB will be entitled to
receive substituted stock options for IB Common Stock, HCS Common Stock and
SEB Common Stock in connection with the Distribution. Individuals who will be
executive officers of IB or SEB will be entitled to receive substituted stock
options for IB Common Stock or SEB Common Stock, respectively, in connection
with the Distribution. Also, new employee benefit plans for the benefit of
such individuals and others will be adopted by each of IB and SEB effective
after the Distribution, including but not limited to the IB Omnibus Stock Plan
and IB Management Incentive Plan, and the SEB Omnibus Stock Plan and SEB
Management Incentive Plan, respectively. In addition, stock options held by
seven employees of the Company, including J. Tracy O'Rourke, Chairman and
Chief Executive Officer, Robert A. Lemos, Vice President, Finance and Chief
Financial Officer, Joseph B. Phair, Vice President, General Counsel and
Secretary, and Wayne P. Somrak, Vice President and Controller, each of whose
employment will terminate under severance agreements in connection with the
Distribution, will be accelerated and may be exchanged for substituted options
for IB Common Stock, HCS Common Stock and SEB Common Stock. See "--Employee
Benefits Allocation Agreement--Stock Options And Other Awards."

The Board of Directors was aware of these interests and considered them,
among other matters, in approving the Distribution.

LISTING AND TRADING OF IB COMMON STOCK AND SEB COMMON STOCK

There is not currently a public market for IB Common Stock or SEB Common
Stock. It is presently anticipated that IB Common Stock and SEB Common Stock
may commence trading on a "when-issued" basis prior to the Distribution Date.
Prices at which IB Common Stock and SEB Common Stock may trade prior to the
Distribution on a "when-issued" basis or after the Distribution cannot be
predicted. Until the IB Common Stock and SEB Common Stock are fully
distributed and an orderly market develops, the prices at which trading in
such stock occurs may fluctuate significantly. The prices at which IB Common
Stock and SEB Common Stock

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<PAGE>

trade will be determined by the marketplace and may be influenced by many
factors, including, among others, the depth and liquidity of the market for
such stock, investor perception of IB and SEB and the industries in which they
participate, IB's and SEB's dividend policy and general economic and market
conditions. Such prices may also be affected by certain provisions of the
Certificates of Incorporation and By-Laws of IB and SEB, as each will be in
effect at the time of the Distribution, which will have an anti-takeover
effect. See "Delaware Law and Certain Charter and By-Law Provisions."

Shares of IB Common Stock and SEB Common Stock distributed to the Company's
stockholders will be freely transferable, except for shares of IB Common Stock
received by persons who may be deemed to be "affiliates" of IB under the
Securities Act of 1933 (the "Securities Act") and shares of SEB Common Stock
received by persons who may be deemed to be "affiliates" of SEB under the
Securities Act. Persons who may be deemed to be affiliates of IB or SEB after
the Distribution generally include individuals or entities that control, are
controlled by, or are under common control with, IB or SEB, as applicable, and
may include certain officers and directors of IB or SEB, as applicable, as
well as principal stockholders of IB or SEB, as applicable. Persons who are
affiliates of IB will be permitted to sell their shares of IB Common Stock
only pursuant to an effective registration statement under the Securities Act
or an exemption from the registration requirements of the Securities Act.
Similarly, persons who are affiliates of SEB will be permitted to sell their
shares of SEB Common Stock only pursuant to an effective registration
statement under the Securities Act or an exemption from the registration
requirements of the Securities Act.

IB intends to apply for quotation of the IB Common Stock on the Nasdaq
National Market and SEB intends to apply for quotation of the SEB Common Stock
on the Nasdaq National Market. Each of IB and SEB initially will have
approximately 5,992 stockholders of record based upon the number of
stockholders of record of the Company as of December 15, 1998. For certain
information regarding options to purchase IB Common Stock and SEB Common Stock
that will be outstanding after the Distribution, see "Management of IB," "The
IB Omnibus Stock Plan," "Management of SEB" and "The SEB Omnibus Stock Plan."

LISTING AND TRADING OF HCS COMMON STOCK

It is expected that the HCS Common Stock will continue to be listed and
traded on the NYSE after the Distribution under the ticker symbol "VAR."
Following the Distribution, HCS's financial results will no longer be
consolidated with those of SEB and IB, and HCS's revenues, income and other
results of operations will be substantially lower than those of the Company
prior to the Distribution. Accordingly, as a result of the Distribution, the
trading price range of the HCS Common Stock immediately after the Distribution
is expected to be significantly lower than the trading price range of the
Company's Common Stock prior to the Distribution. The combined trading prices
of the IB Common Stock, HCS Common Stock and SEB Common Stock held by
stockholders after the Distribution may be less than, equal to or greater than
the trading price of the Company's Common Stock prior to the Distribution. The
prices at which the HCS Common Stock trades after the Distribution will be
determined by the marketplace and may be influenced by many factors,
including, among others, the continuing depth and liquidity of the market for
HCS Common Stock, investor perception of HCS's development, dividend policy
and general economic and market conditions. Such prices may also be affected
by certain provisions of the Certificate of Incorporation and By-Laws of HCS,
as will be in effect at the time of the Distribution, which will have an anti-
takeover effect. See "The Distribution Proposals--Proposal Three: Approval of
Amendment to the Certificate of Incorporation of the Company to Specify That
the Number of Directors Shall be Fixed by Resolution of the Board of
Directors" and "--Proposal Four: Approval of Amendment to the Certificate of
Incorporation of the Company to Change Certain Corporate Governance
Provisions" and "Delaware Law and Certain Charter and By-Law Provisions."

CONDITIONS; TERMINATION

Under the terms of the Distribution Agreement, the Distribution is
conditioned upon, among other things, (i) the IRS having issued the Tax Ruling
in response to the Company's request in form and substance satisfactory to the
Board; (ii) stockholder approval of the Distribution Proposals; (iii) the
Internal Transfers having been

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consummated in all material respects; (iv) the IB Common Stock having been
approved for quotation on the Nasdaq National Market or listing on a national
stock exchange; (v) the SEB Common Stock having been approved for quotation on
the Nasdaq National Market or listing on a national stock exchange; (vi) the
Registration Statements to be filed by IB and SEB with the Commission having
become effective; (vii) the Company, IB and SEB having executed and delivered
the Ancillary Agreements and such agreements being in full force and effect;
(viii) no governmental authority having issued an injunction or other order,
decree or ruling or enacted or promulgated a statute, rule, regulation or
executive order that materially restricts, prohibits or prevents consummation
of the Distribution and (ix) WDR having delivered an updated opinion to the
Company's Board of Directors. Even if all conditions are satisfied, the
Company's Board of Directors has reserved the right to abandon, defer or
modify the Distribution or the other elements of the Distribution Proposals at
any time prior to the Distribution Date. However, the Board will not waive the
requirement of receipt of a favorable Tax Ruling from the IRS unless the
Company receives an opinion of counsel substantially to the effect that (1) no
gain or loss will be recognized by any holder of the Company's Common Stock as
a result of the Distribution and (2) no gain or loss will be recognized by the
Company upon the Distribution. In addition, the Company's Board of Directors
will not waive any other condition to the Distribution or make any changes in
the terms of the Distribution or the other elements of the Distribution
Proposals after the Distribution Proposals are approved by the Company's
stockholders unless the Company's Board of Directors determines that such
waivers or changes would not be materially adverse to the Company's
stockholders. In determining whether any such waivers or changes would be
materially adverse to the Company's stockholders, the Company's Board of
Directors will consider, as appropriate, advice from its outside financial and
legal advisors as well as the recommendation of management as to the potential
impact of such waivers or changes on the Company and the Company's
stockholders.

FUTURE MANAGEMENT OF THE SEPARATE COMPANIES

Following the Distribution it is intended that IB will continue to conduct
the Instruments Business in substantially the same manner in which it is
currently operated. Allen J. Lauer, who is currently Executive Vice President
of the Company, will serve as President and Chief Executive Officer of IB
following the Distribution. The other executive officers of IB following the
Distribution will be primarily drawn from the current management of the
Company. See "Management of IB--Executive Officers."

SEB

Following the Distribution it is intended that SEB will continue to conduct
the Semiconductor Equipment Business in substantially the same manner in which
it is currently operated. Richard A. Aurelio, who is currently Executive Vice
President of the Company, will serve as the President and Chief Executive
Officer of SEB following the Distribution. The other executive officers of SEB
will be primarily drawn from the current management of the Company. See
"Management of SEB--Executive Officers."

HCS

Following the Distribution it is intended that HCS will continue to conduct
the Health Care Systems Business in substantially the same manner in which it
is currently operated. Richard M. Levy, who is currently Executive Vice
President of the Company, will serve as President and Chief Executive Officer
of HCS following the Distribution. The other executive officers of HCS will be
drawn from the current management of the Company. See "Management of HCS--
Executive Officers."

INTERNAL MERGERS AND TRANSFERS

On or prior to the Distribution Date, the Company will effectuate certain
transactions intended to allocate assets and liabilities relating to the
Health Care Systems Business to HCS, assets and liabilities relating to the

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<PAGE>

Semiconductor Equipment Business to SEB and assets and liabilities relating to
the Instruments Business to IB. See "--Distribution Agreement." On the
Distribution Date, following the completion of the foregoing transactions, the
Company will distribute the IB Common Stock and SEB Common Stock to the
holders of the Company's Common Stock on the Distribution Record Date.

RELATIONSHIP AMONG HCS, SEB AND IB AFTER THE DISTRIBUTION

For the purpose of governing certain of the ongoing relationships among HCS,
SEB and IB after the Distribution and to provide mechanisms for an orderly
transition, the Company, IB and SEB have entered or will enter into various
agreements, and will adopt policies, as described in this section. The
Company, IB and SEB believe that the agreements are fair to each of the
parties. The services to be provided by each of the companies pursuant to the
various agreements described below will be billed at their fully burdened cost
to the provider and in each case the terms of these agreements have been
reviewed by individuals who will have senior management positions at IB, HCS
or SEB after the Distribution.

Copies of the forms of such agreements will be filed as exhibits to the
Registration Statements of each of SEB and IB in respect of the registration
of the SEB Common Stock and the IB Common Stock under the Exchange Act. In
addition, HCS intends to file a Current Report on Form 8-K in connection with
the Distribution, and the agreements either will be filed as exhibits to such
Report or will be included in a later filing by HCS under the Exchange Act.
See "Available Information." The following descriptions include a summary of
all material terms of these agreements, but do not purport to be complete and
are qualified by reference to the texts of such agreements, which are
incorporated herein by reference.

DISTRIBUTION AGREEMENT

The Distribution Agreement provides for the terms of the Distribution, the
conditions to the Distribution (see "--Conditions; Termination"), the various
actions to be taken prior to the Distribution (see "--Internal Mergers and
Transfers") and the relationship among the parties subsequent to the
Distribution. The Distribution Agreement is set forth in Annex I to this Proxy
Statement and the foregoing description is qualified by reference to such
agreement, which is incorporated herein by reference.

The Distribution Agreement provides that, from and after the Distribution
Date, (i) IB shall assume, pay, perform and discharge all Instruments
Liabilities (as defined in the Distribution Agreement) in accordance with
their terms, (ii) HCS shall assume, pay, perform and discharge all Health Care
Systems Liabilities (as defined in the Distribution Agreement) in accordance
with their terms and (iii) SEB shall assume, pay, perform and discharge all
Semiconductor Equipment Liabilities (as defined in the Distribution Agreement)
in accordance with their terms.

In addition, the Distribution Agreement provides for cross-indemnities that
require (i) IB to indemnify HCS and SEB (and their respective subsidiaries,
directors, officers, employees and agents and certain other related parties)
against all losses arising out of or in connection with Instruments
Liabilities or the breach of the Distribution Agreement or any Ancillary
Agreement by IB, (ii) HCS to indemnify IB and SEB (and their respective
subsidiaries, directors, officers, employees and agents and certain other
related parties) against all losses arising out of or in connection with the
Health Care Systems Liabilities or the breach of the Distribution Agreement or
any Ancillary Agreement by the Company and (iii) SEB to indemnify IB and HCS
(and their respective subsidiaries, directors, officers, employees and agents
and certain other related parties) against all losses arising out of or in
connection with the Semiconductor Equipment Liabilities or the breach of the
Distribution Agreement or any Ancillary Agreement by SEB, and, in each case,
for contribution in certain circumstances. Each of IB, HCS and SEB also agrees
to indemnify each other for one-third of the costs and expenses associated
with liabilities that are unrelated to their businesses, including certain
discontinued operations and environmental liabilities associated with the
Company's Palo Alto facilities.

Pursuant to the Distribution Agreement, each of the parties has agreed to
use commercially reasonable efforts to take or cause to be taken all action,
and do or cause to be done all things, reasonably necessary or

47
<PAGE>

appropriate to consummate the transactions contemplated by the Distribution
Agreement. As such, the Distribution Agreement provides that if any
contemplated pre-Distribution transfers have not been effected on or prior to
the Distribution Date, the parties will cooperate to effect such transfers as
promptly thereafter as practicable. The entity retaining any asset or
liability which should have been transferred prior to the Distribution Date
will continue to hold that asset for the benefit of the party entitled thereto
or that liability for the account of the party required to assume it, and must
take such other action as may be reasonably requested by the party to whom
such asset was to be transferred or by whom such liability was to be assumed
in order to place such party, insofar as reasonably possible, in the same
position as would have existed had such asset or liability been transferred or
assumed as contemplated by the Distribution Agreement.

The Distribution Agreement (i) requires that the Company renegotiate the
Term Loans, (ii) requires that the Company contribute cash to SEB so that at
the time of the Distribution SEB will have $100 million in cash and cash
equivalents and a Net Worth (as defined in the Distribution Agreement) of at
least $150 million, and its Consolidated Debt (as defined in the Distribution
Agreement) will not exceed $5 million, (iii) requires that IB assume 50% of
the outstanding indebtedness under the Term Loans and have transferred to it
such portion of the indebtedness under the Notes Payable and such amount of
cash and cash equivalents, so that as of the time of the Distribution IB and
HCS will each have Net Debt (as defined in the Distribution Agreement) equal
to approximately 50% of the aggregate Net Debt of IB and HCS, subject to such
adjustments as may be necessary to provide HCS with a Net Worth of between 40%
and 50% of the aggregate Net Worth of HCS and IB, (iv) governs the conduct of
the post-Distribution audit to be undertaken to ascertain the Net Worth of
HCS, IB and SEB upon consummation of the Distribution, (v) requires that post-
Distribution payments be made between the parties if, and to the extent that,
as of the time of the Distribution (a) HCS has a Net Worth that is less than
40% or more than 50% of the aggregate Net Worth of HCS and IB, (b) SEB has
Consolidated Debt exceeding $5 million, or less than $100 million of cash and
cash equivalents or a Net Worth of less than $150 million or (c) SEB has more
than $100 million of cash and cash equivalents and a Net Worth of at least
$150 million or SEB has a Net Worth in excess of $225 million and
(vi) entitles IB to receive approximately 50% of the estimated proceeds, if
any, to be received by HCS after the Distribution from the sale of the
Company's long-term leasehold interest at certain of its Palo Alto facilities,
together with certain related buildings and other corporate assets and
requires IB to pay approximately 50% of any estimated transaction expenses to
be paid by HCS after the Distribution (in each case reduced for estimated
taxes payable or tax benefits received from all sales and transaction
expenses).

The Distribution Agreement also provides for the execution and delivery of
certain other agreements governing the relationship among IB, HCS and SEB at
and following the Distribution. See "--Employee Benefits Allocation
Agreement," "--Tax Sharing Agreement," "--Transition Services Agreement," and
"--Intellectual Property Agreement."

EMPLOYEE BENEFITS ALLOCATION AGREEMENT

On or prior to the Distribution Date, the Company, IB and SEB will enter
into an employee benefits allocation agreement (the "Employee Benefits
Allocation Agreement") providing for the allocation of certain liabilities and
responsibilities with respect to employee compensation, benefits and labor
matters. The allocation of responsibility and adjustments to be made pursuant
to the Employee Benefits Allocation Agreement are substantially consistent
with the existing rights of the Company's employees under the Company's
various compensation plans, with the understanding that each party will have
sole responsibility for determining the benefits it will provide its employees
following the Distribution. The Employee Benefits Allocation Agreement will
generally provide that, effective as of the Distribution Date, each of IB and
SEB will, or will cause one or more of its subsidiaries to, assume or retain,
as the case may be, all liabilities of the Company, to the extent unpaid as of
the Distribution Date, under the Company's employee benefit plans, policies,
arrangements, contracts and agreements, including collective bargaining
agreements, with respect to employees who on or after the Distribution Date
will be employees of IB or its subsidiaries or SEB or its subsidiaries. The
Employee Benefits Allocation Agreement will also provide that HCS generally
will, or will cause one of its subsidiaries to, assume or retain, as the case
may be, all liabilities under the Company's employee benefit plans, policies,
arrangements, contracts and agreements, including collective bargaining
agreements, with respect to employees

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<PAGE>

who on or after the Distribution Date will be employees of HCS or its
subsidiaries. The Employee Benefits Allocation Agreement will also provide
that each of IB, SEB and HCS will generally indemnify the others for one-third
of the administrative costs associated with liabilities to individuals who
were former Company employees as of the Distribution Date.

Defined Contribution Plans

Active participation in the Varian Associates, Inc. Retirement and Profit-
Sharing Program (the "Varian Profit-Sharing Plan") by IB and SEB employees
will terminate on the Distribution.

Effective as of the Distribution Date, each of SEB and IB will establish a
defined contribution plan for the benefit of its employees. As promptly as
practicable after the Distribution, HCS will cause to be transferred to the
SEB defined contribution plan or the IB defined contribution plan the account
balances in, and the liabilities of, the Varian Profit-Sharing Plan to each
employee of SEB or IB, respectively, who elects to so transfer. IB and SEB
will each assume the administrative costs associated with the Varian Profit-
Sharing Plan accounts of IB and SEB employees who do not elect a transfer. IB,
SEB and HCS will also each indemnify the others for one-third of the
administrative costs associated with the accounts of individuals who were
former Company employees as of the Distribution Date or whose employment will
terminate pursuant to severance agreements in connection with the
Distribution.

Non-U.S. Employee Benefits

Non-U.S. employee benefits will be subject to the general principles of the
Employee Benefits Allocation Agreement. To the extent practicable, HCS, SEB
and IB, or their respective subsidiaries, will each assume or retain, as the
case may be, any and all pension liabilities and attendant plans and their
assets related to the employees of each company or its subsidiaries post-
Distribution. If a person is employed by a non-U.S. subsidiary of HCS, IB or
SEB but the associated liabilities are held by another of HCS, IB or SEB, the
entity employing the employees will indemnify the entity holding the
liabilities. IB, SEB and HCS will also each indemnify the others for one-third
of the employee benefit liabilities associated with former employees of non-
U.S. subsidiaries.

Stock Options and Other Awards

Stock options and restricted stock awards (collectively, "stock awards") of
the Company are currently outstanding under the Company's 1982 Non-Qualified
Stock Option Plan and the Company Omnibus Stock Plan (collectively, the
"Plans"). The treatment after the Distribution of stock awards that are
outstanding prior to the Distribution is designed to preserve, as a general
matter, the economic value of each stock award. In addition, the treatment of
outstanding stock awards of individuals who will continue their employment
with either IB, HCS or SEB, is designed to provide an incentive for such
employees to remain employed with their respective employers and to benefit by
their efforts to increase the market value of the stock of such employer.

Adjustments to Awards Held by Employees of HCS and Former Company Employees

In general, it is expected that the number of shares of HCS Common Stock
underlying each stock option held by employees of HCS and certain others
(including former employees of the Company not terminated in connection with
the Distribution and any employees of IB or SEB who do not surrender their
Company stock options as contemplated below (collectively, "Former Company
Employees")) and the exercise price thereof, and the number of shares provided
in restricted stock awards, will be adjusted as necessary to reflect the
Distribution. The Plans and related option agreements provide that, in the
event the number of outstanding shares of the Company's Common Stock is
changed by reason of a split-up or combination of shares or recapitalization
or by reason of a stock dividend, the number of shares and option price shall
be appropriately adjusted so as to maintain the proportionate number of shares
without changing the aggregate option exercise price.

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<PAGE>

Unexercised Company stock options held by employees of HCS and Former
Company Employees will be adjusted as soon as practicable following the
Distribution Date, to preserve as closely as possible their respective
economic value immediately prior to the Distribution (defined as the
difference between the fair market value of the shares underlying the option
and the option exercise price, multiplied by the number of shares subject to
the option). For a discussion of the expected treatment of stock options held
by those individuals who will be employees of IB or SEB after the
Distribution, see "--Treatment of Awards Held by Employees of IB" and "--
Treatment of Awards Held by Employees of SEB." Those individuals who will be
employees of IB and SEB after the Distribution who do not surrender their
Company stock options as contemplated below will have their Company stock
options adjusted in the same manner as individuals who will be employees of
HCS.

The option exercise price of adjusted HCS stock options will be determined
by multiplying the exercise price of the Company stock option by a fraction,
the numerator of which will be the closing price of the HCS Common Stock on
the Distribution Date and the denominator of which will be the closing price
of the Company's Common Stock on the Distribution Date. The number of shares
of HCS Common Stock subject to options will be determined by multiplying the
number of shares of the Company's Common Stock covered by the Company stock
option by a fraction, the numerator of which will be the closing price of the
Company's Common Stock on the Distribution Date and the denominator of which
will be the closing price of the HCS Common Stock on the Distribution Date.

Unvested Company restricted stock held by Former Company Employees or
continuing employees of HCS will vest immediately prior to the Distribution.

As of December 15, 1998, there were approximately 1,721,603 shares of the
Company's Common Stock subject to outstanding stock options held by Former
Company Employees or individuals who will be employees of HCS. It is
impossible to predict with certainty how many shares of HCS Common Stock will
be subject to adjusted HCS stock options after the Distribution Date, since it
is expected that some Company stock options held by such individuals will be
exercised prior to the Distribution Date. The balance of unexercised Company
stock options will be adjusted according to the formula described above, but
the stock prices upon which the adjustment will be based will not be known
until the Distribution Date. Stockholders of HCS are, however, likely to
experience some dilutive impact from the above-described adjustments.

For Former Company Employees or those employees who will continue their
employment with HCS, all of the other original terms and conditions of the
Company stock options, including the vesting and expiration dates, will remain
in effect after the adjustments as to price and number of shares.

Treatment of Awards Held by Employees of IB

It is expected that Company stock options held by those individuals who will
become employees of IB will be replaced with substitute stock options to
purchase IB Common Stock under the IB Omnibus Stock Plan discussed below under
"The IB Omnibus Stock Plan" if the Distribution Proposals are approved by
stockholders. Although such individuals are not contractually required to
surrender their Company stock options, it is expected that such individuals
will do so in order to have their stock options relate to shares of the
company with which they are employed after the Distribution, to preserve
unvested options and to maintain the ability to exercise stock options that
would otherwise expire due to termination of their employment with the
Company. The surrender of such stock options will be encouraged by the Company
because Company management believes the efforts of key employees should be
directed toward enhancing the value of their employer's stock.

Such substitute options will be designed to preserve the economic value of
the related Company stock options, and the vesting and expiration dates and
other terms of the related awards will remain in effect under the IB
substitute stock options. In order to obtain such substitute stock options,
the employees will be required to surrender their unexercised Company stock
options. Replacement of surrendered Company stock options is believed to be
beneficial to IB and its stockholders because it will allow IB to provide
meaningful compensation incentives to its key employees. Since, except for
option price and number of shares, all terms and conditions of

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<PAGE>

the Company stock options will apply to the substitute stock options, the
vesting provisions of the substitute options are expected to provide a
continuing incentive for key employees to remain in the employ of IB after the
Distribution. If an IB employee does not elect to receive a substitute option,
the unvested portion of the employee's Company option will expire upon the
Distribution Date and the employee will generally have three months to
exercise the vested portion for HCS Common Stock.

The option exercise price of substitute IB stock options will be determined
by multiplying the exercise price of the Company stock option by a fraction,
the numerator of which will be the closing price of IB Common Stock on the
Distribution Date and the denominator of which will be the closing price of
the Company's Common Stock on the Distribution Date. The number of shares of
IB Common Stock subject to substitute options will be determined by
multiplying the number of shares of the Company's Common Stock covered by the
Company stock option by a fraction, the numerator of which will be the closing
price of the Company's Common Stock on the Distribution Date and the
denominator of which will be the closing price of IB Common Stock on the
Distribution Date.

Unvested Company restricted stock held by continuing employees of IB will
vest immediately prior to the Distribution.

As of December 15, 1998, there were approximately 966,491 shares of the
Company's Common Stock subject to outstanding stock options held by
individuals who will be employees of IB. It is impossible to predict with
certainty how many shares of IB Common Stock will be subject to substitute IB
stock options after the Distribution Date, since it is expected that some
Company stock options held by individuals who will become employees of IB will
be exercised prior to the Distribution Date. The balance of unexercised
Company stock options will be adjusted according to the formula described
above, but the stock prices upon which the adjustment will be based will not
be known until the Distribution Date. Stockholders of IB are, however, likely
to experience some dilutive impact from the above-described adjustments.

Treatment of Awards Held by Employees of SEB

It is expected that Company stock options held by those individuals who will
become employees of SEB will be replaced with substitute stock options to
purchase SEB Common Stock under the SEB Omnibus Stock Plan discussed below
under "The SEB Omnibus Stock Plan" if the Distribution Proposals are approved
by stockholders. Although such individuals are not contractually required to
surrender their Company stock options, it is expected that such individuals
will do so in order to have their stock options relate to shares of the
company with which they are employed after the Distribution, to preserve
unvested options and to maintain the ability to exercise stock options that
would otherwise expire due to termination of their employment with the
Company. The surrender of such stock options will be encouraged by the Company
because Company management believes the efforts of key employees should be
directed toward enhancing the value of their employer's stock.

Such substitute options will be designed to preserve the economic value of
the related Company stock options, and the vesting and expiration dates and
other terms of the related options will remain in effect under the SEB
substitute stock options. In order to obtain such substitute stock options,
the employees will be required to surrender their unexercised Company stock
options. Replacement of surrendered Company stock options is believed to be
beneficial to SEB and its stockholders because it will allow SEB to provide
meaningful compensation incentives to its key employees. Since, except for
option price and number of shares, all terms and conditions of the Company
stock options will apply to the substitute stock options, the vesting
provisions of the substitute options are expected to provide a continuing
incentive for key employees to remain in the employ of SEB after the
Distribution. If an SEB employee does not elect to receive a substitute
option, the unvested portion of the employee's Company option will expire upon
the Distribution Date and the employee will generally have three months to
exercise the vested portion for HCS Common Stock.

The option exercise price of substitute SEB stock options will be determined
by multiplying the exercise price of the SEB stock option by a fraction, the
numerator of which will be the closing price of SEB Common Stock on

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<PAGE>

the Distribution Date and the denominator of which will be the closing price
of the Company's Common Stock on the Distribution Date. The number of shares
of SEB Common Stock subject to substitute options will be determined by
multiplying the number of shares of the Company's Common Stock covered by the
Company stock option by a fraction, the numerator of which will be the closing
price of the Company's Common Stock on the Distribution Date and the
denominator of which will be the closing price of SEB Common Stock on the
Distribution Date.

Unvested Company restricted stock held by continuing employees of SEB will
vest immediately prior to the Distribution.

As of December 15, 1998, there were approximately 846,603 shares of the
Company's Common Stock subject to outstanding stock options held by
individuals who will be employees of SEB. It is impossible to predict with
certainty how many shares of SEB Common Stock will be subject to substitute
SEB stock options after the Distribution Date, since it is expected that some
Company stock options held by individuals who will become employees of SEB
will be exercised prior to the Distribution Date. The balance of unexercised
Company stock options will be adjusted according to the formula described
above, but the stock prices upon which the adjustment will be based will not
be known until the Distribution Date. Stockholders of SEB are, however, likely
to experience some dilutive impact from the above-described adjustments.

Treatment of Awards Held by Employees Whose Employment will Terminate in
Connection with the Distribution

Employees of the Company whose employment will terminate in connection with
the Distribution (other than the seven employees whose employment will
terminate pursuant to severance agreements) will be permitted to elect to
exchange their Company stock options for stock options with respect to HCS
Common Stock, SEB Common Stock and IB Common Stock. Individuals who so elect
will have one-third of the unexercised portion of the Company stock options
exchanged for each of HCS stock options, SEB stock options and IB stock
options. These individuals will have the adjusted option exercise price and
the number of shares subject to the stock option determined as described
above. See "--Adjustment to Awards Held by Employees of HCS and Former Company
Employees," "--Treatment of Awards Held by Employees of IB" and "--Treatment
of Awards Held by Employees of SEB." The seven employees whose employment will
terminate pursuant to severance agreements will receive this exchange on a
mandatory basis. Employees whose options are exchanged in this manner will
have the unvested portion of their Company options as of the Distribution Date
vested immediately prior to the Distribution or, if later, immediately prior
to termination of the employment of such employees.

Unvested Company restricted stock held by employees whose employment will
terminate in connection with the Distribution will vest immediately prior to
the Distribution or, if later, immediately prior to such termination.

As of December 15, 1998, there were approximately 521,145 shares of the
Company's Common Stock subject to outstanding stock options held by employees
whose employment will terminate in connection with the Distribution (excluding
stock options held by Mr. O'Rourke, a current director who is expected to
serve as a director of SEB following the Distribution). It is impossible to
predict with certainty how many shares of SEB Common Stock, IB Common Stock
and HCS Common Stock will be subject to these stock options after the
Distribution Date, since it is expected that some Company stock options held
by these individuals will be exercised prior to the Distribution Date. In
addition, the balance of unexercised Company stock options will be adjusted
according to the formula described above, but the stock prices upon which the
adjustment will be based will not be known until the Distribution Date.
Stockholders of SEB, IB and HCS are, however, likely to experience some
dilutive impact from the above-described adjustments.

Treatment of Awards Held by Directors

Company stock options held by directors of the Company will be adjusted in
the same manner as Company stock options held by employees whose employment
will terminate in connection with the Distribution; provided that the unvested
portion of their Company options will not vest immediately prior to the
Distribution. Accordingly, these individuals will be permitted to exchange
their Company stock options for stock options with

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<PAGE>

respect to HCS Common Stock, SEB Common Stock and IB Common Stock. See "--
Treatment of Awards Held by Employees Whose Employment Will Terminate in
Connection with the Distribution."

As of December 15, 1998, there were approximately 791,000 shares of the
Company's Common Stock subject to outstanding stock options held by current
directors (including Mr. O'Rourke). It is impossible to predict with certainty
how many shares of SEB, IB and HCS Common Stock will subject to these stock
options after the Distribution Date, since it is expected that some Company
stock options held by these individuals will be exercised prior to the
Distribution Date. In addition, the balance of unexercised Company stock
options will be adjusted pursuant to the formula described above, but the
stock prices upon which the adjustment will be based will not be known until
the Distribution Date. Stockholders of SEB, IB and HCS are, however, likely to
experience some dilutive impact from the above-described adjustments.

TAX SHARING AGREEMENT

The Company, IB and SEB will enter into a tax sharing agreement (the "Tax
Sharing Agreement") that defines the parties' rights and obligations with
respect to federal, state, foreign and other income or franchise taxes
relating to the Company's businesses for tax periods prior to, including and
following the Distribution and with respect to certain other tax matters. In
general, HCS will be responsible for consolidated federal income taxes,
consolidated or combined state income taxes and separate state income taxes of
the Company and its subsidiaries through the Distribution Date. Liability
through the Distribution Date will be determined based on a closing of the
books. Liability for foreign income taxes and non-income taxes will generally
be allocated to the legal entity on which such taxes are imposed, except for
taxes transferred on the closing balance sheets. Adjustments to the reported
tax liability for tax periods through the Distribution Date will be shared
equally by the three companies.

In general, and except as provided below, taxes resulting from the
Distribution will be the responsibility of the legal entity on which such
taxes are imposed. However, each of SEB and IB will be responsible for any
such taxes resulting from income or gain from the Distribution to the extent
that such taxes are attributable to action taken or permitted by that entity
or its affiliates after the Distribution that is inconsistent with the tax
treatment contemplated in the Tax Ruling requested from the IRS. Each of HCS,
IB and SEB will covenant and agree not to take or permit certain actions
inconsistent or potentially inconsistent with the requested Tax Ruling before
January 1, 2002, unless such action has been consented to by the other
companies or approved by a supplemental ruling from the IRS or an unqualified
opinion of independent nationally recognized tax counsel acceptable to each of
the companies. These agreements could restrict the ability of HCS, IB or SEB
to engage in certain corporate transactions, redeem stock, dispose of assets
except in the ordinary course of business, or be the target of an acquisition
transaction, during that period. Adjustments to the anticipated income taxes
resulting from the Distribution that are not attributable to action
inconsistent with the Tax Ruling will be shared equally by the three
companies. Furthermore, if with respect to HCS, IB or SEB, the aggregate taxes
shown on the initial tax returns filed after the Distribution (or the amounts
paid with respect to such taxes) relating to periods prior to the Distribution
Date exceed the aggregate amounts accrued with respect thereto on the closing
balance sheets, by more than $1,000,000, the company with the unanticipated
tax burden may propose a sharing of such amounts among the three companies. If
the three companies cannot agree to a fair and equitable sharing of the excess
taxes, the matter will be submitted to a mutually acceptable nationally
recognized accounting firm for resolution. See "--Federal Income Tax Aspects
of the Distribution."

TRANSITION SERVICES AGREEMENT

On or prior to the Distribution Date, the Company, IB and SEB will enter
into a Transition Services Agreement providing for (i) the sharing of
facilities and equipment for a temporary period not to exceed one year, (ii)
the provision of employees and sharing of certain third party services to
provide treasury, tax, accounting, payroll, human resources and similar and
related functions for a temporary period not to exceed one year and (iii) the
provision of information services personnel for a period extending until June
30, 2000.

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<PAGE>

Compensation for all services and facilities provided under the Transition
Services Agreement will be on a fully burdened cost reimbursement basis. The
management of each of HCS, SEB and IB presently expects that its company will
be able to provide these services for itself after the applicable transition
period without additional material expense, although no assurance can be given
that this will be the case. Each party has the right to terminate certain
transition services arrangements upon a material breach by the other party
thereto.

INTELLECTUAL PROPERTY AGREEMENT

On or prior to the Distribution Date, the Company, IB and SEB will enter
into an Intellectual Property Agreement providing for allocation among these
companies and their respective subsidiaries and associated companies of rights
in the Intellectual Property (as defined in the Distribution Agreement),
including patents, copyrights, trademarks, software and trade secrets, owned
by the Company prior to the Distribution and for the licensing of certain of
such Intellectual Property thereafter. The Intellectual Property Agreement is
to provide HCS, IB and SEB, and their respective subsidiaries and associated
companies, with those continuing rights and licenses in such Intellectual
Property following the Distribution Date necessary for the continued conduct
of their respective businesses.

Under the terms of the Intellectual Property Agreement, the Intellectual
Property that relates primarily to the Instruments Business and the
Semiconductor Equipment Business will be transferred to IB and SEB,
respectively, with HCS retaining the Intellectual Property that relates
primarily to the Health Care Systems Business. Each company will grant a non-
exclusive, perpetual, royalty-free license under the Intellectual Property
that it owns to the other two companies for use in their respective fields.
More specifically, as of the Distribution Date, each of HCS, IB and SEB will
hold certain rights in the mark "VARIAN," the "VA" logo and other rights to
various trademarks, service marks, and trade names containing the word
"VARIAN."

REGULATORY APPROVALS

The Company does not believe that any material federal or state regulatory
approvals will be necessary in connection with the Distribution.

ACCOUNTING TREATMENT

If the stockholders of the Company approve the Distribution Proposals at the
Meeting and after the Company receives a favorable Tax Ruling or opinion of
counsel that the Distribution will qualify for non-recognition treatment
(see "--Federal Income Tax Aspects of the Distribution"), the Company will
thereafter present the businesses of IB and SEB as discontinued operations to
the extent financial information for periods prior to the Distribution is
required to be included in the Company's historical financial statements.
After the Distribution, the businesses of IB and SEB will each present
separate financial statements.

PROPOSAL TWO: APPROVAL OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF THE
COMPANY TO CHANGE THE NAME OF THE COMPANY

The Company's Board of Directors has approved an amendment to Article I of
the Company's Certificate of Incorporation (the "Company Charter"), to be
presented to the stockholders at the Meeting for their approval, to change the
name of the Company to Varian Medical Systems, Inc. in connection with the
Distribution. The Board of Directors believes that if the Distribution is
approved and consummated, the Company's current name, Varian Associates, Inc.,
would not accurately reflect the nature of HCS's business. The Board of
Directors believes that by changing the name of the Company to "Varian Medical
Systems, Inc." it will be more clearly identified with the Health Care Systems
Business, which will be the Company's primary business after the Distribution.
The proposed amendment being made pursuant to Proposal Two is included in the
amendments set forth in Annex A to this Proxy Statement.

THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
PROPOSAL TWO.

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<PAGE>

PROPOSAL THREE: APPROVAL OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION TO
SPECIFY THAT THE NUMBER OF DIRECTORS SHALL BE FIXED BY RESOLUTION OF THE BOARD
OF DIRECTORS.

Article V of the Company Charter currently provides that the number of
directors is fixed at 15, that the number of directors in each class is 5 and
that 8 directors constitutes a quorum of the Company Board. The Company's
Board of Directors has approved an amendment to Article V of the Company
Charter in connection with the Distribution to provide that the specific
number of directors comprising the Company Board (which must be at least
three) be fixed by resolution of the Company Board, and to delete the
reference to the size of each class of directors and to the specific quorum
requirement. These changes are necessary to give the Company Board the ability
to decrease the size of the HCS Board to seven as contemplated by the
Distribution. See "Management of HCS--Board of Directors of HCS." In addition,
these changes would provide the Company Board with the flexibility to
determine the appropriate number of directors who should constitute the Board
in the future. The proposed amendment being made pursuant to Proposal Three is
included in the amendments set forth in Annex A to this Proxy Statement.

The amendment contained in Proposal Three may have certain anti-takeover
effects which the Company Board believes will help protect the value of each
stockholder's investment in the Company. Such provision, when combined with
the proposed amendments set forth in Proposal Four, will allow the existing
Board to enlarge the Board of Directors and to fill the new directorships with
its own nominees, which could prevent a stockholder from obtaining majority
representation. See "The Distribution Proposals--Proposal Four: Approval of
Amendment to the Certificate of Incorporation of the Company to Change Certain
Corporate Governance Provisions--Reasons for the Charter Amendments" and
"Delaware Law and Certain Charter and By-Law Provisions--Certain Charter and
By-Law Provisions--Number of Directors; Removal; Filling Vacancies."

The Company Board expects to adopt conforming amendments to the Company By-
Laws that will become effective upon the effectiveness of this amendment.

THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
PROPOSAL THREE.

PROPOSAL FOUR: APPROVAL OF AMENDMENT TO THE CERTIFICATE OF INCORPORATION OF
THE COMPANY TO CHANGE CERTAIN CORPORATE GOVERNANCE PROVISIONS

The Company Board believes that it is advisable to adopt the amendments (the
"Charter Amendments") to the Company Charter described below, and,
accordingly, has adopted a resolution proposing that such Charter Amendments
be presented to the stockholders at the Meeting for their approval.

PROVISIONS RELATING TO THE BOARD OF DIRECTORS

Article V of the Company Charter would be amended, in connection with the
Distribution, to provide that directors can only be removed for cause, to
provide that vacancies in the Company Board may be filled only by the
affirmative vote of a majority of the remaining directors and to require a
supermajority vote for stockholders to amend such Article V.

The effect of a classified board of directors may be circumvented by
increasing or decreasing the size of the board. Article V will provide that
vacancies caused by an increase in the number of directors or otherwise may be
filled only by the affirmative vote of a majority of the remaining directors,
though less than a quorum, and that directors so chosen would serve for the
remainder of the full term of the class in which the new directorship was
created or the vacancy occurred. Under the DGCL, if a board of directors is
classified by action of the stockholders, unless the certificate of
incorporation specifies otherwise, members of the board of directors of each
class may be removed by the stockholders before the expiration of their
respective terms only for cause. Article V would confirm existing treatment
under the DGCL by expressly providing that directors may be removed only

55
<PAGE>

for cause by the affirmative vote of the stockholders entitled to vote
thereon. In addition, Article V will no longer provide for cumulative voting
for the election of directors. Finally, Article V would provide that such
article cannot be amended except by the affirmative vote of 66 2/3% of the
outstanding shares of the Company's Common Stock. See "Delaware Law and
Certain Charter and By-Law Provisions" and "Risk Factors--Risks Relating to
the Distribution--Certain Anti-takeover Features."

The proposed amendments to Article V being made pursuant to Proposal Four
are included in the amendments set forth in Annex A to this Proxy Statement.

ELIMINATION OF ACTION BY CONSENT OF STOCKHOLDERS

Article X of the Company Charter would be renumbered as Article XI and a new
Article X would be inserted effective as of the Distribution, which Article X
would require that all stockholder action be taken at a duly called annual or
special meeting and not by means of a written consent in lieu of such a
meeting ("New Article X"). New Article X would provide that such article
cannot be amended except by the affirmative vote of 66 2/3% of the outstanding
shares of the Company's Common Stock.

Pursuant to the DGCL, unless otherwise provided in the certificate of
incorporation, any action required or permitted to be taken by the
stockholders of a Delaware corporation may be taken without a meeting, without
prior notice and without a stockholder vote if a written consent setting forth
the action to be taken is signed by the holders of the outstanding stock
having the requisite number of shares that would be necessary to authorize
such action at a meeting at which all shares entitled to vote thereon were
present and voted. The Company Charter does not currently preclude stockholder
action by written consent. See "Delaware Law and Certain Charter and By-Law
Provisions" and "Risk Factors--Risks Relating to the Distribution--Certain
Anti-takeover Features."

The text of the proposed New Article X is set forth in Annex A to this Proxy
Statement.

STOCKHOLDER VOTING REQUIREMENTS FOR CHANGES TO BY-LAWS

Article VI of the Company Charter would be amended effective as of the
Distribution to require a vote of the holders of 66 2/3% of the outstanding
shares of the Company's Common Stock for stockholders to adopt, amend or
repeal the Company By-Laws ("Amended Article VI"). Amended Article VI would
also provide that such article cannot be amended except by the affirmative
vote of 66 2/3% of the outstanding shares of the Company's Common Stock.

Pursuant to the DGCL and the Company Charter, the Company By-Laws may
currently be amended by a majority of the stockholders or by the Company
Board. If the Charter Amendments are approved, the required vote for
stockholders to adopt, amend or repeal the Company By-Laws would be 66 2/3%.
As provided in the Company Charter, the Company Board would continue to have
the power to adopt, amend and repeal the Company By-Laws. See "Delaware Law
and Certain Charter and By-Law Provisions" and "Risk Factors--Risks Relating
to the Distribution--Certain Anti-takeover Features."

The text of the proposed Amended Article VI is set forth in Annex A to this
Proxy Statement.

REASONS FOR THE CHARTER AMENDMENTS

The amendments relating to the Board, the elimination of stockholder action
by written consent and the requirement of a 66 2/3% vote for stockholders to
amend the Company By-Laws and certain provisions of the Company Charter may
have certain anti-takeover effects which the Company Board believes will help
to protect the value of each stockholder's investment in the Company. Certain
current provisions of the Company Charter and the Company By-Laws already
provide certain protections against takeover bids that the Company Board
determines are not in the best interest of stockholders. See "Delaware Law and
Certain Charter and By-Law

56
<PAGE>

Provisions." The Company Board believes that the additional measures are
desirable in connection with the Distribution for a number of reasons.
Following the Distribution, HCS will consist solely of the Health Care Systems
Business. Following the Distribution HCS intends to continue to aggressively
pursue opportunities to build the business both through internal growth and by
strategic acquisitions and alliances. The Company's strategies for the Health
Care Systems Business have already yielded substantial value for stockholders.
The proposed Charter Amendments are intended to enable HCS to concentrate on
and implement this business plan following the Distribution and to foster
sustained long-term growth without the potential disruption caused by the
threat of a takeover not considered by the HCS Board to be in the best
interests of HCS and its stockholders.

In addition, following the Distribution, the price of HCS Common Stock may
not immediately reflect the full value of the company as a pure health care
systems business. It may take time for the market fully to appreciate the
dynamics of HCS following the Distribution and for HCS to realize the long-
term value of focusing on the health care systems business and implementing
its business plan. The additional protective provisions will enable HCS to
preserve for the benefit of HCS's stockholders the advantage of operating as a
dedicated health care company after the Distribution.

The Charter Amendments, combined with the existing classified Board, will
restrict the ability of a raider to acquire control of the Board at a single
annual stockholder meeting. In some cases, a raider may not be interested in
taking over a corporation, but rather may use the threat of a proxy fight
and/or a takeover bid as a means of forcing a corporation to adopt the
raider's strategy for the corporation. The threat of imminent removal of the
Board in a proxy contest or consent solicitation severely curtails the ability
of the Board to negotiate effectively with both a raider and other potential
acquirors. The Board may be deprived of the time and information necessary to
evaluate an unsolicited takeover proposal, to study alternative proposals and
to help ensure that the best price for stockholders is obtained in any
transaction involving HCS which may ultimately be undertaken. If the Board
were to determine that the best alternative for stockholders was for HCS to
remain independent, the Charter Amendments, combined with the classified
Board, could force the raider to take two annual meetings to take control of
the Board and implement its agenda. Accordingly, by making it more time-
consuming for a prospective acquiror to gain control of the Board, the Charter
Amendments create some additional negotiating leverage for the Board to seek
the best terms for all stockholders and to resist proposals that the Board
determines to be contrary to the best interests of stockholders.

Elimination of the stockholder consent procedure would prevent the holders
of the majority of HCS Common Stock from taking action without giving all
stockholders of HCS entitled to vote on such action the opportunity to
participate in determining that action. Elimination of the ability of the
stockholders to act by written consent will also serve to ensure that the
Board will have adequate time and opportunity to evaluate any stockholder
proposals and to avoid the expense and disruption of a proxy fight arising at
times other than at annual meetings of stockholders. As a result of the
provisions of the HCS By-Laws requiring stockholders to give advance notice of
their intention to propose nominees for directors or to propose business for
action at an annual meeting, the Board is afforded more time to evaluate an
unsolicited takeover proposal and to determine what actions are in the best
interests of stockholders.

The requirement for a 66 2/3% vote in order for stockholders to amend the
Company By-Laws or certain provisions of the Company Charter will prevent a
bare majority of the stockholders from seeking to eliminate the Company's
defenses against takeovers or otherwise frustrate certain types of corporate
action traditionally within the authority of the Company Board. In recent
years, potential acquirors, labor unions and other stockholders have proposed
by-law amendments to require the redemption of a company's stockholder rights
plan, terminate a company's defensive measures with respect to a takeover or
authorize expenditures of corporate funds without the approval of the board of
directors. While the validity of many of these by-law amendments is uncertain,
the Company Board believes such proposals undermine the efforts of the Company
Board to protect the value of each stockholder's investment in the Company.
See "Delaware Law and Certain Charter and By-Law Provisions" and "Risk
Factors--Risks Relating to the Distribution--Certain Anti-takeover Features."

57
<PAGE>

The Company Board expects to adopt conforming amendments to the Company By-
Laws that will become effective upon the effectiveness of these amendments.

THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
PROPOSAL FOUR.

PROPOSAL FIVE: APPROVAL OF THE ADOPTION BY IB OF THE IB OMNIBUS STOCK PLAN

IB is expected to adopt the IB Omnibus Stock Plan (the "IB Omnibus Stock
Plan") effective as of the Distribution, under which IB may grant to its
employees and consultants awards in the form of stock options, stock
appreciation rights, restricted stock, performance units and performance
shares, as well as substitute stock options. The IB Omnibus Stock Plan will be
administered by the IB Compensation Committee and is designed to enable IB to
attract and retain key employees and to directly link their incentives to the
performance of IB Common Stock, IB and/or its business units. For a more
complete description of the IB Omnibus Stock Plan, see "The IB Omnibus Stock
Plan." The IB Omnibus Stock Plan is set forth in full as Annex C to this Proxy
Statement.

Approval of Proposal Five will constitute approval of the IB Omnibus Stock
Plan described below under the heading "The IB Omnibus Stock Plan." Approval
of Proposal Five is being sought to establish IB's ability to deduct, for
federal income tax purposes, compensation paid pursuant to the exercise of
stock options and in respect of other awards. Under Section 162(m) of the Code
("Section 162(m)"), stockholder approval of performance-based compensation
plans is necessary to qualify for the performance-based compensation exception
to the limitation on a company's ability to deduct compensation paid to
certain specified individuals in excess of $1 million.

THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
PROPOSAL FIVE.

PROPOSAL SIX: APPROVAL OF THE ADOPTION BY IB OF THE IB MANAGEMENT INCENTIVE
PLAN

IB is expected to adopt the IB Management Incentive Plan (the "IB Management
Incentive Plan") effective as of the Distribution, under which IB may grant to
its employees awards in the form of cash incentives based on the performance
of IB or its business units. The IB Management Incentive Plan will be
administered by the IB Compensation Committee and is designed to enable IB to
attract and retain key employees and to directly link their incentives to the
performance of IB and its business units. For a more complete description of
the IB Management Incentive Plan, see "The IB Management Incentive Plan." The
IB Management Incentive Plan is set forth in full as Annex D to this Proxy
Statement.

Approval of Proposal Six will constitute approval of the IB Management
Incentive Plan described below under the heading "The IB Management Incentive
Plan." Approval of Proposal Six is being sought to establish IB's ability,
under Section 162(m), to deduct, for federal income tax purposes, compensation
paid pursuant to certain cash incentive awards.

THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
PROPOSAL SIX.

PROPOSAL SEVEN: APPROVAL OF THE ADOPTION BY SEB OF THE SEB OMNIBUS STOCK PLAN

SEB is expected to adopt the SEB Omnibus Stock Plan (the "SEB Omnibus Stock
Plan") effective as of the Distribution, under which SEB may grant to its
employees and consultants awards in the form of stock options, stock
appreciation rights, restricted stock, performance units and performance
shares, as well as substitute stock options. The SEB Omnibus Stock Plan will
be administered by the SEB Compensation Committee and is designed to enable
SEB to attract and retain key employees and to directly link their incentives
to the performance of SEB Common Stock, SEB and/or its business units. For a
more complete description of the SEB Omnibus Stock Plan, see "The SEB Omnibus
Stock Plan." The SEB Omnibus Stock Plan is set forth in full as Annex E to
this Proxy Statement.

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<PAGE>

Approval of Proposal Seven will constitute approval of the SEB Omnibus Stock
Plan described below under the heading "The SEB Omnibus Stock Plan." Approval
of Proposal Seven is being sought to establish SEB's ability, under Section
162(m), to deduct, for Federal income tax purposes, compensation paid pursuant
to the exercise of stock options and in respect of other awards.

THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
PROPOSAL SEVEN.

PROPOSAL EIGHT: APPROVAL OF THE ADOPTION BY SEB OF THE SEB MANAGEMENT
INCENTIVE PLAN

SEB is expected to adopt the SEB Management Incentive Plan (the "SEB
Management Incentive Plan") effective as of the Distribution, under which SEB
may grant to its employees awards in the form of cash incentives based on the
performance of SEB or its business units. The SEB Management Incentive Plan
will be administered by the SEB Compensation Committee and is designed to
enable SEB to attract and retain key employees and to directly link their
incentives to the performance of SEB and its business units. For a more
complete description of the SEB Management Incentive Plan, see "The SEB
Management Incentive Plan." The SEB Management Incentive Plan is set forth in
full as Annex F to this Proxy Statement.

Approval of Proposal Eight will constitute approval of the SEB Management
Incentive Plan described below under the heading "The SEB Management Incentive
Plan." Approval of Proposal Eight is being sought to establish SEB's ability,
under Section 162(m), to deduct, for federal income tax purposes, compensation
paid pursuant to certain cash incentive awards.

THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
PROPOSAL EIGHT.

PROPOSAL NINE: APPROVAL OF THE AMENDMENT AND RESTATEMENT BY THE COMPANY OF THE
COMPANY OMNIBUS STOCK PLAN

HCS is expected to sponsor an amended and restated Omnibus Stock Plan of the
Company (the "HCS Omnibus Stock Plan"). Under the HCS Omnibus Stock Plan, HCS
may grant to its employees and consultants awards in the form of stock
options, stock appreciation rights, restricted stock, performance units and
performance shares, based on the performance of HCS or its business units. The
principal amendments contained in the HCS Omnibus Stock Plan would (i) permit
awards to non-employee consultants of HCS, (ii) change the formula for
granting of stock awards to non-employee directors of HCS, (iii) allow non-
employee directors of HCS to elect to receive HCS Common Stock (or options to
purchase HCS Common Stock) in lieu of cash compensation and (iv) adopt new
performance measures for purposes of long-term incentives in order to comply
with Section 162(m). For a more complete description of the HCS Omnibus Stock
Plan, see "Management of HCS" and "Amendment and Restatement of the Company
Omnibus Stock Plan." The proposed HCS Omnibus Stock Plan is set forth in full
as Annex G to this Proxy Statement.

Approval of Proposal Nine will constitute approval of the amendments to the
Company Omnibus Stock Plan described below under the heading "Management of
HCS" and "Amendment and Restatement of the Company Omnibus Stock Plan."
Approval of Proposal Nine is being sought to establish HCS's ability under
Section 162(m) to deduct, for federal income tax purposes, compensation paid
pursuant to the exercise of stock options and in respect of other awards.

THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
PROPOSAL NINE.

PROPOSAL TEN: APPROVAL OF THE AMENDMENT AND RESTATEMENT BY THE COMPANY OF THE
COMPANY MANAGEMENT INCENTIVE PLAN

HCS is expected to sponsor an amended and restated Management Incentive Plan
(the "HCS Management Incentive Plan") under which HCS may grant to its
employee awards in the form of cash incentives based on

59
<PAGE>

the performance of HCS or its business units. The principal amendments
contained in the HCS Management Incentive Plan would (i) allow awards for
performance periods other than one fiscal year and (ii) adopt new performance
measures in order to comply with Section 162(m). For a more complete
description of the Company Management Incentive Plan, see "Management of HCS"
and "Amendment and Restatement of the Company Management Incentive Plan." The
proposed HCS Management Incentive Plan is set forth in full as Annex H to this
Proxy Statement.

Approval of Proposal Ten will constitute approval of the amendments to the
Company Management Incentive Plan described below under the heading
"Management of HCS" and "Amendment and Restatement of the Company Management
Incentive Plan." Approval of Proposal Ten is being sought to establish HCS's
ability under Section 162(m) to deduct, for federal income tax purposes,
compensation paid pursuant to certain cash incentive awards.

THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT STOCKHOLDERS VOTE FOR
PROPOSAL TEN.

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THE INSTRUMENTS BUSINESS
(WHICH WILL BECOME VARIAN, INC. FOLLOWING THE DISTRIBUTION)

SELECTED FINANCIAL DATA

The following table presents selected historical financial data of the
Instruments Business. The information set forth below should be read in
conjunction with "The Instruments Business Pro Forma Condensed Combined
Financial Statements," "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Instruments Business" and the
historical financial statements and notes thereto of the Instruments Business
included elsewhere in this Proxy Statement. The statement of earnings data set
forth below for the fiscal years ended October 2, 1998, September 26, 1997 and
September 27, 1996 and the balance sheet data at October 2, 1998 and September
26, 1997 are derived from, and are qualified by reference to, the audited
financial statements of the Instruments Business included elsewhere in this
Proxy Statement. The statement of earnings data for the fiscal years 1995 and
1994 and the balance sheet data at fiscal year end 1996, 1995 and 1994 are
derived from unaudited financial data of the Instruments Business not included
in this Proxy Statement.

The historical financial information may not be indicative of the
Instruments Business' future performance and does not necessarily reflect what
the financial position and results of operations of the Instruments Business
would have been had the Instruments Business operated as a separate, stand-
alone entity during the periods presented.

<TABLE>
<CAPTION>
FISCAL YEARS
---------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA
Sales.................................. $557.8 $541.9 $504.4 $459.4 $425.7
Operating Earnings before Taxes........ 39.2 26.8 11.5 2.7 20.3
Taxes on earnings.................... 15.8 12.6 5.3 0.7 10.0
Net Earnings........................... 23.4 14.2 6.2 2.0 10.3
Pro Forma Net Earnings Per Share(1).... $ 0.78 $ 0.47 $ 0.20 $ 0.06 $ 0.30
BALANCE SHEET DATA AT YEAR END
Total assets........................... $404.1 $357.9 $301.0 $282.0 $272.6
Long-term debt......................... $ -- $ -- $ -- $ -- $ --
</TABLE>
- --------
(1) The computation of pro forma net earnings per share is based on the
weighted average number of shares of the Company's Common Stock
outstanding during the respective periods, reflecting the anticipated
ratio of one share of IB Common Stock for each share of the Company's
Common Stock outstanding at the time of the Distribution.

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<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE INSTRUMENTS BUSINESS

This discussion and analysis of financial condition and results of
operations is based upon and should be read in conjunction with the combined
financial statements of the Instruments Business and notes thereto included
elsewhere in this Proxy Statement, as well as the information contained under
"Business of IB," "Risk Factors--Risks Relating to the Business of IB" and
"Risk Factors--Additional Risks Relating to Each of the Businesses." The
combined financial statements of the Instruments Business generally reflect
the results of operations, financial position and cash flows of the operations
expected to be transferred to IB in connection with the Internal Transfers and
Distribution. Accordingly, the Instruments Business' combined financial
statements have been carved out from the consolidated financial statements of
the Company using the historical results of operations and historical basis of
the assets and liabilities of the Instruments Business. The combined financial
statements include, among other things, allocations of certain Company
corporate assets (including pension assets), liabilities (including profit
sharing and pension benefits) and expenses (including legal, accounting,
employee benefits, insurance services, information technology services,
treasury and other Company corporate overhead) to the Instruments Business
using the allocation methodology described in Note 1 of the Notes to the
Instruments Business Combined Financial Statements. The combined financial
statements do not reflect any changes that may occur in the financing and
operations of IB as a result of the Distribution.

RESULTS OF OPERATIONS

Fiscal Year

IB's fiscal years reported are the 52- or 53-week periods which ended on the
Friday nearest September 30. Fiscal year 1998 comprises the 53-week period
ended on October 2, 1998. Fiscal years 1997 and 1996 comprise the 52-week
periods ended on September 26, 1997 and September 27, 1996, respectively.

Fiscal Year 1998 Compared to Fiscal Year 1997

Sales. IB's sales of $558 million in fiscal year 1998 were 3% higher than
its sales of $542 million in fiscal year 1997. Fiscal year 1998 sales were
driven largely by IB's Analytical Instruments and NMR Instruments lines. The
effect of the stronger U.S. dollar and a softening Asian market slowed sales
growth during fiscal year 1998. Geographically, sales in North America of $312
million and Europe of $163 million in fiscal year 1998 represented increases
of 3% and 15%, respectively, as compared to fiscal year 1997, while sales in
Asia of $57 million in fiscal year 1998 declined 18% as compared to fiscal
year 1997. IB expects its sales in the United States and Europe to continue to
grow but is uncertain as to the timing of any economic recovery, or increased
sales, in Asia. Overall, IB expects single-digit sales growth in fiscal year
1999. However, IB may experience lower operating earnings in fiscal year 1999
depending on the extent and timing of restructuring plans currently being
developed.

Gross Profit. IB's gross profit of $221 million in fiscal year 1998 was 40%
of sales, compared to $211 million, or 39% 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 improved operating
efficiencies.

Research and Development. Research and development expenses of $30 million
in fiscal year 1998 were 5% of sales compared to $32 million, or 6% of sales,
in fiscal year 1997. This decrease reflected the shift away from outside
consultants and the Ginzton Research Center to in-house employees.

Marketing. Marketing expenses of $114 million in fiscal year 1998 and $110
million in fiscal year 1997, were 20% of sales in fiscal years 1998 and 1997,
as increases in expenses in the United States in fiscal year 1998 were offset
by lower foreign marketing expenses due to the strengthening U.S. dollar.

General and Administrative. General and administrative expenses of $39
million, or 7% of sales, in fiscal year 1998, decreased from $42 million, or
8% of sales, in fiscal year 1997. The decrease in general and administrative
expenses in fiscal year 1998 was due primarily to improved employee
productivity and the effect of the stronger U.S. dollar on IB's expenses
outside the United States.

62
<PAGE>

Taxes on Earnings. IB's effective income tax rate was 40.2% in fiscal year
1998, compared to 47.0% in fiscal year 1997. These rates were higher than the
U.S. federal statutory rate because IB had significant earnings in high-tax
foreign countries. The fiscal year 1997 rate was greater than the fiscal year
1998 rate due to the larger portion of high-taxed foreign earnings in fiscal
year 1997. Future tax rates may vary from the historic rates depending on the
worldwide allocation of earnings and tax planning strategies.

Net Earnings. Net earnings of $23 million ($0.78 pro forma per share) in
fiscal year 1998 increased from the $14 million ($0.47 pro forma per share)
earned in fiscal year 1997. The increase in net earnings was due primarily to
revenue growth in excess of marketing and general and administrative expenses
and the other factors described above.

Fiscal Year 1997 Compared to Fiscal Year 1996

Sales. IB's sales of $542 million in fiscal year 1997 were 7% higher than
its sales of $504 million in fiscal year 1996. All of IB's product lines
contributed to the higher sales in fiscal year 1997. Geographically, sales in
fiscal year 1997 in North America of $302 million and Asia of $70 million both
increased 11% from fiscal year 1996, while sales in Europe of $142 million
declined 3% in fiscal year 1997.

Gross Profit. IB's gross profit of $211 million in fiscal year 1997 was 39%
of sales, compared to $194 million, or 38% of sales, in fiscal year 1996. The
increase in gross profit was attributable primarily to improved sales volume
and relatively constant fixed costs.

Research and Development. Research and development expenses of $32 million
in fiscal year 1997 were 6% of sales compared to $30 million, or 6% of sales,
in fiscal year 1996. The increase in research and development expenses, in
absolute terms, was primarily due to increased consultancy costs.

Marketing. Marketing expenses of $110 million in fiscal year 1997 were 20%
of sales compared to $107 million, or 21% of sales in fiscal year 1996. The
increase in marketing expenses, in absolute terms, was primarily due to
increased new product introductions and new sales offices in Latin America.

General and Administrative. General and administrative expenses of $42
million were 8% of sales in fiscal year 1997, compared to $45 million, or 9%
of sales, in fiscal year 1996. The decrease in general and administrative
expenses was due primarily to a reduction in corporate overhead expenses.

Taxes on Earnings. IB's effective income tax rate was 47.0% in fiscal year
1997, compared to 46.1% in fiscal year 1996. These rates were higher than the
U.S. federal statutory rate because IB had significant earnings in high-tax
foreign countries.

Net Earnings. Net earnings of $14 million ($0.47 pro forma per share) in
fiscal year 1997 increased from the $6 million ($0.20 pro forma per share)
earned in fiscal year 1996. The increase in net earnings was due primarily to
revenue growth in excess of marketing and general and administrative expenses
and the other factors described above.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. It is effective for IB's 1999 fiscal year. The
impact of the implementation of SFAS No. 130 on the combined financial
statements of IB has not yet been determined.

63
<PAGE>

of segment information. It is effective for IB's 1999 fiscal year. The impact
of the implementation of SFAS No. 131 on the reporting of IB's segment
information has not yet been determined.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and is effective for IB's
2000 fiscal year. The impact of the implementation of SFAS No. 133 on the
combined financial statements of IB has not yet been determined.

LIQUIDITY AND CAPITAL RESOURCES

IB's debt has historically been incurred or managed at the parent level. In
connection with the Distribution, a portion of the Company's debt will be
assumed by IB. IB will not be able to rely on the earnings, assets or cash
flows of HCS or SEB after the Distribution to service this debt nor, however,
will its earnings, assets or cash flows be used to contribute to the capital
requirements of those entities.

The debt to be assumed by or transferred to IB at the time of the
Distribution will consist of between $50 and $100 million of Term Loans and
Notes Payable, based on the Company's outstanding indebtedness as of
October 2, 1998 and projected operating results, certain other transactions
and scheduled debt repayments through the Distribution Date. See "The
Instruments Business Forecasted Capitalization." As of October 2, 1998,
interest rates on the Company's outstanding Term Loans ranged from 6.70% to
7.29%, and the weighted average interest rate on these Term Loans was 7.03%.
As of October 2, 1998, interest rates on the Company's outstanding Notes
Payable ranged from 1.50% to 49.00%, and the weighted average interest rate on
these Notes Payable was 1.96%. While IB will assume 50% of the Term Loans, the
specific Term Loans and Notes Payable, if any, that IB will assume in
connection with the Distribution will be determined in accordance with the
Distribution Agreement. See "The Distribution Proposals--Proposal One: The
Distribution--Distribution Agreement." The Term Loans currently 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. In connection with the assumption of the Term Loans by IB, the lender
may revise existing or impose additional restrictive covenants. IB may enter
into one or more credit facilities for working capital and other general
corporate purposes after the Distribution. Any such credit facility may
contain certain representations and warranties, conditions, affirmative,
negative and financial covenants and events of default customary for such
facilities. IB does not expect that it will have any outstanding borrowings
under any such credit facility as of the Distribution.

The Company has used a centralized cash management system to finance its
operations. Cash deposits from the businesses are transferred to the Company
on a daily basis, and the Company funds the Company's required disbursements.
As a result, IB reported no cash and cash equivalents, at October 2, 1998 and
September 27, 1997, respectively. Pursuant to the Distribution Agreement, it
is anticipated that IB will be entitled to receive a cash contribution from
the Company in such amount so that as of the time of the Distribution, IB will
have Net Debt equal to approximately 50% of the aggregate Net Debt of IB and
HCS, subject to such adjustments as may be necessary to provide HCS with a Net
Worth of between 40% and 50% of the aggregate Net Worths of IB and HCS.
Further, IB is entitled to receive approximately 50% of the estimated
proceeds, if any, to be received by HCS after the Distribution from the sale
of the Company's long-term leasehold interest at certain of its Palo Alto
facilities, together with certain related buildings and other corporate assets
and required to pay approximately 50% of any estimated transaction expenses to
be paid by HCS after the Distribution (in each case reduced for estimated
taxes payable or tax benefits received from all sales and transaction
expenses). See "The Distribution Proposals--Proposal One: The Distribution--
Distribution Agreement."

IB generated $37 million of cash from operations in fiscal year 1998,
compared to $17 million in fiscal year 1997 and $23 million in fiscal year
1996. Fiscal year 1998 net earnings plus non-cash charges for depreciation
totalling $41 million, which was offset by a decrease of $7 million in
liabilities and a $5 million decrease in customer advances, respectively,
between fiscal year 1997 and fiscal year 1998, accounted for most of the cash
generated.

IB used $54 million of cash for investing activities in fiscal year 1998,
primarily for the acquisition of Chrompack International B.V., the remaining
minority interest in Varian Iberica, S.L., as well as the replacement

64
<PAGE>

of machinery and equipment. This compares to $52 million used for investing
activities in fiscal year 1997, primarily for the acquisitions of a product
line from each of Rainin Instruments Company, Inc. and Otsuka Electronics
(USA) Inc., as well as the replacement of machinery and equipment. IB used $22
million for investing activities in fiscal year 1996, primarily for capital
expenditures.

IB currently has no plans to materially modify or expand its facilities or
to make other material capital expenditures. Restructuring plans are currently
being developed and are expected to result in additional costs and
expenditures, the timing and amount of which have not yet been determined. In
addition, the Distribution Agreement provides that IB is responsible for
certain litigation described under "Business of IB--Legal Proceedings" and
further provides that IB will indemnify SEB and HCS for one-third of the
costs, expenses and other liabilities of the Company relating to certain
discontinued operations of the Company, including certain environmental
liabilities. See "--Environmental Matters."

IB's liquidity is affected by many factors, some based on the normal ongoing
operations of the business and others related to the uncertainties of the
industry and global economies. Although IB's cash requirements will fluctuate
based on the timing and extent of these factors, management believes that cash
generated from operations, together with IB's borrowing capability, will be
sufficient to satisfy commitments for capital expenditures and other cash
requirements for the current fiscal year and fiscal year 2000.

ENVIRONMENTAL MATTERS

IB'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 their 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 CERCLA at eight sites
where the Company 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, foreign,
federal, state and/or local agencies at certain current or former Company
facilities (including facilities disposed of in connection with the Company's
sale of its Electron Devices business during fiscal year l995 and the sale of
its TFS business during fiscal year 1997). Expenditures by the Company for
environmental investigation and remediation amounted to $5 million in fiscal
year 1998, compared with $2 million in fiscal year 1997 and $5 million in
fiscal year 1996.

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 2, 1998, the Company nonetheless estimated that the
future exposure for environmental-related investigation and remediation costs
for these sites and facilities ranged in the aggregate from $22 million to $49
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 2, 1998. 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 the Company has accrued $22 million in
estimated environmental costs as of October 2, 1998. The amount accrued has
not been discounted to present value.

65
<PAGE>

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 futures
costs were reliably determinable. Together, these amounts totaled $51 million
at October 2, 1998. Accordingly, the Company has accrued $22 million as of
October 2, 1998, which represents its best estimate of the future costs
discounted at 4%, net of inflation. This accrual is in addition to the $22
million described in the preceding paragraph.

Under the Distribution Agreement, IB has agreed to indemnify HCS and SEB for
one-third of these environmental investigation and remediation costs, as
adjusted for any insurance proceeds and tax benefits expected to be realized
upon the payment of these costs. Accordingly, IB had recorded $8 million as
its portion of these estimated future costs for environmental liabilities as
of October 2, 1998.

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. IB believes
that most of these cost ranges will narrow as investigation and remediation
activities progress.

IB believes that its reserves are adequate, but as the scope of its
obligation becomes more clearly defined, these reserves 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 IB'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, IB's management believes
that the costs of these environmental related matters are not reasonably
likely to have a material adverse effect on the consolidated financial
statements of IB.

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 IB 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 IB's
business, results of operations or financial condition.

State of Readiness. IB has initiated a comprehensive assessment of potential
Year 2000 problems with respect to (1) internal systems, (2) products and (3)
significant third parties with which IB does business.

IB 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. With respect to enterprise information systems, IB in 1994 initiated
replacement of its existing systems with a single company-wide system supplied
by SAP America, Inc., which system is designed and tested by SAP for Year 2000
capability. Installation of that system has been staged to replace first those
existing systems that are not Year 2000 capable. Installation of the new SAP
system is approximately 70% complete, with 90% completion expected by July
1999 and full completion expected by the end of 1999. Upgrade of enterprise
information systems is approximately 61% complete, with 80% completion
expected by July 1999 and 100% completion expected by December 1999; upgrade
of networking and telecommunications systems is approximately 95% complete,
with 100% completion expected by July 1999; upgrade of factory-specific
information systems is approximately 70% complete, with 91% completion
expected by July 1999 and 93% completion expected by December 1999; and
upgrade of non-IT systems, computers and packaged software, and facilities
systems are approximately 80% complete, with 100% completion expected by July
1999.

66
<PAGE>

IB has 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 complete, and IB 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 IB's
current products.

With respect to previously-sold products, IB does not intend to assess Year
2000 preparedness of every product it has ever sold, but rather is focusing
its assessments on products that will be under written warranties or are still
relatively early in their useful life, are more likely to be dependent on non-
IT systems that are not Year 2000 capable, and/or cannot be easily upgraded
with readily available externally-utilized computers and packaged software.
These assessments are expected to be substantially completed by July 1999.
Where IB identifies previously-sold products that are not Year 2000 capable,
IB intends in some cases to develop and offer to sell upgrades or retrofits,
identify corrective measures which the customer could itself undertake or
identify for the customer other suppliers of upgrades or retrofits. There may
be instances where IB will be required to repair and/or upgrade such products
at its own expense. Schedules for completing those corrective actions vary
considerably among IB's businesses and products, but are generally expected to
be substantially completed by July 1999.

IB is still assessing potential Year 2000 problems of third parties with
which IB has material relationships, which will be primarily suppliers of
products or services. These assessments will identify and prioritize critical
suppliers, review those suppliers' written assurances on their own assessments
and correction of Year 2000 problems and develop appropriate contingency plans
for those suppliers which might not be adequately prepared for Year 2000
problems. These assessments are expected to be substantially completed by
April 1999.

Costs. As of October 2, 1998, IB estimates that it had incurred
approximately $700,000 to assess and correct Year 2000 problems. Although
difficult to assess, based on its assessment to date, IB estimates that it
will incur approximately $550,000 in additional costs to assess and correct
Year 2000 problems, which costs are expected to be incurred throughout fiscal
year 1999 and the first half of fiscal year 2000. All of these costs 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, IB expects that
certain costs will 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 IB's actual costs to assess and
correct Year 2000 problems will not be higher than the foregoing estimate.

Risks. Failure of IB or its key suppliers to accurately assess and correct
Year 2000 problems would likely result in interruption of certain of IB's
normal business operations, which could have a material adverse effect on IB's
business, results of operations or financial condition. If IB 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 IB 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 IB 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 IB
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 IB does
not expect to be 100% Year 2000 compliant by the end of 1999,

67
<PAGE>

IB does not currently believe that any Year 2000 non-compliance in IB's
information systems would have a material adverse effect on IB'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; 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 the products they supply to
IB; 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. See
"Risk Factors--Risks Relating to the Distribution--Transitioning to New
Information Technology Infrastructures."

Because of uncertainties as to the extent of Year 2000 problems with IB's
previously-sold products and the extent of any legal obligation of IB to
correct Year 2000 problems in those products, IB cannot yet assess risks to IB
with respect to those products. Because its assessments are not yet complete,
IB 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 IB's results of operations.

Contingency Plans. With respect to IB's enterprise information systems, IB
has a contingency plan if the SAP system is not fully installed before
December 31, 1999. That plan primarily involves installation where necessary
of a Year 2000 capable upgrade of existing information systems pending
complete installation of the SAP system. That upgrade is currently in
acceptance testing, and, if functional, will be held for contingency purposes.

With respect to products and significant third parties, IB 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
by December 31, 1999. It is currently anticipated that the focus of these
contingency plans will be the possible interruption of supply of key
components or services from third parties.

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<PAGE>

IB MARKET RISK

FOREIGN CURRENCY EXCHANGE RISK

As a global concern, IB faces exposure to adverse movements in foreign
currency exchange rates. This exposure may change over time as IB's business
practices evolve and could have a material adverse impact on IB's financial
results. Historically, IB's primary exposures have related to non-U.S. dollar
denominated sales and purchases throughout Europe and Asia. The Euro was
adopted as a common currency for members of the European Monetary Union on
January 1, 1999. IB is evaluating, among other issues, the impact of the Euro
conversion on its foreign currency exposure. Based on its evaluation to date,
IB does not expect the Euro conversion to create any change in its currency
exposure due to IB's existing hedging practices.

At the present time, IB hedges its currency exposures associated with
certain assets and liabilities denominated in non-functional currencies and
with anticipated foreign currency cash flows. IB does not enter into forward
exchange contracts for trading purposes. IB's forward exchange contracts
generally range from one to three months in original maturity, and no forward
exchange contract has an original maturity greater than one year.

Forward exchange contracts outstanding and their unrealized gains and losses
as of October 2, 1998 are summarized as follows:
<TABLE>
<CAPTION>
NOTIONAL NOTIONAL
VALUE VALUE UNREALIZED FAIR
PURCHASED SOLD GAIN/(LOSS) VALUE
--------- -------- ----------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Japanese yen........................... $ -- $ 1,637 $ 5 $ 31
French francs.......................... -- 11,550 -- (467)
Canadian dollars....................... -- 7,042 206 260
British pounds......................... 12,044 4,050 537 515
Italian lira........................... -- 4,196 -- (217)
German marks........................... -- 1,955 -- (100)
Spanish pesetas........................ -- 691 -- (38)
Korean won............................. -- 283 -- 1
Australian dollars..................... 6,396 -- -- 23
Swiss francs........................... 246 -- -- 10
Swedish krona.......................... 4,789 -- -- (5)
------- ------- ---- -----
Total.................................. $23,475 $31,404 $748 $ 13
======= ======= ==== =====
</TABLE>

The fair value of forward exchange contracts generally reflects the
estimated amounts that IB would receive or pay to terminate the contracts at
the reporting date, thereby taking into account and approximating the current
unrealized and realized gains or losses of open contracts. The notional
amounts of forward exchange contracts are not a measure of IB's exposure.

INTEREST RATE RISK

Although payments under certain of IB's operating leases for its facilities
are tied to market indices, IB is not exposed to material interest rate risk
associated with its operating leases.

69
<PAGE>

THE INSTRUMENTS BUSINESS
(WHICH WILL BECOME VARIAN, INC. FOLLOWING THE DISTRIBUTION)

SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS

The following financial forecast of the capitalization of IB is based on
forecasts and assumptions by the Company's management concerning events and
circumstances that are expected to occur subsequent to the latest historical
balance sheet date but prior to and including April 1, 1999 (the anticipated
Distribution Date), including future results of operations and other events.
For purposes of the forecasted capitalization at April 1, 1999, net earnings
in the first six months of fiscal year 1999 are assumed to approximate the
same level as in the last six months of fiscal year 1998. In addition,
restructuring plans are currently being developed and may result in additional
charges to IB's equity. Assumptions with respect to events that will occur
between October 3, 1998 and April 1, 1999 include the following:

. Receipt of a cash contribution from the Company of $8 million and the
assumption of long-term debt (including current portion) of $58 million
from the Company.

. Amendment of IB's certificate of incorporation to give IB authorized
capital stock of (i) 99,000,000 shares of IB Common Stock of which
approximately 29,909,061 shares will be issued and outstanding upon the
Distribution (based upon the number of shares of the Company's Common
Stock outstanding as of December 15, 1998) and (ii) 1,000,000 shares of
preferred stock, $.01 par value per share, none of which will be issued
and outstanding upon the Distribution.

In the Company's management's judgment, the listed assumptions and forecasts
reflect those material events or transactions that occurred since October 3,
1998 or are expected to occur prior to the anticipated Distribution Date,
other than the potential restructuring charge discussed in the first paragraph
above. There have been no changes in accounting principles anticipated in this
capitalization forecast nor are any such changes currently contemplated.

LIMITATIONS ON PROJECTIONS AND FORECASTS

The assumptions and estimates underlying the projected and forecasted data
and information in this Proxy Statement are inherently uncertain and, although
considered reasonable by management of the Company, are subject to significant
business, economic and competitive uncertainties, many of which are beyond the
control of the Company and its subsidiaries. Accordingly, there can be no
assurance that the projected and forecasted financial results will be
realized. In fact, actual results in the future usually will differ from the
forecasted financial results and the differences may be material.

Neither the Company nor any of its subsidiaries intends after the date of
this Proxy Statement to update any forecasted or projected financial data or
information contained in this Proxy Statement and the absence of such an
update should not be construed as any indication regarding the views or
beliefs of management of the Company (or of IB after the Distribution)
concerning the forecasted or projected data or information contained in this
Proxy Statement.

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<PAGE>

THE INSTRUMENTS BUSINESS
(WHICH WILL BECOME VARIAN, INC. FOLLOWING THE DISTRIBUTION)

FORECASTED CAPITALIZATION

The following table sets forth the combined capitalization of IB as of
October 2, 1998 on a historical basis, forecasted at April 1, 1999 (the
anticipated Distribution Date), and as adjusted to give effect to the
Distribution and the other transactions contemplated by the Distribution
Agreement. The significant assumptions used below have been described in
"The Instruments Business (Which Will Become Varian, Inc. Following The
Distribution)--Summary of Significant Capitalization Forecast Assumptions" on
the preceding page. The following data is qualified in its entirety by the
financial statements of the Instruments Business and other information
contained elsewhere in this Proxy Statement.

<TABLE>
<CAPTION>
FORECASTED
OCTOBER 2, AT
1998 APRIL 1, PRO FORMA AFTER
HISTORICAL 1999(1) DISTRIBUTION(1)
---------- ---------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Cash and cash equivalents................ $ -- $ -- $ 8.0
====== ====== ======
Notes payable............................ $ -- $ -- $ --
====== ====== ======
Long-Term Debt, including current
portion................................. $ -- $ -- $ 58.0
------ ------ ------
Equity:
Divisional Equity...................... $243.5 $ -- $ --
Common stock, par value $.01 per share:
authorized--99,000,000 shares
issued and outstanding--none
historical and 29,909,061 pro forma.. -- 0.3 0.3
Preferred stock, par value $.01 per
share:
authorized--1,000,000 shares
issued and outstanding--none
historical or pro forma.............. -- -- --
Capital in Excess of Par Value......... -- 254.2 204.2
------ ------ ------
Total Equity....................... 243.5 254.5 204.5
------ ------ ------
Total Capitalization............. $243.5 $254.5 $262.5
====== ====== ======
</TABLE>
- --------
(1) See "The Instruments Business (Which Will Become Varian, Inc. Following
the Distribution)--Summary of Significant Capitalization Forecast
Assumptions" on the preceding page.

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<PAGE>

THE INSTRUMENTS BUSINESS
(WHICH WILL BECOME VARIAN, INC. FOLLOWING THE DISTRIBUTION)

PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The unaudited pro forma condensed combined financial statements of the
Instruments Business, which will become Varian, Inc. following the
Distribution, set forth below consist of a pro forma balance sheet as of
October 2, 1998 and a pro forma statement of earnings for the year ended
October 2, 1998. The pro forma balance sheet was prepared to give effect to
the Distribution as if it had occurred on October 2, 1998 and the pro forma
statement of earnings was prepared to give effect to the Distribution as if it
had occurred on September 27, 1997. The unaudited pro forma balance sheet set
forth below does not purport to represent what the Instruments Business'
financial position actually would have been had the Distribution occurred on
the date indicated or to project the Instruments Business' financial position
for any future date. The unaudited pro forma statement of earnings set forth
below does not purport to represent what the Instruments Business' operations
actually would have been or to project the Instruments Business' operating
results for any future period. The unaudited pro forma adjustments are based
upon currently available information and certain assumptions that the
Instruments Business' management believes are reasonable. The unaudited pro
forma statements should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations of the
Instruments Business" and the historical financial statements of the
Instruments Business and the notes thereto appearing elsewhere in this Proxy
Statement.

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<PAGE>

THE INSTRUMENTS BUSINESS
(WHICH WILL BECOME VARIAN, INC. FOLLOWING THE DISTRIBUTION)

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

OCTOBER 2, 1998

<TABLE>
<CAPTION>
IB PRO FORMA IB
HISTORICAL ADJUSTMENTS(1) PRO FORMA
---------- -------------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................ $ -- $ 8.0 $ 8.0
Other current assets..................... 241.7 -- 241.7
------ ----- ------
Total current assets................... 241.7 8.0 249.7
Property, Plant and Equipment, net......... 94.7 -- 94.7
Other Assets............................... 67.7 -- 67.7
------ ----- ------
Total Assets........................... $404.1 $ 8.0 $412.1
====== ===== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable and current portion of
long-term debt.......................... $ -- $ 6.0 $ 6.0
Other current liabilities................ 149.6 -- 149.6
------ ----- ------
Total Current Liabilities.............. 149.6 6.0 155.6
Long-Term Debt............................. -- 52.0 52.0
Other liabilities.......................... 11.0 -- 11.0
------ ----- ------
Total Liabilities...................... 160.6 58.0 218.6
Equity..................................... 243.5 (50.0) 193.5
------ ----- ------
Total Liabilities and Equity............... $404.1 $ 8.0 $412.1
====== ===== ======
</TABLE>

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

(1) Assumes a cash contribution by the Company to IB of $8.0 million and
the assumption by IB of $58.0 million in long-term debt, including
current portion, from the Company in connection with the Distribution.

73
<PAGE>

THE INSTRUMENTS BUSINESS
(WHICH WILL BECOME VARIAN, INC. FOLLOWING THE DISTRIBUTION)

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS

FISCAL YEAR 1998

<TABLE>
<CAPTION>
IB PRO FORMA IB
HISTORICAL ADJUSTMENTS(1) PRO FORMA
---------- -------------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Sales....................................... $557.8 $ -- $557.8
------ ----- ------
Operating Costs and Expenses
Cost of sales............................. 336.4 -- 336.4
Research and development.................. 29.6 -- 29.6
Marketing................................. 113.9 -- 113.9
General and administrative................ 38.7 -- 38.7
------ ----- ------
Total operating costs and expenses...... 518.6 -- 518.6
------ ----- ------
Operating Earnings.......................... 39.2 -- 39.2
Interest expense.......................... -- (4.1) (4.1)
------ ----- ------
Operating Earnings before Taxes............. 39.2 (4.1) 35.1
Taxes on earnings......................... 15.8 (1.6) 14.2
------ ----- ------
Net Earnings................................ $ 23.4 $(2.5) $ 20.9
====== ===== ======
Pro Forma Net Earnings Per Share(2)......... $ 0.78 $ 0.70
====== ======
</TABLE>

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS

(1) Reflects pro forma adjustment for interest expense on $58.0 million of
long-term debt at an estimated annual rate of interest of 7.03%. A change
of 25 basis points in this estimated annual rate of interest would impact
pro forma interest expense by $145,000. The pro forma adjustment for
income taxes is based upon statutory income tax rates.
(2) The computation of pro forma net earnings per share is based on the
weighted average number of shares of the Company's Common Stock
outstanding during fiscal year 1998, reflecting the anticipated ratio of
one share of IB Common Stock for each share of the Company's Common Stock
outstanding at the time of the Distribution.

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<PAGE>

BUSINESS OF IB

GENERAL

IB, a newly formed, wholly owned subsidiary of the Company, will own and
operate the Instruments Business after the Distribution. References in this
section to "IB" refer to IB and its subsidiaries after giving effect to the
Internal Transfers and the Distribution. References in this section to the
"Instruments Business" refer to the historical business and operations of the
Instruments Business conducted by the Company prior to the Distribution.

OVERVIEW

IB develops, manufactures, sells and services a variety of scientific
instruments and equipment. IB is a major supplier of analytical and research
instruments and related equipment for studying the chemical composition of a
myriad of substances, including metals, inorganic materials, organic
compounds, polymers, natural substances and biochemicals. IB also develops,
manufactures, sells and services nuclear magnetic resonance spectrometers for
probing the structural properties of molecules and for producing non-invasive
three-dimensional images of biomedical materials. IB also develops,
manufactures, sells and services high vacuum products that serve a wide range
of industrial and scientific applications, such as high-energy physics,
surface analysis, scientific and industrial coating processes, analytical
instrumentation and semiconductor manufacturing. IB is also a state-of-the-art
contract manufacturer of advanced electronic assemblies and subsystems such as
printed circuit boards. The Instruments Business operates in 70 countries and
at October 2, 1998 had approximately 3,000 employees.

PRODUCTS

IB's products can be broadly classified into the following categories:
analytical instruments, nuclear magnetic resonance instruments, vacuum
products and electronic components assembly.

Analytical Instruments

Analytical Instruments includes Chromatography Systems and Optical
Spectroscopy Instruments operations, which manufacture liquid and gas
chromatographs, gas chromatograph/mass spectrometers,
ultraviolet/visible/near-infrared spectrometers, atomic absorption
spectrometers, inductively coupled plasma spectrometers, inductively coupled
plasma/mass spectrometers, data management systems and small disposable tools
used to prepare chemical samples for analysis. These products are used in
environmental monitoring and analysis, biological and biochemical research,
and quality control and research in such industries as pharmaceuticals, foods,
metals, chemicals and petroleum as well as in independent test laboratories.
They are employed in analyzing chemical substances including metals, inorganic
materials, organic compounds, polymers, natural substances and biochemicals.

The Chromatography Systems operation ("CS") is a major international
supplier of gas and liquid chromatographs, data management systems and gas
chromatograph/mass spectrometer systems, as well as sample preparation
products and other consumable supplies. Chromatography is a technique that
separates a mixture of substances by taking advantage of the characteristics
specific to each component. CS's systems are used for chemical analysis,
industrial hygiene, pollution monitoring, pharmaceutical analysis and drug
discovery and monitoring applications. CS supplies a complete line of products
to provide all analytical and preparative requirements. CS's manufacturing
facilities are located in Walnut Creek, California, Woburn, Massachusetts,
Middelburg, The Netherlands and Harbor City, California.

The Optical Spectroscopy Instruments operation ("OSI") is a leading
worldwide supplier of atomic absorption, inductively coupled plasma,
inductively coupled plasma/mass spectrometers and ultraviolet/ visible/near
infrared spectrophotometers--instruments that are used to measure compounds
and some 66 different metals in various substances. Optical spectroscopy is a
method of chemical analysis based on the absorption, or emission, by matter of
electromagnetic radiation of a specific wavelength or frequency. OSI's
manufacturing facility is located in Melbourne, Australia.

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<PAGE>

Nuclear Magnetic Resonance Instruments

Nuclear Magnetic Resonance Instruments ("NMRI") is a leading worldwide
supplier of nuclear magnetic resonance ("NMR") spectrometers for advanced
biomolecular, chemical and material science research, as well as for the more
routine analytical work typically performed in industrial and academic
environments. NMRI's manufacturing facilities are located in Palo Alto,
California, and Fort Collins, Colorado.

NMR spectroscopy gives researchers the ability to determine the structure of
many biomolecules including proteins, nucleic acids (DNA and RNA) and
carbohydrates. NMRI's systems are used in a variety of laboratories, including
those conducting basic research and larger facilities that are creating new
pharmaceuticals. NMRI's systems can be found in all major pharmaceutical
companies worldwide, where they are key tools in developing new drugs to fight
disease.

Approximately 80% of NMRI's systems are used for analysis on liquids, 15% on
solids and 5% on imaging (producing pictures). The imaging capability of NMR
allows researchers to non-invasively capture a cross-sectional view of an
object, for example the brain, to map and understand its various parts. Solid
sample NMR research allows researchers to determine the microstructure of
crystals, plastics, rubbers, ceramics, polymers and other solids.

Vacuum Products

Vacuum Products is a worldwide supplier of products used to create, maintain
and contain a vacuum environment. These include vacuum pumps, helium leak
detectors and related instruments and gauges, which are used in many
commercial and scientific applications, including industrial processes,
semiconductor manufacturing, high-energy physics, surface analysis and space
research. Vacuum Products' manufacturing facilities are located in Lexington,
Massachusetts and Torino, Italy.

Vacuum Products offers four types of vacuum pumps: primary, diffusion,
turbo-molecular and ion. Primary pumps include rotary vane and dry diaphragm
mechanical pumps, sorption pumps and dry scroll pumps. Diffusion pumps include
the Very High Speed-Series products. Turbo-molecular pumps provide a high
speed/compression ratio in a compact package. Ion pumps, used to achieve
ultra-high vacuum environments, are used primarily to create ultra-high vacuum
in a variety of applications, from electron microscopes to linear
accelerators.

Vacuum Products also has been a worldwide leader in helium mass spectrometer
leak detectors since the 1960s. These products are used in many commercial and
scientific applications, including industrial processes, analytical
instruments and high-energy physics.

Vacuum Products also produces an extensive line of vacuum instruments and
gauges. Its gauge controllers and gauge tubes are designed for industrial use,
where simplicity of operation and rugged design are important, as well as for
research applications.

Electronic Components Assembly

Tempe Electronics Center ("TEC") is a contract electronic manufacturer of
printed wiring assemblies. It supplies components to each of the Company's
businesses; however, 80% of its sales are to customers other than the Company.
Services range from design layout to total system integration, shipping to end
customers and repair depot facilities. TEC has expertise in high-mix
manufacturing, producing up to 1,800 different products each month. In
addition to printed wiring assemblies, TEC performs electronic subassembly
contract manufacturing and integrates complete systems. TEC serves a wide
range of industries, including telecommunications, medical, network products,
gaming, industrial controls, avionics and satellite communications. TEC's
manufacturing facilities are located in Tempe, Arizona.

MARKETING AND SALES

In the United States, IB markets the largest portion of its products
directly through its own sales and distribution organizations, although
certain products are marketed through independent distributors and sales

76
<PAGE>

representatives. Sales to major markets outside the United States are
generally made by IB's foreign-based sales and service staff, although some
sales are made directly from the United States to foreign customers. In
certain foreign countries, sales are made through various representative and
distributorship arrangements. IB owns or leases sales and service offices in
strategic regional locations in the United States and in foreign countries
through its foreign sales subsidiaries and distribution operations. None of
IB's products are distributed through retail outlets.

The markets in which IB competes are globalized. International sales
accounted for 47%, 47% and 50% of sales for fiscal years 1998, 1997 and 1996,
respectively. As a result, IB's customers increasingly require service and
support on a worldwide basis. In addition to the United States, IB has
manufacturing operations in Australia, Italy and The Netherlands as well as
sales and service offices located throughout Europe, Asia and Latin America.
IB has invested substantial financial and management resources to develop an
international infrastructure to meet the needs of its customers worldwide. IB
intends to continue to expand its presence in international markets.

Demand for IB's products is dependent upon the size of the markets for its
products, the level of capital expenditures of IB's customers, the rate of
economic growth in IB's major markets and competitive considerations. IB
believes that demand for its products does not exhibit any significant
seasonal pattern. No single customer accounted for 10% or more of IB's sales
in fiscal 1998.

Virtually all new analytical methods and tests originate in academic
research in universities and medical schools. If the utility of a new method
or test is demonstrated by fundamental research, it often will then be used by
pharmaceutical investigators, biotechnology companies, teaching hospitals or
specialized clinical laboratories in an investigatory mode. In some cases,
these new techniques eventually emerge in routine, high-volume clinical
testing at hospitals and research labs. Generally, devices used at each stage
from research to routine clinical applications employ the same fundamental
processes but may differ in operating features such as number of tests
performed per hour and degree of automation. By serving several customer
groups with differing needs related through common science and technology, IB
has the opportunity to broadly apply and leverage its expertise. IB's
customers are continually searching for processes and systems that can perform
tests faster, more efficiently and at lower costs. IB believes that its focus
on automated and high throughput systems positions it to capitalize on this
need.

BACKLOG

IB's recorded backlog was $125 million at October 2, 1998 and $132 million
at September 26, 1997. It is IB's general policy to include in backlog only
purchase orders or production releases that have firm delivery dates within
one year. Recorded backlog may not result in sales because of cancellation or
other factors. It is anticipated that all orders included in the October 2,
1998 backlog will be delivered before the close of fiscal year 1999.

COMPETITION

Competition in IB's markets is based upon the performance capabilities of
IB's products, technical support and after-market service, the manufacturer's
reputation as a technological leader and the selling price. Management
believes that performance capabilities are the most important of these
criteria. The markets in which IB competes are highly competitive and are
characterized by the application of mature but advanced technology. There are
numerous companies that specialize in, and a number of larger companies that
devote a significant portion of their resources to, the development,
manufacture and sale of products that compete with those manufactured or sold
by IB. Many of IB's competitors are well-known manufacturers with a high
degree of technical proficiency. In addition, competition is intensified by
the ever-changing nature of the technologies in the industries in which IB is
engaged. The markets for IB's products are characterized by specialized
manufacturers that often have strength in narrow segments of these markets.
While the absence of reliable statistics makes it difficult to determine IB's
relative market position in its industry segments, IB is confident it is one
of the principal manufacturers in its primary fields. See "Risk Factors--Risks
Relating to the Business of IB--Technological Change and New Products."

77
<PAGE>

Each of IB's major businesses competes with many companies that address the
same markets. In Analytical Instruments, IB competes with Hewlett-Packard,
Waters Corporation, Perkin-Elmer, Thermo Electron, Shimadzu Corporation and
numerous local suppliers. NMRI has two major competitors: Bruker and JEOL. In
Vacuum Products, the primary competitors are Edwards High Vacuum, Pfeiffer,
Leybold-Balzers and Alcatel. High-mix contract manufacturers that compete with
the Tempe Electronics Center include EFTCX Corporation, Xetel Corporation, CMC
Industries, Sigmatron International and Smartflex Systems. See "Risk Factors--
Additional Risks Relating to each of the Businesses--Competition."

MANUFACTURING

IB's principal manufacturing activities consist of precision assembly, test,
calibration and machining activities. IB subcontracts a portion of its
assembly, machining and printed circuit board assembly and testing. All other
assembly, test and calibration functions are performed by IB. Some critical
assembly activities are performed in clean-room environments at IB's
facilities.

IB believes that the ability to manufacture reliable products in a cost-
effective manner is critical to meeting the "just-in-time" delivery and other
demanding requirements of its original equipment manufacturer ("OEM") and end-
use customers. IB monitors and analyzes product lead times, warranty data,
process yields, supplier performance, field data on mean time between
failures, inventory turns, repair response time and other indicators so that
it can continuously improve its manufacturing processes. IB has adopted a
total quality management process.

IB has ten manufacturing facilities located throughout the world. Analytical
Instruments has manufacturing facilities in Walnut Creek, California, Woburn,
Massachusetts, Middelburg, The Netherlands, Harbor City, California, and
Melbourne, Australia. NMRI has manufacturing facilities in Palo Alto,
California, and Fort Collins, Colorado. Vacuum Products has manufacturing
facilities in Lexington, Massachusetts, and Torino, Italy. Tempe Electronics
Center has manufacturing facilities in Tempe, Arizona.

In 1993, the member states of the European Union ("EU") began implementation
of their plan for a new unified EU market with reduced trade barriers and
harmonized regulations. The EU adopted a significant international quality
standard, the International Organization for Standardization Series 9000
Quality Standards ("ISO 9000"). All of IB's manufacturing facilities have been
certified as complying with the requirements of ISO 9001.

RAW MATERIALS

There are no specialized raw materials that are particularly essential to
the operation of IB's business. IB's manufacturing operations require a wide
variety of raw materials, electronic and mechanical components, chemical and
biochemical materials and other supplies, some of which are occasionally found
to be in short supply.

Many components used in IB's products, including proprietary analog and
digital circuitry, are manufactured by IB. Other components, including
packaging materials, superconducting magnets, integrated circuits,
microprocessors, microcomputers and certain detector and data analysis
modules, are acquired from other manufacturers. Most of the raw materials,
components and supplies purchased by IB are available from a number of
different suppliers; however, a number of items are purchased from limited or
single sources of supply, and disruption of these sources could have a
temporary adverse effect on shipments and the financial results of IB. IB
believes alternative sources could ordinarily be obtained to supply these
materials, but a prolonged inability to obtain certain materials or components
could have an adverse effect on IB's financial condition or results of
operations and could result in damage to its relationships with its customers.
See "Risk Factors--Additional Risks Relating to Each of the Businesses--
Reliance on Suppliers."

RESEARCH AND DEVELOPMENT

IB is actively engaged in basic and applied research, development and
engineering programs designed to develop new products and to improve existing
products. During fiscal years 1998, 1997 and 1996, IB spent

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<PAGE>

$29.6 million, $32.0 million and $29.9 million, respectively (net of customer
funding), on company-sponsored research, development and engineering
activities.

Although IB intends to continue to conduct extensive research and
development activities, there can be no assurance that it will be able to
develop and market new products on a cost-effective and timely basis, that
such products will compete favorably with products developed by others or that
IB's existing technology will not be superseded by new discoveries or
developments. See "Risk Factors--Risks Relating to the Business of IB--
Uncertainty of Market Acceptance of New Products."

CUSTOMER SUPPORT AND SERVICE

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

PATENT AND OTHER PROPRIETARY RIGHTS

As a leader in the manufacture and sale of analytical and research
instruments and vacuum products, IB 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 IB's products or that fall
within its fields of interest. As of October 2, 1998, IB owned approximately
205 patents in the United States and approximately 260 patents throughout the
world, and had approximately 272 patent applications on file with various
patent agencies worldwide. IB intends to file additional patent applications
as appropriate.

IB 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. IB has trademarks, both registered and
unregistered, that are maintained and enforced to provide customer recognition
for its products in the marketplace. IB 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 IB places considerable importance on its licensed technology, IB does
not believe that the loss of any license would have a material adverse effect
on IB's business.

IB's competitors, like companies in many high-technology businesses,
routinely review the products of others for possible conflict with their own
patent rights. Although IB has from time to time received notices of claims
from others alleging patent infringement, IB believes that there are no
pending patent infringement claims that might have a material adverse effect
on the business of IB. See "Risk Factors--Additional Risks Relating to Each of
the Businesses--Uncertain Protection of Patent and Other Proprietory Rights."

ENVIRONMENTAL MATTERS

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

EMPLOYEES

At October 2, 1998, IB had a total of approximately 3,033 full-time and
temporary employees worldwide--1,905 in North America, 532 in Western Europe,
125 in Asia, 386 in Australia and 85 in Latin America. IB's

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<PAGE>

employees based in certain foreign countries may, from time to time, be
subject to collective bargaining agreements. IB's OSI employees based in
Australia conducted a strike in 1997, which was quickly resolved. Those
employees are subject to a collective bargaining agreement that is scheduled
for renewal in early 1999. IB currently considers its employee relations to be
good.

IB's success depends to a significant extent upon a limited number of key
employees and other members of senior management of IB. The loss of the
service of one or more of these key employees could have a material adverse
effect on IB. The success of IB's future operations depends in large part on
IB'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. IB's inability to attract and retain the personnel it requires
could have a material adverse effect on IB's results of operations.

PROPERTIES

IB has manufacturing, warehouse, research and development, sales, service
and administrative facilities which have an aggregate floor space of 661,000
and 506,500 square feet located in the United States and abroad, respectively,
for a total of 1,167,500 square feet worldwide. Of these facilities, aggregate
floor space of approximately 332,750 square feet is leased, and the remainder
is owned by IB. The management of IB 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 IB believes that
the Instruments Business' facilities and equipment generally are well
maintained, in good operating condition and suitable for IB's purposes and
adequate for present operations.

IB has ten manufacturing facilities located throughout the world. IB's
facilities are located in Palo Alto, California, Walnut Creek, California,
Harbor City, California, Woburn, Massachusetts, Lexington, Massachusetts, Fort
Collins, Colorado, Tempe, Arizona, Melbourne, Australia, Middelburg, The
Netherlands, and Torino, Italy.

IB has 70 sales and service facilities located throughout the world, sixty-
one of which are located outside the United States, including facilities
located in Argentina, Australia, Austria, Belgium, Brazil, Canada, France,
Japan, Korea, Mexico, The Netherlands, Spain, Sweden, Switzerland, Taiwan, the
United Kingdom and Venezuela.

LEGAL PROCEEDINGS

Pursuant to the Distribution Agreement, IB has agreed to indemnify SEB and
HCS for any costs, liabilities or expenses with respect to any legal
proceedings relating to the Instruments Business. In addition, IB has agreed
to pay for one-third of the costs, liabilities and expenses of SEB and HCS
with respect to certain legal proceedings relating to discontinued operations
of the Company. See "The Distribution Proposals--Proposal One: The
Distribution--Distribution Agreement."

IB 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 IB, management does not believe
any pending legal proceeding will result in a judgment or settlement that will
have a material adverse effect on IB's financial position, results of
operations or cash flow.

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MANAGEMENT OF IB

BOARD OF DIRECTORS OF IB

Prior to the Distribution Date, the Company, as sole stockholder of IB,
expects to elect the five persons identified below to the board of directors
of IB (the "IB Board"). Each individual listed below (other than Allen J.
Lauer) is currently a director of the Company and will resign from the Board
of Directors of the Company effective as of the Distribution Date. The IB
Board will be divided into three classes. Directors for each class will be
elected at the annual meeting of stockholders held in the year in which the
term for such class expires and will serve thereafter for three years.

The following table sets forth names, in alphabetical order, and information
about the five persons who are expected to serve as directors of IB after the
Distribution:

<TABLE>
<CAPTION>
INITIAL
NAME, AGE AND CURRENT TERM
PRINCIPAL OCCUPATION EXPIRES INFORMATION
--------------------- ------- -----------
<S> <C> <C>
Allen J. Lauer, 61,..... 2000 Mr. Lauer is the Executive Vice President of the
Executive Vice Company responsible for the Instruments Business.
President In more than 30 years with the Company, Mr. Lauer
of the Company has served in numerous key management roles. He
was named a corporate Vice President in 1981,
was elevated to Senior Vice President in 1989,
and became Executive Vice President in 1990.

John G. McDonald, 61,... 2001 Professor McDonald is The Industrial Bank of Japan
The Industrial Bank of Professor of Finance at Stanford University's Graduate
Japan Professor of School of Business, where he has served on the faculty
Finance at Stanford since 1968. He is a director of Golden State Vintners,
University's Graduate Inc., Scholastic Corporation and TriNet Corporate
School of Business Realty Trust, Inc., and is an independent trustee of
eight mutual funds managed by Capital Research &
Management Co. and its affiliates. Professor McDonald
has been a director of the Company since 1988.

Wayne R. Moon, 58,...... 2001 Mr. Moon is Chairman of the Board and Chief Executive
Chairman of the Board Officer of Blue Shield of California (a health care
and Chief Executive company), positions he has held since 1993. From 1990
Officer of Blue Shield to 1993, he served as President and Chief Operating
of California Officer of Kaiser Foundation Health Plan, Inc. and
Kaiser Foundation Hospitals (health maintenance
organizations). Mr. Moon has been a director of the
Company since 1995.

D. E. Mundell, 67,...... 2002 Mr. Mundell is Chairman of the Board of ORIX USA
Chairman of the Board Corporation and Advisor (a board-level position) to
of ORIX USA Corporation ORIX Corporation (both financial services companies),
positions he has held since 1991. He is director of
Beazer Homes USA, Inc. and Stockton Holdings, Ltd. Mr.
Mundell has been a director of the Company since 1992.

Elizabeth E. Tallett, 2002 Ms. Tallett is President and Chief Executive Officer of
49,.................... Dioscor, Inc. (a biopharmaceutical company), positions
President and Chief she has held since 1996. Ms. Tallett is also President
Executive Officer of and Chief Executive Officer of Ellard Pharmaceuticals
Dioscor, Inc., Inc. (a pharmaceutical company), positions she has held
and of Ellard since 1998. From 1992 to 1996, Ms. Tallett served as
Pharmaceuticals Inc. President and Chief Executive Officer of Transcell
Technologies, Inc. (a biotechnology company).
Ms. Tallett is a director of The Principal Mutual Life
Insurance Company, Coventry Health Care Inc. and
Integrated America Inc., and is Chairman of the Board
of Huma Scan, Inc. She has been a director of the
Company since 1996.
</TABLE>

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COMPENSATION OF DIRECTORS

Each director who is not an IB employee will receive an annual retainer fee
of $20,000, plus $1,000 for each IB Board and committee meeting attended. The
non-employee Chairman of the IB Board will receive a retainer fee of $90,000
(in lieu of any other annual retainer or committee chair fee), and directors
chairing standing committees of the IB Board will each receive a retainer fee
of $5,000. Under the proposed IB Omnibus Stock Plan, each director who is not
an IB employee will also receive, upon initial appointment or election to the
IB Board, a non-qualified stock option to acquire 10,000 shares of IB Common
Stock, and will receive annually thereafter a non-qualified stock option to
acquire 5,000 shares of IB Common Stock. In lieu of these grants, any non-
employee Chairman will receive upon initial appointment a non-qualified stock
option to acquire 50,000 shares of IB Common Stock. Such stock options will be
granted with an exercise price equal to the fair market value of IB Common
Stock on the date of grant, becoming exercisable immediately on the date of
grant and having a ten-year term. Directors who are IB employees will receive
no compensation for their services as directors.

COMMITTEES OF THE IB BOARD OF DIRECTORS

The business of IB will be managed under the direction of the IB Board. The
IB Board will have Audit and Compensation Committees. Members of the Audit and
Compensation Committees will not be employees of IB.

Audit Committee

The Audit Committee's principal functions will be to review the scope of the
annual audit of IB by its independent auditors, review the annual financial
statements of IB and the related audit report as prepared by the independent
auditors, recommend the selection of independent auditors each year and review
any non-audit fees paid to the independent auditors. The members of the Audit
Committee are expected to be the following non-employee directors: John G.
McDonald (Chairman), Wayne R. Moon, D. E. Mundell and Elizabeth E. Tallett.

Compensation Committee

The Compensation Committee will administer the stock and cash incentive
plans of IB and in this capacity it will make option grants or awards under
these plans. In addition, the Committee will determine the compensation of the
President and Chief Executive Officer and the other senior executives. The
Committee will also recommend the establishment of policies dealing with
various compensation and employee benefit plans for IB. The members of the
Committee are expected to be the following non-employee directors: John G.
McDonald, Wayne R. Moon, D. E. Mundell (Chairman) and Elizabeth E. Tallett.

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EXECUTIVE OFFICERS

Set forth below is certain information with respect to the persons who are
expected to serve as executive officers of IB immediately following the
Distribution. Those persons listed below who are currently officers of the
Company will relinquish their positions with the Company effective as of the
Distribution Date.

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE PRIOR TO BECOMING
NAME AND TITLE AGE AN EXECUTIVE OFFICER OF IB
-------------- --- -------------------------------------
<S> <C> <C>
Allen J. Lauer,......... 61 Mr. Lauer is the Executive Vice President of the
President and Company responsible for the Instruments Business.
Chief Executive Officer In more than 30 years with the Company, Mr. Lauer
has served in numerous key management roles. He
was named a corporate Vice President in 1981, was
elevated to Senior Vice President in 1989, and
became Executive Vice President in 1990.

Garry W. Rogerson,...... 46 Mr. Rogerson is Vice President of the Company's
Vice President, Analytical Instruments business, which includes
Analytical Instruments the Chromatography Systems business and Optical
Spectroscopy Instruments business, a position he
has held since 1998. Mr. Rogerson has been Vice
President and General Manager of the Company's
Chromatography Systems business (which is
expected to be a continuing responsibility) since
1994. Prior to this, Mr. Rogerson served as Sales
and Marketing Manager for the Company's NMR
Instruments business. Mr. Rogerson has held
various other positions in the Instruments
Business during his 19 years with the Company.

Raymond J. Shaw,........ 49 Mr. Shaw is Vice President and General Manager of the
Vice President, Company's NMR Instruments business, positions he has held since
NMR Instruments 1989. Mr. Shaw has held various other positions in the
Instruments Business during his 20 years with the
Company.

Arthur W. Homan,........ 39 Mr. Homan is Associate General Counsel and Assistant
Vice President, Secretary of the Company, positions he has held since 1998 and
General Counsel and 1993, respectively. From 1993 to 1998, he served as
Secretary Senior Corporate Counsel. Mr. Homan has held various
positions in the legal department during his 10 years
with the Company.

James L. Colbert,....... 52 Mr. Colbert is Controller of the Company's NMR
Controller Instruments business, a position he has held since 1992. Mr.
Colbert has held various other positions during his 26
years with the Company.
</TABLE>

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<PAGE>

EXECUTIVE OFFICER COMPENSATION

Summary of Compensation

IB Table I below sets forth a summary of the compensation paid by the Company
for the last three fiscal years to the individual expected to be the chief
executive officer of IB, and the four additional most highly compensated
individuals (based on their fiscal year 1998 compensation from the Company) who
are expected to be executive officers of IB immediately after the Distribution.

IB TABLE I

IB SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------- --------------------- -------
SECURITIES
RESTRICTED UNDERLYING
OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) ($)(3) (#)(4) ($)(5) ($)(6)
------------------ ---- ------- ------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Allen J. Lauer.......... 1998 338,910 232,936 33,050 0 36,000 347,454 101,096
President and Chief 1997 323,148 359,300 22,594 244,388 36,000 461,552 117,958
Executive Officer 1996 310,990 532,363 35,458 204,225 36,000 628,056 93,274

Garry W. Rogerson....... 1998 166,388 62,566 7,791 0 8,500 98,969 20,516
Vice President, 1997 156,024 89,372 8,796 52,369 7,200 88,644 15,487
Analytical Instruments 1996 148,564 108,864 9,307 43,763 5,500 83,344 17,419

Raymond J. Shaw......... 1998 164,731 63,210 5,232 0 7,500 87,125 22,853
Vice President, 1997 156,494 104,812 6,309 52,369 7,200 88,586 25,149
NMR Instruments 1996 150,522 124,416 6,164 43,763 6,000 152,048 23,438

Arthur W. Homan......... 1998 150,836 29,221 4,476 20,366 8,000 0 16,669
Vice President, General 1997 122,770 62,273 4,764 14,588 6,000 0 15,857
Counsel and Secretary 1996 117,233 66,372 3,057 37,125 5,000 0 12,872

James L. Colbert........ 1998 120,330 28,802 0 0 1,050 0 13,280
Controller 1997 115,703 33,386 0 0 1,050 0 14,655
1996 112,211 27,111 0 0 1,000 0 12,374
</TABLE>
- --------
(1) Consists of Company Management Incentive Plan awards, Cash Profit-Sharing
Plan allocations and (in some cases) special cash bonuses.

(2) Consists of amounts reimbursed for the payment of taxes on certain
perquisites and personal benefits and (in some cases) cash payments for
unused accrued vacation time.

(3) Consists of restricted shares of the Company's Common Stock (valued at the
closing market price on the date of grant), which shares are released from
restrictions in three equal installments over a three-year period (the
principal restriction being continued employment until the respective
release dates), during which dividends, if any, are paid on such shares.
The number and value (at $34.375 per share) of aggregate restricted stock
holdings at the end of fiscal year 1998 were as follows: Mr. Lauer, 8,400
shares, $288,750; Mr. Rogerson, 1,800 shares, $61,875; Mr. Shaw, 1,800
shares, $61,875; Mr. Homan, 800 shares, $27,500; and Mr. Colbert, 0 shares,
$0. Shares of restricted stock awarded for fiscal years 1998, 1997 and
1996, respectively, which partially vest in under three years were as
follows: Mr. Lauer, 0 shares, 4,200 shares and 4,200 shares; Mr. Rogerson 0
shares, 900 shares and 900 shares; Mr. Shaw, 0 shares, 900 shares and 900
shares; Mr. Homan, 350 shares, 300 shares and 750 shares; and Mr. Colbert,
0 shares, 0 shares and 0 shares.

(4) Consists of shares of the Company's Common Stock that may be acquired under
stock options granted pursuant to the Company Omnibus Stock Plan (no stock
appreciation rights have been granted).

(5) Consists of cash payouts in fiscal years 1999, 1998 and 1997 under the
long-term incentive feature of the Company Omnibus Stock Plan for three-
year cycles ended with fiscal years 1998, 1997 and 1996, respectively.

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<PAGE>

(6) Consists of (a) Company contributions (including interest) to Retirement
and Profit-Sharing Program and Supplemental Retirement Plan (or similar
plan in Australia for Mr. Shaw) accounts for fiscal years 1998, 1997 and
1996, respectively (Mr. Lauer, $98,941, $116,157 and $91,816; Mr.
Rogerson, $19,389, $14,604 and $16,718; Mr. Shaw, $22,836, $25,134 and
$23,424; Mr. Homan, $16,184, $15,603 and $12,677; and Mr. Colbert,
$12,516, $14,020 and $11,861); and (b) Company-paid premiums for group
term life insurance in fiscal years 1998, 1997 and 1996, respectively (Mr.
Lauer, $2,155, $1,801 and $1,458; Mr. Rogerson, $1,127, $883 and $701; Mr.
Shaw, $17, $15 and $14; Mr. Homan, $485, $254 and $195; and Mr. Colbert,
$764, $635 and $513).

STOCK OPTIONS

Grant of Options

IB Table II below sets forth information with respect to grants of options
to purchase the Company's Common Stock during the year ended October 2, 1998
to the individuals listed in IB Table I. These grants were made pursuant to
the Company Omnibus Stock Plan and are reflected in IB Table I.

IB TABLE II

OPTION/SAR GRANTS IN LAST FISCAL YEAR

INDIVIDUAL GRANTS
----------------------------------------------- POTENTIAL
PERCENT OF REALIZABLE VALUE AT
TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS/ RATES OF STOCK
SECURITIES SARS GRANTED EXERCISE PRICE APPRECIATION
UNDERLYING TO EMPLOYEES OR BASE FOR OPTION TERM(2)
OPTIONS/SARS IN FISCAL PRICE EXPIRATION -------------------
NAME GRANTED (#)(1) YEAR ($/SH) DATE 5% ($) 10% ($)
---- -------------- ------------ -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Allen J. Lauer.......... 36,000 3.55 58.1563 11/20/07 1,316,671 3,336,702
Garry W. Rogerson....... 8,500 0.84 58.1563 11/20/07 310,881 787,832
Raymond J. Shaw......... 7,500 0.74 58.1563 11/20/07 274,306 695,146
Arthur W. Homan......... 8,000 0.79 58.1563 11/20/07 292,593 741,489
James L. Colbert........ 1,050 0.10 58.1563 11/20/07 38,403 97,330
</TABLE>
- --------
(1) Consists of stock options, which were granted at an exercise price of 100%
of the market price of the underlying shares on the date of grant, become
exercisable over three years at the rate of approximately one-third each
year and expire ten years from the date of grant. Payment of the exercise
price may be made under a promissory note or by delivery of already-owned
shares.

(2) The 5% and 10% assumed annual rates of stock price appreciation would
result from per share prices of $94.73 and $150.84, respectively. Such
assumed rates are not intended to represent a forecast of possible future
appreciation of the Company's Common Stock or total stockholder return.

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<PAGE>

Aggregated Option Exercises and Year-End Values

The following table sets forth as of October 2, 1998, for each of the
individuals listed in IB Table I (i) the total number of shares received upon
exercise of options during 1998, (ii) the value realized upon such exercise
(based on the fair market value of the underlying shares on the exercise
date), (iii) the total number of unexercised options to purchase the Company's
Common Stock (exercisable and unexercisable) and (iv) the value of such
options which were in-the-money at October 2, 1998 (based on the closing price
of the Company's Common Stock at October 2, 1998, $34.375).

IB TABLE III

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT FISCAL IN-THE-MONEY OPTIONS/SARS
SHARES VALUE YEAR-END (#) AT FISCAL YEAR-END ($)
ACQUIRED ON REALIZED ------------------------- -------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Allen J. Lauer.......... 0 0 126,000 72,000 717,150 0
Garry W. Rogerson....... 0 0 6,284 15,134 0 0
Raymond J. Shaw......... 0 0 19,600 14,300 65,016 0
Arthur W. Homan......... 1,000 27,875 6,333 13,667 0 0
James L. Colbert........ 1,000 19,500 1,566 2,084 0 0
</TABLE>

LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR(1)

<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK PRICE-
PERFORMANCE OR BASED PLANS
NUMBER OF OTHER PERIOD UNTIL ------------------------
SHARES, UNITS OR MATURATION OR THRESHOLD TARGET MAXIMUM
NAME OTHER RIGHTS (#) PAYOUT ($)(2) ($)(3) ($)(4)
---- ---------------- ------------------ --------- ------ -------
<S> <C> <C> <C> <C> <C>
Allen J. Lauer.... N/A 1998-2000 25,604 67,423 --
Garry W.
Rogerson......... N/A 1998-2000 5,717 22,582 --
Raymond J. Shaw... N/A 1998-2000 5,033 19,880 --
Arthur W. Homan... N/A N/A N/A N/A --
James L. Colbert.. N/A N/A N/A N/A --
</TABLE>
- --------
(1) Determinations by the Company's Organization and Compensation Committee
(the "Committee") that a named executive officer may participate in the
long-term incentive feature of the Company Omnibus Stock Plan ("LTI") and
might receive a payout for a specified period is an award for purposes of
this table. Awards (i.e., the determination of participation in the LTI)
for the 1998-2000 cycle were made in fiscal year 1998. Under the LTI, each
named executive officer is eligible to receive compensation payable in
cash or in the Company's Common Stock, or a combination thereof, based
upon the Company's achievement of objectives for average annual return on
net assets ("RONA") and revenue growth ("RG") over a three-year cycle. No
estimate or assumption made in connection with this table is intended to
represent a forecast of possible future performance of the Company.

(2) If the minimum level of RONA or RG established by the Committee at the
beginning of the three-year cycle is achieved, the minimum amount payable
ranges from 3% to 7.5% of annual base salary as of the end of the last
fiscal year of the cycle. If neither RONA nor RG for the three-year cycle
equals the applicable minimum level, no amount will be paid. The minimum
amount payable, if any amount is paid at all, depends on each named
executive's base salary in the last year of the cycle, and the amounts set
forth above assume that each named executive officer's annual base salary
at the end of fiscal year 2000 will be identical to the executive
officer's 1999 annual base salary.

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<PAGE>

(3) A "Target" award is not determinable under the LTI. The amounts shown are
estimates of the payout for the three-year cycle assuming (a) that the
RONA and revenues for the remaining years of the cycle are the same as
RONA and revenues for fiscal year 1998 and (b) that each named executive
officer's annual base salary at the end of fiscal year 2000 will be
identical to his 1999 annual base salary. The actual payment for the
three-year cycle may be greater or less than the estimates shown in this
column, depending upon the actual RONA and revenues for fiscal years 1998,
1999 and 2000, the actual base salary of the named executive officer at
the end of fiscal year 2000, and the aggregate payout to all participants
(see footnote 4 below).

(4) The maximum amount payable is not determinable or estimable prior to the
end of the three-year cycle for the following reason: If the maximum
levels of RONA and RG established by the Committee at the beginning of the
three-year cycle are achieved or exceeded, the maximum amount payable
ranges from 100% to 200% of annual base salary as of the end of the last
fiscal year of the cycle. The maximum amount payable is reduced, however,
if the aggregate LTI payout to all participants (including the named
executive officers) would exceed 5% (before such payouts) of the Company's
pre-tax operating earnings in the last fiscal year of the three-year
cycle. This variable makes the maximum amount not determinable or
estimable.

CHANGE IN CONTROL AGREEMENTS

Certain IB executive officers are already parties to change in control
agreements with the Company. These change in control agreements will be
assumed by IB pursuant to the terms of such agreements. Some of these
agreements are expected to be amended to reflect the executive officers' new
and increased responsibilities with IB. In addition, IB executive officers not
already parties to change in control agreements with the Company may be
offered similar change in control agreements with IB. See "Change in Control
and Other Agreements."

THE IB OMNIBUS STOCK PLAN

The IB Omnibus Stock Plan is expected to be adopted by the IB Board
effective as of the Distribution. Adoption of the IB Omnibus Stock Plan is
subject to the approval of a majority of the shares of the Company's Common
Stock that are present in person or by proxy at the Meeting. See "Distribution
Proposals--Proposal Five: Approval of the Adoption by IB of the IB Omnibus
Stock Plan."

PURPOSE OF THE IB OMNIBUS STOCK PLAN

The IB Omnibus Stock Plan is intended to promote the success of IB by
providing a vehicle under which a variety of stock-based incentive and other
awards can be granted to employees and consultants and to directors of IB who
are employees of neither IB nor any affiliate ("non-employee directors").

DESCRIPTION OF THE IB OMNIBUS STOCK PLAN

The following paragraphs provide a summary of the principal features of the
IB Omnibus Stock Plan and its operation. The IB Omnibus Stock Plan is set
forth in its entirety as Annex C to this Proxy Statement. The following
summary is qualified in its entirety by reference to Annex C.

GENERAL

The IB Omnibus Stock Plan provides for the granting of stock options, stock
appreciation rights ("SARs"), restricted stock, performance units and
performance shares (collectively, "IB Awards") to eligible IB Omnibus Stock
Plan participants. The maximum number of shares of IB Common Stock available
for IB Awards under the IB Omnibus Stock Plan will be 4,200,000, plus such
number of shares as may be granted in substitution for other options in
connection with the Distribution.

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<PAGE>

ADMINISTRATION OF THE IB OMNIBUS STOCK PLAN

The IB Omnibus Stock Plan will be administered by the Compensation Committee
of IB's Board of Directors (the "IB Committee"). The members of the IB
Committee must qualify as "non-employee directors" under Rule 16b-3 under the
Exchange Act, and as "outside directors" under Section 162(m) of the Code
("Section 162(m)") (for purposes of qualifying the IB Omnibus Stock Plan as
performance-based compensation under Section 162(m)).

Subject to the terms of the IB Omnibus Stock Plan, the IB Committee has the
sole discretion to determine the employees and consultants who will be granted
IB Awards, the size and types of such IB Awards, and the terms and conditions
of such IB Awards. The IB Committee may delegate its authority to grant and
administer awards to one or more officers or directors appointed by the IB
Committee, but only the Committee can make awards to participants who are
subject to Section 16 of the Exchange Act.

ELIGIBILITY TO RECEIVE AWARDS

Employees and consultants of IB and its affiliates are eligible to be
selected to receive one or more IB Awards. The actual number of individuals
who will receive IB Awards under the IB Omnibus Stock Plan cannot be
determined because eligibility for participation in the IB Omnibus Stock Plan
is in the discretion of the IB Committee. The IB Omnibus Stock Plan also
provides for the grant of non-qualified stock options to IB's non-employee
directors. Such options will be granted pursuant to an automatic, non-
discretionary formula.

OPTIONS

The IB Committee may grant non-qualified stock options, incentive stock
options (which are entitled to favorable tax treatment), or a combination
thereof. The number of shares covered by each option will be determined by the
IB Committee, but during any fiscal year of IB, no participant may be granted
options for more than 1,000,000 shares.

The price of the shares of IB Common Stock subject to each stock option is
set by the IB Committee but cannot be less than 100% of the fair market value
(on the date of grant) of the shares covered by the option. In addition, the
exercise price of an incentive stock option must be at least 110% of fair
market value if (on the grant date) the participant owns stock possessing more
than 10% of the total combined voting power of all classes of stock of IB or
any of its subsidiaries. Nevertheless, substitute options may be granted at
less than fair market value to employees or consultants who receive such
options in connection with a corporate reorganization. Also, the aggregate
fair market value of the shares (determined on the grant date) covered by
incentive stock options which first become exercisable by any participant
during any calendar year may not exceed $100,000.

The exercise price of each option must be paid in full at the time of
exercise. The IB Committee also may permit payment through the tender of
shares of IB Common Stock that are already owned by the participant, or by any
other means which the IB Committee determines to be consistent with the IB
Omnibus Stock Plan's purpose. Any taxes required to be withheld must be paid
by the participant at the time of exercise.

Options become exercisable at the times and on the terms established by the
IB Committee. Options expire at the times established by the IB Committee but
not later than 10 years after the date of grant (except in certain cases
involving the death of the optionee). The IB Committee may extend the maximum
term of any option granted under the IB Omnibus Stock Plan, subject to the
preceding limits.

NON-EMPLOYEE DIRECTOR OPTIONS

Under the IB Omnibus Stock Plan, each non-employee director automatically
will receive, as of the later of (a) the non-employee director's appointment
or election to the IB Board, or (b) ten business days after the

88
<PAGE>

effective date of the IB Omnibus Stock Plan, a non-qualified stock option to
purchase 10,000 shares. Each non- employee director will also automatically
receive a non-qualified stock option to purchase 5,000 shares coincident with
each subsequent annual meeting of IB, provided the non-employee director
serves continuously as a director through the next grant date. In lieu of the
above grants, any non-employee Chairman of the IB Board automatically will
receive, as of the later of (a) the date he or she becomes Chairman or (b) ten
business days after the effective date of the IB Omnibus Stock Plan, a non-
qualified stock option to purchase 50,000 shares.

The exercise price of each non-employee director and Chairman option will be
100% of the fair market value (on the date of grant) of the shares covered by
the option. Nevertheless, substitute options may be granted at less than fair
market value to non-employee directors who receive such options in connection
with a corporate reorganization. Each option will become exercisable on the
grant date. All options granted to non-employee directors generally will have
a term of ten years from the date of grant. If a director terminates service
on the Board prior to an option's normal expiration date, the period of
exercisability of the option may be shorter, depending upon the reason for the
termination.

In addition, non-employee directors may elect to receive shares of IB Common
Stock under the IB Omnibus Stock Plan in lieu of cash compensation.

STOCK APPRECIATION RIGHTS

The IB Committee determines the terms and conditions of each SAR. SARs may
be granted in conjunction with an option, or may be granted on an independent
basis. The number of shares covered by each SAR will be determined by the IB
Committee, but during any fiscal year of IB, no participant may be granted
SARs for more than 1,000,000 shares. Upon exercise of an SAR, the participant
will receive payment from IB in an amount determined by multiplying: (1) the
difference between the fair market value of a share on the date of exercise
over the grant price (fair market value of a share on the grant date), times
(2) the number of shares with respect to which the SAR is exercised. SARs may
be paid in cash or shares of IB Common Stock, as determined by the IB
Committee. SARs are exercisable at the times and on the terms established by
the IB Committee.

RESTRICTED STOCK AWARDS

Restricted stock awards are shares of IB Common Stock that vest in
accordance with terms and conditions established by the IB Committee. The
number of shares of restricted stock granted to a participant (if any) will be
determined by the IB Committee, but during any fiscal year of IB, no
participant may be granted more than 100,000 shares.

In determining whether an award of restricted stock should be made and/or
the vesting schedule for an award, the IB Committee may impose whatever
conditions to vesting it determines to be appropriate. For example, the IB
Committee may determine to grant restricted stock only if performance goals
established by the IB Committee are satisfied. Any performance goals may be
applied on a company-wide or an individual business unit basis, as determined
by the IB Committee. See discussion below of "--Performance Goals."

PERFORMANCE UNITS AND PERFORMANCE SHARES

Performance Units and Performance Shares are IB Awards which will result in
a payment to a participant only if performance goals established by the IB
Committee are satisfied. The initial value of each Performance Unit and each
Performance Share shall not exceed the fair market value (on the date of
grant) of a share of IB Common Stock. The applicable performance goals will be
determined by the IB Committee, and may be applied on a company-wide or an
individual business unit basis, as deemed appropriate in light of the
participant's specific responsibilities. See discussion below of "--
Performance Goals."

In addition to the performance requirements discussed above, Performance
Units and Performance Shares are subject to additional limits set forth in the
IB Omnibus Stock Plan. During any fiscal year of IB, no participant shall
receive more than 100,000 Performance Units or Performance Shares.

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<PAGE>

PERFORMANCE GOALS

The IB Committee in its discretion may make performance goals applicable to
a participant with respect to an IB Award. At the IB Committee's discretion,
one or more of the following performance goals may apply: EBIT, EBITDA,
earnings per share, net income, operating cash flow, return on assets, return
on equity, return on sales, revenue and stockholder return. The IB Committee
may also use other performance goals.

EBIT means IB's or a business unit's income before reductions for interest
and taxes. EBITDA means IB's or a business unit's income before reductions for
interest, taxes, depreciation and amortization. Earnings per share means IB's
or a business unit's net income, divided by a weighted average number of
common shares outstanding and dilutive common equivalent shares deemed
outstanding. Net income means IB's or a business unit's income after taxes.
Operating cash flow means IB's or a business unit's sum of net income plus
depreciation and amortization less capital expenditures plus certain specified
changes in working capital. Return on assets means the percentage equal to
IB's or a business unit's EBIT (but before incentive compensation), divided by
IB's or a business unit's, as applicable, average net assets. Return on equity
means the percentage equal to IB's net income, divided by average
stockholders' equity. Return on sales means the percentage equal to IB's or a
business unit's EBIT (but before incentive compensation), divided by IB's or
the business unit's, as applicable, revenue. Revenue means IB's or a business
unit's sales. Stockholder return means the total return (change in share price
plus reinvestment of any dividends) of a share of the IB Common Stock.

NONTRANSFERABILITY OF IB AWARDS

IB Awards granted under the IB Omnibus Stock Plan may not be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than by will or by the applicable laws of descent and distribution.

TAX ASPECTS

A recipient of a stock option or SAR will not have taxable income upon the
grant of the option. For options and SARs other than incentive stock options,
the participant will recognize ordinary income upon exercise in an amount
equal to the excess of the fair market value of the shares over the exercise
price (the "appreciation value") on the date of exercise. Any gain or loss
recognized upon any later disposition of the shares generally will be capital
gain or loss.

Purchase of shares upon exercise of an incentive stock option will not
result in any taxable income to the participant, except for purposes of the
alternative minimum tax. Gain or loss recognized by the participant on a later
sale or other disposition will either be long-term capital gain or loss or
ordinary income depending upon whether the participant holds the shares
transferred upon the exercise for a specified period. Any ordinary income
recognized will be in the amount, if any, by which the lesser of the fair
market value of such shares on the date of exercise or the amount realized
from the sale exceeds the option price.

Unless the participant elects to be taxed at the time of receipt of
restricted stock, Performance Units or Performance Shares, the participant
will not have taxable income upon the receipt of the IB Award, but upon
vesting will recognize ordinary income equal to the fair market value of the
shares or cash at the time of vesting.

At the discretion of the IB Committee, the IB Omnibus Stock Plan allows a
participant to satisfy tax withholding requirements under federal and state
tax laws in connection with the exercise or receipt of an IB Award by electing
to have shares of IB Common Stock withheld, or by delivering to IB already-
owned shares, having a value equal to the amount required to be withheld.

IB generally will be entitled to a tax deduction in connection with an IB
Award under the IB Omnibus Stock Plan only in an amount equal to the ordinary
income realized by the participant and at the time the participant recognizes
such income. However, IB may not be entitled to a deduction in connection with
certain substitute stock options issued in connection with the Distribution.
In addition, Section 162(m) contains special rules

90
<PAGE>

regarding the federal income tax deductibility of compensation paid to IB's
Chief Executive Officer and to each of the other four most highly compensated
executive officers. The general rule is that annual compensation paid to any
of these specified executives will be deductible only to the extent that it
does not exceed $1 million. However, IB can preserve the deductibility of
certain compensation in excess of $1 million if it complies with conditions
imposed by Section 162(m), including the establishment of a maximum number of
shares with respect to which IB Awards may be granted to any one employee
during one year, and for IB Awards other than options and SARs, the IB Omnibus
Stock Plan sets forth performance goals which must be achieved prior to
payment of the IB Awards. The IB Omnibus Stock Plan has been designed to
permit the IB Committee to grant IB Awards which satisfy the requirements of
Section 162(m), thereby permitting IB to continue to receive a federal income
tax deduction in connection with such IB Awards.

AWARDS UNDER THE IB OMNIBUS STOCK PLAN

Awards under the IB Omnibus Stock Plan will be made at the discretion of the
IB Committee. The IB Committee has not yet considered the types and amounts of
awards that will be granted under the lB Omnibus Stock Plan which will not be
effective until the Distribution. Accordingly, awards that will be made under
the IB Omnibus Stock Plan are not yet determinable. The following table sets
forth information concerning stock-related awards made for fiscal year 1998
under the Company Omnibus Stock Plan to individuals listed on IB Table I and
the groups comprised of individuals who are expected to be executive officers,
non-executive directors and non-executive officer employees of IB upon the
Distribution. This information is likely not indicative of awards that will be
made under the IB Omnibus Stock Plan (except with respect to non-executive
directors, where the table reflects formula grants which would be made in
fiscal year 1999 under the IB Omnibus Stock Plan).

New Plan Benefits

<TABLE>
<CAPTION>
COMPANY OMNIBUS STOCK PLAN
----------------------------
DOLLAR VALUE NUMBER OF
OF RESTRICTED SHARES SUBJECT
NAME AND POSITION STOCK(1) TO OPTIONS(2)
----------------- ------------- --------------
<S> <C> <C>
Allen J. Lauer.................................... $ 0 36,000
President and Chief Executive Officer
Garry W. Rogerson................................. 0 8,500
Vice President, Analytical Instruments
Raymond J. Shaw................................... 0 7,500
Vice President, NMR Instruments
Arthur W. Homan................................... 12,534 8,000
Vice President, General Counsel and Secretary
James L. Colbert.................................. 0 1,050
Controller
All Executive Officers as a Group................. 12,534 62,100
All Non-Executive Directors as a Group............ 0 80,000
All Non-Executive Officer Employees as a Group.... 10,743 157,800
</TABLE>
- --------
(1) Based on the closing price for the Company's Common Stock on the NYSE
Composite Tape on December 15, 1998.
(2) Options were granted at an exercise price of 100% of the market price of
the underlying shares of the Company's Common Stock on the date of grant,
become exercisable over three years at the rate of approximately one-third
each year and expire no later than ten years from the date of grant.

AMENDMENT AND TERMINATION OF THE IB OMNIBUS STOCK PLAN

The IB Board generally may amend or terminate the IB Omnibus Stock Plan at
any time and for any reason.

91
<PAGE>

THE IB MANAGEMENT INCENTIVE PLAN

The IB Management Incentive Plan is expected to be adopted by the IB Board
effective as of the Distribution. Adoption of the IB Management Incentive Plan
is subject to the approval of a majority of the shares of the Company's Common
Stock that are present in person or by proxy at the Meeting. See "Distribution
Proposals--Proposal Six: Approval of the Adoption by IB of the IB Management
Incentive Plan."

BACKGROUND AND REASONS FOR ADOPTION

Under Section 162(m), the federal income tax deductibility of compensation
paid to IB's Chief Executive Officer and to each of its next four most highly
compensated executive officers may be limited to the extent that it exceeds $1
million in any one year. IB can deduct compensation in excess of that amount
if it qualifies as "performance-based compensation" under Section 162(m). The
IB Management Incentive Plan is intended to permit IB to pay incentive
compensation which qualifies as performance-based compensation, thereby
permitting IB to receive a federal income tax deduction for the payment of
such incentive compensation.

DESCRIPTION OF THE IB MANAGEMENT INCENTIVE PLAN

The following paragraphs provide a summary of the principal features of the
IB Management Incentive Plan and its operation. The IB Management Incentive
Plan is set forth in its entirety as Annex D to this Proxy Statement. The
following summary is qualified in its entirety by reference to Annex D.

PURPOSE OF THE IB MANAGEMENT INCENTIVE PLAN

The IB Management Incentive Plan is intended to motivate IB's key employees
to increase stockholder value by (1) linking a portion of their cash
compensation to IB's financial performance, (2) providing rewards for
improving IB's financial performance and (3) helping to attract and retain key
employees.

ADMINISTRATION OF THE IB MANAGEMENT INCENTIVE PLAN

The IB Management Incentive Plan will be administered by the IB Committee.
The members of the IB Committee must qualify as "outside directors" under
Section 162(m) (for purposes of qualifying the IB Management Incentive Plan as
performance-based compensation under such section). Subject to the terms of
the IB Management Incentive Plan, the IB Committee has the sole discretion to
determine the key employees who will be granted awards, and the amounts, terms
and conditions of each award. The IB Committee may delegate its authority to
grant and administer awards to one or more officers or directors appointed by
the IB Committee, but only with respect to awards that are not intended to
qualify as performance-based compensation under Section 162(m).

ELIGIBILITY TO RECEIVE AWARDS

Eligibility for the IB Management Incentive Plan is determined in the
discretion of the IB Committee. In selecting participants for the IB
Management Incentive Plan, the IB Committee will choose key employees of IB
and its affiliates who are likely to have a significant impact on IB
performance.

AWARDS AND PERFORMANCE GOALS

Under the IB Management Incentive Plan, the IB Committee will establish (1)
the performance goals which must be achieved in order for the participant to
actually be paid an award and (2) a formula or table for calculating a
participant's award, depending upon how actual performance compares to the
preestablished performance goals. A participant's award will increase or
decrease as actual performance increases or decreases. The IB Committee also
will determine the periods for measuring actual performance (the "performance
period"). Performance periods may last as long as three fiscal years of IB.

92
<PAGE>

The IB Committee may set performance periods and performance goals which
differ from participant to participant. For example, the IB Committee may
choose performance goals based on either company-wide or business unit
results, as deemed appropriate in light of the participant's specific
responsibilities. For purposes of qualifying awards as performance-based
compensation under Section 162(m), the IB Committee will specify performance
goals from the following list: EBIT, EBITDA, earnings per share, net income,
operating cash flow, return on assets, return on equity, return on sales,
revenue and stockholder return.

For any performance period, no participant may receive an award of more than
the lesser of (1) 200% of the participant's annualized salary rate on the last
day of the performance period or (2) $2 million. Also, the total of all awards
for any performance period cannot exceed 8% of IB's EBIT before incentive
compensation for the most recent completed fiscal year of IB. Awards which
exceed this overall limit will be pro-rated so that the total does not exceed
such limit.

DETERMINATION OF ACTUAL AWARDS

After the end of each performance period, a determination will be made as to
the extent to which the performance goals applicable to each participant were
achieved or exceeded. The actual award (if any) for each participant will be
determined by applying the formula to the level of actual performance which
was achieved. However, the IB Committee retains discretion to eliminate or
reduce the actual award payable to any participant below that which otherwise
would be payable under the applicable formula. Awards under the IB Management
Incentive Plan generally will be payable in cash or IB Common Stock within 120
days after the performance period during which the award was earned.

AWARDS UNDER THE IB MANAGEMENT INCENTIVE PLAN

Awards under the lB Management Incentive Plan will be made at the discretion
of the IB Committee. The IB Committee has not yet considered the types and
amounts of awards that will be granted under the IB Management Incentive Plan
which will not be effective until the Distribution. Accordingly, awards that
will be made under the IB Management Incentive Plan are not yet determinable.
The following table sets forth information concerning cash awards made for
fiscal year 1998 or award cycles ending with fiscal year 1998 under the
Company Management Incentive Plan and the long-term feature of the Company
Omnibus Stock Plan, respectively, to individuals listed on IB Table I and the
groups comprised of individuals who are expected to be executive officers,
non-executive directors and non-executive officer employees of IB upon the
Distribution. This information is likely not indicative of awards that will be
made under the IB Management Incentive Plan.

93
<PAGE>

New Plan Benefits

<TABLE>
<CAPTION>
CASH AWARDS UNDER COMPANY
MANAGEMENT INCENTIVE PLAN
AND COMPANY OMNIBUS STOCK
NAME AND POSITION PLAN
----------------- -------------------------
<S> <C>
Allen J. Lauer........................................ $ 572,019
President and Chief Executive Officer
Garry W. Rogerson..................................... 157,378
Vice President, Analytical Instruments
Raymond J. Shaw....................................... 128,577
Vice President, NMR Instruments
Arthur W. Homan....................................... 25,495
Vice President, General Counsel and Secretary
James L. Colbert...................................... 12,190
Controller
All Executive Officers as a Group..................... 907,849
All Non-Executive Directors as a Group(1)............. 0
All Non-Executive Officer Employees as a Group........ 1,087,812
</TABLE>
- --------
(1) Non-executive directors are not eligible to receive awards under the IB
Management Incentive Plan.

AMENDMENT AND TERMINATION OF THE IB MANAGEMENT INCENTIVE PLAN

The IB Board may amend or terminate the IB Management Incentive Plan at any
time and for any reason.

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<PAGE>

OWNERSHIP OF IB COMMON STOCK

IB is currently a wholly owned subsidiary of the Company. IB Table IV sets
forth information as to the beneficial ownership of IB Common Stock, as of the
Distribution Date (and following the Distribution) as if the Distribution took
place on December 15, 1998, by (a) each expected officer named in IB Table I,
(b) each expected director of IB and (c) all expected directors and executive
officers of IB as a group. The information in IB Table IV is based on the
ownership of the Company's Common Stock as of December 15, 1998 and the number
of shares of IB Common Stock expected to be distributed to each existing
stockholder of the Company in the Distribution. For information as to
beneficial owners of 5% or more of the IB Common Stock after the Distribution,
see "Stock Ownership--Principal Stockholders."

IB TABLE IV

<TABLE>
<CAPTION>
SHARES OF PERCENT OF
IB COMMON STOCK EXPECTED OUTSTANDING SHARES
TO BE EXPECTED TO BE
NAME BENEFICIALLY OWNED(1)(2) BENEFICIALLY OWNED(1)
- ---- ------------------------ ---------------------
<S> <C> <C>
John G. McDonald................ 19,800 (3) *
Wayne R. Moon................... 6,836 (4) *
D. E. Mundell................... 16,400 (5) *
Elizabeth F. Tallett............ 5,100 (6) *
Allen J. Lauer.................. 233,510 (7) *
Garry W. Rogerson............... 15,751 (8) *
Raymond J. Shaw................. 34,516 (9) *
Arthur W. Homan................. 14,842(10) *
James L. Colbert................ 4,000(11) *
All Expected Directors and
Executive Officers of IB
as a Group (9 persons)......... 350,755(12) 1.2
</TABLE>
- --------
* The percentage of shares of IB Common Stock expected to be beneficially
owned does not exceed one percent of the shares of IB Common Stock
expected to be outstanding.

(1) For purposes of this table, a person or group of persons is deemed to
have "beneficial ownership" of any shares of IB Common Stock which such
person has the right to acquire within 60 days following December 15,
1998. For purposes of computing the percentage of outstanding shares of
IB Common Stock held by each person or group of persons named above, any
security which such person or persons has or have the right to acquire
within 60 days following December 15, 1998 is deemed to be outstanding,
but is not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person. Fractional shares are rounded
down to the nearest whole share.

(2) To IB's knowledge, unless otherwise indicated, the person named in the
table has sole voting and investment power with respect to the shares or
shares such voting and investment power with such person's spouse or
children.

(3) Includes 16,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan.

(4) Includes 6,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan.

(5) Includes (a) 12,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan and (b) 3,400
shares held in a trust of which Mr. Mundell is co-trustee with his wife.

(6) Includes 4,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan.

95
<PAGE>

(7) Includes (a) 4,200 shares of restricted stock granted pursuant to the
Company Omnibus Stock Plan, (b) 162,000 shares which may be acquired on
or within 60 days of December 15, 1998 under stock options granted
pursuant to the Company Omnibus Stock Plan and (c) 63,110 shares held in
a trust of which Mr. Lauer is co-trustee with his wife.

(8) Includes (a) 900 shares of restricted stock granted pursuant to the
Company Omnibus Stock Plan and (b) 13,351 shares which may be acquired on
or within 60 days of December 15, 1998 under stock options granted
pursuant to the Company Omnibus Stock Plan.

(9) Includes (a) 900 shares of restricted stock granted pursuant to the
Company Omnibus Stock Plan and (b) 26,500 shares which may be acquired on
or within 60 days of December 15, 1998 under stock options granted
pursuant to the Company Omnibus Stock Plan.

(10) Includes (a) 584 shares of restricted stock granted pursuant to the
Company Omnibus Stock Plan and (b) 11,666 shares which may be acquired on
or within 60 days of December 15, 1998 under stock options granted
pursuant to the Company Omnibus Stock Plan.

(11) Includes 2,600 shares which may be acquired on or within 60 days of
December 15, 1998 under stock options granted pursuant to the Company
Omnibus Stock Plan.

(12) Includes (a) 7,484 shares of restricted stock granted to executive
officers pursuant to the Company Omnibus Stock Plan, (b) 278,117 shares
which may be acquired on or within 60 days of December 15, 1998 by
executive officers and directors under stock options granted pursuant to
the Company Omnibus Stock Plan and (c) 66,510 shares as to which voting
and/or investment power is shared (see certain of the foregoing
footnotes).

96
<PAGE>

THE SEMICONDUCTOR EQUIPMENT BUSINESS
(WHICH WILL BECOME VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
FOLLOWING THE DISTRIBUTION)

SELECTED FINANCIAL DATA

The following table presents selected historical financial data of the
Semiconductor Equipment Business. The information set forth below should be
read in conjunction with "The Semiconductor Equipment Business Pro Forma
Condensed Combined Financial Statements," "Management's Discussion and
Analysis of Financial Condition and Results of Operations of the Semiconductor
Equipment Business" and the historical financial statements and notes thereto
of the Semiconductor Equipment Business included elsewhere in this Proxy
Statement. The statement of earnings data set forth below for the fiscal years
ended October 2, 1998, September 26, 1997 and September 27, 1996 and the
balance sheet data at October 2, 1998 and September 26, 1997 are derived from,
and are qualified by reference to, the audited financial statements of the
Semiconductor Equipment Business included elsewhere in this Proxy Statement.
The statement of earnings data for the fiscal years 1995 and 1994 and the
balance sheet data at fiscal year end 1996, 1995 and 1994 are derived from
unaudited financial data of the Semiconductor Equipment Business not included
in this Proxy Statement.

<TABLE>
<CAPTION>
FISCAL YEARS
---------------------------------------
1998 1997(1) 1996 1995 1994
------- ------- ------- ------- -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA
Revenue................................ $342.9 $448.3 $667.2 $660.7 $476.6
Operating Earnings before Taxes........ 16.3 105.9 122.3 92.5 39.2
Taxes on earnings.................... 4.9 34.9 43.0 33.8 12.8
Net Earnings........................... 11.4 71.0 79.3 58.7 26.4
Pro Forma Net Earnings Per Share(2).... $ 0.38 $ 2.33 $ 2.56 $ 1.74 $ 0.77
BALANCE SHEET DATA AT YEAR END
Total assets........................... $224.6 $233.3 $312.1 $275.8 $242.2
</TABLE>
- --------
(1) Fiscal year 1997 results include a $51.0 million pre-tax gain ($33.2
million after-tax or $1.09 pro forma per share) on the sale of the Thin
Film Systems business.
(2) The computation of pro forma net earnings per share is based on the
weighted average number of shares of the Company's Common Stock
outstanding during the respective periods, reflecting the anticipated
ratio of one share of SEB Common Stock for each share of the Company's
Common Stock outstanding at the time of the Distribution.

97
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE SEMICONDUCTOR EQUIPMENT BUSINESS

This discussion and analysis of financial condition and results of
operations is based upon and should be read in conjunction with the combined
financial statements of the Semiconductor Equipment Business and notes thereto
included elsewhere in this Proxy Statement, as well as the information
contained under "Business of SEB," "Risk Factors--Risks Relating to the
Business of SEB" and "Risk Factors--Additional Risks Relating to Each of the
Businesses." The combined financial statements of the Semiconductor Equipment
Business generally reflect the results of operations, financial position and
cash flows of the operations expected to be transferred to SEB in connection
with the Internal Transfers and Distribution. Accordingly, the Semiconductor
Equipment Business' combined financial statements have been carved out from
the consolidated financial statements of the Company using the historical
results of operations and historical basis of the assets and liabilities of
the Semiconductor Equipment Business. The combined financial statements
include, among other things, allocations of certain Company corporate assets
(including pension assets), liabilities (including profit sharing and pension
benefits) and expenses (including legal, accounting, employee benefits,
insurance services, information technology services, treasury and other
Company corporate overhead) to the Semiconductor Equipment Business using the
allocation methodology described in Note 1 of the Notes to the Semiconductor
Equipment Business Combined Financial Statements. The combined financial
statements do not reflect any changes that may occur in the financing and
operations of SEB as a result of the Distribution.

RESULTS OF OPERATIONS

Fiscal Year

SEB's fiscal years reported are the 52- or 53-week periods which ended on
the Friday nearest September 30. Fiscal year 1998 comprises the 53-week period
ended on October 2, 1998. Fiscal years 1997 and 1996 comprise the 52-week
periods ended on September 26, 1997 and September 27, 1996, respectively.

Fiscal Year 1998 Compared to Fiscal Year 1997

Revenue. SEB's revenue of $343 million in fiscal year 1998 was 24% lower
than its revenue of $448 million in fiscal year 1997. Adjusted for revenue
attributable to the former Thin Films Systems ("TFS") business sold in June
1997, SEB's revenue was 10% lower in fiscal year 1998 than in fiscal year
1997. Starting in the first half of fiscal year 1998, the semiconductor
industry began to experience a significant worldwide slowdown in equipment
demand, brought about by depressed device pricing, excess capacity and the
Asian financial crisis, all of which contributed to the lower revenue. Fourth
quarter revenue of $42 million in fiscal year 1998 was 63% lower than the $115
million of fourth quarter revenue in fiscal year 1997.

International revenue was $239 million, or 70% of SEB's revenue, in fiscal
year 1998, compared to $231 million, or 52% of revenue, in fiscal year 1997.
When adjusted for revenue attributable to the TFS business, international
revenue was $208 million, or 55% of revenue, in fiscal year 1997. SEB's North
American (primarily United States) revenue dropped from 45% of revenue in
fiscal year 1997 to 30% of revenue in fiscal year 1998, while its Europe
region revenue rose from 11% of revenue in fiscal year 1997 to 19% of revenue
in fiscal year 1998. The aggregate of Taiwan, Japan and Korea revenue
increased as a percentage of revenue, representing 39% of revenue in fiscal
year 1997 and 45% of revenue in fiscal year 1998, with Taiwan accounting for
most of the percentage increase in revenue.

The semiconductor industry has been experiencing a slowdown of product
demand and extreme volatility in product pricing. This slowdown and volatility
have caused the semiconductor industry to reduce significantly or delay
purchases of semiconductor manufacturing equipment and construction of new
fabrication facilities. This slowdown and volatility are expected to continue
throughout fiscal year 1999. These conditions have adversely affected and will
continue to adversely affect SEB's results of operations.

Royalty income decreased by $20 million or 65% in fiscal year 1998, compared
to fiscal year 1997. Royalty income in fiscal year 1998 was primarily
attributable to royalty bearing license agreements with Applied Materials

98
<PAGE>

and Tokyo Electron Limited ("TEL") for gas-assisted wafer heat transfer
patents, and a royalty bearing license agreement with TEL for the use of MB/2/
technology, co-developed by the Company and TEL. The decrease in royalty
income between 1997 and 1998 resulted primarily from the cessation of
contractual obligations for TEL to pay royalties in connection with
termination of a distribution agreement between TEL and the Company in the
first quarter of fiscal year 1998, with the effect that royalties therefrom
amounted to $3 million in fiscal year 1998 compared to $19 million in fiscal
year 1997. Fiscal year 1999 royalty income is also anticipated to be lower
than fiscal year 1998 royalty income.

Gross Profit. SEB's gross profit of $118 million in fiscal year 1998 was 34%
of revenue, compared to $185 million, or 41% of revenue, in fiscal year 1997.
Adjusted for the gross profit attributable to the TFS business, SEB's gross
profit in fiscal year 1997 was 43% of TFS-adjusted revenue. The decrease in
gross profit as a percentage of revenue from fiscal year 1997 to fiscal year
1998 was primarily attributable to competitive pricing pressures encountered
during the industry slowdown in the second half of fiscal year 1998, costs
associated with excess capacity and the 65% decrease in royalty income.

Research and Development. Research and development expenses of $41 million
in fiscal year 1998 were 12% of revenue compared to $47 million, or 11% of
revenue, in fiscal year 1997. After adjusting for research and development
expenses attributable to the TFS business in fiscal year 1997, research and
development expenses were $30 million, or 8% of TFS-adjusted revenue, in
fiscal year 1997. The increase in research and development expense, on a TFS-
adjusted basis, reflects SEB's increasing commitment to the development of new
systems and processes and improving existing system capabilities. SEB's future
operating results depend on its ability to maintain a competitive advantage in
the products and services it provides.

Marketing. Marketing expenses of $35 million in fiscal year 1998, down from
$51 million in fiscal year 1997, were 10% of revenue in fiscal year 1998 and
11% in fiscal year 1997. Adjusted for marketing expenses attributable to the
TFS business, SEB's marketing expenses were $40 million or 11% of TFS-adjusted
revenue in fiscal year 1997. The balance of the decrease was attributable to
decreased volume-related expenses.

General and Administrative. General and administrative expenses of $25
million were 7% of revenue in fiscal year 1998, compared to $32 million, or 7%
of revenue, in fiscal year 1997. Adjusted for general and administrative
expenses attributable to the TFS business, SEB's general and administrative
expenses were $25 million, or 7% of TFS-adjusted revenue in fiscal year 1997.

Sale of Business. In June 1997, SEB completed the sale of its TFS business.
Total proceeds received from the sale of the TFS business were $146 million in
cash. The gain on the sale was $33 million, net of income taxes of $18
million. A $52 million reserve was recorded to cover, among other items,
purchase price disputes, retained liabilities, transaction costs, employee
terminations, facilities separation costs, indemnification obligations,
litigation expense and other contingencies (See Note 5 of the Notes to the
Semiconductor Equipment Business Combined Financial Statements). During the
remainder of fiscal year 1997, $10.3 million of this reserve was used
(primarily for the cash settlement of transaction and legal indemnification
and defense costs). During fiscal year 1998, an additional $7.2 million of
this reserve was used (primarily for the cash settlement of transaction,
employee termination, facilities separation and legal indemnification and
defense costs). The reserve as of October 2, 1998 was $34 million and related
to costs associated with pending litigation and indemnity obligations relating
to certain patent infringement claims by Applied Materials as well as purchase
price disputes with Novellus arising out of the sale of the TFS business. See
"Business of SEB--Legal Proceedings."

Other Charges. In the fourth quarter of fiscal year 1998, SEB recorded a
charge of approximately $6 million, relating primarily to inventory write-
downs of approximately $4 million and to termination benefits of approximately
$2 million for approximately 240 employees at its Massachusetts facilities.
Inventory write-downs were charged to cost of revenue. At October 2, 1998, SEB
had paid approximately $1 million of these termination benefits. The remaining
$1 million in termination benefits is expected to be paid by the end of the
third quarter of fiscal year 1999.

99
<PAGE>

Taxes on Earnings. SEB's effective income tax rate was 30.1% in fiscal year
1998, compared to 32.9% in fiscal year 1997. These rates are lower than the
U.S. federal statutory rate principally due to the tax benefits arising from
the use of a foreign sales corporation, tax credits and joint venture income.
The fiscal year 1998 rate was less than the fiscal year 1997 rate as the tax
credits in 1998 produced a higher tax benefit. Future tax rates may vary from
the historic rates depending on the worldwide allocations of earnings and tax
planning strategies.

Net Earnings. Net earnings were $11 million ($0.38 pro forma per share) or
3% of revenue in fiscal year 1998. This represented an 84% reduction from the
$71 million of net earnings ($2.33 pro forma per share) or 16% of revenue in
fiscal year 1997. The decrease in net earnings primarily reflects the sale of
the TFS business, which provided an after-tax gain of $33 million ($1.09 pro
forma per share) in fiscal year 1997, and the other factors described above.

Fiscal Year 1997 Compared to Fiscal Year 1996

Revenue. SEB's revenue of $448 million in fiscal year 1997 was 33% lower
than its revenue of $667 million in fiscal year 1996. Adjusted for revenue
attributable to the TFS business, SEB's revenue was 26% lower in fiscal year
1997 than in fiscal year 1996. Beginning in the later half of fiscal year
1996, the semiconductor equipment industry began to experience a slowdown. The
slowdown was a product of excess capacity and sharply decreasing device prices
within the DRAM market segment. This slowdown lasted through the first half of
fiscal year 1997, when industry conditions began to improve slightly as a
result of strengthening demand from logic and microprocessor device
manufacturers, primarily located in Taiwan.

International revenue was $231 million, or 52% of SEB's revenue in fiscal
year 1997, compared to $430 million, or 64% of revenue, in fiscal year 1996.
SEB's North American (primarily United States) and Europe region revenue were
45% and 11% of revenue, respectively, in fiscal year 1997 compared to 34% and
12% of revenue, respectively, in fiscal year 1996. The aggregate of Taiwan,
Japan and Korea revenue as a percentage of revenue was 39% in fiscal year
1997, compared to 50% in fiscal year 1996. Adjusted for revenue attributable
to the TFS business, international revenue was $208 million, or 55% of SEB's
revenue in fiscal year 1997, compared to $342 million, or 67% of revenue, in
fiscal year 1996.

Royalty income increased 8% in fiscal year 1997, compared to fiscal year
1996, primarily because of increased royalties for the license agreement with
TEL for the use of MB/2/ technology.

Gross Profit. SEB's gross profit of $185 million in fiscal year 1997, and
$267 million in fiscal year 1996, represented 41% and 40% of revenue in fiscal
year 1997 and fiscal year 1996, respectively. Adjusted for gross profit
attributable to the TFS business, SEB's gross profit in fiscal year 1997 was
43% of TFS-adjusted revenue compared to 42% of TFS-adjusted revenue in fiscal
year 1996. The slight increase in gross profit as a percentage of revenue was
due to changes in product and territory mix, particularly the increase in
higher-margin medium- current system sales.

Research and Development. Research and development expenses of $47 million
in fiscal year 1997 were 11% of revenue compared to $56 million, or 8% of
revenue, in fiscal year 1996. Adjusted for research and development expenses
attributable to the TFS business, research and development expenses
represented 8% and 6% of TFS-adjusted revenue in fiscal year 1997 and fiscal
year 1996, respectively. The $8 million reduction in research and development
expenses from fiscal year 1996 to 1997 was primarily due to the sale of the
TFS business in fiscal year 1997.

Marketing. Marketing expenses of $51 million in fiscal year 1997 were 11% of
revenue compared to $53 million, or 8% of revenue in fiscal year 1996.
Adjusted for marketing expenses attributable to the TFS business, SEB's
marketing expenses were $40 million or 11% of TFS-adjusted revenue in fiscal
year 1997, compared to $35 million or 7% of TFS-adjusted revenue in fiscal
year 1996. The increase on a TFS-adjusted basis between the fiscal years was a
result of SEB's increased investment in process support, such as the
Introduction Support Teams and Productivity Transfer Teams.

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<PAGE>

General and Administrative. General and administrative expenses of $32
million were 7% of revenue in fiscal year 1997, compared to $36 million, or 5%
of revenue, in fiscal year 1996. Adjusted for general and administrative
expenses attributable to the TFS business, SEB's general and administrative
expenses were 7% of TFS-adjusted revenue in fiscal year 1997 compared to 6% of
TFS-adjusted revenue in fiscal year 1996. The reduction in general and
administrative expenses between fiscal year 1996 and fiscal year 1997 was
primarily due to the sale of the TFS business and decreased volume-related
expenses.

Taxes on Earnings. SEB's effective income tax rate was 32.9% in fiscal year
1997, compared to 35.1% in fiscal year 1996. The fiscal year 1997 rate was
lower than the U.S. federal statutory rate principally due to the tax benefits
arising from the use of a foreign sales corporation, tax credits and joint
venture income. The fiscal year 1997 rate was less than the fiscal year 1996
tax rate as the fiscal year 1997 rate included a larger benefit from joint
venture income.

Net Earnings. Net earnings were $71 million ($2.33 pro forma per share) or
16% of revenue in fiscal year 1997. This was 11% lower than the $79 million in
net earnings ($2.56 pro forma per share) or 12% of revenue in fiscal year
1996. The decline in earnings resulting from the reduction of revenue between
fiscal year 1996 and fiscal year 1997 was significantly offset by the $33
million after-tax gain ($1.09 pro forma per share) in fiscal year 1997 from
the sale of the TFS business.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. It is effective for SEB's 1999 fiscal year. The
impact of the implementation of SFAS No. 130 on the combined financial
statements of SEB has not yet been determined.

In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 changes current practice
under SFAS No. 14 by establishing a new framework on which to base segment
reporting (referred to as the "management" approach) and also requires interim
reporting of segment information. It is effective for SEB's 1999 fiscal year.
The impact of the implementation of SFAS No. 131 on the reporting of SEB's
segment information has not yet been determined.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and is effective for SEB's
2000 fiscal year. The impact of the implementation of SFAS No. 133 on the
combined financial statements of SEB has not yet been determined.

LIQUIDITY AND CAPITAL RESOURCES

SEB's debt has historically been incurred or managed at the parent level. In
connection with the Distribution, it is anticipated that SEB will assume
approximately $5 million of the Company's Notes Payable. SEB will not be able
to rely on the earnings, assets or cash flows of HCS or IB after the
Distribution nor, however, will its earnings, assets or cash flows be used to
contribute to the capital requirements of those entities.

The Company has used a centralized cash management system to finance its
operations. Cash deposits from most of the businesses are transferred to the
Company on a daily basis, and the Company funds its required disbursements. As
the result, SEB reported no cash and cash equivalents at October 2, 1998 and
September 27, 1997. Pursuant to the Distribution Agreement, SEB will receive a
cash contribution from the Company such that SEB's cash and cash equivalents
equal $100 million and its Consolidated Debt, expected to consist of Notes
Payable, will not exceed $5 million. Such cash and cash equivalents are
expected to represent SEB's principal source of liquidity for the foreseeable
future. See "The Semiconductor Equipment Business Forecasted Capitalization."
As of October 2, 1998, interest rates on the Company's outstanding Notes
Payable ranged from

101
<PAGE>

1.50% to 49.00%, and the weighted average interest rate on these Notes Payable
was 1.96%. The specific Notes Payable that SEB will assume in connection with
the Distribution will be determined in accordance with the Distribution
Agreement. See "The Distribution Proposals--Proposal One: The Distribution--
Distribution Agreement." In addition, SEB may enter into one or more credit
facilities for working capital and other general corporate purposes after the
Distribution. Any such credit facility may contain certain representations and
warranties, conditions, affirmative, negative and financial covenants and
events of default customary for such facilities. SEB does not expect that it
will have any outstanding borrowings under any such credit facility as of the
Distribution.

SEB generated $40 million of cash from operations in fiscal year 1998,
compared to $72 million in fiscal year 1996. SEB used $3 million of cash for
operations in fiscal year 1997. Fiscal year 1998 net income (plus non-cash
charges for depreciation) was $19 million. Another major source of cash was
the $38 million decrease in accounts receivable, partially offset by a $26
million decrease in accounts payable and accrued liabilities, all of which
were attributable to reduced volume.

SEB used $38 million for investing activities in fiscal year 1998. Cash used
for investing activities in fiscal year 1998 was primarily for the
acquisitions of a product line of Genus, Inc. and the remaining minority
interest in Varian Korea Ltd. This compares to $141 million generated by
investing activities, primarily the sale of the TFS business, in fiscal year
1997, which was partially offset by $11 million in capital expenditures. SEB
used $22 million for investing activities in fiscal year 1996 primarily for
capital expenditures.

As a consequence of the industry slowdown, SEB currently has no plans to
materially modify or expand its facilities or to make other material capital
expenditures. Restructuring plans associated with the Distribution are
currently being developed and may result in additional costs and expenditures.
The Distribution Agreement provides that SEB is responsible for certain
litigation described under "Business of SEB--Legal Proceedings" and further
provides that SEB will indemnify IB and HCS for one-third of the costs,
expenses and other liabilities of the Company relating to certain discontinued
operations of the Company, including certain environmental liabilities. See
"--Environmental Matters."

SEB's liquidity is affected by many factors, some based on the normal
operations of the business and others related to the uncertainties of the
industry and global economies. Although SEB's cash requirements will fluctuate
based on the timing and extent of these factors, management believes that cash
generated from operations, together with the cash contribution to be made by
the Company to SEB at the time of the Distribution and SEB's borrowing
capability, will be sufficient to satisfy commitments for capital expenditures
and other cash requirements for the current fiscal year and fiscal year 2000.

ENVIRONMENTAL MATTERS

SEB'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 CERCLA at eight sites
where the Company 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, foreign, federal, state and/or local agencies at certain current or
former Company facilities (including facilities disposed of in connection with
the Company's sale of its Electron Devices business during fiscal year 1995
and the sale of its TFS business during fiscal year 1997). Expenditures by the
Company for environmental investigation and remediation amounted to $5 million
in fiscal year 1998, compared with $2 million in fiscal year 1997 and $5
million in fiscal year 1996.

102
<PAGE>

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 2, 1998, the Company nonetheless estimated that the
future exposure for environmental related investigation and remediation costs
for these sites and facilities ranged in the aggregate from $22 million to $49
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 2, 1998. 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 the Company has accrued $22 million in
estimated environmental costs as of October 2, 1998. The amount accrued has
not been discounted to present value.

As to other sites and facilities, the Company has gained sufficient
knowledge to be able to better estimate the scope and costs of future
environmental activities. As of October 2, 1998, the Company estimated that
the future exposure for environmental-related investigation and remediation
costs for these sites and facilities ranged in the aggregate from $40 million
to $74 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 2, 1998. 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 $51 million
at October 2, 1998. Accordingly, the Company has accrued $22 million as of
October 2, 1998, which represents its best estimate of the future costs
discounted at 4%, net of inflation. This accrual is in addition to the
$22 million described in the preceding paragraph.

Under the Distribution Agreement, SEB has agreed to indemnify HCS and IB for
one-third of these environmental investigation and remediation costs, as
adjusted for any insurance proceeds and tax benefits expected to be realized
upon the payment of these costs. Accordingly, SEB had recorded $8 million as
its portion of these estimated future costs for environmental liabilities as
of October 2, 1998.

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. SEB believes
that most of these cost ranges will narrow as investigation and remediation
activities progress.

SEB believes that its reserves are adequate, but as the scope of its
obligation becomes more clearly defined, these reserves 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 SEB'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, 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
SEB.

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 SEB 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 SEB's
business, results of operations or financial condition.

103
<PAGE>

State of Readiness. SEB has initiated a comprehensive assessment of
potential Year 2000 problems with respect to (1) internal systems, (2)
products and (3) significant third parties with which SEB does business.

SEB 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. With respect to enterprise information systems, SEB in 1994 initiated
replacement of its existing systems with a single company-wide system supplied
by SAP America, Inc., which system is designed and tested by SAP for Year 2000
capability. Installation of that system has been staged to replace first those
existing systems that are not Year 2000 capable. Installation of the new SAP
system is approximately 70% complete, with 90% completion expected by July
1999 and full completion expected by the end of 1999. Upgrade of enterprise
information systems is approximately 77% complete, with 96% completion
expected by July 1999 and 100% completion expected by December 1999; upgrade
of networking and telecommunications systems is approximately 95% complete,
with 100% completion expected by July 1999; upgrade of factory-specific
information systems is approximately 42% complete, with 67% completion
expected by July 1999 and 84% completion expected by December 1999; and
upgrade of non-IT systems, computers and packaged software is approximately
85% complete, with 100% completion expected by July 1999 (except in the case
of some computers and packaged software, which might not be completed until
December 1999) and upgrade of facilities systems is approximately 75%
complete, with 100% completion expected by July 1999.

SEB has 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 complete, and SEB 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 SEB's
current products.

With respect to previously-sold products, SEB does not intend to assess Year
2000 preparedness of every product it has ever sold, but rather is focusing
its assessments on products that will be under written warranties or are still
relatively early in their useful life, 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 or with
internally developed software. These assessments are expected to be
substantially completed by April 1999. Where SEB identifies previously-sold
products that are not Year 2000 capable, SEB intends in some cases to develop
and offer to sell upgrades or retrofits, identify corrective measures which
the customer could itself undertake or identify for the customer other
suppliers of upgrades or retrofits. There may be instances where SEB will be
required to repair and/or upgrade such products at its own expense. Schedules
for completing those corrective actions vary considerably among SEB's
businesses and products, but are generally expected to be substantially
completed by July 1999.

SEB is still assessing potential Year 2000 problems of third parties with
which SEB has material relationships, which are primarily suppliers of
products or services. These assessments will identify and prioritize critical
suppliers, review those suppliers' written assurances on their own assessments
and correction of Year 2000 problems, and develop appropriate contingency
plans for those suppliers which might not be adequately prepared for Year 2000
problems. In this respect, SEB is requiring its suppliers to complete a
questionnaire that was prepared and recommended by SEMATECH, an industry group
comprised of U.S. semiconductor manufacturers and designed to assess each
supplier's Year 2000 readiness. Additionally, officials of SEB plan to visit
and audit the Year 2000 compliance efforts of all sole source suppliers, or
those having a software content in their products. These assessments are
expected to be substantially completed by August 1999.

Costs. As of October 2, 1998, SEB estimates that it had incurred less than
$1 million to assess and correct Year 2000 problems. Although difficult to
assess, based on its assessment to date, SEB estimates that it will incur less
than $1 million in additional costs to assess and correct Year 2000 problems,
which costs are expected to be incurred throughout fiscal year 1999 and the
first half of fiscal year 2000. All of these costs have been and will continue
to be expensed as incurred.

104
<PAGE>

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, SEB expects that
certain costs will be offset by revenue 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 SEB's actual costs to assess and
correct Year 2000 problems will not be higher than the foregoing estimate.

Risks. Failure of SEB and its key suppliers to accurately assess and correct
Year 2000 problems, would likely result in interruption of certain of SEB's
normal business operations, which could have a material adverse effect on
SEB's business, results of operations or financial condition. If SEB 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 SEB 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 SEB 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 SEB
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 SEB
does not expect to be 100% Year 2000 compliant by the end of 1999, SEB does
not currently believe that any Year 2000 non-compliance in SEB's information
systems will have a material adverse effect on SEB'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; 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 the products they supply to SEB; 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. See "Risk Factors--Risks
Relating to the Distribution--Transitioning to New Information Technology
Infrastructures."

Because of uncertainties as to the extent of Year 2000 problems with SEB's
previously-sold products and the extent of any legal obligation of SEB to
correct Year 2000 problems in those products, SEB cannot yet assess risks to
SEB with respect to those products. Because its assessments are not yet
complete, SEB 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 SEB's results of operations.

Contingency Plans. With respect to SEB's enterprise information systems, SEB
has a contingency plan if the SAP system is not fully installed before
December 31, 1999. That plan primarily involves installation where necessary
of a Year 2000 capable upgrade of existing information systems pending
complete installation of the SAP system. That upgrade is currently in
acceptance testing, and if functional will be held for contingency purposes.

With respect to products and significant third parties, SEB intends, as part
of its on-going assessment of potential Year 2000 problems, to develop
contingency plans for more critical problems that might not have been
corrected by December 31, 1999. It is currently anticipated that the focus of
these contingency plans will be the possible interruption of supply of key
components or services from third parties.

105
<PAGE>

SEB MARKET RISK

FOREIGN CURRENCY EXCHANGE RISK

As a global concern, SEB faces exposure to adverse movements in foreign
currency exchange rates. This exposure may change over time as SEB's business
practices evolve and could have a material adverse impact on SEB's financial
results. Historically, SEB's primary exposures have related to non-U.S. dollar
denominated sales and purchases throughout Europe and Asia. The Euro was
adopted as a common currency for members of the European Monetary Union on
January 1, 1999. SEB is evaluating, among other issues, the impact of the Euro
conversion on its foreign currency exposure. Based on its evaluation to date,
SEB does not expect the Euro conversion to create any change in its currency
exposure due to SEB's existing hedging practices.

At the present time, SEB hedges its currency exposures associated with
certain assets and liabilities denominated in non-functional currencies and
with anticipated foreign currency cash flows. SEB does not enter into forward
exchange contracts for trading purposes. SEB's forward exchange contracts
generally range from one to three months in original maturity, and no forward
exchange contract has an original maturity greater than one year.

Forward exchange contracts outstanding as of October 2, 1998 are summarized
as follows:

<TABLE>
<CAPTION>
NOTIONAL
VALUE NOTIONAL FAIR
PURCHASED VALUE SOLD VALUE
--------- ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Japanese yen.................................... $ -- $ 231 $ 7
French francs................................... -- 2,884 (117)
British pounds.................................. -- 55 --
Italian lira.................................... 90 -- (5)
German marks.................................... -- 2,011 (108)
Taiwan dollars.................................. -- 910 (25)
Korean won...................................... -- 7,738 18
Swiss francs.................................... 6 -- --
----- ------- ------
Total........................................... $ 96 $13,829 $ (230)
===== ======= ======
</TABLE>

There were no unrealized gains or losses for the forward exchange contracts
as of fiscal year-end 1998. The fair value of forward exchange contracts
generally reflects the estimated amounts that SEB would receive or pay to
terminate the contracts at the reporting date, thereby taking into account and
approximating the current unrealized and realized gains or losses of open
contracts. The notional amounts of forward exchange contracts are not a
measure of SEB's exposure.

INTEREST RATE RISK

Although payments under certain of SEB's operating leases for its facilities
are tied to market indices, SEB is not exposed to material interest rate risk
associated with its operating leases.

106
<PAGE>

THE SEMICONDUCTOR EQUIPMENT BUSINESS
(WHICH WILL BECOME VARIAN SEMICONDUCTOR EQUIPMENT
ASSOCIATES, INC. FOLLOWING THE DISTRIBUTION)

SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST ASSUMPTIONS

The following financial forecast of the capitalization of SEB is based on
forecasts and assumptions by the Company's management concerning events and
circumstances that are expected to occur subsequent to the latest historical
balance sheet date but prior to and including April 1, 1999 (the anticipated
Distribution Date), including future results of operations and other events.
For purposes of the forecasted capitalization at April 1, 1999, SEB's net
earnings in the first six months of fiscal year 1999 are assumed to
approximate the same level as in the last six months of fiscal year 1998,
exclusive of approximately $5 million of restructuring costs to write down
impaired assets and cover effects of workforce reductions at SEB's
Massachusetts facilities. In addition, restructuring plans associated with the
Distribution are currently being developed and may result in additional
charges to SEB's equity. Assumptions with respect to events that will occur
between October 3, 1998 and April 1, 1999, include the following:

. Receipt of a cash contribution from the Company of $100 million and the
assumption of Notes Payable of $5 million from the Company.

. Amendment of SEB's certificate of incorporation to give SEB authorized
capital stock of (i) 150,000,000 shares of SEB Common Stock of which
approximately 29,909,061 shares will be issued and outstanding upon the
Distribution (based upon the number of shares of the Company's Common
Stock outstanding as of December 15, 1998) and (ii) 5,000,000 shares of
preferred stock, $.01 par value per share, none of which will be issued
and outstanding upon the Distribution.

In the Company's management's judgment, the listed assumptions and forecasts
reflect those material events or transactions that occurred since October 3,
1998 or are expected to occur prior to the anticipated Distribution Date,
other than the potential restructuring charges discussed in the first
paragraph above. There have been no changes in accounting principles
anticipated in this capitalization forecast nor are any such changes currently
contemplated.

LIMITATIONS ON PROJECTIONS AND FORECASTS

Neither the Company nor any of its subsidiaries intends after the date of
this Proxy Statement to update any forecasted or projected financial data or
information contained in this Proxy Statement and the absence of such an
update should not be construed as any indication regarding the views or
beliefs of management of the Company (or of SEB after the Distribution)
concerning the forecasted or projected data or information contained in this
Proxy Statement.

107
<PAGE>

THE SEMICONDUCTOR EQUIPMENT BUSINESS
(WHICH WILL BECOME VARIAN SEMICONDUCTOR EQUIPMENT
ASSOCIATES, INC. FOLLOWING THE DISTRIBUTION)

FORECASTED CAPITALIZATION

The following table sets forth the combined capitalization of SEB as of
October 2, 1998 on a historical basis, forecasted at April 1, 1999 (the
anticipated Distribution Date), and as adjusted to give effect to the
Distribution and the other transactions contemplated by the Distribution
Agreement. The significant assumptions used below have been described in "The
Semiconductor Equipment Business (Which Will Become Varian Semiconductor
Equipment Associates, Inc. Following the Distribution)--Summary of Significant
Capitalization Forecast Assumptions" on the preceding page. The following data
is qualified in its entirety by the financial statements of the Semiconductor
Equipment Business and other information contained elsewhere in this Proxy
Statement.

<TABLE>
<CAPTION>
FORECASTED
OCTOBER 2, AT
1998 APRIL 1, PRO FORMA AFTER
HISTORICAL 1999(1) DISTRIBUTION(1)
---------- ---------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Cash and cash equivalents................ $ -- $ -- $100.0
====== ===== ======
Notes payable............................ $ -- $ -- $ 5.0
====== ===== ======
Equity:
Divisional Equity...................... $103.2 $ -- $ --
Common stock, par value $.01 per share:
authorized--150,000,000 shares
issued and outstanding--none
historical and 29,909,061
pro forma........................... -- 0.3 0.3
Preferred stock, par value $.01 per
share:
authorized--5,000,000 shares
issued and outstanding--none
historical or pro forma............. -- -- --
Capital in Excess of Par Value......... -- 94.9 189.9
------ ----- ------
Total Equity....................... 103.2 95.2 190.2
------ ----- ------
Total Capitalization............. $103.2 $95.2 $190.2
====== ===== ======
</TABLE>
- --------
(1) See "The Semiconductor Equipment Business (Which Will Become Varian
Semiconductor Equipment Associates, Inc. Following the Distribution)--
Summary of Significant Capitalization Forecast Assumptions" on the
preceding page.

108
<PAGE>

THE SEMICONDUCTOR EQUIPMENT BUSINESS
(WHICH WILL BECOME VARIAN SEMICONDUCTOR EQUIPMENT
ASSOCIATES, INC. FOLLOWING THE DISTRIBUTION)

PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The unaudited pro forma condensed combined financial statements of the
Semiconductor Equipment Business, which will become SEB following the
Distribution, set forth below consist of a pro forma balance sheet as of
October 2, 1998 and a pro forma statement of earnings for the year ended
October 2, 1998. The pro forma balance sheet was prepared to give effect to
the Distribution as if it had occurred on October 2, 1998 and the pro forma
statement of earnings was prepared to give effect to the Distribution as if it
had occurred on September 27, 1997. The unaudited pro forma balance sheet set
forth below does not purport to represent what the Semiconductor Equipment
Business' financial position actually would have been had the Distribution
occurred on the date indicated or to project the Semiconductor Equipment
Business' financial position for any future date. The unaudited pro forma
statement of earnings set forth below does not purport to represent what the
Semiconductor Equipment Business' operations actually would have been or to
project the Semiconductor Equipment Business' operating results for any future
period. The unaudited pro forma adjustments are based upon currently available
information and certain assumptions that the Semiconductor Equipment Business'
management believes are reasonable. The unaudited pro forma statements should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations of the Semiconductor Equipment Business"
and the historical financial statements of the Semiconductor Equipment
Business and the notes thereto appearing elsewhere in this Proxy Statement.

109
<PAGE>

THE SEMICONDUCTOR EQUIPMENT BUSINESS
(WHICH WILL BECOME VARIAN SEMICONDUCTOR EQUIPMENT
ASSOCIATES, INC. FOLLOWING THE DISTRIBUTION)

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

OCTOBER 2, 1998

<TABLE>
<CAPTION>
SEB PRO FORMA SEB
HISTORICAL ADJUSTMENTS(1) PRO FORMA
---------- -------------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................. $ -- $100.0 $100.0
Other current assets...................... 162.1 -- 162.1
------ ------ ------
Total current assets.................... 162.1 100.0 262.1
Property, Plant and Equipment, net.......... 38.8 -- 38.8
Other Assets................................ 23.7 -- 23.7
------ ------ ------
Total Assets............................ $224.6 $100.0 $324.6
====== ====== ======
LIABILITIES AND EQUITY
Current Liabilities
Notes payable............................. $ -- $ 5.0 $ 5.0
Other current liabilities................. 112.6 -- 112.6
------ ------ ------
Total Current Liabilities............... 112.6 5.0 117.6
Long-Term Debt.............................. -- -- --
Other Liabilities........................... 8.8 -- 8.8
------ ------ ------
Total Liabilities....................... 121.4 5.0 126.4
Equity...................................... 103.2 95.0 198.2
------ ------ ------
Total Liabilities and Equity................ $224.6 $100.0 $324.6
====== ====== ======
</TABLE>

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(1) Assumes a cash contribution by the Company to SEB of $100.0 million and
the transfer to SEB of $5.0 million in Notes Payable from the Company in
connection with the Distribution.

110
<PAGE>

THE SEMICONDUCTOR EQUIPMENT BUSINESS
(WHICH WILL BECOME VARIAN SEMICONDUCTOR EQUIPMENT
ASSOCIATES, INC. FOLLOWING THE DISTRIBUTION)

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS

FISCAL YEAR 1998

<TABLE>
<CAPTION>
SEB PRO FORMA SEB
HISTORICAL ADJUSTMENTS(1) PRO FORMA
---------- -------------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue..................................... $342.9 $ -- $342.9
------ ----- ------
Operating Costs and Expenses
Cost of revenue........................... 225.2 -- 225.2
Research and development.................. 40.8 -- 40.8
Marketing................................. 35.2 -- 35.2
General and administrative................ 25.3 -- 25.3
------ ----- ------
Total operating costs and expenses...... 326.6 -- 326.6
------ ----- ------
Operating Earnings.......................... 16.3 -- 16.3
Interest expense.......................... -- (0.2) (0.2)
------ ----- ------
Operating Earnings before Taxes............. 16.3 (0.2) 16.1
Taxes on earnings......................... 4.9 (0.1) 4.8
------ ----- ------
Net Earnings................................ $ 11.4 $(0.1) $ 11.3
====== ===== ======
Pro Forma Net Earnings Per Share(2)......... $ 0.38 $ 0.38
====== ======
</TABLE>

NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS

(1) Reflects pro forma adjustment for interest expense on $5.0 million of
Notes Payable at an estimated annual rate of interest of 3.6%. A change of
25 basis points in this estimated annual rate of interest would impact pro
forma interest expense by $13,000. The pro forma adjustment for income
taxes is based upon statutory income tax rates.
(2) The computation of pro forma net earnings per share is based on the
weighted average number of shares of the Company's Common Stock
outstanding during fiscal year 1998, reflecting the anticipated ratio of
one share of SEB Common Stock for each share of the Company's Common Stock
outstanding at the time of the Distribution.

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BUSINESS OF SEB

GENERAL

SEB, a newly formed, wholly owned subsidiary of the Company, will own and
operate the Semiconductor Equipment Business after the Distribution.
References in this section to "SEB" refer to SEB and its subsidiaries after
giving effect to the Internal Transfers and the Distribution. References in
this section to the Semiconductor Equipment Business refer to the historical
business and operations of the Semiconductor Equipment Business conducted by
the Company prior to the Distribution.

OVERVIEW

SEB designs, manufactures, markets and services semiconductor processing
equipment used in the fabrication of integrated circuits. SEB is a leading
supplier of ion implantation systems, key pieces of capital equipment used to
manufacture semiconductor chips. SEB has shipped more than 2,500 systems
worldwide, and more SEB ion implanters are at work than those from all other
manufacturers combined.

SEB provides customers with world-class products and support. SEB achieved
the number one ranking for the second consecutive year in VLSI Research Inc.'s
1998 customer satisfaction survey. The annual study surveys semiconductor
manufacturing customers worldwide. SEB was ranked as the industry's top large
supplier of wafer processing capital equipment and received the highest
overall point total ever achieved by a large equipment supplier.

SEB equipment is used by virtually every major semiconductor manufacturer in
the U.S., Europe, Japan, Korea and throughout the Asia Pacific region. Its
award-winning support network offers chip producers around-the-clock,
worldwide service, training and process support. SEB has become an industry
leader in providing after-market products and services which reduce operating
costs and extend the cost-effective life of its products.

SEB's business depends upon the capital expenditures of semiconductor
manufacturers, which in turn depend on the current and anticipated market
demand for integrated circuits and products utilizing integrated circuits. The
semiconductor industry has been experiencing a slowdown resulting from
depressed DRAM pricing, manufacturing over-capacity and the economic
difficulties affecting many Asian countries. This has caused semiconductor
manufacturers to reduce their capital equipment investments, and in certain
cases customers have either rescheduled or canceled capital equipment
purchases.

BACKGROUND

SEB

SEB's role in the semiconductor fabrication market can be traced to the
Company's pioneering work in ultra-high vacuum technology. In the 1960s, this
ability to create ultra-high vacuum environments was applied to physics and
space research projects. Since chip fabrication must also be performed in
ultra-clean environments, the Company's vacuum expertise proved critical to
the development of many of today's sophisticated systems. As the needs of the
burgeoning semiconductor industry grew, the Semiconductor Equipment Business
developed methods for controlling electron beams and ions in ultra-clean
environments. It also conducted research into methods of manipulating and
depositing new materials onto silicon wafers.

The Semiconductor Equipment Business entered the ion implantation business
in 1975 through the acquisition of Extrion Corporation, in Gloucester,
Massachusetts. Since then, the Semiconductor Equipment Business has produced a
complete line of medium and high current implanters. These systems introduce
precise quantities of dopant materials into the wafers, creating desired
electrical characteristics. In June 1997, the Semiconductor Equipment Business
sold its TFS business, which made physical vapor deposition equipment,

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also known as sputtering systems, to Novellus. In July 1998, the Semiconductor
Equipment Business acquired the high-energy ion implantation equipment product
line of Genus, Inc. ("Genus").

The Industry

The semiconductor industry has experienced significant growth in recent
years due to the continued increase of the personal computer market, the
expansion of the telecommunications industry, the emergence of new
applications such as consumer electronics products, wireless communications
devices and portable computers and the increased semiconductor content in
these electronics systems. Significant performance advantages and lower prices
for integrated circuits have contributed to the growth and expansion of the
semiconductor industry. In response to the growth in demand for integrated
circuits, the semiconductor industry has significantly increased its
manufacturing capacity through the expansion of existing facilities and
construction of new facilities.

The fabrication of integrated circuits requires a number of complex and
repetitive processing steps, including deposition, photolithography, etch and
ion implantation. Deposition is a process in which a film of either
electrically insulating, or electrically conductive, material is deposited on
the surface of a wafer. Photolithography is used to transfer a device or
circuit pattern into a light-sensitive, resistant layer which, after
development, can be used in turn to transfer the pattern onto the silicon
surface. The etch process completes the transfer of the pattern into the
various thin films used to make the integrated circuit. Finally, ion
implantation provides a means for introducing dopant material into the silicon
surface, typically into selected areas defined by the photolithographic
process. These selectively doped areas become the electrical components of the
integrated circuits.

Semiconductor manufacturers generally measure the cost performance of their
production equipment in terms of "cost per wafer," which is determined by
factoring in the fixed costs for acquisition and installation of the system,
its variable operating costs and its net throughput rate. A system with higher
throughput allows the semiconductor manufacturer to recover the purchase price
of the system over a greater number of wafers and thereby reduce the cost of
ownership of the system on a per wafer basis. Throughput is most accurately
measured on a net or overall basis, which takes into account the processing
speed of the system and any non-operational downtime for cleaning, maintenance
or other repairs. The increased costs of larger and more complex semiconductor
wafers have made high yields extremely important in selecting processing
equipment. To achieve higher yields and better film quality, implant systems
must be capable of repeating the original process on a consistent basis
without a disqualifying level of defects. This characteristic, known in the
industry as "repeatability," is extremely important in achieving commercially
acceptable yields. Repeatability is more easily achieved in those systems that
can operate at desired throughput rates without requiring the system to
approach its critical tolerance limits.

The continuing evolution of semiconductor devices to smaller geometries and
more complex multi-level circuitry has significantly increased the cost and
performance requirements of the capital equipment used to manufacture these
devices. Many of the advanced 200mm fabrication lines that are currently
planned, or in construction, will cost over $1 billion each, representing a
substantial increase over the costs of prior generation fabrication
facilities. Increased capital depreciation costs will continue to become a
much larger percentage of the aggregate production costs for semiconductor
manufacturers relative to labor, materials and other variable manufacturing
costs. As a result, there has been an increasing focus by the semiconductor
industry on obtaining increased productivity and higher returns from its
semiconductor manufacturing equipment, thereby reducing the effective cost of
ownership of such systems.

PRODUCTS

SEB designs and manufactures a broad range of implant tools, using data-
driven quality processes to produce reliable systems and provide total support
to its customers. SEB's products are used for ion implantation in
semiconductor manufacturing. During ion implantation, silicon wafers are
bombarded by a high-velocity beam

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of electrically charged ions. These ions penetrate film materials at selected
sites, changing their electrical properties.

SEB entered the medium current portion of the implantation market in 1971.
Its medium current ion implanters include the VIISta(TM) 810 (a 300mm-
compatible product), the EHP-220, and the EHP-500. The EHP-220 and EHP-500 are
the third evolutionary generations of the E-series, the world's most widely
accepted medium current machines.

SEB entered the high-current portion of the implant market in 1981. Its high
current ion implanters include the VIISta(TM) 80 and the SHC-80 (both 300mm-
compatible products), the VIISion(TM) 80 LE and the VIISion(TM) 200 LE.
VIISion(TM) LE is acknowledged as the most economical batch system available
today. It offers tripled low-energy boron beam currents, increased mechanical
throughput, and an improved particle specification. The SHC-80 is the world's
first, serial-process, high current implanter. It is compatible with both
200mm wafers and 300mm wafers for advanced processes. The SHC-80 promises
throughput improvements up to 30 percent greater than the same process on
batch machines. The VIISta(TM) 80 extends the SHC-80's performance to sub-KeV
energy levels.

SEB's high-energy (MeV) ion implantation equipment product line, purchased
from Genus in fiscal year 1998, represents an excellent fit with SEB's
existing medium and high current product lines, and offers a rapid entry to
the fast growing, high-energy sector of the industry.

Over 85% of the SEB implanters shipped since 1975 are still in use through a
comprehensive upgrade and refurbishment program and world-class support
network that continually improves the capability of older systems.

CUSTOMER SUPPORT AND SERVICES

SEB provides a range of innovative customer support products designed to
improve the productivity of its worldwide customers as well as to provide a
direct link to SEB factories and research centers.

Remote Assist(TM) is a completely new semiconductor equipment service
capability that quickly puts product experts "virtually' into customer
fabrication facilities. This offering uses advanced video conferencing
capabilities and a new video helmet for linking on-site engineers with SEB
support offices and factories.

The Introduction Support Teams and Productivity Transfer Teams assist the
customer in bringing SEB implanters up, and in making them productive as
quickly as possible. These teams speed process qualification and smooth
integration into the production environment, often reducing installation time
by anywhere from two to more than five weeks.

FAB Care Plus(TM) is a unique program which encourages customers to tailor
an overall support program that meets a company's specific needs--whether it
be for a research facility or an offshore production facility. FAB Care
Plus(TM) solutions can be implemented around the world to provide consistent
and reliable support.

For parts management, SEB has strategically placed Parts Banks throughout
the world to provide carefully regulated inventory, global delivery and
logistics services. SEB also offers a comprehensive consumable parts program
that can be tailored to the individual fabrication facility.

Through VEDoc(TM), an electronic documentation system, customers can easily
access information about its implanters. All assembly drawings, schematics,
parts lists, maintenance and operation manuals, and video-illustrated
maintenance procedures are available in this easy-to-follow CD-ROM format.

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SEB's commitment to customer service extends to training and support. It
operates applications laboratories on three continents that contain not only
the latest equipment, but also the latest technology. For instance, SEB's Ion
Implant Systems VIP facility, with a class 1/10 cleanroom, a post-implant
process laboratory, process training and applications support is available to
handle customer wafers for process evaluation and to assist with new process
requirements.

MARKETING AND SALES

Historically, SEB has sold close to one-half of its systems in any
particular period to its top ten customers. Revenue from SEB's ten largest
customers in fiscal years 1998, 1997 and 1996 accounted for 47%, 46% and 52%
of revenue, respectively. SEB expects that sales of its products to relatively
few customers will continue to account for a high percentage of its revenue in
the foreseeable future. During fiscal year 1998, revenue from Intel
Corporation ("Intel") accounted for 14% of SEB's revenue, and Intel was the
only customer that accounted for 10% or more of SEB's revenue during that
period.

SEB has sold one or more ion implantation product to each of the 20 largest
semiconductor manufacturers in the world. SEB's sales objective is to work
closely with customers to secure purchase orders for multiple systems as such
customers expand existing facilities and build next-generation, wafer
facilities. SEB seeks to build customer loyalty and to achieve a high level of
repeat business by offering highly reliable products, comprehensive field
support and a responsive parts replacement and service program.

None of SEB's customers has entered into a long-term agreement requiring it
to purchase SEB's products. SEB believes that sales to certain of its
customers will decrease in the near future as those customers complete current
purchasing requirements for new or expanded fabrication facilities. Although
the composition of the group comprising SEB's largest customers has varied
from year to year, the loss of a significant customer or any reduction in
orders from any significant customer, including reductions due to customer
departures from recent buying patterns, market, economic or competitive
conditions in the semiconductor industry or in the industries that manufacture
products utilizing integrated circuits, could adversely affect SEB's business,
financial condition and results of operations. In addition, sales of SEB's
systems depend, in significant part, upon the decision of a prospective
customer to increase manufacturing capacity in an existing fabrication
facility or to transfer a manufacturing process to a new fabrication facility,
both of which typically involve a significant capital commitment. In addition,
SEB has from time to time experienced delays in finalizing system sales
following initial system's qualification. Due to these and other factors,
SEB's systems typically have a lengthy sales cycle during which SEB may expend
substantial funds and management effort. See "Risk Factors--Risks Relating to
the Business of SEB--Variability of Operating Results."

The ability to provide prompt and effective field support is critical to
SEB's sales efforts, due to the substantial operational and financial
commitments made by customers which purchase ion implantation systems. SEB's
strategy of supporting its installed base through both its customer support
and research and development groups has served to encourage use of SEB's
systems in production applications and has accelerated penetration of certain
key accounts. SEB believes that its marketing efforts are enhanced by the
technical expertise of its research and development personnel, who provide
customer process support and participate in a number of industry forums such
as conferences and technical publications.

SEB has 6 sales and service offices located in the United States and 11 in
Western Europe and Asia for a total of 17 worldwide. SEB has a global
infrastructure of sales, marketing and service engineers linked through SEB's
Knowledge Network(TM), Lotus Notes(R) and SAP(R) operating systems, allowing
SEB to globally review bookings and sales forecasts against detailed account
management plans. SEB's spare parts distribution capability has been
benchmarked by Intel as the best in the industry. Through modeling of parts
usage by equipment type, installed base distribution, freight, routes and
specific customs regulations, SEB has developed an infrastructure of parts
distribution and warehousing through partnering with Federal Express.

The Semiconductor Equipment Business has a long and direct presence in
Europe. From 1978 to 1996, the Company's semiconductor equipment was sold and
serviced in Japan by Tokyo Electron Ltd. ("TEL"). During

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much of the 18-year relationship, a joint venture, TEL-Varian Ltd.,
manufactured or customized equipment in Japan for the Semiconductor Equipment
Business. In December 1996, the Company and TEL revised their relationship to
enable Japanese customers to have more direct access to the Semiconductor
Equipment Business' product, engineering and support organizations worldwide.
Shortly thereafter, the Company formed a wholly-owned subsidiary, Varian
Japan, K.K., that today provides direct support of SEB's growing Japanese
customer base.

Using the original TEL joint venture relationship as a model, the Company
formed Varian Korea Ltd. ("VKL") in 1985 with its distributor in Korea. What
started as a venture for handling sales and service of semiconductor equipment
and vacuum products in Korea was expanded to include manufacturing in 1989.
Its 63,000-square-foot factory in Songtan City includes a Class 10,000
manufacturing area. In January 1998, the Company purchased the remaining 39%
of the VKL joint venture held by the original joint venture partner.

Managing global operations and sites located throughout the world presents
challenges associated with cultural diversities and organizational alignment.
Moreover, each region in the global semiconductor equipment market exhibits
unique characteristics that can cause capital equipment investment patterns to
vary significantly from period to period. Although international markets
provide SEB with significant growth opportunities, periodic economic
downturns, trade balance issues, political instability and fluctuations in
interest and foreign currency exchange rates are all risks that could affect
global product and service demand. Many Pacific Rim countries are currently
experiencing a significant economic downturn and are continuing to experience
further banking and currency difficulties that could lead to a deepening of
the economic recession in those countries. Specifically, the decline in value
of the Korean currency, together with difficulties obtaining credit, have
resulted in a decline in the purchasing power of SEB's Korean customers. This
in turn has resulted in the cancellation or delay of orders for SEB's products
from Korean customers, thus adversely affecting SEB's results of operations.
In addition, if Japan's economy weakens further, investments by Japanese
customers may be negatively affected, and it is possible that economic
recovery in other Pacific Rim countries could be delayed. SEB actively manages
its exposure to changes in foreign currency exchange rates, but there can be
no assurance that future changes in foreign currency exchange rates will not
have a material adverse effect on its results of operations or financial
condition.

International revenue of SEB for the year ended October 2, 1998 was
approximately $239 million, or 70% of revenue. For fiscal years 1997 and 1996,
international revenue of SEB was approximately $231 million and $430 million,
respectively, or 52% and 64% of revenue, respectively. For the fiscal year
ended October 2, 1998, revenue of SEB from customers in North America
(primarily the United States), Taiwan, Europe, Japan and Korea were
approximately 30%, 24%, 19%, 11% and 9%, respectively, of SEB's total revenue.
For the fiscal year ended September 26, 1997, revenue of SEB from customers in
North America (primarily the United States), Taiwan, Europe, Japan and Korea
were approximately 45%, 19%, 11%, 9% and 11%, respectively, of SEB's total
revenue. SEB's business is not seasonal in nature, but it is cyclical based on
the capital equipment investment expenditures of major semiconductor
manufacturers. These expenditure patterns are based on many factors, including
anticipated market demand for integrated circuits, the development of new
technologies and global economic conditions. The cyclicality in the
semiconductor equipment market over the last several years has resulted in a
decline in sales since 1996, with orders and backlog under continuous
pressure. This situation is the combined result of an oversupply in memory
chips, a decline in PC demand and the rippling of the Asian financial crises
through the Korean, Taiwanese and Japanese markets. See "Risk Factors--
Additional Risks Relating to Each of the Businesses--International Sales and
Manufacturing."

BACKLOG

As of October 2, 1998, SEB's backlog was $80 million, as compared to a
backlog of $151 million at September 26, 1997. SEB includes in its backlog
only those orders for which it has accepted purchase orders and assigned
shipment dates within twelve months. All orders are subject to cancellation or
rescheduling by customers with limited or no penalties. Due to possible
changes in system delivery schedules, cancellations of orders and delays in
systems shipments, SEB's backlog at any particular date is not necessarily
indicative of actual sales for any succeeding period.

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MANUFACTURING

SEB manufactures its products at its production facilities in Gloucester,
Massachusetts; Newburyport, Massachusetts (recently acquired); Songtan, Korea;
and Yamanashi, Japan. SEB's Gloucester facility has become the low-cost
manufacturer of ion implanters through the use of advanced manufacturing
methods and technologies, including, just-in-time, demand flow technology,
statistical process control and solids modeling. Despite operating in a
cyclical and competitive market, SEB has strengthened its profitability by
steadily increasing efficiency and reducing operating expenses. SEB has also
significantly reduced its costs through a reduction in rework, scrap, warranty
and testing costs. See "Risk Factors--Additional Risks Relating to Each of the
Businesses--International Sales and Manufacturing."

SEB'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 SEB. SEB utilizes an outsourcing
strategy for the manufacture of major subassemblies and performs system
design, assembly and testing in-house. SEB believes that outsourcing enables
it to minimize its fixed costs and capital expenditures while also providing
the flexibility to increase production capacity. This strategy also allows SEB
to focus on product differentiation through system design and quality control.
Through the use of manufacturing specialists, SEB believes that its subsystems
incorporate advanced technologies in robotics, vacuum and microcomputers. SEB
works closely with its suppliers on achieving mutual cost reduction through
joint design efforts.

SEB manufactures its systems in clean-room environments which are similar to
the clean rooms used by semiconductor manufacturers for wafer fabrication.
This procedure is intended to reduce installation and production qualification
times and the amount of particulates and other contaminants in the assembled
system, which in turn improves yield and reduces downtime for the customer.
Following disassembly, the tested system is packaged in multiple layers of
plastic shrink-wrap to maintain cleanroom standards during shipment.

SEB uses outsourcing to take advantage of economies of scale at outside
manufacturing facilities and to alleviate manufacturing bottlenecks. SEB
purchases material and components from various suppliers that are either
standard products or built to SEB specifications. Some of the components and
subassemblies included in SEB's products are obtained from a limited group of
suppliers. Although SEB seeks to reduce its dependence on these limited
sources, disruption or termination of certain of these sources could occur and
such disruptions could have at least a temporary adverse effect on SEB's
operations. Moreover, a prolonged inability to obtain certain components could
have a material adverse effect on SEB's business, financial condition and
results of operations and could result in damage to customer relationships.

Quality efforts at SEB begin with product development. SEB uses 3D,
computer-aided design, finite element analysis and other computer-based
modeling methods to prove new designs. A SEB implanter design is thoroughly
tested and proven throughout all stages of development before the first
production system is built. Concurrent engineering programs ensure that new
designs are quickly and successfully integrated into manufacturing.

COMPETITION

The semiconductor manufacturing equipment market is highly competitive and
is characterized by a small number of large players and over 250 small
domestic and foreign participants. The larger companies include Applied
Materials, Lam Research, Eaton, Novellus, TEL, Nikon, Canon and ASML. SEB
faces significant competitive factors in the ion implantation market. Within
this segment, as reported for calendar 1997 by Dataquest, SEB, Eaton, Applied
Materials, Nissin and Ulvac had 35%, 45%, 13%, 4% and 3%, respectively, of the
market share for ion implantation equipment.

Significant competitive factors in the ion implantation market include
relationships, price/cost of ownership, technological performance,
distribution and financial viability. Other significant competitive factors in
the semiconductor equipment market include system performance and flexibility,
cost, the size of each manufacturer, its installed customer base, capability
for customer support and breadth of product line. SEB believes it competes

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favorably in each of these categories. For example, its gradual transition
from joint ventures and distributor agreements to direct selling and service
has given SEB the ability to serve customers on a global basis through the
management of information critical to consistent, timely delivery of services
and products. Management believes that to remain competitive it will require
significant financial resources to offer a broad range of products, to
maintain customer service and support centers worldwide and to invest in
product and process research and development.

Certain of SEB's existing and potential competitors have substantially
greater financial resources and more extensive engineering, manufacturing,
marketing and customer service and support organizations. SEB expects its
competitors to continue to improve the design and performance of their current
products and processes and to introduce new products and processes with
enhanced price and performance characteristics. If SEB's competitors enter
into strategic relationships with leading semiconductor manufacturers covering
ion implantation products similar to those sold by SEB, its ability to sell
its products to those manufacturers could be adversely affected.

In addition, a substantial investment is required by customers to install
and integrate capital equipment into a semiconductor production line. As a
result, once a semiconductor manufacturer has selected a particular vendor's
capital equipment, SEB believes that the manufacturer will be generally
reliant upon that equipment for the specific production line application.
Accordingly, SEB may experience difficulty in selling a product line to a
particular customer for a significant period of time if that customer selects
a competitor's product. Increased competitive pressure could lead to lower
prices for SEB's products, thereby materially and adversely affecting SEB's
business, financial condition and results of operations. There can be no
assurance that SEB will be able to compete successfully in the future. See
"Risk Factors--Additional Risks Relating to Each of the Businesses--
Competition."

RESEARCH AND DEVELOPMENT

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

SEB's current research and development efforts are directed at development
of new systems and processes and improving existing system capabilities. SEB
is focusing its research and development efforts on the completion of the
VIISta(TM) platform, the next generation ion implant system. VIISta(TM) is
designed to cover the complete range of implants required for the next several
generations of integrated circuits and extend production capability to 0.10
micron geometries. VIISta(TM) medium and high current systems were introduced
in mid-1998 and are expected to achieve production implementation by mid-1999.
SEB is currently developing the next generation VIISta(TM) high-energy system
with the goal of demonstrating advanced capabilities of serial implantation to
this market segment in 1999.

Worldwide expenditures by SEB (net of customer funding) for research and
development during fiscal years 1998, 1997 and 1996 were $41 million, $47
million and $56 million, respectively, or approximately 12%, 11% and 8% of
revenue, respectively. SEB expects in future years that research and
development expenditures will continue to represent a substantial percentage
of revenue.

The success of SEB in developing, introducing and selling new and enhanced
systems depends upon a variety of factors, including new product selection,
timely and efficient completion of product design and development, timely and
efficient implementation of manufacturing and assembly processes, product
performance in the field and effective sales and marketing. There can be no
assurance that SEB will be successful in selecting, developing, manufacturing
and marketing new products or in enhancing its existing products. SEB's
inability to complete the development or meet the technical specifications of
any of its new systems or

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enhancements or to manufacture and ship these systems or enhancements in
volume in a timely manner would materially and adversely affect SEB's
business, financial condition and results of operations. See "Risk Factors--
Risks Relating to the Business of SEB--Technological Change and Dependence on
New Products."

PATENT AND OTHER PROPRIETARY RIGHTS

As a leader in the manufacture and sale of ion implantation equipment, SEB
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 SEB's products or that fall within its fields of interest. As
of October 2, 1998, SEB owned approximately 119 patents in the United States
and approximately 219 patents throughout the world, and had approximately 84
patent applications on file with various patent agencies worldwide. SEB
intends to file additional patent applications as appropriate.

SEB relies on a combination of copyright, trade secret and other laws, and
contractual restrictions on disclosure, copying and transferring title to
protect its rights. SEB has trademarks, both registered and unregistered, that
are maintained and enforced to provide customer recognition for its products
in the marketplace. SEB also has agreements with third parties that provide
for licensing of patented or proprietary technology. These agreements include
royalty-bearing licenses and technology cross-licenses. The loss of certain of
such licenses could have a material adverse effect on SEB's business. In
particular, the current royalty bearing license agreements with Applied
Materials and TEL for gas-assisted wafer heat transfer patents produced
approximately $5.9 million in royalties in fiscal year 1998 and over $40
million in royalties since 1992. The principal patent covered by these
licenses will expire on July 14, 2004.

SEB's competitors, like companies in many high-technology businesses,
routinely review the products of others for possible conflict with their own
patent rights. There has also been substantial litigation regarding patent and
other intellectual property rights in semiconductor-related industries. As set
forth in "--Legal Proceedings" below, SEB is currently involved in such
litigation and there can be no assurances as to the results of such
litigation. There can be no assurance that SEB or its licensors or suppliers
will not be subject to additional claims of patent infringement or that any
claim will not require that SEB pay substantial damages or delete certain
features from its products or both. See "Risk Factors--Additional Risks
Relating to Each of the Businesses--Uncertain Protection of Patent and Other
Proprietary Rights."

SALE OF BUSINESS

Effective as of June 13, 1997, the Semiconductor Equipment Business
completed the sale of its TFS business. Total proceeds received from the sale
were $145.5 million in cash. A $51.5 million reserve was recorded to cover,
among other items, purchase price disputes, retained liabilities, transaction
costs, employee terminations, facilities separation costs, indemnification
obligations, litigation expense and other contingencies. The gain on the sale
was $33.2 million (net of income taxes of $17.8 million).

ENVIRONMENTAL MATTERS

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

EMPLOYEES

At October 2, 1998, SEB had a total of approximately 1,232 full-time and
temporary employees worldwide--864 in North America, 292 in Asia and 76 in
Western Europe. None of SEB's employees based in the United States is subject
to collective bargaining agreements and SEB has never experienced a work
stoppage, slowdown, or strike. SEB's employees based in certain foreign
countries may, from time to time, be subject to collective bargaining
agreements. SEB currently considers its employee relations to be good.

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

PROPERTIES

SEB has 6 sales and service offices located in the United States and 11
located outside of the United States, including offices in France, Germany,
Hong Kong, Japan, Korea, Singapore, Taiwan, and the United Kingdom. SEB has
two manufacturing facilities located in Massachusetts, one in Korea and one in
Japan, in addition to its headquarters facility in Gloucester, Massachusetts
and its research center located in Palo Alto, California. These offices and
facilities aggregate more than 562,000 square feet of which 209,000 square
feet is leased. Since 1994, the manufacturing facilities have been registered
to the internationally recognized ISO 9001 quality standard. Field support
operations in the U.S., Korea, France and Taiwan have been registered to the
ISO 9002 standard.

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

LEGAL PROCEEDINGS

In June 1997, Applied Materials filed a civil action in the U.S. District
Court for the Northern District of California alleging infringement of four
patents relating to sputter coating systems (the "Applied Litigation").
Applied Materials contends that the Applied Materials patents are infringed by
the M2i, MB/2/(TM) and Inova(TM) systems that were made and sold by the
Company's TFS business prior to the Company's sale of its TFS business to
Novellus effective as of June 13, 1997. The complaint requests unspecified
money damages and an injunction preventing further alleged infringement and
requests that any damages awarded be increased up to three-fold for the
Company's and Novellus' alleged willful infringement. Novellus was
subsequently added as a defendant in this action and, as part of the sale of
the TFS business, the Company agreed to indemnify Novellus for certain damages
it may suffer as a result of such litigation and to reimburse Novellus for up
to $7.5 million of its litigation expenses (of which $1.4 million had been
reimbursed as of October 2, 1998). The Company's answer denied infringement
and asserted that Applied Materials' patents are invalid and that one of the
asserted patents is unenforceable. The Company also filed a separate suit
seeking damages and injunctive relief against Applied Materials contending
that certain of Applied Materials' business practices violated antitrust laws.
That action has been procedurally related to the infringement case and is
pending before the same judge. Novellus has asserted three of its patents,
obtained as part of its purchase of the TFS business, against Applied
Materials. Discovery has begun but no date has been set for completion of
discovery. During the fourth quarter of fiscal year 1998, the Company and
Applied Materials began informal discussions concerning the possibility of
resolving some or all of the issues raised by the Applied Litigation and the
Company's antitrust suit through settlement or mediation. Discussions
regarding a proposed procedure for non-binding mediation are continuing but
have not yet resulted in a definitive mediation arrangement. On December 9 and
10, 1998, the Court held a "Markman" hearing for the purpose of determining
how the various claims of the four Applied Materials and the three Novellus
patents should be interpreted. The parties are awaiting this decision.
Pursuant to the Distribution Agreement, SEB has agreed to indemnify IB and HCS
for any costs, liabilities or expenses with respect to any legal proceedings
relating to the Semiconductor Equipment Business, including the Applied
Litigation. In the event of an outcome unfavorable to SEB, SEB might be liable
for damages for past sales up to the June 1997 closing date of the sale of the
TFS business to Novellus and may have to pay Novellus under the
indemnification obligations described above. See Note 10 to the Notes to
Combined Financial Statements of the Semiconductor Equipment Business of
Varian Associates, Inc.

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<PAGE>

In connection with the sale of the TFS business, Novellus has submitted to
arbitration a claim against the Company arising out of a dispute over the
closing date balance sheet, for which SEB has also agreed to indemnify HCS and
IB. In addition, SEB has agreed to pay for one-third of the costs, liabilities
and expenses of SEB and HCS with respect to certain legal proceedings relating
to discontinued operations of the Company. See "The Distribution Proposals--
Proposal One: The Distribution--Distribution Agreement."

SEB 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 SEB, management does not believe
any pending legal proceeding will result in a judgment or settlement that will
have a material adverse effect on SEB's financial position, results of
operations or cash flows. See "Risk Factors--Risks Relating to the Business of
SEB--Legal Proceedings."

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<PAGE>

MANAGEMENT OF SEB

BOARD OF DIRECTORS OF SEB

Prior to the Distribution Date, the Company, as sole stockholder of SEB,
expects to elect the five persons identified below to the board of directors
of SEB (the "SEB Board"). Each individual listed below (other than Richard A.
Aurelio) is currently a director of the Company and will resign from the Board
of Directors of the Company effective as of the Distribution Date. The SEB
Board will be divided into three classes. Directors for each class will be
elected at the annual meeting of stockholders held in the year in which the
term for such class expires and will serve thereafter for three years.

The following table sets forth names, in alphabetical order, and information
about the five persons who are expected to serve as directors of SEB after the
Distribution.

<TABLE>
<CAPTION>
INITIAL
NAME, AGE AND CURRENT TERM
PRINCIPAL OCCUPATION EXPIRES INFORMATION
--------------------- ------- -----------
<S> <C> <C>
Richard A. Aurelio, 2002 Mr. Aurelio is the Executive Vice President of the
54,.................... Company responsible for the Semiconductor Equipment Business.
Executive Vice Mr. Aurelio joined the Company in 1991 from a position
President of the as Executive Vice President of Holland's ASM
Company Lithography, where he was also President of its U.S.
affiliate. He was hired as President of the
Semiconductor Equipment Business in 1991 and was
elevated to Executive Vice President of the Company in
1992.

Ruth M. Davis, 70....... 2000 Dr. Davis is President and Chief Executive Officer of
President and Chief the Pymaturing Group, Inc. (a technology management
Executive Officer of company), positions she has held since 1981. She is a director
the Pymaturing Group, of Air Products and Chemicals, Inc., BTG, Inc.,
Inc. Ceridian Corporation, Consolidated Edison Company of
New York, Inc., Premark International, Inc., The
Principal Mutual Life Insurance Company, and
Tupperware Corporation. Dr. Davis is also Chairman of
the Board of The Aerospace Corporation. She has been a
director of the Company since 1981.

Robert W. Dutton, 54,... 2001 Dr. Dutton is Director of Research at the Center for
Director of Research at Integrated Systems and Professor of Electrical Engineering at
the Center for Stanford University, positions he has held since 1991
Integrated Systems and and 1971, respectively. Dr. Dutton has been a director
Professor of Electrical of the Company since 1996.
Engineering at Stanford
University

Angus A. MacNaughton, 2002 Mr. MacNaughton is President of Genstar Investment
67,.................... Corporation (a private investment company), a position he has held
President of Genstar since 1987. He is a director of Canadian Pacific
Investment Corporation Limited, Sun Life Assurance Company of Canada, Sun
Life Assurance Company of Canada (U.S.), Sun Life
Insurance & Annuity Company of Canada (NY) and DCS
Business Services, Inc. Mr. MacNaughton is also Vice-
Chairman of the Board of Barrick Gold Corporation. He
has been a director of the Company since 1986.

J. Tracy O'Rourke, 63,... 2001 Mr. O'Rourke is Chairman of the Board and Chief
Chairman of the Board Executive Officer of the Company, positions he has held since
and Chief Executive 1990. Mr. O'Rourke has been a director of the Company
Officer of the Company since 1990.

</TABLE>

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<PAGE>

COMPENSATION OF DIRECTORS

The non-employee Chairman of the SEB Board will receive a retainer fee of
$120,000. Under the proposed SEB Omnibus Stock Plan, each director who is not
an SEB employee will also receive upon initial appointment or election to the
SEB Board a non-qualified stock option to acquire 50,000 shares of SEB Common
Stock, and will receive annually beginning with the second annual meeting
following his or her election or appointment a non-qualified stock option to
acquire 5,000 shares of SEB Common Stock. In lieu of these grants, any non-
employee Chairman will receive upon initial appointment a non-qualified stock
option to acquire 200,000 shares of SEB Common Stock. Such stock options will
be granted with an exercise price equal to the fair market value of SEB Common
Stock on the date of grant, becoming exercisable after one year from the date
of grant and having a ten-year term. Directors who are SEB employees will
receive no compensation for their services as directors.

COMMITTEES OF THE SEB BOARD OF DIRECTORS

The business of SEB will be managed under the direction of the SEB Board.
SEB will have Audit and Compensation Committees of the SEB Board. Members of
the Audit and Compensation Committees will not be employees of SEB.

Audit Committee

The Audit Committee's principal functions will be to review the scope of the
annual audit of SEB by its independent auditors, review the annual financial
statements of SEB and the related audit report as prepared by the independent
auditors, recommend the selection of independent auditors each year and review
any non-audit fees paid to the independent auditors. The members of the Audit
Committee are expected to be the following non-employee directors: Ruth M.
Davis, Robert W. Dutton, Angus A. MacNaughton (Chairman) and J. Tracy
O'Rourke.

Compensation Committee

The Compensation Committee will administer the stock and cash incentive
plans of SEB, and in this capacity it will make option grants or awards under
these plans. In addition, the Committee will determine the compensation of the
President and Chief Executive Officer and the other senior executives. The
Committee will also recommend the establishment of policies dealing with
various compensation and employee benefit plans for SEB. The members of the
Committee are expected to be the following non-employee directors: Ruth M.
Davis, Robert W. Dutton, Angus A. MacNaughton and J. Tracy O'Rourke
(Chairman).

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<PAGE>

EXECUTIVE OFFICERS

Set forth below is certain information with respect to the persons who are
expected to serve as executive officers of SEB immediately following the
Distribution. Those persons listed below who are currently officers of the
Company will relinquish their positions with the Company effective as of the
Distribution Date.

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE PRIOR TO BECOMING
NAME AND TITLE AGE AN EXECUTIVE OFFICER OF SEB
-------------- --- -------------------------------------
<S> <C> <C>
Richard A. Aurelio,..... 54 Mr. Aurelio is the Executive Vice President of the
President and Company responsible for the Semiconductor Equipment Business.
Chief Executive Officer Mr. Aurelio joined the Company in 1991 from a position
as Executive Vice President of Holland's ASM
Lithography, where he was also President of its U.S.
affiliate. Mr. Aurelio was hired as President of the
Semiconductor Equipment Business in 1991 and was
elevated to Executive Vice President of the Company in
1992.

Charles M. McKenna,..... 53 Dr. McKenna is Vice President and General Manager of
Chief Operating and the Company's Ion Implant Systems business, positions he
Technology Officer has held since 1989. Dr. McKenna has held various
other positions in the Semiconductor Equipment
Business during his 15 years with the Company. He is a
director of Micrion Corporation.

G. Dennis Key,.......... 56 Mr. Key is Vice President, Sales and Marketing of the
Vice President, Semiconductor Equipment Business, a position he has
Sales and Marketing held since joining the Company in 1998. Prior to
joining the Company, he was an independent consultant
in the semiconductor industry from 1996 to 1998.
Mr. Key was Vice President of Worldwide Sales and
Field Operations at Lam Research Corporation (a
semiconductor equipment manufacturer) from 1988 to
1996.

Walter F. Sullivan,..... 47 Mr. Sullivan is Vice President, Customer Support, of
Vice President, the Semiconductor Equipment Business, a position he has
Customer Support held since 1995. Prior to joining the Company in 1995,
he was Group Director, Worldwide Customer Support
Operations for PictureTel Corporation (a
telecommunications equipment company),
a position he held from 1993 to 1995.

Ernest L. Godshalk 53 Mr. Godshalk is Vice President, Finance of the
III,................... Semiconductor Equipment Business, a position he has held since
Vice President and joining the Company in November 1998. Prior to joining
Chief Financial Officer the Company, he was Managing Director of Elgin
Management Group (an investment company), a position
he held from 1993 to 1996 and again in 1998. Mr.
Godshalk was Chief Financial Officer and Secretary of
Prodigy, Inc. (an internet company) from 1996 to 1998.

J. Michael Spelman,..... 53 Mr. Spelman is Controller of the Semiconductor
Controller Equipment Business, a position he has held since
1997. Mr. Spelman was Controller of the Company's
Ion Implant Systems business from 1983 to 1997.
Mr. Spelman has held various other accounting and
finance positions in the Ion Implant Systems
business during his 29 years with the Company.
</TABLE>

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<PAGE>

EXECUTIVE OFFICER COMPENSATION

Summary of Compensation

SEB Table I below sets forth a summary of the compensation paid by the
Company for the last three fiscal years to the individual expected to be the
chief executive officer of SEB and the four additional most highly compensated
individuals (based on their fiscal year 1998 compensation from the Company)
who are expected to be executive officers of SEB immediately after the
Distribution.

SEB TABLE I

SEB SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------- --------------------- -------
SECURITIES
RESTRICTED UNDERLYING
OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) ($)(3) (#)(4) ($)(5) ($)(6)
------------------ ---- ------- ------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard A. Aurelio...... 1998 338,910 80,995 34,319 0 36,000 463,501 110,864
President and 1997 323,148 533,492 20,602 244,388 36,000 653,016 122,904
Chief Executive Officer 1996 310,990 645,915 21,258 204,225 36,000 628,056 105,818

Charles M. McKenna...... 1998 198,304 22,499 5,439 0 17,000 158,917 24,530
Chief Operating and 1997 180,504 159,559 8,089 52,369 20,000 182,520 25,452
Technology Officer 1996 171,658 184,890 4,069 43,763 15,000 175,032 20,787

G. Dennis Key........... 1998 121,156 10,653 0 65,625 20,000 34,781 888
Vice President, 1997 N/A N/A N/A N/A N/A N/A N/A
Sales and Marketing 1996 N/A N/A N/A N/A N/A N/A N/A

Walter F. Sullivan...... 1998 153,139 26,825 3,935 0 10,000 110,340 15,185
Vice President, 1997 145,128 141,473 4,322 52,369 12,000 80,852 11,963
Customer Support 1996 137,240 234,470 2,122 43,763 10,000 0 650

J. Michael Spelman...... 1998 127,282 7,270 975 0 2,250 0 14,456
Controller 1997 118,036 56,721 1,196 0 2,400 0 15,577
1996 112,332 63,347 0 0 2,400 0 12,836
</TABLE>
- --------
(1) Consists of Company Management Incentive Plan awards, Cash Profit-Sharing
Plan allocations and (in some cases) special cash bonuses.

(2) Consists of amounts reimbursed for the payment of taxes on certain
perquisites and personal benefits and (in some cases) cash payments for
unused accrued vacation time.

(3) Consists of restricted shares of the Company's Common Stock (valued at the
closing market price on the date of grant), which shares are released from
restrictions in three equal installments over a three-year period (the
principal restriction being continued employment until the respective
release dates), during which dividends, if any, are paid on such shares.
The number and value (at $34.375 per share) of aggregate restricted stock
holdings at the end of fiscal year 1998 were as follows: Mr. Aurelio,
8,400 shares, $288,750; Dr. McKenna, 1,800 shares, $61,875; Mr. Key, 2,000
shares, $68,750; Mr. Sullivan, 1,800 shares, $61,875; and Mr. Spelman, 0
shares, $0. Shares of restricted stock awarded for fiscal years 1998, 1997
and 1996, respectively, which partially vest in under three years were as
follows: Mr. Aurelio, 0 shares, 4,200 shares and 4,200 shares; Dr.
McKenna, 0 shares, 900 shares and 900 shares; Mr. Key, 2,000 shares, 0
shares and 0 shares; Mr. Sullivan, 0 shares, 900 shares and 900 shares;
and Mr. Spelman, 0 shares, 0 shares and 0 shares.

(4) Consists of shares of the Company's Common Stock that may be acquired
under stock options granted pursuant to the Company Omnibus Stock Plan (no
stock appreciation rights have been granted).

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<PAGE>

(6) Consists of (a) Company contributions (including interest) to Retirement
and Profit-Sharing Program and Supplemental Retirement Plan accounts for
fiscal years 1998, 1997 and 1996, respectively (Mr. Aurelio, $110,847,
$121,103 and $104,378; Dr. McKenna, $23,561, $24,766 and $20,243; Mr. Key,
$0, $0 and $0; Mr. Sullivan, $14,205, $11,140 and $0; and Mr. Spelman,
$13,635, $14,903 and $12,302); and (b) Company-paid premiums for group
term life insurance in fiscal years 1998, 1997 and 1996, respectively (Mr.
Aurelio, $17, $1,801 and $1,440; Dr. McKenna, $969, $686 and $544; Mr.
Key, $888, $0 and $0; Mr. Sullivan, $980, $823 and $650; and Mr. Spelman,
$821, $674 and $534).

STOCK OPTIONS

Grant of Options

SEB Table II below sets forth information with respect to grants of options
to purchase the Company's Common Stock during the year ended October 2, 1998
to the individuals listed in SEB Table I. These grants were made pursuant to
the Company Omnibus Stock Plan and are reflected in SEB Table I.

SEB TABLE II

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------
POTENTIAL
REALIZABLE VALUE AT
NUMBER OF PERCENT ASSUMED ANNUAL
SECURITIES OF TOTAL RATES OF STOCK
UNDERLYING OPTIONS/ SARS PRICE APPRECIATION
OPTIONS/ SARS GRANTED TO EXERCISE OR FOR OPTION TERM(2)
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION -------------------
NAME (#)(1) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- ---- ------------- ------------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Aurelio...... 36,000 3.55 58.1563 11/20/07 1,316,671 3,336,702
Charles M. McKenna...... 17,000 1.68 58.1563 11/20/07 621,761 1,575,665
G. Dennis Key........... 20,000 1.97 33.0313 09/11/08 415,464 1,052,868
Walter F. Sullivan...... 10,000 0.99 58.1563 11/20/07 365,742 926,862
J. Michael Spelman...... 2,250 0.22 58.1563 11/20/07 82,292 208,544
</TABLE>
- --------
(1) Consists of stock options, which were granted at an exercise price of 100%
of the market price of the underlying shares on the date of grant, become
exercisable over three years at the rate of approximately one-third each
year and expire ten years from the date of grant. Payment of the exercise
price may be made under a promissory note or by delivery of already-owned
shares.

(2) The 5% and 10% assumed annual rates of stock price appreciation would
result from per share prices of $94.73 and $150.84, respectively ($53.80
and $85.67 for Mr. Key). Such assumed rates are not intended to represent
a forecast of possible future appreciation of the Company's Common Stock
or total stockholder return.

Aggregated Option Exercises and Year-End Value

The following table sets forth as of October 2, 1998, for each of the
individuals listed in SEB Table I (i) the total number of shares received upon
exercise of options during 1998, (ii) the value realized upon such exercise
(based on the fair market value of the underlying shares on the exercise
date), (iii) the total number of unexercised options to purchase the Company's
Common Stock (exercisable and unexercisable) and (iv) the value of such
options which were in-the-money at October 2, 1998 (based on the closing price
of the Company's Common Stock at October 2, 1998, $34.375).

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<PAGE>

SEB TABLE III

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
ACQUIRED VALUE AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)
ON EXERCISE REALIZED ------------------------- -------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Aurelio...... 10,000 387,488 66,000 72,000 0 0
Charles M. McKenna...... 0 0 33,166 35,334 36,120 0
G. Dennis Key........... 0 0 0 20,000 0 26,874
Walter F. Sullivan...... 0 0 13,666 21,334 0 0
J. Michael Spelman...... 6,000 204,870 4,200 4,650 0 0
</TABLE>

LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR(1)

<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
UNDER
PERFORMANCES NON-STOCK PRICE-BASED
NUMBER OF OR OTHER PLANS
SHARES,UNITS PERIOD UNTIL ------------------------
OR OTHER MATURATION THRESHOLD TARGET MAXIMUM
NAME RIGHTS (#) OR PAYOUT ($)(2) ($)(3) ($)(4)
- ---- ------------ ------------ --------- ------ -------
<S> <C> <C> <C> <C> <C>
Richard A. Aurelio........... N/A 1998-2000 25,604 0 --
Charles M. McKenna........... N/A 1998-2000 6,177 0 --
G. Dennis Key................ N/A 1998-2000 6,953 0 --
Walter F. Sullivan........... N/A 1998-2000 4,679 0 --
J. Michael Spelman........... N/A N/A N/A N/A --
</TABLE>
- --------
(1) Determinations by the Committee that a named executive officer may
participate in the long-term incentive feature of the Company Omnibus
Stock Plan ("LTI") and might receive a payout for a specified period is an
award for purposes of this table. Awards (i.e., the determination of
participation in the LTI) for the 1998-2000 cycle were made in fiscal year
1998. Under the LTI, each named executive officer is eligible to receive
compensation payable in cash or in the Company's Common Stock, or a
combination thereof, based upon the Company's achievement of objectives
for average annual return on net assets ("RONA") and revenue growth ("RG")
over a three-year cycle. No estimate or assumption made in connection with
this table is intended to represent a forecast of possible future
performance of the Company.

127
<PAGE>

beginning of the three-year cycle are achieved or exceeded, the maximum
amount payable ranges from 100% to 200% of annual base salary as of the end
of the last fiscal year of the cycle. The maximum amount payable is
reduced, however, if the aggregate LTI payout to all participants
(including the named executive officers) would exceed 5% (before such
payouts) of the Company's pre-tax operating earnings in the last fiscal
year of the three-year cycle. This variable makes the maximum amount not
determinable or estimable.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

For a description of certain relationships and related transactions with SEB
management or directors that are expected to exist subsequent to the
Distribution, see "Management Indebtedness and Certain Transactions."

CHANGE IN CONTROL AGREEMENTS

Certain SEB executive officers are already parties to change in control
agreements with the Company. These change in control agreements will be
assumed by SEB pursuant to the terms of such agreements. Some of these
agreements are expected to be amended to reflect the executive officer's new
and increased responsibilities with SEB. In addition, SEB executive officers
not already parties to change in control agreements with the Company may be
offered similar change in control agreements with SEB. See "Change in Control
and Other Agreements."

128
<PAGE>

THE SEB OMNIBUS STOCK PLAN

The SEB Omnibus Stock Plan is expected to be adopted by the SEB Board
effective as of the Distribution. Adoption of the SEB Omnibus Stock Plan is
subject to the approval of a majority of the shares of the Company's Common
Stock that are present in person or by proxy at the Meeting. See "Distribution
Proposals--Proposal Seven: Approval of the Adoption by SEB of the SEB Omnibus
Stock Plan."

PURPOSE OF THE SEB OMNIBUS STOCK PLAN

The SEB Omnibus Stock Plan is intended to promote the success of SEB by
providing a vehicle under which a variety of stock-based incentive and other
awards can be granted to employees and consultants and to directors of SEB who
are employees of neither SEB nor any affiliate ("non-employee directors").

DESCRIPTION OF THE SEB OMNIBUS STOCK PLAN

The following paragraphs provide a summary of the principal features of the
SEB Omnibus Stock Plan and its operation. The SEB Omnibus Stock Plan is set
forth in its entirety as Annex E to this Proxy Statement. The following
summary is qualified in its entirety by reference to Annex E.

GENERAL

The SEB Omnibus Stock Plan provides for the granting of stock options, stock
appreciation rights ("SARs"), restricted stock, performance units and
performance shares (collectively, "SEB Awards") to eligible SEB Omnibus Stock
Plan participants. The maximum number of shares of SEB Common Stock available
for SEB Awards under the SEB Omnibus Stock Plan will be 6,000,000, plus such
number of shares as may be granted in substitution of other options in
connection with the Distribution.

ADMINISTRATION OF THE SEB OMNIBUS STOCK PLAN

The SEB Omnibus Stock Plan will be administered by the Compensation
Committee of SEB's Board of Directors (the "SEB Committee"). The members of
the SEB Committee must qualify as "non-employee directors" under Rule 16b-3
under the Exchange Act, and as "outside directors" under Section 162(m) (for
purposes of qualifying the SEB Omnibus Stock Plan as performance-based
compensation under Section 162(m)).

Subject to the terms of the SEB Omnibus Stock Plan, the SEB Committee has
the sole discretion to determine the employees and consultants who will be
granted SEB Awards, the size and types of such SEB Awards, and the terms and
conditions of such SEB Awards. The SEB Committee may delegate its authority to
grant and administer awards to one or more officers or directors appointed by
the SEB Committee, but only the SEB Committee can make awards to participants
who are subject to Section 16 of the Exchange Act.

ELIGIBILITY TO RECEIVE AWARDS

Employees and consultants of SEB and its affiliates are eligible to be
selected to receive one or more SEB Awards. The actual number of individuals
who will receive SEB Awards under the SEB Omnibus Stock Plan cannot be
determined because eligibility for participation in the SEB Omnibus Stock Plan
is at the discretion of the SEB Committee. The SEB Omnibus Stock Plan also
provides for the grant of non-qualified stock options to SEB's non-employee
directors. Such options will be granted pursuant to an automatic, non-
discretionary formula.

OPTIONS

The SEB Committee may grant non-qualified stock options, incentive stock
options (which are entitled to favorable tax treatment), or a combination
thereof. The number of shares covered by each option will be

129
<PAGE>

determined by the SEB Committee, but during any fiscal year of SEB, no
participant may be granted options for more than 1,000,000 shares.

The price of the shares of SEB Common Stock subject to each stock option is
set by the SEB Committee but cannot be less than 100% of the fair market value
(on the date of grant) of the shares covered by the option. In addition, the
exercise price of an incentive stock option must be at least 110% of fair
market value if (on the grant date) the participant owns stock possessing more
than 10% of the total combined voting power of all classes of stock of SEB or
any of its subsidiaries. Nevertheless, substitute options may be granted at
less than fair market value to employees or consultants who receive such
options in connection with a corporate reorganization. Also, the aggregate
fair market value of the shares (determined on the grant date) covered by
incentive stock options which first become exercisable by any participant
during any calendar year may not exceed $100,000.

The exercise price of each option must be paid in full at the time of
exercise. The SEB Committee also may permit payment through the tender of
shares of SEB Common Stock that are already owned by the participant, or by
any other means which the SEB Committee determines to be consistent with the
SEB Omnibus Stock Plan's purpose. Any taxes required to be withheld must be
paid by the participant at the time of exercise.

Options become exercisable at the times and on the terms established by the
SEB Committee. Options expire at the times established by the SEB Committee
but not later than 10 years after the date of grant (except in certain cases
involving the death of the optionee). The SEB Committee may extend the maximum
term of any option granted under the SEB Omnibus Stock Plan, subject to the
preceding limits.

NON-EMPLOYEE DIRECTOR OPTIONS

Under the SEB Omnibus Stock Plan, each non-employee director automatically
will receive, as of the later of (a) the non-employee director's appointment
or election to the SEB Board or (b) the effective date of the SEB Omnibus
Stock Plan, a non-qualified stock option to purchase 50,000 shares. Each non-
employee director will also automatically receive a non-qualified stock option
to purchase 5,000 shares coincident with each subsequent annual meeting of SEB
beginning with the second annual meeting following his or her appointment or
election, provided the non-employee director serves continuously as a director
through the next grant date. In lieu of the above grants, any non-employee
Chairman of the SEB Board automatically will receive, as of the later of (a)
the date he or she becomes Chairman or (b) the effective date of the SEB
Omnibus Stock Plan, a non-qualified stock option to purchase 200,000 shares.

The exercise price of each non-employee director and Chairman option will be
100% of the fair market value (on the date of grant) of the shares covered by
the option. Nevertheless, substitute options may be granted at less than fair
market value to non-employee directors who receive such options in connection
with a corporate reorganization. Each option will become exercisable on the
first anniversary of the grant date (assuming the participant remains on the
Board or Chairman, as the case may be, on such anniversary date). All options
granted to non-employee directors generally will have a term of ten years from
the date of grant. If a director terminates service on the Board prior to an
option's normal expiration date, the period of exercisability of the option
may be shorter, depending upon the reason for the termination.

STOCK APPRECIATION RIGHTS

The SEB Committee determines the terms and conditions of each SAR. SARs may
be granted in conjunction with an option, or may be granted on an independent
basis. The number of shares covered by each SAR will be determined by the SEB
Committee, but during any fiscal year of SEB, no participant may be granted
SARs for more than 1,000,000 shares. Upon exercise of an SAR, the participant
will receive payment from SEB in an amount determined by multiplying: (1) the
difference between the fair market value of a share on the date of exercise
over the grant price (fair market value of a share on the grant date), times
(2) the number of shares

130
<PAGE>

with respect to which the SAR is exercised. SARs may be paid in cash or shares
of SEB Common Stock, as determined by the SEB Committee. SARs are exercisable
at the times and on the terms established by the SEB Committee.

RESTRICTED STOCK AWARDS

Restricted stock awards are shares of SEB Common Stock that vest in
accordance with terms and conditions established by the SEB Committee. The
number of shares of restricted stock granted to a participant (if any) will be
determined by the SEB Committee, but during any fiscal year of SEB, no
participant may be granted more than 100,000 shares.

In determining whether an award of restricted stock should be made and/or
the vesting schedule for an award, the SEB Committee may impose whatever
conditions to vesting as it determines to be appropriate. For example, the SEB
Committee may determine to grant restricted stock only if performance goals
established by the SEB Committee are satisfied. Any performance goals may be
applied on a company-wide or an individual business unit basis, as determined
by the SEB Committee. See discussion below of "--Performance Goals."

PERFORMANCE UNITS AND PERFORMANCE SHARES

Performance Units and Performance Shares are SEB Awards which will result in
a payment to a participant only if performance goals established by the SEB
Committee are satisfied. The initial value of each Performance Unit and each
Performance Share shall not exceed the fair market value (on the date of
grant) of a share of SEB Common Stock. The applicable performance goals will
be determined by the SEB Committee, and may be applied on a company-wide or an
individual business unit basis, as deemed appropriate in light of the
participant's specific responsibilities. See discussion below of "--
Performance Goals."

In addition to the performance requirements discussed above, Performance
Units and Performance Shares are subject to additional limits set forth in the
SEB Omnibus Stock Plan. During any fiscal year of SEB, no participant shall
receive more than 100,000 Performance Units or Performance Shares.

PERFORMANCE GOALS

The SEB Committee in its discretion may make performance goals applicable to
a participant with respect to an SEB Award. At the SEB Committee's discretion,
one or more of the following performance goals may apply: EBIT, EBITDA,
earnings per share, net income, operating cash flow, return on assets, return
on equity, return on sales, revenue and stockholder return. The SEB Committee
may also use other performance goals.

EBIT means SEB's or a business unit's income before reductions for interest
and taxes. EBITDA means SEB's or a business unit's income before reductions
for interest, taxes, depreciation and amortization. Earnings per share means
SEB's or a business unit's net income, divided by a weighted average number of
common shares outstanding and dilutive common equivalent shares deemed
outstanding. Net income means SEB's or a business unit's income after taxes.
Operating cash flow means SEB's or a business unit's sum of net income plus
depreciation and amortization less capital expenditures plus certain specified
changes in working capital. Return on assets means the percentage equal to
SEB's or a business unit's EBIT (before incentive compensation), divided by
SEB's or a business unit's, as applicable, average net assets. Return on
equity means the percentage equal to SEB's net income, divided by average
stockholders' equity. Return on sales means the percentage equal to SEB's or a
business unit's EBIT (before incentive compensation), divided by SEB's or the
business unit's, as applicable, revenue. Revenue means SEB's or a business
unit's net sales. Stockholder return means the total return (change in share
price plus reinvestment of any dividends) of a share of the SEB Common Stock.

NONTRANSFERABILITY OF SEB AWARDS

SEB Awards granted under the SEB Omnibus Stock Plan may not be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than by will or by the applicable laws of descent and distribution.

131
<PAGE>

TAX ASPECTS

The purchase of shares upon exercise of an incentive stock option will not
result in any taxable income to the participant, except for purposes of the
alternative minimum tax. Gain or loss recognized by the participant on a later
sale or other disposition will either be long-term capital gain or loss or
ordinary income depending upon whether the participant holds the shares
transferred upon the exercise for a specified period. Any ordinary income
recognized will be in the amount, if any, by which the lesser of the fair
market value of such shares on the date of exercise or the amount realized
from the sale exceeds the option price.

Unless the participant elects to be taxed at the time of receipt of
restricted stock, Performance Units or Performance Shares, the participant
will not have taxable income upon the receipt of the SEB Award, but upon
vesting will recognize ordinary income equal to the fair market value of the
shares or cash at the time of vesting.

At the discretion of the SEB Committee, the SEB Omnibus Stock Plan allows a
participant to satisfy tax withholding requirements under federal and state
tax laws in connection with the exercise or receipt of an SEB Award by
electing to have shares of SEB Common Stock withheld, or by delivering to SEB
already-owned shares, having a value equal to the amount required to be
withheld.

SEB generally will be entitled to a tax deduction in connection with an SEB
Award under the SEB Omnibus Stock Plan only in an amount equal to the ordinary
income realized by the participant and at the time the participant recognizes
such income. However, SEB may not be entitled to a deduction in connection
with certain substitute stock options issued in connection with the
Distribution. In addition, Section 162(m) contains special rules regarding the
federal income tax deductibility of compensation paid to SEB's Chief Executive
Officer and to each of the other four most highly compensated executive
officers. The general rule is that annual compensation paid to any of these
specified executives will be deductible only to the extent that it does not
exceed $1 million. However, SEB can preserve the deductibility of certain
compensation in excess of $1 million if it complies with conditions imposed by
Section 162(m), including the establishment of a maximum number of shares with
respect to which SEB Awards may be granted to any one employee during one
year, and if for SEB Awards other than options and SARs, the SEB Omnibus Stock
Plan sets forth performance goals which must be achieved prior to payment of
the SEB Awards. The SEB Omnibus Stock Plan has been designed to permit the SEB
Committee to grant SEB Awards which satisfy the requirements of Section
162(m), thereby permitting SEB to continue to receive a federal income tax
deduction in connection with such SEB Awards.

AWARDS UNDER THE SEB OMNIBUS STOCK PLAN

Awards under the SEB Omnibus Stock Plan will be made at the discretion of
the SEB Committee. The SEB Committee has not yet considered the types and
amounts of awards that will be granted under the SEB Omnibus Stock Plan, which
will not be effective until the Distribution. Accordingly, awards that will be
made under the SEB Omnibus Stock Plan are not yet determinable. The following
table sets forth information concerning stock-related awards made for fiscal
year 1998 under the Company Omnibus Stock Plan to individuals listed on SEB
Table I and the groups comprised of individuals who are expected to be
executive officers, non-executive directors and non-executive officer
employees of SEB upon the Distribution. This information is likely not
indicative of awards that will be made under the SEB Omnibus Stock Plan
(except with respect to non-executive directors, where the table reflects
formula grants which would be made in fiscal year 1999 under the SEB Omnibus
Stock Plan).

132
<PAGE>

New Plan Benefits

<TABLE>
<CAPTION>
COMPANY OMNIBUS STOCK PLAN
-----------------------------------------
DOLLAR VALUE OF NUMBER OF SHARES
NAME AND POSITION RESTRICTED STOCK(1) SUBJECT TO OPTIONS(2)
----------------- ------------------- ---------------------
<S> <C> <C>
Richard A. Aurelio.................. $ 0 36,000
President and Chief Executive Offi-
cer
Charles M. McKenna.................. 0 17,000
Chief Operating and Technology Of-
ficer
G. Dennis Key....................... 71,620 20,000
Vice President, Sales and Marketing
Walter F. Sullivan.................. 0 10,000
Vice President, Customer Support
J. Michael Spelman.................. 0 2,250
Controller
All Executive Officers as a Group... 71,620 75,250
All Non-Executive Directors as a 0 350,000
Group..............................
All Non-Executive Officer Employees 139,660 201,800
as a Group.........................
</TABLE>
- --------
(1) Based on the closing price for the Company's Common Stock on the NYSE
Composite Tape on December 15, 1998.
(2) Options were granted at an exercise price of 100% of the market price of
the underlying shares of the Company's Common Stock on the date of grant,
become exercisable over three years at the rate of approximately one-third
each year and expire no later than ten years from the date of grant.

AMENDMENT AND TERMINATION OF THE SEB OMNIBUS STOCK PLAN

The SEB Board generally may amend or terminate the SEB Omnibus Stock Plan at
any time and for any reason.

133
<PAGE>

THE SEB MANAGEMENT INCENTIVE PLAN

The SEB Management Incentive Plan is expected to be adopted by the SEB Board
effective as of the Distribution. Adoption of the SEB Management Incentive
Plan is subject to the approval of a majority of the shares of the Company's
Common Stock that are present in person or by proxy at the Meeting. See
"Distribution Proposals--Proposal Eight: Approval of the Adoption by SEB of
the SEB Management Incentive Plan."

BACKGROUND AND REASONS FOR ADOPTION

Under Section 162(m), the federal income tax deductibility of compensation
paid to SEB's Chief Executive Officer and to each of its next four most highly
compensated executive officers may be limited to the extent that it exceeds $1
million in any one year. SEB can deduct compensation in excess of that amount
if it qualifies as "performance-based compensation" under Section 162(m). The
SEB Management Incentive Plan is intended to permit SEB to pay incentive
compensation which qualifies as performance-based compensation, thereby
permitting SEB to receive a federal income tax deduction for the payment of
such incentive compensation.

DESCRIPTION OF THE SEB MANAGEMENT INCENTIVE PLAN

The following paragraphs provide a summary of the principal features of the
SEB Management Incentive Plan and its operation. The SEB Management Incentive
Plan is set forth in its entirety as Annex F to this Proxy Statement. The
following summary is qualified in its entirety by reference to Annex F.

PURPOSE OF THE SEB MANAGEMENT INCENTIVE PLAN

The SEB Management Incentive Plan is intended to motivate SEB's key
employees to increase stockholder value by (1) linking a portion of their cash
compensation to SEB's financial performance, (2) providing rewards for
improving SEB's financial performance and (3) helping to attract and retain
key employees.

ADMINISTRATION OF THE SEB MANAGEMENT INCENTIVE PLAN

The SEB Management Incentive Plan will be administered by the SEB Committee.
The members of the SEB Committee must qualify as "outside directors" under
Section 162(m) (for purposes of qualifying the SEB Management Incentive Plan
as performance-based compensation under such section). Subject to the terms of
the SEB Management Incentive Plan, the SEB Committee has the sole discretion
to determine the key employees who will be granted awards, and the amounts,
terms and conditions of each award. The SEB Committee may delegate its
authority to grant and administer awards to one or more officers or directors
appointed by the SEB Committee, but only with respect to awards that are not
intended to qualify as performance-based compensation under Section 162(m).

ELIGIBILITY TO RECEIVE AWARDS

Eligibility for the SEB Management Incentive Plan is determined in the
discretion of the Committee. In selecting participants for the SEB Management
Incentive Plan, the SEB Committee will choose key employees of SEB and its
affiliates who are likely to have a significant impact on SEB performance.

AWARDS AND PERFORMANCE GOALS

Under the SEB Management Incentive Plan, the SEB Committee will establish
(1) the performance goals which must be achieved in order for the participant
to actually be paid an award and (2) a formula or table for calculating a
participant's award, depending upon how actual performance compares to the
preestablished performance goals. A participant's award will increase or
decrease as actual performance increases or decreases. The SEB Committee also
will determine the period for measuring actual performance (the "performance
period"). Performance periods may last as long as three fiscal years of SEB.

134
<PAGE>

The SEB Committee may set performance periods and performance goals which
differ from participant to participant. For example, the SEB Committee may
choose performance goals based on either company-wide or business unit
results, as deemed appropriate in light of the participant's specific
responsibilities. For purposes of qualifying awards as performance-based
compensation under Section 162(m), the SEB Committee will specify performance
goals from the following list: EBIT, EBITDA, earnings per share, net income,
operating cash flow, return on assets, return on equity, return on sales,
revenue and stockholder return.

For any performance period, no participant may receive an award of more than
the lesser of (1) 400% of the Participant's annualized salary rate on the last
day of the performance period or (2) $4 million. Also, the total of all awards
for any performance period cannot exceed 8% of SEB's EBIT before incentive
compensation for the most recently completed fiscal year of SEB. Awards which
exceed this overall limit will be pro-rated so that the total does not exceed
such limit.

DETERMINATION OF ACTUAL AWARDS

After the end of each performance period, a determination will be made as to
the extent to which the performance goals applicable to each participant were
achieved or exceeded. The actual award (if any) for each participant will be
determined by applying the formula to the level of actual performance which
was achieved. However, the SEB Committee retains discretion to eliminate or
reduce the actual award payable to any participant below that which otherwise
would be payable under the applicable formula. Awards under the SEB Management
Incentive Plan generally will be payable in cash or SEB Common Stock within
120 days after the performance period during which the award was earned.

AWARDS UNDER THE SEB MANAGEMENT INCENTIVE PLAN

Awards under the SEB Management Incentive Plan will be made at the
discretion of the SEB Committee. The SEB Committee has not yet considered the
types and amounts of awards that will be granted under the SEB Management
Incentive Plan which will not be effective until the Distribution.
Accordingly, awards that will be made under the SEB Management Incentive Plan
are not yet determinable. The following table sets forth information
concerning cash awards made for fiscal year 1998 or award cycles ending with
fiscal year 1998 under the Company Management Incentive Plan and the long-term
incentive feature of the Company Omnibus Stock Plan, respectively, to
individuals listed on SEB Table I and the groups comprised of individuals who
are expected to be executive officers, non-executive directors and non-
executive officer employees of SEB upon the Distribution. This information is
likely not indicative of awards that will be made under the SEB Management
Incentive Plan.

135
<PAGE>

New Plan Benefits

<TABLE>
<CAPTION>
CASH AWARDS UNDER
COMPANY MANAGEMENT
INCENTIVE PLAN AND COMPANY
NAME AND POSITION OMNIBUS STOCK PLAN
----------------- --------------------------
<S> <C>
Richard A. Aurelio.................................. $536,125
President and Chief Executive Officer
Charles M. McKenna.................................. 176,268
Chief Operating and Technology Officer
G. Dennis Key....................................... 45,327
Vice President, Sales and Marketing
Walter F. Sullivan.................................. 123,483
Vice President, Customer Support
J. Michael Spelman.................................. 4,126
Controller
All Executive Officers as a Group................... 885,329
All Non-Executive Directors as a Group(1)........... 0
All Non-Executive Officer Employees as a Group...... 91,000
</TABLE>
- --------
(1) Non-executive directors are not eligible to receive awards under the SEB
Management Incentive Plan.

AMENDMENT AND TERMINATION OF THE SEB MANAGEMENT INCENTIVE PLAN

The SEB Board may amend or terminate the SEB Management Incentive Plan at
any time and for any reason.

136
<PAGE>

OWNERSHIP OF SEB COMMON STOCK

SEB is a wholly owned subsidiary of the Company. SEB Table IV sets forth
information as to the beneficial ownership of SEB Common Stock as of the
Distribution Date (and following the Distribution) as if the Distribution took
place on December 15, 1998, by (a) each expected officer named in SEB Table I,
(b) each expected director of SEB and (c) all expected directors and executive
officers of SEB as a group. The information in SEB Table IV is based on the
ownership of the Company's Common Stock as of December 15, 1998 and the number
of shares of SEB Common Stock expected to be distributed to each existing
Company stockholder in the Distribution. For information as to beneficial
owners of 5% or more of the SEB Common Stock after the Distribution, see
"Stock Ownership--Principal Stockholders."

SEB TABLE IV

<TABLE>
<CAPTION>
SHARES OF PERCENT OF
SEB COMMON STOCK OUTSTANDING SHARES
EXPECTED TO BE EXPECTED TO BE
NAME BENEFICIALLY OWNED(1)(2) BENEFICIALLY OWNED(1)
---- ------------------------ ---------------------
<S> <C> <C>
Ruth M. Davis................... 10,451(3) *
Robert W. Dutton................ 4,600(4) *
Angus A. MacNaughton............ 26,800(5) *
J. Tracy O'Rourke............... 654,500(6) 2.2
Richard A. Aurelio.............. 125,564(7) *
Charles M. McKenna.............. 62,964(8) *
G. Dennis Key................... 2,364(9) *
Walter F. Sullivan.............. 26,133(10) *
J. Michael Spelman.............. 6,550(11) *
All Expected Directors and Exec-
utive Officers of SEB
as a Group (10 persons)........ 920,826(12) 3.1
</TABLE>
- --------
*The percentage of shares of SEB Common Stock expected to be beneficially
owned does not exceed one percent of the shares of SEB Common Stock
expected to be outstanding.

(1) For purposes of this table, a person or group of persons is deemed to
have "beneficial ownership" of any shares of SEB Common Stock which such
person has the right to acquire within 60 days following December 15,
1998. For purposes of computing the percentage of outstanding shares of
SEB Common Stock held by each person or group of persons named above, any
security which such person or persons has or have the right to acquire
within 60 days following December 15, 1998 is deemed to be outstanding,
but is not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person. Fractional shares are rounded
down to the nearest whole share.

(2) To SEB's knowledge, unless otherwise indicated, the person named in the
table has sole voting and investment power with respect to the shares or
shares such voting and investment power with such person's spouse or
children.

(3) Includes 8,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan.

(4) Includes 4,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan.

(5) Includes (a) 16,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan and (b) 5,000
shares held in a trust of which Mr. MacNaughton is sole trustee.

(6) Includes (a) 8,001 shares of restricted stock granted pursuant to the
Company Omnibus Stock Plan and (b) 564,000 shares which may be acquired
on or within 60 days of December 15, 1998 under stock options granted
pursuant to the 1982 Non-Qualified Stock Option Plan and the Omnibus
Stock Plan.

137
<PAGE>

(7) Includes (a) 4,200 shares of restricted stock granted pursuant to the
Company Omnibus Stock Plan, (b) 102,000 shares which may be acquired on
or within 60 days of December 15, 1998 under stock options granted
pursuant to the Company Omnibus Stock Plan and (c) 217 shares held by Mr.
Aurelio's daughter.

(8) Includes (a) 900 shares of restricted stock granted pursuant to the
Company Omnibus Stock Plan and (b) 50,499 shares which may be acquired on
or within 60 days of December 15, 1998 under stock options granted
pursuant to the Company Omnibus Stock Plan.

(9) Includes (a) 2,000 shares of restricted stock granted pursuant to the
Company Omnibus Stock Plan.

(10) Includes (a) 900 shares of restricted stock granted pursuant to the
Company Omnibus Stock Plan and (b) 24,333 shares which may be acquired on
or within 60 days of December 15, 1998 under stock options granted
pursuant to the Company Omnibus Stock Plan.

(11) Includes 6,550 shares which may be acquired on or within 60 days of
December 15, 1998 under stock options granted pursuant to the Company
Omnibus Stock Plan.

(12) Includes (a) 16,901 shares of restricted stock granted to executive
officers pursuant to the Company Omnibus Stock Plan, (b) 775,382 shares
which may be acquired on or within 60 days of December 15, 1998 by
executive officers and directors under stock options granted pursuant to
the 1982 Non-Qualified Stock Option Plan and the Company Omnibus Stock
Plan, (c) 5,217 shares as to which voting and/or investment power is
shared (see certain of the foregoing footnotes) and (d) 900 shares of
restricted stock granted to Ernest L. Godshalk III (expected to be an
executive officer of SEB) pursuant to the Company Omnibus Stock Plan.

138
<PAGE>

HCS
(VARIAN ASSOCIATES, INC. TO BE RENAMED VARIAN
MEDICAL SYSTEMS, INC., FOLLOWING THE DISTRIBUTION)

SUMMARY OF SIGNIFICANT CAPITALIZATION FORECAST
ASSUMPTIONS

The following financial forecast of the capitalization of HCS is based on
forecasts and assumptions by the Company's management concerning events and
circumstances that are expected to occur subsequent to the latest historical
balance sheet date but prior to and including April 1, 1999 (the anticipated
Distribution Date), including future results of operations and other events.
For purposes of the forecasted capitalization at April 1, 1999, HCS's net
earnings in the first six months of fiscal year 1999 are assumed to
approximate the sum of the net earnings of SEB and IB for the last six months
of fiscal year 1998 (exclusive of approximately $5 million of restructuring
costs to write down impaired assets and cover effects of workforce reductions
at SEB's Massachusetts facilities), and the HCS as adjusted historical
earnings for the first six months of fiscal year 1998. In addition,
restructuring plans associated with the Distribution are currently being
developed and may result in additional charges to HCS's equity. Assumptions
with respect to events that will occur between October 3, 1998 and April 1,
1999, include the following:

. Payment of cash contributions to SEB and IB of $100 million and $8
million, respectively.

. The assumption by IB of $58 million of long-term debt (including current
portion) from the Company and the transfer to SEB of $5 million of Notes
Payable from the Company.

. The exercise of 544,000 stock options at an average exercise price of
$17.21 per share and the assumed purchase of the Company's Common Stock
under the Employee Stock Purchase Plan, resulting in net proceeds of
approximately $11 million. The Company has suspended the Employee Stock
Purchase Plan effective as of January 4, 1999.

. Payment of cash dividends to the holders of the Company's Common Stock
of $0.10 per share, payable to holders of record on December 4, 1998.

. The dividend to existing Company stockholders of all of the outstanding
IB Common Stock and SEB Common Stock at their respective book values in
connection with the Distribution.

. The sale, in connection with the Distribution, of the Company's long-
term leasehold interest in certain of its Palo Alto facilities, together
with the related buildings and other corporate assets, resulting in
estimated cash proceeds of approximately $21 million. Additional real
estate sales, resulting in estimated cash proceeds of an additional $34
million, are expected subsequent to the anticipated Distribution Date,
and have not been included in the forecasted capitalization of HCS.

. Payment of net transaction costs related to the Distribution estimated
to be $50 million. Approximately $25 million of such transaction costs
are assumed to have been accrued for but unpaid at the anticipated
Distribution Date.

. Scheduled principal payments on long-term debt of $7 million.

In the Company's management's judgment, the listed assumptions and forecasts
reflect those material events or transactions that occurred since October 3,
1998 or are expected to occur prior to the anticipated Distribution Date,
other than the potential restructuring charges discussed in the first
paragraph above. There have been no changes in accounting principles
anticipated in this capitalization forecast nor are any such changes currently
contemplated.

LIMITATIONS ON PROJECTIONS AND FORECASTS

Neither the Company nor any of its subsidiaries intends after the date of
this Proxy Statement to update any forecasted or projected financial data or
information contained in this Proxy Statement and the absence of such an
update should not be construed as any indication regarding the views or
beliefs of management of the Company (or of HCS after the Distribution)
concerning the forecasted or projected data or information contained in this
Proxy Statement.

139
<PAGE>

HCS
(VARIAN ASSOCIATES, INC., TO BE RENAMED VARIAN MEDICAL
SYSTEMS, INC. FOLLOWING THE DISTRIBUTION)

FORECASTED CAPITALIZATION

The following table sets forth the combined capitalization of HCS as of
October 2, 1998 on a historical basis, forecasted at April 1, 1999 (the
anticipated Distribution Date), and as adjusted to give effect to the
Distribution and the other transactions contemplated by the Distribution
Agreement. The significant assumptions used below have been described in "HCS
(Varian Associates, Inc., To Be Renamed Varian Medical Systems, Inc. Following
The Distribution)--Summary of Significant Capitalization Forecast Assumptions"
on the preceding page. The following data is qualified in its entirety by the
financial statements of the Company, incorporated by reference in this Proxy,
the HCS unaudited pro forma consolidated financial statements appearing
elsewhere in this Proxy and other information contained elsewhere in this
Proxy Statement.

<TABLE>
<CAPTION>
FORECASTED
OCTOBER 2, AT
1998 APRIL 1, PRO FORMA AFTER
HISTORICAL 1999(1) DISTRIBUTION(1)
---------- ---------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Cash and cash equivalents................ $149.7 $136.7 $ 29.7
====== ====== ======
Notes payable............................ $ 34.8 $ 34.8 $ 29.8
====== ====== ======
Long-Term Debt, including current
portion................................. $123.2 $116.2 $ 58.2
------ ------ ------
Stockholders' Equity:
Common stock, par value $1 per share:
authorized--99,000,000 shares
issued and outstanding--29,743,000
historical and 29,909,061 pro
forma(2)............................ 29.7 29.9 29.9
Preferred stock, par value $1 per
share:
authorized--1,000,000 shares
issued and outstanding--none
historical or pro forma............. -- -- --
Retained earnings...................... 527.8 500.6 105.9
------ ------ ------
Total Stockholders' Equity......... 557.5 530.5 135.8
------ ------ ------
Total Capitalization............. $680.7 $646.7 $194.0
====== ====== ======
</TABLE>
- --------
(1) See "HCS (Varian Associates, Inc. To Be Renamed Varian Medical Systems,
Inc. Following the Distribution)--Summary of Significant Capitalization
Forecast Assumptions" on the preceding page.
(2) Pro forma number of shares of HCS Common Stock outstanding is based upon
the number of shares of the Company's Common Stock outstanding as of
December 15, 1998.

140
<PAGE>

HCS
(VARIAN ASSOCIATES, INC., TO BE RENAMED
VARIAN MEDICAL SYSTEMS, INC. FOLLOWING THE DISTRIBUTION)

PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The unaudited pro forma consolidated financial statements of HCS set forth
below consist of a pro forma balance sheet as of October 2, 1998 and pro forma
statements of earnings for each of the most recent three fiscal years. The pro
forma balance sheet was prepared to give effect to the Distribution as if it
had occurred on October 2, 1998 and the pro forma statements of earnings were
prepared to give effect to the Distribution as if it had occurred on the first
day of the earliest period presented. The unaudited pro forma balance sheet
presented below does not purport to represent what HCS's financial position
actually would have been had the Distribution occurred on the date indicated
or to project HCS's financial position for any future date. The unaudited pro
forma statements of earnings set forth below do not purport to represent what
HCS's operations actually would have been or to project HCS's operating
results for any future period. The unaudited pro forma adjustments are based
upon currently available information and certain assumptions that the Company
believes are reasonable. The unaudited pro forma statements should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations of HCS" and the historical consolidated financial
statements of the Company and the notes thereto incorporated herein by
reference.

141
<PAGE>

HCS
(VARIAN ASSOCIATES, INC., TO BE RENAMED
VARIAN MEDICAL SYSTEMS, INC. FOLLOWING THE DISTRIBUTION)

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

OCTOBER 2, 1998

<TABLE>
<CAPTION>
AS
COMPANY ADJUSTMENTS FOR ADJUSTED PRO FORMA HCS
HISTORICAL DISTRIBUTION(1) HISTORICAL ADJUSTMENTS(2) PRO FORMA
---------- --------------- ---------- -------------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash
equivalents.......... $ 149.7 $ -- $149.7 $(108.0) $ 41.7
Accounts receivable... 392.6 206.5 186.1 -- 186.1
Inventories........... 204.5 132.0 72.5 -- 72.5
Other current assets.. 93.0 55.4 37.6 -- 37.6
-------- ------ ------ ------- ------
Total current
assets............. 839.8 393.9 445.9 (108.0) 337.9
Property, Plant and
Equipment, net......... 214.2 133.5 80.7 -- 80.7
Other Assets............ 164.3 79.8 84.5 -- 84.5
-------- ------ ------ ------- ------
Total Assets........ $1,218.3 $607.2 $611.1 $(108.0) $503.1
======== ====== ====== ======= ======
LIABILITIES AND EQUITY
Current Liabilities
Notes payable and
current portion of
long-term debt....... $ 46.8 $ -- $ 46.8 $ (11.0) $ 35.8
Accounts payable--
trade................ 76.2 44.9 31.3 -- 31.3
Accrued expenses...... 282.7 175.6 107.1 -- 107.1
Product warranty...... 44.1 29.0 15.1 -- 15.1
Advance payments from
customers............ 55.1 8.8 46.3 -- 46.3
-------- ------ ------ ------- ------
Total Current
Liabilities........ 504.9 258.3 246.6 (11.0) 235.6
Long-Term Accrued
Expenses............... 44.8 -- 44.8 -- 44.8
Long-Term Debt.......... 111.1 -- 111.1 (52.0) 59.1
-------- ------ ------ ------- ------
Total Liabilities... 660.8 258.3 402.5 (63.0) 339.5
Equity.................. 557.5 348.9 208.6 (45.0) 163.6
-------- ------ ------ ------- ------
Total Liabilities and
Equity................. $1,218.3 $607.2 $611.1 $(108.0) $503.1
======== ====== ====== ======= ======
</TABLE>

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

(2) Assumes a cash contribution by the Company to IB of $8.0 million, the
assumption by IB of $58.0 million in long-term debt (including current
portion) from the Company, the cash contribution by the Company to SEB of
$100.0 million, and the transfer to SEB of $5.0 million in Notes Payable
from the Company in connection with the Distribution. See "The Instruments
Business Forecasted Capitalization," "The Semiconductor Equipment Business
Forecasted Capitalization" and "HCS Forecasted Capitalization."

142
<PAGE>

HCS
(VARIAN ASSOCIATES, INC., TO BE RENAMED
VARIAN MEDICAL SYSTEMS, INC. FOLLOWING THE DISTRIBUTION)

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS

FISCAL YEAR 1998

<TABLE>
<CAPTION>
AS
COMPANY ADJUSTMENTS FOR ADJUSTED PRO FORMA HCS
HISTORICAL DISTRIBUTION(1) HISTORICAL ADJUSTMENTS PRO FORMA
---------- --------------- ---------- ----------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales.................. $1,422.1 $880.6 $541.5 $ -- $541.5
-------- ------ ------ ----- ------
Operating Costs and
Expenses
Cost of sales........ 896.3 548.7 347.6 -- 347.6
Research and
development......... 107.0 67.5 39.5 -- 39.5
Marketing............ 199.1 148.3 50.8 -- 50.8
General and
administrative...... 104.5 60.1 44.4 -- 44.4
-------- ------ ------ ----- ------
Total operating
costs and
expenses.......... 1,306.9 824.6 482.3 -- 482.3
-------- ------ ------ ----- ------
Operating Earnings..... 115.2 56.0 59.2 -- 59.2
Interest expense..... (8.9) -- (8.9) 4.3 (2) (4.6)
Interest income...... 6.4 -- 6.4 (5.6)(3) 0.8
-------- ------ ------ ----- ------
Operating Earnings
before Taxes.......... 112.7 56.0 56.7 (1.3) 55.4
Taxes on earnings.... 38.9 21.0 17.9 (0.5)(4) 17.4
-------- ------ ------ ----- ------
Net Earnings........... $ 73.8 $ 35.0 $ 38.8 $(0.8) $ 38.0
======== ====== ====== ===== ======
Net Earnings Per
Share--Basic.......... $ 2.47
========
Net Earnings Per
Share--Diluted........ $ 2.43
========
Pro Forma Net Earnings
Per Share--Basic(5)... $ 1.27
======
Pro Forma Net Earnings
Per Share--Dilut-
ed(6)................. $ 1.25
======
</TABLE>

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS

(1) To adjust the historical financial statements of the Company for the
impact of the Distribution of IB Common Stock and SEB Common Stock to
Company stockholders. The Distribution of IB Common Stock and SEB Common
Stock is reflected at book value.
(2) Reflects the reduction of interest expense on $58.0 million of long-term
debt at an estimated annual rate of interest of 7.03% and on $5.0 million
of Notes Payable at an estimated annual rate of interest of 3.6%. A change
of 25 basis points on these estimated annual rates of interest would
impact pro forma interest expense by $158,000.
(3) Reflects the reduction of interest income on $108.0 million of cash and
cash equivalents at an estimated annual rate of interest of 5.2%.
(4) The pro forma adjustment for income taxes is based upon statutory income
tax rates.
(5) The computation of pro forma net earnings per share--basic is based on the
weighted average number of shares of the Company's Common Stock
outstanding during fiscal year 1998.
(6) The computation of pro forma net earnings per share--diluted is based on
the sum of the weighted average number of shares of the Company's Common
Stock outstanding and the Company's dilutive potential Common Stock during
fiscal year 1998.

143
<PAGE>

HCS
(VARIAN ASSOCIATES, INC., TO BE RENAMED
VARIAN MEDICAL SYSTEMS, INC. FOLLOWING THE DISTRIBUTION)

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS

FISCAL YEAR 1997

<TABLE>
<CAPTION>
AS
COMPANY ADJUSTMENTS FOR ADJUSTED PRO FORMA HCS
HISTORICAL DISTRIBUTION(1) HISTORICAL ADJUSTMENTS PRO FORMA
---------- --------------- ---------- ----------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales.................. $1,425.9 $949.6 $476.3 $ -- $476.3
-------- ------ ------ ----- ------
Operating Costs and
Expenses
Cost of sales........ 902.7 579.4 323.3 -- 323.3
Research and
development......... 110.8 79.6 31.2 -- 31.2
Marketing............ 199.2 156.8 42.4 -- 42.4
General and
administrative...... 83.2 52.1 31.1 -- 31.1
-------- ------ ------ ----- ------
Total operating
costs and
expenses.......... 1,295.9 867.9 428.0 -- 428.0
-------- ------ ------ ----- ------
Operating Earnings..... 130.0 81.7 48.3 -- 48.3
Interest expense..... (7.8) -- (7.8) 4.3 (2) (3.5)
Interest income...... 4.6 -- 4.6 (4.6)(3) --
Gain on sale of Thin
Film Systems........ 51.0 51.0 -- -- --
-------- ------ ------ ----- ------
Operating Earnings
before Taxes.......... 177.8 132.7 45.1 (0.3) 44.8
Taxes on earnings.... 62.2 47.4 14.8 (0.1)(4) 14.7
-------- ------ ------ ----- ------
Net Earnings........... $ 115.6 $ 85.3 $ 30.3 $(0.2) $ 30.1
======== ====== ====== ===== ======
Net Earnings Per
Share--Basic.......... $ 3.79
========
Net Earnings Per
Share--Diluted........ $ 3.67
========
Pro Forma Net Earnings
Per Share--Basic(5)... $ 0.99
======
Pro Forma Net Earnings
Per Share--Dilut-
ed(6)................. $ 0.96
======
</TABLE>

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS

(1) To adjust the historical financial statements of the Company for the
impact of the Distribution of IB Common Stock and SEB Common Stock to
Company stockholders. The Distribution of IB Common Stock and SEB Common
Stock is reflected at book value.
(2) Reflects the reduction of interest expense on $58.0 million of long-term
debt at an estimated annual rate of interest of 7.03% and on $5.0 million
of Notes Payable at an estimated annual rate of interest of 3.6%. A change
of 25 basis points on these estimated annual rates of interest would
impact pro forma interest expense by $158,000.
(3) Reflects the reduction of interest income on $108.0 million of cash and
cash equivalents at an estimated annual rate of interest of 5.2%. This pro
forma adjustment is limited to the amount of actual interest income earned
by the Company during the period.
(4) The pro forma adjustment for income taxes is based upon statutory income
tax rates.
(5) The computation of pro forma net earnings per share--basic is based on the
weighted average number of shares of the Company's Common Stock
outstanding during fiscal year 1997.
(6) The computation of pro forma net earnings per share--diluted is based on
the sum of the weighted average number of shares of the Company's Common
Stock outstanding and the Company's dilutive potential Common Stock during
fiscal year 1997.

144
<PAGE>

HCS
(VARIAN ASSOCIATES, INC., TO BE RENAMED
VARIAN MEDICAL SYSTEMS, INC. FOLLOWING THE DISTRIBUTION)

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS

FISCAL YEAR 1996

<TABLE>
<CAPTION>
AS
COMPANY ADJUSTMENTS FOR ADJUSTED PRO FORMA HCS
HISTORICAL DISTRIBUTION(1) HISTORICAL ADJUSTMENTS PRO FORMA
---------- --------------- ---------- ----------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Sales.................. $1,599.4 $1,131.9 $467.5 $ -- $467.5
-------- -------- ------ ----- ------
Operating Costs and
Expenses
Cost of sales........ 995.7 687.5 308.2 -- 308.2
Research and
development......... 110.2 86.0 24.2 -- 24.2
Marketing............ 200.3 159.1 41.2 -- 41.2
General and
administrative...... 103.1 65.5 37.6 -- 37.6
-------- -------- ------ ----- ------
Total operating
costs and
expenses.......... 1,409.3 998.1 411.2 -- 411.2
-------- -------- ------ ----- ------
Operating Earnings..... 190.1 133.8 56.3 -- 56.3
Interest expense..... (6.4) -- (6.4) 4.3 (2) (2.1)
Interest income...... 5.5 -- 5.5 (5.5)(3) --
-------- -------- ------ ----- ------
Operating Earnings
before Taxes.......... 189.2 133.8 55.4 (1.2) 54.2
Taxes on earnings.... 67.1 48.4 18.7 (0.4)(4) 18.3
-------- -------- ------ ----- ------
Net Earnings........... $ 122.1 $ 85.4 $ 36.7 $(0.8) $ 35.9
======== ======== ====== ===== ======
Net Earnings Per
Share--Basic.......... $ 3.93
========
Net Earnings Per
Share--Diluted........ $ 3.81
========
Pro Forma Net Earnings
Per Share--Basic(5)... $ 1.16
======
Pro Forma Net Earnings
Per Share--Dilut-
ed(6)................. $ 1.12
======
</TABLE>

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS

(1) To adjust the historical financial statements of the Company for the
impact of the Distribution of IB Common Stock and SEB Common Stock to
Company stockholders. The Distribution of IB Common Stock and SEB Common
Stock is reflected at book value.
(2) Reflects the reduction of interest expense on $58.0 million of long-term
debt at an estimated annual rate of interest of 7.03% and on $5.0 million
of Notes Payable at an estimated annual rate of interest of 3.6%. A change
of 25 basis points on these estimated annual rates of interest would
impact pro forma interest expense by $158,000.
(3) Reflects the reduction of interest income on $108.0 million of cash and
cash equivalents at an estimated annual rate of interest of 5.2%. This pro
forma adjustment is limited to the amount of actual interest income earned
by the Company during the period.
(4) The pro forma adjustment for income taxes is based upon statutory income
tax rates.
(5) The computation of pro forma net earnings per share--basic is based on the
weighted average number of shares of the Company's Common Stock
outstanding during fiscal year 1996.
(6) The computation of pro forma net earnings per share--diluted is based on
the sum of the weighted average number of shares of the Company's Common
Stock outstanding and the Company's dilutive potential Common Stock during
fiscal year 1996.

145
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF HCS

This discussion and analysis of financial condition and results of
operations is based upon and should be read in conjunction with " HCS Pro
Forma Consolidated Financial Statements" included elsewhere in this Proxy
Statement, as well as the information contained under "Business of HCS," "Risk
Factors--Risks Relating to the Business of HCS" and "Risk Factors--Additional
Risks Relating to Each of the Businesses."

The unaudited pro forma consolidated financial statements of HCS generally
reflect the results of operations, financial position and cash flows of the
operations expected to be retained by HCS after the Internal Transfers and
Distribution. The unaudited pro forma balance sheet does not, however, purport
to represent what HCS's financial position actually would have been had the
Distribution occurred on the date indicated, or to project HCS's financial
position for any future date. The unaudited pro forma statements of earnings
similarly do not purport to represent what HCS's operating results actually
would have been had the Distribution occurred on the date indicated, or to
project HCS's operating results for any future period. The unaudited pro forma
consolidated financial statements include, among other things, allocations of
certain Company corporate assets (including pension assets), liabilities
(including profit sharing and pension benefits) and expenses (including legal,
accounting, employee benefits, insurance services, information technology
services, treasury and other Company corporate overhead) to HCS using the
allocation methodology described in the notes to the HCS pro forma
consolidated financial statements during the periods presented. These
allocations are not necessarily indicative of the amounts that would have been
recorded by HCS had it operated on a stand-alone basis during the periods
presented or will be recorded by HCS in the future. The pro forma consolidated
financial statements do not reflect any changes that may occur in the
financing and operations of HCS as a result of the Distribution.

RESULTS OF OPERATIONS

Fiscal Year

HCS's fiscal years reported are the 52- or 53-week periods which ended on
the Friday nearest September 30. Fiscal year 1998 comprises the 53-week period
ended on October 2, 1998. Fiscal years 1997 and 1996 comprise the 52-week
periods ended on September 26, 1997 and September 27, 1996, respectively.

Fiscal Year 1998 Compared to Fiscal Year 1997

Sales. HCS's sales of $542 million in fiscal year 1998 were 14% higher than
its sales of $476 million in fiscal year 1997, and consisted of sales and
service of oncology systems, and the sale of x-ray tubes and imaging
subsystems. 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. HCS
expects high single-digit sales growth in fiscal year 1999. Despite this sales
growth, operating earnings will be negatively impacted by transaction costs
and cost allocations resulting from the presentation of IB and SEB as
discontinued operations.

Oncology systems sales were $408 million, or 75% of HCS's sales, in fiscal
year 1998, compared to $347 million, or 73% of sales, in fiscal year 1997. X-
ray tubes and imaging subsystems sales were $133 million, or 25% of HCS's
sales, in fiscal year 1998, compared to $129 million, or 27% of sales, in
fiscal year 1997. Oncology systems sales accounted for almost all of the
increase in sales in fiscal year 1998. The 18% 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 RS
Business in December 1997. X-ray tubes and imaging subsystem sales also
increased 3% between fiscal year 1997 and fiscal year 1998.

By product line, oncology systems sales in North America, Europe, Asia and
the rest of the world amounted to $204 million, $145 million, $35 million and
$24 million in fiscal year 1998, and $192 million, $91 million, $48 million
and $16 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 $39 million, $34 million,

146
<PAGE>

$56 million and $4 million in fiscal year 1998, and $34 million, $30 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.

Gross Profit. HCS's gross profit of $194 million in fiscal year 1998 was 36%
of sales, compared to $153 million, or 32% 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. Gross profit as a
percentage of sales of oncology systems amounted to 37% in fiscal year 1998,
compared to 34% in fiscal year 1997. Gross profit as a percentage of sales of
x-ray tubes and imaging subsystems was flat at 33% in fiscal year 1998 and
fiscal year 1997, despite production start-up costs for new digital imaging
products.

Research and Development. Research and development expenses of $40 million
in fiscal year 1998, were 27% 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
HCS'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.

Marketing. Marketing expenses were $51 million in fiscal year 1998, compared
to $42 million, in fiscal year 1997, representing 9% of sales in both years.
The increase in marketing expenses, in absolute terms, was a result of HCS's
acquisition of Cyber-Nisty Company, a Japanese distributor, higher
international commission expenses and the expansion of HCS's sales and
marketing forces.

General and Administrative. General and administrative expenses of $44
million were 8% of sales in fiscal year 1998, compared to $31 million, or 7%
of sales, in fiscal year 1997. The increase resulted from amortization of
goodwill and trade receivables write-offs.

Taxes on Earnings. HCS's effective tax rate was 31.6% in fiscal year 1998,
compared to 32.8% 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. HCS's net earnings in fiscal year 1998 were $39 million, or 7%
of sales, an increase of 28% over the $30 million of net earnings, or 6% of
sales, in fiscal year 1997. The increase in net earnings was primarily the
result of increased sales volume.

Fiscal Year 1997 Compared to Fiscal Year 1996

Sales. HCS's sales of $476 million in fiscal year 1997 were 2% higher than
its sales of $468 million in fiscal year 1996. Oncology systems sales were
$347 million, or 73% of HCS's sales in fiscal year 1997, compared to
$325 million, or 69% of sales, in fiscal year 1996. X-ray tubes and imaging
subsystems sales were $129 million, or 27% of HCS's sales, in fiscal year
1997, compared to $143 million, or 31% of sales, in fiscal year 1996. Oncology
systems sales accounted for the entire increase in sales. The 7% increase in
sales of oncology systems between fiscal year 1996 and fiscal year 1997
reflected the increasing demand for ancillary products. The increase in
oncology systems sales was partially offset by a 9% decrease in x-ray tube and
imaging subsystem sales between fiscal year 1996 and fiscal year 1997. The
decrease resulted from lower levels of demand in fiscal year 1997 than in
fiscal year 1996 from original equipment manufacturers who purchased x-ray
tube products from HCS.

By product line, oncology systems sales in North America, Europe, Asia, and
the rest of the world amounted to $192 million, $91 million, $48 million and
$16 million in fiscal year 1997, and $177 million, $93 million, $42 million
and $13 million in fiscal year 1996, respectively, while sales of x-ray tubes
and imaging subsystems

147
<PAGE>

in North America, Europe, Asia and the rest of the world amounted to $34
million, $30 million, $63 million and $2 million in fiscal year 1997, and $43
million, $32 million, $65 million and $3 million in fiscal year 1996,
respectively.

Gross Profit. HCS's gross profit of $153 million in fiscal year 1997 was 32%
of sales, compared to $159 million, or 34% of sales, in fiscal year 1996. The
decrease in gross profit as a percentage of sales from fiscal year 1996 to
fiscal year 1997 was primarily attributable to the strengthening of the U.S.
dollar relative to other international currencies, which affected both
oncology systems and x-ray tubes and imaging subsystems. Gross profit as a
percentage of sales of x-ray tubes and imaging subsystems amounted to 33% in
fiscal year 1997, compared to 35% in fiscal year 1996. Gross profit as a
percentage of sales of oncology systems amounted to 34% in fiscal year 1997,
compared to 36% in fiscal year 1996.

Research and Development. Research and development expenses of $31 million
in fiscal year 1997, were 29% higher than the $24 million of such expenses in
fiscal year 1996. Research and development expenses represented 6.6% of sales
in fiscal year 1997 compared to 5.2% of sales in fiscal year 1996. HCS
increased research and development expenditures as a percentage of sales for
both oncology systems and x-ray tubes and imaging subsystems in fiscal year
1997. In 1997, oncology systems research and development effort was focused on
new product releases in the software products, particularly its imaging
products. X-ray tubes completed eight of 28 ongoing new tube developments,
proved feasibility of a new air-cooled "integral housing" tube, and initiated
several high end tube developments. The imaging business continued addressing
technical and manufacturability issues for amorphous silicon solid state
detectors.

Marketing. Marketing expenses were $42 million in fiscal year 1997, compared
to $41 million in fiscal year 1996, or 9% of sales in both fiscal years. The
increase, on an absolute basis, was mainly in oncology systems where the
product marketing and sales organizations were expanded.

General and Administrative. General and administrative expenses of $31
million were 7% of sales in fiscal year 1997, compared to $38 million, or 8%
of sales, in fiscal year 1996. The decrease was primarily due to a reduction
in corporate overhead expenses.

Taxes on Earnings. HCS's effective tax rate was 32.8% in fiscal year 1997,
compared to 33.8% in fiscal year 1996. The fiscal year 1997 and fiscal year
1996 rates were lower than the U.S. federal statutory rate principally due to
the tax benefits arising from the use of a foreign sales corporation. The
fiscal year 1997 rate was lower than the fiscal year 1996 rate due to the
impact of tax credits.

Net Earnings. HCS's net earnings in fiscal year 1997 were $30 million, or 6%
of sales, a decrease of 17% from the $37 million of earnings, or 8% of sales,
in fiscal year 1996. The decrease in net earnings was the result of increased
investment in research and development and lower export prices due to the
strengthening of the U.S. dollar.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. It is effective for HCS's 1999 fiscal year. The
impact of the implementation of SFAS No. 130 on the consolidated financial
statements of HCS has not yet been determined.

In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 changes current practice
under SFAS No. 14 by establishing a new framework on which to base segment
reporting (referred to as the "management" approach) and also requires interim
reporting of segment information. It is effective for HCS's 1999 fiscal year.
The impact of the implementation of SFAS No. 131 on the reporting of HCS's
segment information has not yet been determined.

148
<PAGE>

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and is effective for HCS's
2000 fiscal year. The impact of the implementation of SFAS No. 133 on the
consolidated financial statements of HCS has not yet been determined.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically incurred or managed debt at the parent level,
and a portion of this debt will be retained by HCS as of the Distribution
Date. HCS will not be able to rely on the earnings, assets or cash flows of
SEB or IB after the Distribution to service this debt, nor however, will its
earnings, assets or cash flows be used to contribute to the capital
requirements of those entities.

The debt to be retained by HCS at the time of the Distribution will consist
of between $50 million and $100 million of Term Loans and Notes Payable, based
on the Company's outstanding indebtedness as of October 2, 1998 and projected
operating results, certain other transactions and scheduled debt repayments
through the Distribution Date. See "HCS Forecasted Capitalization." As of
October 2, 1998, interest rates on the Company's outstanding Term Loans ranged
from 6.70% to 7.29%, and the weighted average interest rate on these Term
Loans was 7.03%. As of October 2, 1998, interest rates on the Company's
outstanding Notes Payable ranged from 1.50% to 49.00%, and the weighted
average interest rate on these Notes Payable was 1.96%. While IB will assume
50% of the Company's Term Loans, the specific Term Loans and Notes Payable
that HCS will retain in connection with the Distribution will be determined in
accordance with the Distribution Agreement. See "The Distribution Proposals--
Proposal One: The Distribution--Distribution Agreement." The Term Loans
currently 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. In connection with the renegotiation of the
Term Loans, the lender may revise existing or impose additional restrictive
covenants. HCS also may enter into one or more credit facilities for working
capital and other general corporate purposes on or after the Distribution. Any
such credit facility may contain certain representations and warranties;
conditions; affirmative, negative and financial covenants; and events of
default customary for such facilities.

At October 2, 1998, HCS had $150 million in cash and cash equivalents,
compared to $142 million at September 27, 1997. Under the terms of the
Distribution Agreement, the Company will make a cash contribution to SEB such
that SEB's cash and cash equivalents equal $100 million at the time of the
Distribution. In addition, it is anticipated that the Company will be required
to contribute cash to IB so that as of the time of the Distribution IB and HCS
will each have Net Debt equal to approximately 50% of the aggregate Net Debt
of IB and HCS, subject to such adjustments as may be necessary to provide HCS
with a Net Worth of between 40% and 50% of the aggregate Net Worths of IB and
HCS. See "The Distribution Proposals--Proposal One: The Distribution--
Distribution Agreement." In connection with the Distribution, the Company
intends to sell its long-term leasehold interest in certain of its Palo Alto
facilities, together with the related buildings and other corporate assets,
from which it expects to receive proceeds of $55 million in the aggregate. In
addition, the Company will be required to pay the net expenses associated with
the Internal Transfers and Distribution, estimated at approximately $50
million. IB is entitled to receive approximately 50% of the estimated
proceeds, if any, to be received by HCS after the Distribution from the sales
of these facilities and assets and is required to pay approximately 50% of any
estimated transaction expenses to be paid by HCS after the Distribution (in
each case reduced for estimated taxes payable or tax benefits received from
all sales and transaction expenses). If the Company is unable to sell the
facilities and assets it intends to sell prior to the Distribution or at all,
HCS may be required to enter into and draw upon a credit facility to make such
cash contributions or pay such expenses.

In December 1997, HCS purchased the RS Business from the General Electric
Company for approximately $45 million. This acquisition has been accounted for
under the purchase method of accounting. HCS is amortizing acquired goodwill
of $37 million over 40 years.

HCS expects that its future capital expenditures will continue to
approximate 2.5% of sales in each fiscal year. In addition, it expects to
incur up to $5 million in additional capital expenditures related to
relocations effected in connection with the Distribution. Additional
restructuring plans associated with the Distribution are

149
<PAGE>

currently being developed and may result in additional costs. The Distribution
Agreement provides that HCS will remain liable for certain litigation
described under "Business of HCS--Legal Proceedings" and will indemnify IB and
SEB for one-third of the costs, expenses and other liabilities of the Company
relating to certain discontinued operations, including certain environmental
liabilities. See "Environmental Matters."

HCS's liquidity is affected by many factors, some based on the normal
ongoing operations of the business and others related to the uncertainties of
the industry and global economies. Although HCS's cash requirements will
fluctuate based on the timing and extent of these factors, management believes
that existing cash, cash generated from operations and HCS's borrowing
capability will be sufficient to satisfy anticipated commitments for capital
expenditures and other cash requirements for the current fiscal year and
fiscal year 2000.

ENVIRONMENTAL MATTERS

HCS'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 CERCLA, as amended,
at eight sites where the Company 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, foreign, federal, state and/or local agencies at
certain current or former Company facilities (including facilities disposed of
in connection with the Company's sale of its Electron Devices business during
fiscal year l995 and the sale of its TFS business during fiscal year 1997).
Expenditures by the Company for environmental investigation and remediation
amounted to $5 million in fiscal year 1998, compared with $2 million in fiscal
year 1997 and $5 million in fiscal year 1996.

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 2, 1998, the Company nonetheless estimated that the
future exposure for environmental-related investigation and remediation costs
for these sites and facilities ranged in the aggregate from $22 million to $49
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 2, 1998. 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 the Company has accrued $22 million in
estimated environmental costs as October 2, 1998. The amount accrued has not
been discounted to present value.

As to other sites and facilities, the Company has gained sufficient
knowledge to be able to better estimate the scope and costs of future
environmental activities. As of October 2, 1998, the Company estimated the
future exposure for environmental related investigation and remediation costs
for these sites and facilities ranged in the aggregate from $40 million to $74
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 2, 1998. 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 futures costs were
reliably determinable. Together, these amounts totaled $51 million at
October 2, 1998. Accordingly, the Company has accrued $22 million as of
October 2, 1998, which represents its best estimate of the future costs
discounted at 4%, net of inflation. This accrual is in addition to the
$22 million described in the preceding paragraph.

The Company 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

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which the Company believes that it has rights to contribution, indemnity
and/or reimbursement. Claims for recovery of environmental investigation and
remediation costs already incurred, and to be incurred in the future, have
been asserted against various insurance companies and other third parties. In
1992, 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, and has a $0.5 million receivable in Other Current
Assets at October 2, 1998. 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 the Company therefore has a $5.5 million receivable in Other Assets at
October 2, 1998. Although the Company intends to aggressively pursue
additional insurance recoveries, the Company has not reduced any liability in
anticipation of recovery with respect to claims made against third parties.

Under the Distribution Agreement, HCS has agreed to indemnify IB and SEB for
one-third of these environmental investigation and remediation costs, and IB
and SEB have each agreed to indemnify the Company for one-third of these
costs, as adjusted for any insurance proceeds and tax benefits expected to be
realized upon the payment of these costs. Accordingly, as of October 2, 1998
HCS has recorded a $16 million receivable from IB and SEB relating to their
obligations to indemnify HCS for their respective portions of these costs.

The foregoing amounts are only estimates of anticipated future environmental
related costs, and the amounts actually spent in the years indicated may be
greater or less than such estimates. The aggregate range of cost estimates
reflects various uncertainties inherent in many environmental investigation
and remediation activities and the large number of sites and facilities
involved. HCS believes that most of these cost ranges will narrow as
investigation and remediation activities progress.

HCS believes that its reserves are adequate, but as the scope of its
obligation becomes more clearly defined, these reserves 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 HCS'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, 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
HCS.

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 HCS 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 HCS's
business, results of operations or financial condition.

State of Readiness. HCS has initiated a comprehensive assessment of
potential Year 2000 problems with respect to (1) internal systems, (2)
products and (3) significant third parties with which HCS does business.

HCS 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. With respect to enterprise information systems, HCS in 1994 initiated
replacement of its existing systems with a single company-wide system supplied
by SAP America, Inc., which system is designed and tested by SAP for Year 2000
capability. Installation of that system has been staged to replace first those
existing systems that are not Year 2000 capable. Installation of

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the new SAP system is approximately 35% complete, with 90% completion expected
by July 1999 and full completion expected by the end of 1999. Upgrade of
enterprise information systems is approximately 35% complete, with 94%
completion expected by July 1999 and 100% completion expected by December
1999; upgrade of networking and telecommunications systems is approximately
95% complete, with 100% completion expected by July 1999; upgrade of factory-
specific information systems is approximately 58% complete, with 87%
completion expected by July 1999 and 87% completion expected by December 1999;
upgrade of non-IT systems, computers and packaged software and facilities
systems is approximately 30% complete, with 85% completion expected by July
1999 and 100% completion expected by December 1999.

HCS has 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 HCS 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 HCS's current products.

With respect to previously-sold products, HCS does not intend to assess Year
2000 preparedness of every product it has ever sold, but rather is focusing
its assessments on products that are subject to regulatory requirements with
respect to Year 2000, including FDA requirements for medical devices. HCS is
also focusing its assessments on products that will be under written
warranties or are still relatively early in their useful life, 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. These assessments are
expected to be substantially completed by January 1999. Where HCS identifies
previously-sold products that are not Year 2000 capable, HCS intends in some
cases to develop and offer to sell upgrades or retrofits, identify corrective
measures which the customer could itself undertake or identify for the
customer other suppliers of upgrades or retrofits. There may be instances
where HCS will be required to repair and/or upgrade such products at its own
expense. Schedules for completing those corrective actions vary considerably
among HCS's businesses and products, but are generally expected to be
substantially completed by July 1999.

HCS is still assessing the potential Year 2000 problems of third parties
with which HCS has material relationships, which are primarily suppliers of
products or services. These assessments will identify and prioritize critical
suppliers, review those suppliers' written assurances on their own assessments
and correction of Year 2000 problems, and develop appropriate contingency
plans for those suppliers which might not be adequately prepared for Year 2000
problems. These assessments are expected to be substantially completed by July
1999.

Costs. As of October 2, 1998, HCS estimates that it had incurred
approximately $500,000 to assess and correct Year 2000 problems. Although
difficult to assess, based on its assessments to date HCS estimates that it
will incur approximately $3,000,000 in additional costs to assess and correct
Year 2000 problems, which costs are expected to be incurred throughout fiscal
year 1999 and the first half of fiscal year 2000. All of these costs 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, HCS 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 HCS's actual costs to assess and
correct Year 2000 problems will not be higher than the foregoing estimate.

Risks. Failure by HCS and its key suppliers to accurately assess and correct
Year 2000 problems, would likely result in interruption of certain of HCS's
normal business operations, which could have a material adverse effect on
HCS's business, results of operations or financial condition. If HCS 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

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reporting. If HCS does not adequately identity 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 HCS 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 HCS 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 HCS
does not expect to be 100% Year 2000 compliant by the end of 1999, HCS does
not currently believe that any Year 2000 non-compliance in HCS's information
systems would have a material adverse effect on HCS'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; 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 HCS; 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. See "Risk Factors--Risks Relating to the Distribution--
Transitioning to New Information Technology Infrastructures."

Because of uncertainties as to the extent of Year 2000 problems with HCS's
previously-sold products and the extent of any legal obligation of HCS to
correct Year 2000 problems in those products, HCS cannot yet assess risks to
HCS with respect to those products. Because its assessments are not yet
complete, HCS 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 HCS's results of operations.

Contingency Plans. With respect to HCS's enterprise information systems, HCS
has a contingency plan if the SAP system is not fully installed by December
31, 1999. That plan primarily involves installation where necessary of a Year
2000 capable upgrade of existing information systems pending complete
installation of the SAP system. That upgrade is currently in acceptance
testing and, if functional, will be held for contingency purposes.

With respect to products and significant third parties, HCS 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.

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BUSINESS OF HCS

GENERAL

The Company, which will be renamed Varian Medical Systems, Inc., will
conduct the Health Care Systems Business currently conducted by the Company.
The Company has been engaged in the Health Care Systems Business since 1959.
References in this section to "HCS" refer to HCS and its subsidiaries after
giving effect to the Internal Transfers and the Distribution. References to
the "Health Care Systems Business" refer to the historical business and
operations of the Health Care Systems Business conducted by the Company prior
to the Distribution.

OVERVIEW

HCS 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
both equipment manufacturers and replacement tube and imaging subsystems
suppliers.

In serving the market for advanced medical systems (primarily for cancer
care), HCS 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 its capabilities and efficiency. These
ancillary offerings now account for more than half of all oncology systems
sales.

In addition to developing leading-edge medical hardware, HCS 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 tube sector, HCS provides a broad selection of diagnostic tubes
capable of delivering more scans with excellent resolution and imaging more
patients than its competitors. HCS 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.

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

HCS's products can be broadly classified into two principal categories:
oncology systems, and x-ray tubes and imaging subsystems.

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Oncology Systems

HCS 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,
high dose rate brachytherapy systems and data management systems for radiation
oncology centers. HCS oncology systems offers an integrated system of products
embracing both linear accelerators and sophisticated ancillary products and
services to extend its capabilities and efficiency.

Linear accelerators are primarily used in cancer therapy. HCS's CLINAC
series of medical linear accelerators, marketed to hospitals and clinics
worldwide, generates therapeutic x-rays and radiation beams for cancer
treatment. VariSource(TM), HCS'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.

Linear accelerators are also used for industrial radiographic applications.
HCS'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.

HCS also manufactures and markets related radiotherapy products such as
imaging systems, information management systems, multi-leaf collimators,
simulators and radiosurgery products. HCS has received United States 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.
HCS continually works with physicians and technicians to develop the latest
technology and treatments.

In addition to pursuing growth opportunities in existing markets, HCS is
pursuing the vast potential in combining advances in focused energy with the
latest breakthroughs in biotechnology. HCS is also evaluating the application
of radiation to treat diseases other than cancer. Such efforts are designed to
yield a whole new range of products and technologies that allow HCS to take
full advantage of its reputation for technology innovation leadership in the
health care field.

X-Ray Tubes and Imaging Subsystems

HCS 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. HCS conducts an
active research and development program to address new technology and
applications in both the medical and industrial x-ray tube markets. HCS's
extensive scientific and engineering expertise in glass and metal center
section tubes is considered to be state-of-the-art.

HCS manufactures tubes for four primary medical x-ray imaging applications:
CT scanner; radiographic/fluoroscopic; special procedures; and mammography.
HCS 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 HCS's current tubes last twice as long as tubes
did 5 years ago, resulting in significant savings for customers.

HCS 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 HCS tubes. HCS also offers a 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.

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HCS also designs, manufactures and markets imaging products. A new imaging
product line was launched in September 1996. Amorphous silicon imaging
technologies developed by HCS can be broadly applied as an alternative to
image intensifiers or film, representing over $1 billion of industry sales.
The new products are expected to increase the efficiency of diagnostic x-ray
imaging while decreasing costs. An amorphous silicon imaging subsystems 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.

MARKETING AND SALES

Historically, HCS has sold a significant proportion of its systems in any
particular period to a limited number of customers. Sales to HCS's ten largest
customers in fiscal years 1998, 1997 and 1996 accounted for approximately 24%,
28% and 30% of sales, respectively. HCS 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% of more
of HCS's sales in fiscal year 1998. See "Risk Factors--Risks Relating to the
Business of HCS--Customer Concentration; Customer Financing."

HCS sells its products throughout the world through a direct sales force in
North America, Asia, Europe and Latin America. HCS has 19 field sales offices
in the United States and 15 sales offices in other countries. Sales and
service in other countries are generally handled by distributors.

HCS 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 $408 million, $347
million and $327 million for fiscal years 1998, 1997 and 1996, respectively.
HCS 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%, 36%, 8% and 6% of HCS's sales during the 1998 fiscal
year and 55%, 26%, 14% and 5% during the 1997 fiscal year, respectively.

HCS sells approximately 80% of its x-ray tube products to original equipment
manufacturers and 20% to replacement tube distributors. HCS has supplied tubes
to such industry leaders as Toshiba, Elscint, Hitachi and Shimadzu, each of
which accounted for 5% or more of x-ray tube product sales in fiscal year
1998. Total sales for x-ray tube products were $130 million, $129 million and
$141 million for fiscal years 1998, 1997 and 1996, respectively. HCS 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 43%, 28%, 26% and 3% of HCS's sales during the 1998 fiscal year
and 49%, 26%, 23% and 2% during the 1997 fiscal year, respectively.

HCS believes that in the foreseeable future there will be a continuous
world-wide growth in the markets for oncology systems and related services
because of the improvement of health care services in developing countries and
Eastern Europe and the necessity to meet increasingly stricter regulations
with respect to radiation dosage and other safety features and environmental
hazards in many jurisdictions. With the transition from conventional to
digital x-ray systems, the demand for products and services related to
networking, archiving and electronic distribution of digital x-ray images will
grow in industrialized countries. HCS also believes there will be continuous
growth in the markets for information technology.

HCS's marketing strategy is to offer to its customers a complete package of
products and services in the fields of cancer-care and radiotherapy, including
equipment, accessories and related services such as consulting and after-sales
services. HCS'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. HCS's growth strategy is to add products in its
existing markets and expand its international market share.

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CUSTOMER SUPPORT AND SERVICES

HCS 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. HCS's network of service engineers and customer support
specialists provide installation, warranty, repair, training and support
services. HCS generates service revenue by providing service to customers on a
time and materials basis and through comprehensive service contracts and sale
of parts.

HCS 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. HCS warrants that software will perform in accordance with
specifications at the delivery date and up to 3 months thereafter if the
customer gives notice of any nonconformance. HCS offers a variety of post-
warranty service agreements that permit customers to contract for the level of
equipment maintenance they require. In addition, HCS has begun to offer
specific software support agreements, reflecting the growing use in HCS's
products of software that can be updated. Service is provided at rates
competitive with those offered by HCS's competitors.

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

Oncology system 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 generally home-based
engineers who are available to handle service requests 24-hours a day to
satisfy HCS's customer requirements. Most of these engineers are employees of
HCS, but many are also employees of dealers and/or agents of HCS. Customers
can access HCS's extensive service network by calling any of HCS's service
centers located throughout North America, Europe, Asia and Latin America.

HCS 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 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, HCS 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 HCS.

HCS 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. HCS applications specialists and engineers make
recommendations to meet the customer's technical requirements within the
customer's budgetary constraints. HCS often develops specifications for a
unique product, which will be designed and manufactured to meet a specific
customer's requirements. HCS also maintains a technical customer support group
in Charleston, South Carolina to meet the technical support requirements of
independent tube installers using HCS's x-ray tube products.

RESEARCH AND DEVELOPMENT

Developing products, systems and services based on advanced technological
concepts is essential to HCS's ability to compete effectively. HCS currently
maintains a product development and engineering staff responsible for product
design and engineering. There can be no assurance that HCS's product
development efforts will result in the development or commercialization of
successful products or product enhancements. Research and development
expenditures (net of customer funding) totaled $40 million, $31 million and
$24 million in fiscal years 1998, 1997 and 1996, respectively.

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

Although HCS intends to continue to conduct extensive research and
development activities, there can be no assurance that it will be able to
develop and market new products on a cost-effective and timely basis, that
such products will compete favorably with products developed by others or that
HCS's existing technology will not be superseded by new discoveries or
developments. See "Risk Factors--Risks Relating to the Business of HCS--
Technological Change and New Products."

COMPETITION

The health care equipment markets are characterized by rapidly evolving
technology, intense competition and pricing pressure. HCS competes with
companies worldwide, some of which have greater financial, marketing and
management resources than HCS. These competitors could develop technologies
and products that are more effective than those currently used or produced by
HCS or that could render HCS's products obsolete or noncompetitive. Smaller
competitors of HCS could be acquired by companies with greater financial
strength enabling them to compete more aggressively. Certain distributors of
HCS could also be acquired by competitors thereby disrupting certain
distribution arrangements of HCS. Management believes, however, HCS 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. HCS believes that the key
to success in its markets is to provide technologically superior products that
deliver cost-effective, high quality clinical diagnosis and that meet or
exceed customer quality and service expectations. HCS's ability to compete
successfully depends on its ability to commercialize new products ahead of its
competitors. In its sales of oncology systems, HCS competes with Siemens,
Nucletron, Elekta, Mitsubishi, and certain government facilities. In addition,
HCS 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 HCS's x-ray tube business, manufacture x-ray tubes for use in
their own products. HCS must compete with these in-house x-ray tube
manufacturing operations that are naturally favored by their parent company.
As a result, HCS must have a competitive advantage in one or more significant
areas which may include lower product cost, better product quality, or
technological superiority. HCS 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, HCS competes against other stand-alone x-ray tube
manufacturers such as Comet, located in Switzerland and IAE, located in Italy.
These companies compete with HCS for both the OEM business of major diagnostic
imaging equipment manufacturers as well as independent servicers of x-ray tube
equipment. See "Risk Factors--Additional Risks Relating to Each of the
Businesses--Competition."

MANUFACTURING AND SUPPLIES

Oncology systems manufactures its accelerator systems in Palo Alto,
California, and its treatment simulator systems, accelerator subsystems and
brachytherapy systems 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 HCS's manufacturing
facilities in Salt Lake City, Utah, Arlington Heights, Illinois, and
Charleston, South Carolina. 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

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international quality standards. See "Risk Factors--Additional Risks Relating
to Each of the Businesses--International Sales and Manufacturing."

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

HCS'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 HCS. HCS utilizes an outsourcing
strategy for the manufacture of major subassemblies and performs system
design, assembly and testing in-house. HCS believes outsourcing enables it to
minimize its fixed costs and capital expenditures while also providing it with
the flexibility to increase production capacity. HCS purchases material and
components from various suppliers that are either standard products or built
to HCS specifications. Certain components used in existing products of HCS, as
well as products under development, are frequently purchased from single
sources.

BACKLOG

Backlog for HCS amounted to $352 million and $344 million at the end of
fiscal 1998 and 1997, respectively. HCS 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 accurately the amount of backlog
orders that will result in sales.

PRODUCT LIABILITY

HCS's business exposes it to potential product liability claims which are
inherent in the manufacture and sale of medical devices, and as such HCS 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 HCS's products. Therefore, the design, manufacture, sale or service of
the medical products manufactured by HCS involve the risk of product liability
claims and expose HCS to substantial liability to patients for damages
resulting from the faulty design, manufacture or servicing of such products.
Although HCS maintains limited product liability insurance coverage in an
amount that it deems sufficient for 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.

GOVERNMENT REGULATION

Domestic Regulation

HCS'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

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its Department of Health Services), where HCS 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. Recently, the FDA
promulgated new design process regulations that revise the good manufacturing
practices applicable to medical device manufacturers. Among other things,
these new regulations require that manufacturers establish performance
requirements before production, insure that device components are compatible,
select adequate packing materials, and, if appropriate, do risk analyses. The
regulations took effect on June 1, 1997, but include a twelve-month transition
period during which enforcement action with respect to design control
requirements was not taken.

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)
premarket 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 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, HCS has not been required to resort to the
PMAA process for approval of its products.

Software deemed to be a medical device, such as HCS'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

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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 HCS.

HCS 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 HCS 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 HCS'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 HCS.
HCS believes that its products substantially comply with all applicable
electrical safety and environmental standards, such as those of Underwriters
Laboratories and IEC 601.

HCS is also subject to FDA and FTC 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 HCS. See "Risk
Factors--Risks Relating to the Business of HCS--Government Regulation."

The manufacture and sale of medical products manufactured by HCS involve the
risk of product liability claims and exposes HCS to 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 HCS's
products. Therefore, the design, manufacture, sale or service of the medical
products manufactured by HCS involve the risk of product liability claims and
exposes HCS to substantial liability to patients for damages resulting from
the faulty design, manufacture or servicing of such products. See "Risk
Factors--Risks Relating to the Business of HCS--Product Recalls, Product
Liability and Insurance."

Medicare and Medicaid Reimbursement

The 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.

For capital costs for inpatient services, prior to October 1, 1991, Medicare
reimbursed hospitals an amount based on 85 percent of the actual reasonable
costs they had incurred. 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 in law August 5, 1997, further reduces capital
payments to hospitals by 2.1 percent 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 percent of which is based on the hospital's
reasonable costs and 58 percent of which is based on the fee schedule amount
that Medicare reimburses for such services when furnished in a physician's
office. The BBA requires capital outpatient reimbursement to shift from a cost
basis to a prospective payment system by 1999. Because the Health Care
Financing Administration ("HCFA") has not yet proposed regulations to
implement the outpatient PPS, it is unclear what impact such a

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change 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 percent 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 percent of a physician's
Medicare fee schedule payment for a particular service. Under the BBA, HCFA is
required to implement by January 1, 1999, 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 issue
regulations setting new practice expense values. Certain revisions that HCFA
might make in these values could have a positive or negative effect 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 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 HCS 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 payers (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 diagnostic procedures, which may
affect the demand for HCS'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.

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The current administration 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
HCS's products. See "Risk Factors--Risks Relating to the Business of HCS--
Uncertainty of Third-Party Reimbursement."

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. The European Union has
adopted a new Medical Device Directive, which was implemented in all countries
of the European Union in July 1998. HCS is required to obtain ISO 9001
certification necessary to enable it to 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 life. There can be no
assurance that HCS 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 would have a material adverse effect on HCS'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,
HCS 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 HCS's products or that fall within its fields of interest. As
of October 2, 1998, HCS owned approximately 58 patents in the United States
and approximately 77 patents throughout the world, and had approximately 101
patent applications on file with various patent agencies worldwide. HCS
intends to file additional patent applications as appropriate.

HCS 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. HCS has trademarks, both registered and
unregistered, that are maintained and enforced to provide customer recognition
for its products in the marketplace. HCS 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 HCS places considerable importance on its licensed technology,
HCS does not believe that the loss of any license would have a material
adverse effect on HCS's business.

HCS's competitors, like companies in many high technology businesses,
routinely review the products of others for possible conflict with their own
patent rights. Although HCS has from time to time received notices of claims
from others alleging patent infringement, HCS believes that there are no
pending patent infringement claims that might have a material adverse effect
on the business of HCS. See "Risk Factors--Additional Risks Relating to Each
of the Businesses--Uncertain Protection of Patent and Other Proprietary
Rights."

ENVIRONMENTAL MATTERS

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

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EMPLOYEES

At October 2, 1998, HCS had a total of approximately 2,034 full-time and
temporary employees worldwide--1,126 in the United States and 908 elsewhere.
These numbers do not include approximately 76 corporate employees who are
expected to become employees of HCS as of the Distribution.

None of HCS'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. HCS currently considers its employee relations to be good.

HCS's success depends to a significant extent upon a limited number of key
employees and other members of senior management of HCS. The loss of the
service of one or more of these key employees could have a material adverse
effect on HCS. The success of HCS's future operations depends in large part on
HCS'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. HCS's inability to attract and retain the personnel it requires
could have a material adverse effect on HCS's results of operations.

PROPERTIES

HCS's manufacturing, warehouse, research and development, sales, service and
administrative facilities have an aggregate floor space of 696,000 and 130,000
square feet, located in the United States and abroad, respectively, for a
total of 826,000 square feet worldwide. Of these facilities, aggregate floor
space of approximately 291,000 square feet is leased and the remainder is
owned by HCS. The management of HCS 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 HCS believes
that its facilities and equipment, generally are well maintained, in good
operating condition and suitable for HCS's purposes and adequate for present
operations.

HCS has facilities located throughout the world, including facilities
located in Palo Alto, California; Salt Lake City, Utah; Charleston, South
Carolina; Arlington Heights, Illinois; Crawley, England; Baden, Switzerland;
and Helsinki, Finland. HCS has 34 service and sales facilities located
throughout the world, 19 of which are 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.

LEGAL PROCEEDINGS

The Company is a party to three related federal antitrust claims 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 the Company and compete with it for the servicing of linear accelerators
made by the Company. In response to several threats of litigation regarding
the legality of the Company'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 the Company'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
Company's policies was defeated. The ISOs defendants amended the complaint to
include class action allegations and allege a variety of other anti-
competitive business practices and filed a motion for class certification,
which is scheduled to be heard by the U.S. District Court in Texas in June
1999.

After the Distribution, HCS will retain responsibility for the liabilities
of the Health Care Systems Business, including the ISOs Litigation. In
addition, in accordance with the Distribution Agreement HCS has agreed to pay
for one-third of the costs, liabilities and expenses of certain legal
proceedings relating to discontinued operations of the Company. See "The
Distribution Proposals--Proposal One: The Distribution--Distribution
Agreement."

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HCS 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 HCS, management does not believe
any pending legal proceeding will result in a judgment or settlement that will
have a material adverse effect on HCS's financial position, results of
operations or cash flows.

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MANAGEMENT OF HCS

BOARD OF DIRECTORS OF HCS

Prior to the Distribution Date, nine current members of the board of
directors of the Company (other than John Seely Brown, Samuel Hellman, Terry
R. Lautenbach, David W. Martin, Jr., Burton Richter and Richard W. Vieser) are
expected to resign, and Richard M. Levy is expected to be added as a new
director. The board of directors of HCS (the "HCS Board") is expected to
consist of 7 directors after the Distribution. The HCS Board will continue to
be divided into three classes. Directors for each class will be elected at the
annual meeting of stockholders held in the year in which the term for such
class expires and will serve thereafter for three years.

The following table sets forth names, in alphabetical order, and information
about the persons who are expected to serve as directors of HCS after the
Distribution.

<TABLE>
<CAPTION>
NAME, AGE AND CURRENT INITIAL TERM
PRINCIPAL OCCUPATION EXPIRES INFORMATION
--------------------- ------------ -----------
<C> <C> <S>
John Seely Brown, 58............. 2001 Dr. Brown is Vice President,
Vice President, Director of the Director of the Xerox Palo
Xerox Palo Alto Research Center Alto Research Center and
and Chief Scientist of Xerox Chief Scientist of Xerox
Corporation Corporation, positions he
has held since 1986, 1990
and 1992, respectively. He
is a director of Corning
Incorporated and General
Instrument Corporation. Dr.
Brown has been a director
of the Company since 1998.

Samuel Hellman, 64............... 2001 Dr. Hellman is the A. N.
A.N. Pritzker Distinguished Pritzker Distinguished
Service Professor in the Service Professor in the
Department of Radiation and Department of Radiation and
Cellular Oncology at the Cellular Oncology at the
University of Chicago University of Chicago, a
position he has held since
1993. From 1988 to 1993, he
was Dean of that
University's Division of
Biological Sciences and its
Pritzker School of
Medicine, Vice President of
the University's Medical
Center and the A.N.
Pritzker Professor in the
Department of Radiation and
Cellular Oncology. Dr.
Hellman has been a director
of the Company since 1992.

Terry R. Lautenbach, 60.......... 2001 Mr. Lautenbach is a former
Senior Vice President (Retired) Senior Vice President of
of International Business International Business
Machines Corporation Machines Corporation
("IBM"), a position he held
from 1988 to 1992. He was
responsible for IBM's
worldwide manufacturing and
development, and North
American marketing and
services from 1990 to 1992,
and served on IBM's
Management Committee in
1991 and 1992. Mr.
Lautenbach is a director of
Air Products and Chemicals,
Inc., CVS Corporation and
Footstar, Inc. He has been
a director of the Company
since 1993.

Richard M. Levy, 60.............. 2002 Dr. Levy is the Executive
Executive Vice President of the Vice President of the
Company Company responsible for the
Health Care Systems
Business. Dr. Levy also
oversees the Company's
Edward L. Ginzton Research
Center in Palo Alto. He
joined the Company in 1968,
and was elevated to
Executive Vice President in
1990.
</TABLE>

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<PAGE>

<TABLE>
<CAPTION>
NAME, AGE AND CURRENT INITIAL TERM
PRINCIPAL OCCUPATION EXPIRES INFORMATION
--------------------- ------------ -----------
<C> <C> <S>
David W. Martin, Jr., 57......... 2000 Dr. Martin is President and
President and Chief Executive Chief Executive Officer of
Officer of EOS Biotechnology, EOS Biotechnology, Inc. (a
Inc. biotechnology company),
positions he has held since
1997. From 1995 to 1996, he
was President, Chief
Operating Officer and a
director of LYNX
Therapeutics, Inc. (a
biotechnology company), and
from 1994 to 1995, he was
Senior Vice President of
Chiron Corporation and
President of Chiron
Therapeutics (a
biotechnology company). From
1990 through 1993, Dr.
Martin was Executive Vice
President for Research and
Development at The Du Pont
Merck Pharmaceutical
Company. Dr. Martin is a
director of Cubist
Pharmaceuticals, Inc. Dr.
Martin has been a director
of the Company since 1994.

Burton Richter, 67............... 2002 Dr. Richter is Director of
Director of the Stanford Linear the Stanford Linear
Accelerator Center and Paul Accelerator Center and Paul
Pigott Professor in Physical Pigott Professor in Physical
Sciences at Stanford University Sciences at Stanford
University, positions he has
held since 1984 and 1980,
respectively. He has been a
director of the Company
since 1990.

Richard W. Vieser, 71............ 2000 Mr. Vieser is former Chairman
Chairman, Chief Executive of the Board, Chief
Officer and President (Retired) Executive Officer and
of Lear Siegler, Inc. President of Lear Siegler,
Inc. (a diversified
manufacturing company),
positions he held from 1987
to 1989. He is a director of
Ceridian Corporation, Global
Industrial Technologies,
Inc., International Wire
Group, Inc. and Sybron
International Corporation.
Mr. Vieser has been a
director of the Company
since 1991.
</TABLE>

COMPENSATION OF DIRECTORS

Each director who is not an employee of HCS will receive an annual retainer
fee of $20,000 plus $1,000 for each HCS Board and committee meeting attended.
The non-employee Chairman of the Board will receive an annual retainer fee of
$70,000. Under the proposed HCS Omnibus Stock Plan, the non-employee Chairman
of the Board will receive an initial non-qualified stock option grant to
acquire 100,000 shares of HCS Common Stock, each of the other directors who
are not HCS employees will also receive at the Distribution Date, or
thereafter upon appointment or election to the HCS Board, a non-qualified
stock option to acquire 10,000 shares of HCS Common Stock. All directors will
receive annually thereafter a non-qualified stock option to acquire 5,000
shares of HCS Common Stock. Any non-employee director's annual retainer fee
may, at the director's election, be converted to stock options, at the rate of
$1 deferred cash converting to $4 of stock options at the fair market value of
HCS Common Stock on the grant date. Such stock options will be granted with an
exercise price equal to the fair market value of HCS Common Stock on the date
of grant, becoming exercisable immediately on the date of grant and having a
ten-year term. Directors who are HCS employees will receive no compensation
for their services as directors.

COMMITTEES OF THE BOARD OF DIRECTORS

The business of HCS will be managed under the direction of the HCS Board.
The Company's Board of Directors currently has six standing committees. After
the Distribution, HCS will have an Executive Committee,

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an Audit Committee and a Compensation Committee of the HCS Board. Members of
the latter two Committees will not be employees of HCS.

Executive Committee

The Executive Committee's principal function will be to act on matters when
convening a meeting of the full Board of Directors is impracticable. It will
be delegated all powers of the Board of Directors except certain powers
reserved by law to the full Board. The members of the Executive Committee are
expected to be the following directors: Richard M. Levy and Richard W. Vieser
(Chairman).

Audit Committee

The Audit Committee's principal functions will be to review the scope of the
annual audit of HCS by its independent auditors, review the annual financial
statements of HCS and the related audit report as prepared by the independent
auditors, recommend the selection of independent auditors each year and review
any non-audit fees paid to the independent auditors. The members of the Audit
Committee are expected to be the following non-employee directors: John Seely
Brown, Samuel Hellman, Terry R. Lautenbach, David W. Martin, Jr., Burton
Richter and Richard W. Vieser (Chairman).

Compensation Committee

The Compensation Committee will administer the stock and cash incentive
plans of HCS, and in this capacity it will make option grants or awards under
these plans. In addition, the Committee will determine the compensation of the
President and Chief Executive Officer and the other senior executives. The
Committee will also recommend the establishment of policies dealing with
various compensation and employee benefit plans for HCS. The members of the
Committee are expected to be the following non-employee directors: John Seely
Brown, Samuel Hellman, Terry R. Lautenbach, David W. Martin, Jr., Burton
Richter and Richard W. Vieser (Chairman).

EXECUTIVE OFFICERS

Set forth below is certain information with respect to the persons who are
expected to serve as executive officers of HCS immediately following the
Distribution.

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE PRIOR TO
BECOMING
NAME AND TITLE AGE AN EXECUTIVE OFFICER OF HCS
-------------- --- ----------------------------
<C> <C> <S>
Richard M. Levy....................... 60 Dr. Levy is the Executive Vice
President and Chief Executive Officer President of the Company
responsible for the Health Care
Systems Business. Dr. Levy also
oversees the Company's Edward L.
Ginzton Research Center in Palo
Alto. He joined the Company in
1968, and was elevated to
Executive Vice President in
1990.

Timothy E. Guertin.................... 49 Mr. Guertin is Corporate Vice
Corporate Vice President President and President of the
Company's Oncology Systems
business, positions he has held
since 1992 and 1990,
respectively. Mr. Guertin has
held various other positions in
the Health Care Systems Business
during his 23 years with the
Company.

John C. Ford.......................... 54 Dr. Ford is Senior Vice
Corporate Vice President President, Business Development,
for the Health Care Systems
Business, a position he has held
since 1992. Dr. Ford has held
various other positions in the
Health Care Systems Business
during his 26 years with the
Company.
</TABLE>

168
<PAGE>

<TABLE>
<CAPTION>
BUSINESS EXPERIENCE PRIOR TO
BECOMING
NAME AND TITLE AGE AN EXECUTIVE OFFICER OF HCS
-------------- --- ----------------------------
<C> <C> <S>
Robert H. Kluge...................... 52 Mr. Kluge is Vice President and
Corporate Vice President General Manager of the Company's
X-Ray Tube Products business,
positions he has held since
1993. Before joining the Company
in 1993, he held various
positions with Picker
International (an x-ray systems
manufacturer).

Elisha W. Finney..................... 37 Ms. Finney is the Company's
Corporate Vice President, Treasurer, a position she has
Chief Financial Officer and held since January 1998. From
Treasurer 1988 to 1998, she was the
Company's Risk Manager, and from
1995 to 1998 Ms. Finney also
served as Assistant Treasurer.
Ms. Finney has held various
other positions during her 10
years with the Company.

Duane A. Walstrom.................... 47 Mr. Walstrom is Director,
Corporate Controller Accounting of the Company,
a position he has held since
1985. Mr. Walstrom has held
various other accounting and
finance positions during his
16 years with the Company.
</TABLE>

169
<PAGE>

EXECUTIVE OFFICER COMPENSATION

Summary of Compensation

HCS Table I below sets forth a summary of the compensation paid by the
Company for the last three fiscal years to the individual expected to be the
chief executive officer of HCS and the four additional most highly compensated
individuals (based on their fiscal year 1998 compensation from the Company)
who are expected to be executive officers of HCS immediately after the
Distribution.

HCS TABLE I

HCS SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------- --------------------- -------
SECURITIES
OTHER RESTRICTED UNDERLYING
ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION AWARDS SARS PAYOUTS COMPENSATION
POSITION YEAR ($) ($)(1) ($)(2) (S)($)(3) ($)(4) ($)(5) ($)(6)
------------------ ---- ------ ------ ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard M. Levy........ 1998 338,910 250,607 21,620 0 36,000 195,763 85,676
President and Chief 1997 323,148 206,984 18,249 244,388 36,000 391,810 108,374
Executive Officer 1996 310,990 432,879 43,736 204,225 36,000 628,056 99,753

Timothy E. Guertin .... 1998 216,680 112,526 8,288 0 15,000 93,988 45,434
Corporate Vice 1997 205,858 125,253 30,117 139,650 15,000 124,800 50,384
President 1996 198,084 165,969 16,754 116,700 15,000 300,066 49,260

John C. Ford........... 1998 203,138 101,013 1,448 0 8,500 0 36,068
Corporate Vice 1997 192,984 84,940 14,712 0 8,000 0 28,247
President 1996 184,936 107,226 0 0 10,000 0 35,803

Robert H. Kluge........ 1998 176,382 50,216 8,455 0 8,500 34,128 21,526
Corporate Vice 1997 165,514 45,935 7,458 52,369 7,500 67,018 23,043
President 1996 155,874 109,338 8,240 43,763 9,000 160,004 15,678

Duane A. Walstrom ..... 1998 137,364 36,897 4,982 0 4,000 0 15,379
Corporate Controller 1997 130,083 52,905 12,460 21,881 4,000 0 17,071
1996 125,252 57,821 2,434 0 4,000 0 14,241
</TABLE>
- --------
(1) Consists of Company Management Incentive Plan awards, Cash Profit-Sharing
Plan allocations and (in some cases) special cash bonuses.

(2) Consists of amounts reimbursed for the payment of taxes on certain
perquisites and personal benefits and (in some cases) cash payments for
unused accrued vacation time.

(3) Consists of restricted shares of the Company's Common Stock (valued at the
closing market price on the date of grant), which shares are released from
restrictions in three equal installments over a three-year period (the
principal restriction being continued employment until the respective
release dates), during which dividends, if any, are paid on such shares.
The number and value (at $34.375 per share) of aggregate restricted stock
holdings at the end of fiscal year 1998 were as follows: Dr. Levy, 8,400
shares, $288,750; Mr. Guertin, 4,800 shares, $165,000; Dr. Ford, 0 shares,
$0; Mr. Kluge, 1,800 shares, $61,875; and Mr. Walstrom, 0 shares, $0.
Shares of restricted stock awarded for fiscal years 1998, 1997 and 1996,
respectively, which partially vest in under three years were as follows:
Dr. Levy 0 shares, 4,200 shares and 4,200 shares; Mr. Guertin, 0 shares,
2,400 shares and 2,400 shares; Dr. Ford, 0 shares, 0 shares and 0 shares;
Mr. Kluge, 0 shares, 900 shares and 900 shares; and Mr. Walstrom, 0
shares, 450 shares and 0 shares.

(4) Consists of shares of the Company's Common Stock that may be acquired
under stock options granted pursuant to the Company Omnibus Stock Plan (no
stock appreciation rights have been granted).

(5) Consists of cash payouts in fiscal years 1999, 1998, 1997 under the long-
term incentive feature of the Company Omnibus Stock Plan for three-year
cycles ended with fiscal years 1998, 1997 and 1996, respectively.

(6) Consists of (a) Company contributions (including interest) to Retirement
and Profit-Sharing Program and Supplemental Retirement Plan accounts for
fiscal years 1998, 1997 and 1996, respectively (Dr. Levy, $83,521,
$106,573 and $98,313; Mr. Guertin, $44,053, $49,224 and $48,330; Dr.
Ford, $34,770, $27,158 and $34,932; Mr. Kluge, $20,397, $22,101 and
$14,942; and Mr. Walstrom, $15,074, $16,815 and $14,034; and (b) Company-
paid premiums for group term life insurance in fiscal years 1998, 1997
and 1996, respectively (Dr. Levy, $2,155, $1,801 and $1,440; Mr. Guertin,
$1,381, $1,160 and $930; Dr. Ford, $1,298, $1,089 and $871; Mr. Kluge,
$1,129, $942 and $737; and Mr. Walstrom, $305, $256 and $207).

170
<PAGE>

STOCK OPTIONS

Grant of Options

HCS Table II below sets forth information with respect to grants of options
to purchase the Company's Common Stock during the year ended October 2, 1998
to the individuals listed in HCS Table I. These grants were made pursuant to
the Company Omnibus Stock Plan and are reflected in HCS Table I.

HCS TABLE II

OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
------------------------------------------------ REALIZABLE VALUE AT
NUMBER OF ASSUMED ANNUAL
SECURITIES PERCENT OF RATES OF STOCK
UNDERLYING TOTAL OPTIONS/ EXERCISE PRICE APPRECIATION
OPTIONS/ SARS GRANTED OR BASE FOR OPTION TERM(2)
GRANTED TO EMPLOYEES PRICE EXPIRATION ------------------- -------
NAME (#)(1) IN FISCAL YEAR(2) ($/SH) DATE 5%($) 10%($)
---- ---------- ----------------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard M. Levy......... 36,000 3.55 58.163 11/20/07 1,316,671 3,336,702
Timothy E. Guertin...... 15,000 1.48 58.163 11/20/07 548,613 1,390,292
John C. Ford............ 8,500 0.84 58.163 11/20/07 310,881 787,832
Robert H. Kluge......... 8,500 0.84 58.163 11/20/07 310,881 787,832
Duane A. Walstrom....... 4,000 0.39 58.163 11/20/07 109,723 278,058
</TABLE>
- --------
(1) Consists of stock options, which were granted at an exercise price of 100%
of the market price of the underlying shares on the date of grant, become
exercisable over three years at the rate of approximately one-third each
year and expire ten years from the date of grant. Payment of the exercise
price may be made under a promissory note or by delivery of already-owned
shares.

Aggregated Option Exercises And Year-End Values

The following table sets forth as of October 2, 1998, for each of the
individuals listed in HCS Table I (i) the total number of shares received upon
exercise of options during 1998, (ii) the value realized upon such exercise
(based on the fair market value of the underlying shares on the exercise
date), (iii) the total number of unexercised options to purchase the Company's
Common Stock (exercisable and unexercisable) and (iv) the value of such
options which were in-the-money at October 2, 1998 (based on the closing price
of the Company's Common Stock at October 2, 1998, $34.375).

HCS TABLE III

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT IN-THE-MONEY OPTIONS/SARS
VALUE FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)
SHARES ACQUIRED REALIZED ------------------------- -------------------------
NAME ON EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard M. Levy......... 0 0 96,000 72,000 270,900 0
Timothy E. Guertin...... 8,334 249,581 19,000 30,000 0 0
John C. Ford............ 5,000 240,637 37,332 17,168 267,015 0
Robert H. Kluge......... 0 0 20,500 16,500 54,180 0
Duane A. Walstrom....... 3,000 90,090 6,999 8,001 0 0
</TABLE>
- --------

171
<PAGE>

LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR(1)

<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK PRICE-
PERFORMANCE OR BASED PLANS
NUMBER OF OTHER PERIOD ------------------------
SHARES, UNITS OR UNTIL MATURATION THRESHOLD TARGET MAXIMUM
NAME OTHER RIGHTS (#) OR PAYOUT ($)(2) ($)(3) ($)(4)
---- ---------------- ---------------- --------- ------ -------
<S> <C> <C> <C> <C> <C>
Richard M. Levy..... N/A 1998-2000 25,604 47,793 --
Timothy E. Guertin.. N/A 1998-2000 12,940 24,155 --
John C. Ford........ N/A N/A N/A N/A --
Robert H. Kluge..... N/A 1998-2000 5,408 15,144 --
Duane A. Walstrom... N/A N/A N/A N/A --
</TABLE>
- --------
(1) Determinations by the Committee that a named executive officer may
participate in the long-term incentive feature of the Company Omnibus
Stock Plan ("LTI") and might receive a payout for a specified period is an
award for purposes of this table. Awards (i.e., the determination of
participation in the LTI) for the 1998-2000 cycle were made in fiscal year
1998. Under the LTI, each named executive officer is eligible to receive
compensation payable in cash or in the Company's Common Stock, or a
combination thereof, based upon the Company's achievement of objectives
for average annual return on net assets ("RONA") and revenue growth ("RG")
over a three-year cycle. No estimate or assumption made in connection with
this table is intended to represent a forecast of possible future
performance of the Company.

(3) A "Target" award is not determinable under the LTI. The amounts shown are
estimates of the payout for the three-year cycle assuming (a) that RONA
and revenues for the remaining years of the cycle are the same as the RONA
and revenues for fiscal year 1998 and (b) that each named executive
officer's annual base salary at the end of fiscal year 2000 will be
identical to his 1999 annual base salary. The actual payment for the
three-year cycle may be greater or less than the estimates shown in this
column, depending upon the actual RONA and revenues for fiscal years 1998,
1999 and 2000, the actual base salary of the named executive officer at
the end of fiscal year 2000, and the aggregate payout to all participants
(see footnote 4 below).

CHANGE IN CONTROL AGREEMENTS

Certain HCS executive officers are already parties to change in control
agreements with the Company. Some of those agreements are expected to be
amended to reflect the executive officer's new and increased responsibilities
with HCS. In addition, HCS executive officers not already parties to change in
control agreements with the Company may be offered similar change in control
agreements with HCS. See "Change in Control and Other Agreements."

172
<PAGE>

AMENDMENT AND RESTATEMENT OF THE COMPANY OMNIBUS STOCK PLAN

The Company Omnibus Stock Plan is expected to be amended and restated by the
Company's Board of Directors, effective as of the Distribution. The amendment
and restatement of the Company Omnibus Stock Plan (the "HCS Omnibus Stock
Plan") is subject to the approval of a majority of the shares of the Company's
Common Stock that are present in person or by proxy at the Meeting. See
"Distribution Proposals--Proposal Nine: Approval of the Amendment and
Restatement by the Company of the Company Omnibus Stock Plan."

PURPOSE OF THE HCS OMNIBUS STOCK PLAN

The HCS Omnibus Stock Plan is intended to promote the success of HCS by
providing a vehicle under which a variety of stock-based incentive and other
awards can be granted to employees and consultants and to directors of HCS who
are employees of neither HCS nor any affiliate ("non-employee directors").

DESCRIPTION OF THE HCS OMNIBUS STOCK PLAN

The following paragraphs provide a summary of the principal features of the
HCS Omnibus Stock Plan and its operation. The HCS Omnibus Stock Plan is set
forth in its entirety as Annex G to this Proxy Statement. The following
summary is qualified in its entirety by reference to Annex G.

GENERAL

The HCS Omnibus Stock Plan provides for the granting of stock options, stock
appreciation rights ("SARs"), restricted stock, performance units and
performance shares (collectively, "HCS Awards") to eligible HCS Omnibus Stock
Plan participants. The maximum number of shares of HCS Common Stock available
for HCS Awards under the HCS Omnibus Stock Plan will be 5,000,000, plus such
number of shares as may be granted in substitution of other options in
connection with the Distribution.

ADMINISTRATION OF THE HCS OMNIBUS STOCK PLAN

The HCS Omnibus Stock Plan will be administered by the Committee. The
members of the Committee must qualify as "non-employee directors" under Rule
16b-3 under the Exchange Act, and as "outside directors" under Section 162(m)
(for purposes of qualifying the HCS Omnibus Stock Plan as performance-based
compensation under Section 162(m)).

Subject to the terms of the HCS Omnibus Stock Plan, the Committee has the
sole discretion to determine the employees and consultants who shall be
granted HCS Awards, the size and types of such HCS Awards, and the terms and
conditions of such HCS Awards. The Committee may delegate its authority to
grant and administer awards to one or more officers or directors appointed by
the Committee, but only the Committee can make awards to participants who are
subject to Section 16 of the Exchange Act.

ELIGIBILITY TO RECEIVE AWARDS

Employees and consultants of HCS and its affiliates are eligible to be
selected to receive one or more HCS Awards. The actual number of individuals
who will receive HCS Awards under the HCS Omnibus Stock Plan cannot be
determined because eligibility for participation in the HCS Omnibus Stock Plan
is in the discretion of the Committee. The HCS Omnibus Stock Plan also
provides for the grant of non-qualified stock options to HCS's non-employee
directors. Such options will be granted pursuant to an automatic, non-
discretionary formula.

OPTIONS

The Committee may grant non-qualified stock options, incentive stock options
(which are entitled to favorable tax treatment), or a combination thereof. The
number of shares covered by each option will be

173
<PAGE>

determined by the Committee, but during any fiscal year of HCS, no participant
may be granted options for more than 1,000,000 shares.

The price of the shares of HCS Common Stock subject to each stock option is
set by the Committee but cannot be less than 100% of the fair market value (on
the date of grant) of the shares covered by the option. In addition, the
exercise price of an incentive stock option must be at least 110% of fair
market value if (on the grant date) the participant owns stock possessing more
than 10% of the total combined voting power of all classes of stock of HCS or
any of its subsidiaries. Nevertheless, substitute options may be granted at
less than fair market value to employees or consultants who receive such
options in connection with a corporate reorganization. Also, the aggregate
fair market value of the shares (determined on the grant date) covered by
incentive stock options which first become exercisable by any participant
during any calendar year may not exceed $100,000.

The exercise price of each option must be paid in full at the time of
exercise. The Committee also may permit payment through the tender of shares
of HCS Common Stock that are already owned by the participant, or by any other
means which the Committee determines to be consistent with the HCS Omnibus
Stock Plan's purpose. Any taxes required to be withheld must be paid by the
participant at the time of exercise.

Options become exercisable at the times and on the terms established by the
Committee. Options expire at the times established by the Committee but not
later than 10 years after the date of grant (except in certain cases involving
the death of the optionee). The Committee may extend the maximum term of any
option granted under the HCS Omnibus Stock Plan, subject to the preceding
limits.

NON-EMPLOYEE DIRECTOR OPTIONS

Under the HCS Omnibus Stock Plan, each non-employee director, other than the
Chairman of the Board, automatically will receive, as of the later of (a) the
Distribution Date for current non-employee directors or, for future directors,
the non-employee director's appointment or election to the HCS Board or (b)
the effective date of the HCS Omnibus Stock Plan, a non-qualified stock option
to purchase 10,000 shares. Each non-employee director will also automatically
receive a non-qualified stock option to purchase 5,000 shares coincident with
each subsequent annual meeting of HCS, provided the non-employee director
serves continuously as a director through the next grant date.

In lieu of the above initial grant, any non-employee Chairman of the HCS
Board automatically will receive, as of the later of (a) the date he or she
becomes Chairman or (b) the effective date of the HCS Omnibus Stock Plan, a
non-qualified stock option to purchase 100,000 shares. The Chairman will also
automatically receive a non-qualified stock option to purchase 5,000 shares
coincident with each subsequent annual meeting of HCS, provided he or she
serves continuously as Chairman through the next grant date.

In addition, non-employee directors may elect to receive options for shares
of HCS Common Stock in lieu of cash compensation. Such options will be granted
at fair market value on the election date, with a net exercise price of four
times the value of the compensation deferred.

174
<PAGE>

STOCK APPRECIATION RIGHTS

The Committee determines the terms and conditions of each SAR. SARs may be
granted in conjunction with an option, or may be granted on an independent
basis. The number of shares covered by each SAR will be determined by the
Committee, but during any fiscal year of HCS, no participant may be granted
SARs for more than 1,000,000 shares. Upon exercise of a SAR, the participant
will receive payment from HCS in an amount determined by multiplying: (1) the
difference between the fair market value of a share on the date of exercise
over the grant price (fair market value of a share on the grant date), times
(2) the number of shares with respect to which the SAR is exercised. SARs may
be paid in cash or shares of HCS Common Stock, as determined by the Committee.
SARs are exercisable at the times and on the terms established by the
Committee.

RESTRICTED STOCK AWARDS

Restricted stock awards are shares of HCS Common Stock that vest in
accordance with terms and conditions established by the Committee. The number
of shares of restricted stock granted to a participant (if any) will be
determined by the Committee, but during any fiscal year of HCS, no participant
may be granted more than 100,000 shares.

In determining whether an award of restricted stock should be made, and/or
the vesting schedule for an award, the Committee may impose whatever
conditions to vesting as it determines to be appropriate. For example, the
Committee may determine to grant restricted stock only if performance goals
established by the Committee are satisfied. Any performance goals may be
applied on a company-wide or an individual business unit basis, as determined
by the Committee. See discussion below of "--Performance Goals."

PERFORMANCE UNITS AND PERFORMANCE SHARES

Performance Units and Performance Shares are HCS Awards that will result in
a payment to a participant only if performance goals established by the
Committee are satisfied. The initial value of each Performance Unit and each
Performance Share shall not exceed the fair market value (on the date of
grant) of a share of HCS Common Stock. The applicable performance goals will
be determined by the Committee, and may be applied on a company-wide or an
individual business unit basis, as deemed appropriate in light of the
participant's specific responsibilities. See discussion below of "--
Performance Goals."

In addition to the performance requirements discussed above, Performance
Units and Performance Shares are subject to additional limits set forth in the
HCS Omnibus Stock Plan. During any fiscal year of HCS, no participant shall
receive more than 100,000 Performance Units or Performance Shares.

PERFORMANCE GOALS

The Committee in its discretion may make performance goals applicable to a
participant with respect to an HCS Award. At the Committee's discretion, one
or more of the following performance goals may apply: EBIT, EBITDA, earnings
per share, net income, operating cash flow, return on assets, return on
equity, return on sales, revenue and stockholder return. The Committee may
also use other performance goals.

EBIT means HCS's or a business unit's income before reductions for interest
and taxes. EBITDA means HCS's or a business unit's income before reductions
for interest, taxes, depreciation and amortization. Earnings per share means
HCS's or a business unit's net income, divided by a weighted average number of
common shares outstanding and dilutive common equivalent shares deemed
outstanding. Net income means HCS's or a business unit's income after taxes.
Operating cash flow means HCS's or a business unit's sum of net income plus
depreciation and amortization less capital expenditures plus certain specified
changes in working capital. Return on assets means the percentage equal to
HCS's or a business unit's EBIT (before incentive compensation), divided by
HCS's or a business unit's, as applicable, average net assets. Return on
equity means the percentage equal to HCS's net income, divided by average
stockholders' equity. Return on sales means the percentage equal

175
<PAGE>

to HCS's or a business unit's EBIT (before incentive compensation), divided by
HCS's or the business unit's, as applicable, revenue. Revenue means HCS's or a
business unit's sales. Stockholder return means the total return (change in
share price plus reinvestment of any dividends) of a share.

NONTRANSFERABILITY OF COMPANY AWARDS

HCS Awards granted under the HCS Omnibus Stock Plan may not be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than by will or by the applicable laws of descent and distribution.

TAX ASPECTS

Unless the participant elects to be taxed at the time of receipt of
restricted stock, Performance Units or Performance Shares, the participant
will not have taxable income upon the receipt of the HCS Award, but upon
vesting will recognize ordinary income equal to the fair market value of the
shares or cash at the time of vesting.

At the discretion of the Committee, the HCS Omnibus Stock Plan allows a
participant to satisfy tax withholding requirements under federal and state
tax laws in connection with the exercise or receipt of an HCS Award by
electing to have shares of common stock withheld, or by delivering to HCS
already-owned shares, having a value equal to the amount required to be
withheld.

HCS will be entitled to a tax deduction in connection with an HCS Award
under the HCS Omnibus Stock Plan only in an amount equal to the ordinary
income realized by the participant and at the time the participant recognizes
such income. In addition, Section 162(m) contains special rules regarding the
federal income tax deductibility of compensation paid to HCS's Chief Executive
Officer and to each of the other four most highly compensated executive
officers. The general rule is that annual compensation paid to any of these
specified executives will be deductible only to the extent that it does not
exceed $1,000,000. However, HCS can preserve the deductibility of certain
compensation in excess of $1,000,000 if it complies with conditions imposed by
Section 162(m), including the establishment of a maximum number of shares with
respect to which HCS Awards may be granted to any one employee during one
year, and if for HCS Awards other than options and SARs, the HCS Omnibus Stock
Plan sets forth performance goals which must be achieved prior to payment of
the HCS Awards. The HCS Omnibus Stock Plan has been designed to permit the
Committee to grant HCS Awards which satisfy the requirements of Section
162(m), thereby permitting HCS to continue to receive a federal income tax
deduction in connection with such HCS Awards.

AWARDS UNDER THE HCS OMNIBUS STOCK PLAN

Awards under the HCS Omnibus Stock Plan will be made at the discretion of
the Committee. The Committee has not yet considered the types and amounts of
awards that will be granted under the HCS Omnibus Stock Plan which will not be
effective until the Distribution. Accordingly, awards that will be made under
the HCS Omnibus Stock Plan are not yet determinable. The following table sets
forth information concerning stock-

176
<PAGE>

related awards made for fiscal year 1998 under the Company Omnibus Stock Plan
to individuals listed on HCS Table I and the groups comprised of individuals
who are expected to be executive officers, non-executive directors and non-
executive officer employees of HCS upon the Distribution. This information is
likely not indicative of awards that will be made under the HCS Omnibus Stock
Plan (except with respect to non-executive directors, where the table reflects
formula grants which would be made in fiscal year 1999 under the HCS Omnibus
Stock Plan).

New Plan Benefits

<TABLE>
<CAPTION>
COMPANY
NAME AND POSITION OMNIBUS STOCK PLAN
----------------- ------------------------------
NUMBER
OF SHARES
DOLLAR VALUE OF SUBJECT TO
RESTRICTED STOCK(1) OPTIONS(2)
------------------- ----------
<S> <C> <C>
Richard M. Levy.......... $ 0 36,000
President and Chief Ex-
ecutive Officer
Timothy E. Guertin....... 0 15,000
Corporate Vice President
John C. Ford............. 0 8,500
Corporate Vice President
Robert H. Kluge.......... 0 8,500
Corporate Vice President
Duane A. Walstrom........ 0 4,000
Corporate Controller
All Executive Officers as
a Group................. 32,230 78,000
All Non-Executive Direc-
tors as a Group......... 0 140,000
All Non-Executive Officer
Employees as a Group.... 26,858 190,900
</TABLE>
- --------
(1) Based on the closing price for the Company's Common Stock on the NYSE
Composite Tape on December 15, 1998.
(2) Options were granted at an exercise price of 100% of the market price of
the underlying shares of the Company's Common Stock on the date of grant,
become exercisable over three years at the rate of approximately one-third
each year and expire no later than ten years from the date of grant.

AMENDMENT AND TERMINATION OF THE HCS OMNIBUS STOCK PLAN

The HCS Board of Directors generally may amend or terminate the HCS Omnibus
Stock Plan at any time and for any reason.

177
<PAGE>

AMENDMENT AND RESTATEMENT OF THE COMPANY MANAGEMENT INCENTIVE PLAN

The Company Management Incentive Plan is expected to be amended and restated
by the Company Board effective as of the Distribution. The amendment and
restatement of the Company Management Incentive Plan (the "HCS Management
Incentive Plan") is subject to the approval of a majority of the shares of the
Company's Common Stock that are present in person or by proxy at the Meeting.
See "Distribution Proposals--Proposal Ten: Approval of the Amendment and
Restatement by the Company of the Company Management Incentive Plan."

BACKGROUND AND REASONS FOR AMENDMENT

Under Section 162(m) the federal income tax deductibility of compensation
paid to HCS's Chief Executive Officer and to each of its next four most highly
compensated executive officers may be limited to the extent that it exceeds $1
million in any one year. HCS can deduct compensation in excess of that amount
if it qualifies as "performance-based compensation" under Section 162(m). The
HCS Management Incentive Plan is intended to permit HCS to pay incentive
compensation that qualifies as performance-based compensation, thereby
permitting HCS to receive a federal income tax deduction for the payment of
such incentive compensation.

DESCRIPTION OF THE HCS MANAGEMENT INCENTIVE PLAN

The following paragraphs provide a summary of the principal features of the
HCS Management Incentive Plan (as amended and restated) and its operation. The
HCS Management Incentive Plan is set forth in its entirety as Annex H to this
Proxy Statement. The following summary is qualified in its entirety by
reference to Annex H.

PURPOSE OF THE HCS MANAGEMENT INCENTIVE PLAN

The HCS Management Incentive Plan is intended to motivate HCS's key
employees to increase stockholder value by (1) linking a portion of their cash
compensation to HCS's financial performance, (2) providing rewards for
improving HCS's financial performance and (3) helping to attract and retain
key employees.

ADMINISTRATION OF THE HCS MANAGEMENT INCENTIVE PLAN

The HCS Management Incentive Plan will be administered by the Compensation
Committee of the HCS Board of Directors (the "Committee"). The members of the
Committee must qualify as "outside directors" under Section 162(m) (for
purposes of qualifying the HCS Management Incentive Plan as performance-based
compensation under such section). Subject to the terms of the HCS Management
Incentive Plan, the Committee has the sole discretion to determine the key
employees who shall be granted awards, and the amounts, terms and conditions
of each award. The Committee may delegate its authority to grant and
administer awards to one or more officers or directors appointed by the
Committee, but only with respect to awards that are not intended to qualify as
performance-based compensation under Section 162(m).

ELIGIBILITY TO RECEIVE AWARDS

Eligibility for the HCS Management Incentive Plan is determined in the
discretion of the Committee. In selecting participants for the HCS Management
Incentive Plan, the Committee will choose key employees of HCS and its
affiliates who are likely to have a significant impact on HCS's performance.

AWARDS AND PERFORMANCE GOALS

Under the HCS Management Incentive Plan, the Committee will establish (1)
the performance goals which must be achieved in order for the participant to
actually be paid an award and (2) a formula or table for calculating a
participant's award, depending upon how actual performance compares to the
preestablished performance goals. A participant's award will increase or
decrease as actual performance increases or decreases.

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The Committee also will determine the periods for measuring actual performance
(the "performance period"). Performance periods may last as long as three
fiscal years of HCS.

The Committee may set performance periods and performance goals that differ
from participant to participant. For example, the Committee may choose
performance goals based on either company-wide or business unit results, as
deemed appropriate in light of the participant's specific responsibilities.
For purposes of qualifying awards as performance based compensation under
Section 162(m), the Committee will specify performance goals from the
following list: EBIT, EBITDA, earnings per share, net income, operating cash
flow, return on assets, return on equity, return on sales, revenue and
stockholder return.

For any performance period, no participant may receive an award of more than
the lesser of (1) 200% of the Participant's annualized salary rate on the last
day of the performance period or (2) $2 million. Also, the total of all awards
for any performance period cannot exceed 8% of HCS's EBIT before incentive
compensation for the most recent completed fiscal year of HCS. Awards that
exceed this overall limit will be pro-rated so that the total does not exceed
such limit.

DETERMINATION OF ACTUAL AWARDS

After the end of each performance period, a determination will be made as to
the extent to which the performance goals applicable to each participant were
achieved or exceeded. The actual award (if any) for each participant will be
determined by applying the formula to the level of actual performance that was
achieved. However, the Committee retains discretion to eliminate or reduce the
actual award payable to any participant below that which otherwise would be
payable under the applicable formula. Awards under the HCS Management
Incentive Plan generally will be payable in cash or HCS Common Stock within
120 days after the performance period during which the award was earned.

AWARDS UNDER THE HCS MANAGEMENT INCENTIVE PLAN

Awards under the HCS Management Incentive Plan will be made at the
discretion of the Committee. The Committee has not yet considered the types
and amounts of awards that will be granted under the HCS Management Incentive
Plan which will not be effective until the Distribution. Accordingly, awards
that will be made under the HCS Management Incentive Plan are not yet
determinable. The following table sets forth information concerning cash
awards made for fiscal year 1998 under the Company Management Incentive Plan
and the long-term incentive feature of the Company Omnibus Stock Plan,
respectively, to individuals listed on HCS Table I and the groups comprised of
individuals who are expected to be executive officers, non-executive directors
and non-executive officer employees of HCS upon the Distribution. This
information is likely not indicative of awards that will be made under the HCS
Management Incentive Plan.

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New Plan Benefits

<TABLE>
<CAPTION>
CASH AWARDS UNDER
COMPANY MANAGEMENT
INCENTIVE PLAN
AND COMPANY OMNIBUS
NAME AND POSITION STOCK PLAN
----------------- -------------------
<S> <C>
Richard M. Levy........................................... $337,999
President and Chief Executive Officer
Timothy E. Guertin........................................ 201,162
Corporate Vice President
John C. Ford.............................................. 85,996
Corporate Vice President
Robert H. Kluge........................................... 79,987
Corporate Vice President
Duane A. Walstrom......................................... 14,753
Corporate Controller
All Executive Officers as a Group......................... 746,241
All Non-Executive Directors as a Group(1)................. 0
All Non-Executive Officer Employees as a Group............ 690,058
</TABLE>
- --------
(1) Non-executive directors are not eligible to receive awards under the HCS
Management Incentive Plan.

AMENDMENT AND TERMINATION OF THE HCS MANAGEMENT INCENTIVE PLAN

The HCS Board of Directors may amend or terminate the HCS Management
Incentive Plan at any time and for any reason.

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OWNERSHIP OF HCS COMMON STOCK

After the Distribution, HCS Common Stock will remain outstanding. HCS Table
IV sets forth information as to the beneficial ownership of HCS Common Stock
as of the Distribution Date (and following the Distribution) as if the
Distribution took place on December 15, 1998, by (a) each expected officer
named in HCS Table I, (b) each expected director of HCS and (c) all expected
directors and executive officers of HCS as a group. For information as to
beneficial owners of 5% or more of the HCS Common Stock after the
Distribution, see "Stock Ownership--Principal Stockholders."

HCS TABLE IV

<TABLE>
<CAPTION>
SHARES OF HCS PERCENT OF
COMMON STOCK OUTSTANDING
EXPECTED TO BE SHARES EXPECTED
BENEFICIALLY TO BE BENEFICIALLY
NAME OWNED(1)(2) OWNED(1)
---- -------------- ------------------
<S> <C> <C>
John Seely Brown............................. 200 *
Samuel Hellman............................... 16,400(3) *
Terry R. Lautenbach.......................... 15,200(4) *
David W. Martin, Jr.......................... 9,000(5) *
Burton Richter............................... 18,600(6) *
Richard W. Vieser............................ 19,600(7) *
Richard M. Levy.............................. 145,655(8) *
Timothy E. Guertin........................... 38,800(9) *
John C. Ford................................. 47,516(10) *
Robert H. Kluge.............................. 34,233(11) *
Duane A. Walstrom............................ 11,118(12) *
All expected Directors and Executive Officers
of HCS as a Group (12 persons).............. 370,460(13) 1.2

</TABLE>
- --------
*The percentage of shares of HCS Common Stock expected to be beneficially
owned does not exceed one percent of the shares of HCS Common Stock
expected to be outstanding.

(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares of HCS Common Stock which such person
has the right to acquire within 60 days following December 15, 1998. For
purposes of computing the percentage of outstanding shares of HCS Common
Stock held by each person or group of persons named above, any security
which such person or persons has or have the right to acquire within 60
days following December 15, 1998 is deemed to be outstanding, but is not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person. Fractional shares are rounded down to the
nearest whole share.

(2) To the Company's knowledge, unless otherwise indicated, the person named
in the table has sole voting and investment power with respect to the
shares or shares such voting and investment power with such person's
spouse or children.

(3) Includes (a) 10,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan and (b) 2,500
shares held by Dr. Hellman's wife.

(4) Includes 10,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan.

(5) Includes 8,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan.

(6) Includes (a) 14,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan and (b) 3,800
shares held in a trust of which Dr. Richter is co-trustee with his wife.

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(7) Includes 14,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan.

(8) Includes (a) 4,200 shares of restricted stock granted pursuant to the
Company Omnibus Stock Plan (b) 132,000 shares which may be acquired on or
within 60 days of December 15, 1998 under stock options granted pursuant
to the 1982 Non-Qualified Stock Option Plan and the Company Omnibus Stock
Plan and (c) 5,105 shares held in a trust of which Dr. Levy is co-trustee
with his wife.

(9) Includes (a) 2,400 shares of restricted stock granted pursuant to the
Company Omnibus Stock Plan and (b) 34,000 shares which may be acquired on
or within 60 days of December 15, 1998 under stock options granted
pursuant to the Company Omnibus Stock Plan.

(10) Includes 41,166 shares which may be acquired on or within 60 days of
December 15, 1998 under stock options granted pursuant to the Company
Omnibus Stock Plan.

(11) Includes (a) 900 shares of restricted stock granted pursuant to the
Company Omnibus Stock Plan and (b) 28,833 shares which may be acquired on
or within 60 days of December 15, 1998 under stock options granted
pursuant to the Company Omnibus Stock Plan.

(12) Includes 10,999 shares which may be acquired on or within 60 days of
December 15, 1998 by executive officers and directors under stock options
granted pursuant to the Company Omnibus Stock Plan.

(13) Includes (a) 8,600 shares of restricted stock granted to executive
officers pursuant to the Company Omnibus Stock Plan (b) 313,764 shares
which may be acquired on or within 60 days of December 15, 1998 by
executive officers and directors under stock options granted pursuant to
the 1982 Non-Qualified Stock Option Plan and the Company Omnibus Stock
Plan, (c) 11,405 shares as to which voting and/or investment power is
shared (see certain of the foregoing footnotes) and (d) 1,100 shares of
restricted stock granted to Elisha W. Finney (expected to be an executive
officer of HCS) pursuant to the Company Omnibus Stock Plan and 10,766
shares which may be acquired by Ms. Finney on or within 60 days of
December 15, 1998 under stock options granted pursuant to the Company
Omnibus Stock Plan.

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FINANCING

On an historical basis, the Company incurred or managed indebtedness at the
parent level, and IB, SEB and HCS were not allocated any of the Company's debt
as the Company used a centralized approach to cash management and the
financing of its operations. The amount of debt to be retained by HCS and
assumed by or transferred to IB and SEB and the determination of the initial
capital structures of IB, SEB and HCS as of the Distribution Date are based
upon the goals of maximizing combined stockholder value for the Company's
present stockholders while enabling SEB to maintain sufficient cash flow to
cover anticipated operating deficits caused by the current downturn in the
semiconductor equipment market.

The Company is required to renegotiate the terms of its outstanding
unsecured term loans (the "Term Loans") to permit 50% of the outstanding
indebtedness under the Term Loans to be assumed by IB in connection with the
Distribution. 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 of the borrower. In addition,
certain short-term notes payable of the Company and its subsidiaries (the
"Notes Payable") will, as a result of the Internal Transfers and debt
allocation provisions of the Distribution Agreement, remain outstanding as
direct and indirect obligations of HCS (and IB or SEB, if required) as of the
Distribution Date.

Based on the outstanding indebtedness of the Company under the Term Loans
and Notes Payable as of October 2, 1998 and the Company's projected operating
results, certain other transactions and scheduled debt repayments through the
Distribution Date, it is anticipated that at the Distribution Date, each of
HCS and IB will have between $50 million and $100 million of outstanding
indebtedness under the Term Loans and Notes Payable. In connection with the
Distribution, the Company will contribute cash to SEB so that at the time of
the Distribution, SEB will have approximately $100 million in cash and cash
equivalents and its Consolidated Debt, expected to be comprised of Notes
Payable, will not exceed $5 million. It is anticipated that in connection with
the Distribution, IB will be entitled to a cash contribution from the Company
so that as of the time of the Distribution, IB will have Net Debt equal to
approximately 50% of the aggregate Net Debt of IB and HCS, subject to such
adjustments as may be necessary to provide HCS with a Net Worth of between 40%
and 50% of the aggregate Net Worths of IB and HCS. Based on the assumptions
stated therein, the allocation of indebtedness at the Distribution Date should
approximate the amounts reflected in "The Instruments Business Forecasted
Capitalization," "The Semiconductor Equipment Business Forecasted
Capitalization" and "HCS Forecasted Capitalization." Management of the Company
believes that there is sufficient financing capability in respect of IB and
HCS to accomplish the contemplated allocation of indebtedness. See "HCS
Forecasted Capitalization" and "The Instruments Business Forecasted
Capitalization."

In connection with the Distribution, the Company intends to sell its long-
term leasehold interest in certain of its Palo Alto facilities, together with
the related buildings and other corporate assets, from which it expects to
receive proceeds of $55 million in the aggregate. In addition, the Company
will be required to pay the net expenses associated with the Internal
Transfers and Distribution, estimated at approximately $50 million. IB is
entitled to receive approximately 50% of the estimated proceeds, if any, to be
received by HCS after the Distribution from the sales of these facilities and
assets and is required to pay approximately 50% of any estimated transaction
expenses to be paid by HCS after the Distribution (in each case reduced for
estimated taxes payable or tax benefits received from all sales and
transaction expenses).

The Company, IB and SEB may enter into separate credit facilities for
working capital and other general corporate purposes. The credit facilities
may contain certain customary financial and operating covenants, including
restrictions upon incurring indebtedness and liens, making certain fundamental
changes, selling assets and paying dividends. The Company may borrow amounts
under its credit facility on or prior to the Distribution in order to fund a
portion of the cash contribution to be made to SEB (and IB, if required), to
pay transaction expenses or for general corporate purposes. It is not expected
that IB or SEB will have any outstanding borrowings under their separate
credit facilities as of the Distribution.

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DESCRIPTION OF THE CAPITAL STOCK

GENERAL

After the Distribution, HCS's authorized capital stock will be the same as
the Company's authorized capital stock prior to the Distribution. Pursuant to
its Restated Certificate of Incorporation, the Company's authorized capital
stock currently consists of (i) 99,000,000 shares of HCS Common Stock and (ii)
1,000,000 shares of preferred stock, par value $1 per share ("HCS Preferred
Stock"). As of December 15, 1998, approximately 29,909,061 million shares of
HCS Common Stock were issued and outstanding. All outstanding shares of HCS
Common Stock are fully paid and nonassessable. No shares of HCS Preferred
Stock are issued and outstanding. If the Distribution Proposals are approved
and the Distribution is consummated, the Restated Certificate of Incorporation
will be amended to change the name of the Company and change certain corporate
governance provisions. See "The Distribution Proposals--Proposal Two: Approval
of Amendment to the Certificate of Incorporation of the Company to Change the
Name of the Company," "--Proposal Three: Approval of Amendment to the
Certificate of Incorporation of the Company to Specify That the Number of
Directors Shall be Fixed by Resolution of the Board of Directors" and "--
Proposal Four: Approval of Amendment to Certificate of Incorporation of the
Company to Change Certain Corporate Governance Provisions."

Pursuant to IB's Certificate of Incorporation which will be in effect at the
time of the Distribution, the authorized capital stock of IB will consist of
(i) 99,000,000 shares of IB Common Stock of which approximately 29,909,061
million shares will be issued and outstanding upon consummation of the
Distribution (based on the number of shares of the Company's Common Stock
outstanding as of December 15, 1998) and (ii) 1,000,000 shares of preferred
stock, $.01 par value per share ("IB Preferred Stock"), none of which will be
issued and outstanding upon consummation of the Distribution.

Pursuant to SEB's Certificate of Incorporation which will be in effect at
the time of the Distribution, SEB's authorized capital stock will consist of
(i) 150,000,000 shares of SEB Common Stock of which approximately 29,909,061
million shares will be issued and outstanding upon the consummation of the
Distribution (based on the number of shares of the Company's Common Stock
outstanding as of December 15, 1998) and (ii) 5,000,000 shares of preferred
stock, $.01 par value per share (the "SEB Preferred Stock"), none of which
will be issued and outstanding upon consummation of the Distribution.

All outstanding shares of IB Common Stock and SEB Common Stock are, and the
shares to be issued in the Distribution will be, validly issued, fully paid
and nonassessable.

COMMON STOCK

HCS. Each holder of HCS Common Stock is entitled to one vote for each share
owned of record on all matters submitted to a vote of stockholders, and,
assuming Proposal Four is approved, cumulative voting will not apply with
respect to the election of directors. Subject to the preferential rights of
any outstanding series of HCS Preferred Stock and to the restrictions on
payment of dividends imposed by the Term Loans and any credit facilities that
may be entered into by HCS, the holders of HCS Common Stock will be entitled
to such dividends as may be declared from time to time by the HCS Board from
funds legally available therefor, and will be entitled, after payment of all
prior claims, to receive pro rata all assets of HCS upon the liquidation,
dissolution or winding up of HCS. Holders of HCS Common Stock have no
redemption, conversion rights or preemptive rights to purchase or subscribe
for securities of HCS.

The Company's Common Stock is currently listed on the NYSE under the symbol
"VAR." The HCS Common Stock is expected to continue to be listed on the NYSE
under the symbol "VAR" following the Distribution. The trading price of the
HCS Common Stock will be substantially affected by the Distribution.

IB. Each holder of IB Common Stock is entitled to one vote for each share
owned of record on all matters submitted to a vote of stockholders. There are
no cumulative voting rights. Accordingly, the holders of a majority of the
shares voting for the election of directors can elect all the directors if
they choose to do so, subject to any

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<PAGE>

voting rights of holders of IB Preferred Stock to elect directors. Subject to
the preferential rights of any outstanding series of IB Preferred Stock, and
to the restrictions on payment of dividends imposed by the Term Loans and any
credit facilities that may be entered into by IB, the holders of IB Common
Stock will be entitled to such dividends as may be declared from time to time
by the IB Board from funds legally available therefor, and will be entitled,
after payment of all prior claims, to receive pro rata all assets of IB upon
the liquidation, dissolution or winding up of IB. Holders of IB Common Stock
have no redemption or conversion rights or preemptive rights to purchase or
subscribe for securities of IB. Certain provisions of the Certificate of
Incorporation and By-Laws of IB that will be in effect at the time of the
Distribution may have the effect of making more difficult an acquisition of
control of IB in a transaction not approved by the IB Board. See "Delaware Law
and Certain Charter and By-Law Provisions."

IB intends to apply for quotation of the IB Common Stock on the Nasdaq
National Market under the symbol "VARI."

SEB. Each holder of SEB Common Stock is entitled to one vote for each share
owned of record on all matters submitted to a vote of stockholders. There are
no cumulative voting rights. Accordingly, the holders of a majority of the
shares voting for the election of directors can elect all the directors if
they choose to do so, subject to any voting rights of holders of SEB Preferred
Stock to elect directors. Subject to the preferential rights of any
outstanding series of SEB Preferred Stock, and to any restrictions on payment
of dividends imposed by any credit facilities that may be entered into by SEB,
the holders of SEB Common Stock will be entitled to such dividends as may be
declared from time to time by the SEB Board from funds legally available
therefor, and will be entitled, after payment of all prior claims, to receive
pro rata all assets of SEB upon the liquidation, dissolution or winding up of
SEB. Holders of SEB Common Stock have no redemption or conversion rights or
preemptive rights to purchase or subscribe for securities of SEB. Certain
provisions of the Certificate of Incorporation and By-Laws of SEB that will be
in effect at the time of the Distribution may have the effect of making more
difficult an acquisition of control of SEB in a transaction not approved by
the SEB Board. See "Delaware Law and Certain Charter and By-Law Provisions."

SEB intends to apply for quotation of the SEB Common Stock on the Nasdaq
National Market under the symbol "VSEA."

PREFERRED STOCK

The authorized capital stock of each of HCS, IB and SEB includes shares of
Preferred Stock, none of which are currently issued or outstanding. The Board
of Directors of each company is authorized to divide that company's Preferred
Stock into series and, with respect to each series, to determine the
preferences and rights and the qualifications, limitations or restrictions
thereof, including the dividend rights, conversion rights, voting rights,
redemption rights and terms, liquidation preferences, sinking fund provisions,
the number of shares constituting the series and the designation of such
series. The Board of Directors of each company could, without stockholder
approval, issue that company's Preferred Stock with voting and other rights
that could adversely affect the voting power of the holders of that company's
Common Stock and which could have certain anti-takeover effects.

In connection with the HCS Rights Plan (as defined), the Board of Directors
of the Company has authorized 50,000 shares of Participating Preferred Stock
(the "HCS Participating Preferred"). If, as anticipated, the IB Board and the
SEB Board adopt rights plans, such Boards will authorize shares of
Participating Preferred (the "IB Participating Preferred" and the "SEB
Participating Preferred," respectively). For a description of the rights,
powers and preferences of the Participating Preferred for each of HCS, IB and
SEB, see "--Rights Plans."

RIGHTS PLANS

HCS. The Company has entered into a Rights Agreement (the "HCS Rights Plan")
with First Chicago Trust Company of New York, as Rights Agent. Under the HCS
Rights Plan, the HCS Board has declared and

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<PAGE>

distributed a dividend of one right (collectively, the "HCS Rights") for each
outstanding share of HCS Common Stock. Each HCS Right entitles a registered
holder to purchase one one-thousandth of a share of HCS Participating
Preferred at a purchase price of $180 per one one-thousandth of a share of HCS
Participating Preferred, subject to adjustment. The HCS Rights will expire no
later than on the tenth anniversary of the record date of the HCS Rights Plan,
December 4, 2008. The HCS Rights will be exercisable on the earlier to occur
of (i) the first date of public announcement (or such earlier or later date as
the HCS Board may determine) that a person or "group" has acquired beneficial
ownership of 15% or more of the outstanding HCS Common Stock (an "Acquiring
Person") and (ii) ten business days (or such later date as the HCS Board may
determine) following the commencement of a tender or exchange offer the
consummation of which would result in a person or group becoming an Acquiring
Person.

If any person or group becomes an Acquiring Person or commences a tender
offer upon consummation of which such person or group would become an
Acquiring Person, each HCS Right not owned by such Acquiring Person or certain
related parties would entitle its holder to purchase, at the HCS Right's then
current exercise price, shares of HCS Common Stock, or, in the discretion of
the HCS Board, shares of HCS Participating Preferred having a value equal to
twice the HCS Right's exercise price. The effect would be to significantly
dilute the equity interest of the HCS Acquiring Person. In addition, if, after
a person or group becomes an Acquiring Person, HCS is involved in a merger or
other business combination transaction in which (i) the holders of all of the
outstanding HCS Common Stock immediately prior to the consummation of the
transaction are not the holders of the surviving corporation's voting power or
(ii) more than 50% of HCS's assets or earning power is sold or transferred,
each HCS Right will entitle its holder to purchase, at the HCS Right's then
current exercise price, common shares of the acquiring company having a value
equal to twice the HCS Right's then current exercise price.

The purchase price payable, and the shares issuable, upon exercise of the
HCS Rights Plan are subject to adjustment from time to time as specified in
the HCS Rights Plan. HCS is generally entitled to redeem the HCS Rights in
whole, but not in part, at $0.001 per HCS Right at any time prior to the
earlier to occur of (i) a person becoming an Acquiring Person or (ii)
expiration of the HCS Rights.

Shares of HCS Participating Preferred purchasable upon exercise of the HCS
Rights will not be redeemable and will be designed so that each one one-
thousandth of a share has economic and voting terms similar to one share of
HCS Common Stock. Each share of HCS Participating Preferred will be entitled
to a minimum preferential quarterly dividend payment of $2.50 per share but,
if greater, will be entitled to an aggregate dividend per share of 1,000 times
the dividend declared per share of HCS Common Stock. In the event of
liquidation of HCS, the holders of HCS Participating Preferred will be
entitled to a minimum preferential liquidation payment of $100.00, provided
that they will be entitled to an aggregate payment per share of at least 1,000
times the aggregate payment made per HCS Common Stock. Each share of HCS
Participating Preferred will have one thousand votes, voting together with the
HCS Common Stock. These rights are protected by customary anti-dilution
provisions.

IB and SEB. It is anticipated that the IB Board and the SEB Board will adopt
the IB Rights Plan and SEB Rights Plan, respectively, pursuant to which, one
right (an "IB Right" and an "SEB Right," respectively) to purchase one one-
thousandth of a share of IB Participating Preferred and SEB Participating
Preferred, respectively, at a purchase price (substantially above the expected
current trading value for each company) to be determined, subject to
adjustment, would be distributed with the IB Common Stock and SEB Common
Stock, respectively, in the Distribution. The rights will be issuable on the
terms and subject to the conditions set forth in the IB Rights Plan and SEB
Rights Plan, respectively. The IB Rights and SEB Rights will expire no later
than on the tenth anniversary of the record dates for the respective dividends
in 2009. The IB Rights and SEB Rights will be exercisable on the earlier to
occur of (i) the first date of public announcement (or such earlier or later
date as the applicable Board may determine) that a person or "group" has
acquired beneficial ownership of 15% or more of the outstanding IB Common
Stock or SEB Common Stock, as applicable (an "IB Acquiring Person" and an "SEB
Acquiring Person," respectively) and (ii) ten business days (or such later
date as the applicable

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Board may determine) following the commencement of a tender or exchange offer
the consummation of which would result in a person or group becoming an IB
Acquiring Person or an SEB Acquiring Person, as applicable.

If any person or group becomes an IB Acquiring Person or a SEB Acquiring
Person or commences a tender or exchange offer upon consummation of which such
person or group would become an IB Acquiring Person or an SEB Acquiring
Person, each IB Right or SEB Right, as applicable, not owned by such IB or SEB
Acquiring Person or certain related parties would entitle its holder to
purchase, at the IB or SEB Right's, as applicable, then current exercise
price, shares of IB Common Stock or SEB Common Stock, as applicable, or, in
the discretion of the applicable Board, shares of IB or SEB Participating
Preferred, respectively, having a value equal to twice the IB or SEB Right's,
as applicable, then current exercise price. The effect would be to
significantly dilute the equity interest of the IB or SEB Acquiring Person, as
applicable. In addition, if, after a person or group becomes an IB or SEB
Acquiring Person, IB or SEB, as applicable, is involved in a merger or other
business combination transaction in which (i) the holders of all of the
outstanding IB Common Stock or SEB Common Stock, as applicable, immediately
prior to the consummation of the transaction are not the holders of the
surviving corporation's voting power or (ii) more than 50% of IB's or SEB's,
as applicable, assets or earning power is sold or transferred, each IB Right
or SEB Right, as applicable, will entitle its holder to purchase, at the IB or
SEB Right's, as applicable, then current exercise price, common shares of the
acquiring company having a value equal to twice the IB or SEB Right's, as
applicable, then current exercise price.

The purchase price payable, and the shares issuable, upon exercise of the IB
Rights or SEB Rights, as applicable, will be subject to adjustment from time
to time as specified in the applicable Rights Plan. SEB will generally be
entitled to redeem the SEB Rights in whole, but not in part, at $0.001 per SEB
Right at any time prior to the earlier to occur of (i) a person becoming an
SEB Acquiring Person or (ii) expiration of the SEB Rights. IB will generally
be entitled to redeem the IB Rights in whole, but not in part, at $0.001 per
IB Right at any time prior to the earlier to occur of (i) a person becoming an
IB Acquiring Person or (ii) expiration of the IB Rights.

Shares of IB Participating Preferred and SEB Participating Preferred
purchasable upon exercise of the IB Rights and SEB Rights, respectively, will
not be redeemable and will be designed so that each one one-thousandth of a
share has economic and voting terms similar to one share of IB Common Stock or
SEB Common Stock, as applicable. Each share of IB Participating Preferred and
SEB Participating Preferred will be entitled to a minimum preferential
quarterly dividend payment of $2.50 per share but, if greater, will be
entitled to an aggregate dividend per share of 1,000 times the dividend
declared per share of IB or SEB Common Stock, as applicable. In the event of
liquidation of IB or SEB, the holders of IB Participating Preferred and SEB
Participating Preferred, as applicable, will be entitled to a minimum
preferential liquidation payment of $100.00, provided that they will be
entitled to an aggregate payment per share of at least 1,000 times the
aggregate payment made per share of IB Common Stock or SEB Common Stock, as
applicable. Each share of IB Participating Preferred and SEB Participating
Preferred will have one thousand votes, voting together with the IB Common
Stock or SEB Common Stock, as applicable. These rights are protected by
customary anti-dilution provisions.

TRANSFER AGENT AND RIGHTS AGENT

The transfer agent for the HCS Common Stock, the IB Common Stock and the SEB
Common Stock and the Rights Agent under the HCS Rights Plan is First Chicago
Trust Company of New York. It is expected that First Chicago Trust Company of
New York will also be the Rights Agent under the IB Rights Plan and SEB Rights
Plan.

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PRICE RANGE OF THE COMPANY'S COMMON STOCK AND DIVIDENDS

The Company's Common Stock is listed on the NYSE and PE and is traded under
the symbol "VAR." The following table sets forth, for the fiscal periods
indicated, the high and low sales prices per share of the Company's Common
Stock as reported on the NYSE Composite Tape. The table also sets forth the
cash dividends paid per share of the Company's Common Stock in the period
actually paid. None of HCS, IB or SEB anticipates paying dividends on its
Common Stock in the future.

The Board of Directors anticipates that, if the stockholders approve the
Distribution at the Meeting, the Company will not declare or pay any further
cash dividends on the Company's Common Stock thereafter.

On August 20, 1998, the last trading day before the Company announced that
the Board of Directors had approved the Distribution subject to certain
conditions, the high and low sales prices for the Company's Common Stock on
the NYSE Composite Tape were $36 3/8 and $35 1/2, respectively. On January 13,
1999, the last trading day for which quotations were available prior to the
date of this Proxy Statement, the closing price for the Company's Common Stock
on the NYSE Composite Tape was $38 5/16. Stockholders are urged to obtain
current trading price information. On December 15, 1998, there were
approximately 5,992 holders of the Company's Common Stock.

For a discussion of the impact of the Distribution on the trading price of
HCS Common Stock, see "The Distribution Proposals--Proposal One: The
Distribution--Listing and Trading of HCS Common Stock." There has not been any
established public trading market for IB Common Stock or SEB Common Stock. For
a discussion of certain matters in respect thereof, see "The Distribution
Proposals--Proposal One: The Distribution--Listing and Trading of IB Common
Stock and SEB Common Stock."

<TABLE>
<CAPTION>
DIVIDENDS
DECLARED
HIGH LOW PER SHARE
---- ---- ---------
<S> <C> <C> <C>
1996
First Quarter................................. $53 7/8 $42 1/2 $0.07
Second Quarter................................ 52 5/8 43 1/4 0.08
Third Quarter................................. 62 7/8 49 1/4 0.08
Fourth Quarter................................ 52 7/8 40 1/2 0.08
1997
First Quarter................................. $51 7/8 $44 1/8 $0.08
Second Quarter................................ 59 1/2 49 0.09
Third Quarter................................. 56 1/2 47 1/8 0.09
Fourth Quarter................................ 62 1/8 52 5/8 0.09
1998
First Quarter................................. $66 3/4 $47 3/4 $0.09
Second Quarter................................ 58 3/8 47 1/2 0.10
Third Quarter................................. 53 15/16 38 3/16 0.10
Fourth Quarter................................ 43 31 13/16 0.10
1999
First Quarter................................. $41 1/8 $31 5/8 $0.10
Second Quarter (through January 13, 1999)..... 41 3/8 37 --
</TABLE>

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LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Certificate of Incorporation of each of HCS, IB and SEB that will be in
effect at the time of the Distribution will provide that a director will not
be personally liable to the company or its stockholders for monetary damages
for any breach of fiduciary duty as a director, except in certain cases where
liability is mandated by the DGCL. The Certificate of Incorporation and/or By-
Laws of each of HCS, IB and SEB that will be in effect as of the Distribution
also provide for indemnification, to the fullest extent permitted by law, of
any person who is or was involved in any manner in any pending, threatened or
completed investigation, claim or other proceeding by reason of the fact that
such person is or was a director or officer of HCS, SEB or IB, as the case may
be, or, at the request of such company, is or was serving as a director or
officer of another entity, against all expenses, liabilities, losses and
claims incurred or suffered by such person in connection with the
investigation, claim or other proceeding. Each of HCS, IB and SEB has entered
into, or intends to enter into, agreements to provide indemnification for
directors and certain officers in addition to the indemnification provided for
in their respective Certificates of Incorporation and By-Laws. These
agreements, among other things, will indemnify directors and certain officers
to the fullest extent permitted by law for certain expenses (including
attorneys' fees) and all losses, claims, liabilities, judgments, fines and
settlement amounts incurred by such person arising out of or in connection
with such person's service as a director or officer of the company or another
entity for which such person was serving as an officer or director at the
request of HCS, IB or SEB, as the case may be. Other than as described herein,
there is no pending litigation or proceeding involving a director, officer,
employee or other agent of IB, SEB or HCS or any other entity as to which
indemnification is being sought under these provisions from IB, SEB or HCS,
and none of IB, SEB or HCS is aware of any pending or threatened litigation
that may result in claims for indemnification under these provisions by a
director, officer, employee or other agent.

DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS

DELAWARE LAW

Each of HCS, SEB and IB is subject to the provisions of Section 203 of the
DGCL ("Section 203"). In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes a merger, asset sale or other transaction resulting in a
financial benefit to the interested stockholder. An "interested stockholder"
is a person who, together with affiliates and associates, owns (or, in certain
cases, within three years prior, did own) 15% or more of the corporation's
voting stock. Under Section 203, a business combination between the
corporation and an interested stockholder is prohibited unless it satisfies
one of the following conditions: (i) the board of directors must have
previously approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder; or (ii) on
consummation of the transaction that resulted in the stockholders becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation, outstanding at the time the transaction
commenced (excluding, for purposes of determining the number of shares
outstanding, shares owned by (a) persons who are directors and also officers
and (b) employee stock plans, in certain instances); or (iii) the business
combination is approved by the board of directors and authorized at an annual
or special meeting of the stockholders by the affirmative vote of at least 66
2/3% of the outstanding voting stock which is not owned by the interested
stockholder.

CERTAIN CHARTER AND BY-LAW PROVISIONS

The Company Charter, including the proposed amendments to the Company
Charter set forth in Proposal Three and Proposal Four, if approved (the "HCS
Charter"), and the Certificate of Incorporation of SEB (the "SEB Charter") and
the Certificate of Incorporation of IB (the "IB Charter") will contain
provisions that will make more difficult the acquisition of control of HCS, IB
or SEB, respectively, by means of a tender offer, open

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<PAGE>

market purchases, a proxy fight or otherwise that are not approved by their
respective boards. The IB, HCS and SEB By-Laws will also contain provisions
that could have an anti-takeover effect.

The purposes of such provisions of the IB, HCS and SEB Charters and By-Laws
are to discourage certain types of transactions, described below, which may
involve an actual or threatened change of control of IB, HCS or SEB and to
encourage persons seeking to acquire control of IB, HCS or SEB to negotiate
the terms of any proposed business combination or offer with their respective
boards. The provisions are designed to reduce the vulnerability of IB, HCS or
SEB to an unsolicited proposal for a takeover that does not contemplate the
acquisition of all outstanding shares or is otherwise unfair to stockholders
of IB, HCS or SEB, or an unsolicited proposal for the restructuring or sale of
all or part of IB, HCS or SEB. The Company believes that, as a general rule,
such proposals would not be in the best interests of IB, HCS, SEB or the
stockholders of each. These provisions will help ensure that the IB, HCS or
SEB Board, if confronted by a surprise proposal from a third party which has
acquired a block of stock, will have sufficient time to review the proposal
and appropriate alternatives to the proposal and to act in what it believes to
be the best interests of the stockholders.

There has been a marked increase in hostile takeover activity during the
last several years. The Company believes that the provisions discussed herein
may provide some measure of protection for stockholders against certain
potentially coercive takeover tactics. Such takeover tactics include the
accumulation of substantial stock positions in public companies by third
parties as a prelude to proposing a takeover, a restructuring or sale of all
or part of the company or another similar extraordinary corporate action. Such
actions are often undertaken by a third party without advance notice to, or
consultation with, the management or board of directors of a company. In many
cases, the purchaser seeks representation on a company's board of directors in
order to increase the likelihood that its proposal will be implemented by a
company. If a company resists the efforts of the purchaser to obtain
representation on the company's board, a purchaser may commence a proxy
contest to have its nominees elected to the board of directors in place of
certain directors or in place of the entire board of directors. In some cases,
a purchaser may not truly be interested in taking over a company, but may use
the threat of a proxy fight and/or a bid to take over a company as a means of
forcing the company to repurchase its equity position at a substantial premium
over market price.

The Company believes that the threat of imminent removal of the IB, HCS or
SEB management or board of directors in such situations would severely curtail
the ability of management or the board of directors to negotiate effectively
with such purchasers. Management or the board of directors would be deprived
of the time and information necessary to evaluate the takeover proposal, to
study alternative proposals and to help ensure that the best price is obtained
in any transaction involving IB, HCS or SEB that may ultimately be undertaken.
If the real purpose of a takeover bid were to force IB, HCS or SEB to
repurchase an accumulated stock interest at a premium price, management or the
board of directors would face the risk that, if it did not repurchase the
purchaser's stock interest, IB's, HCS's or SEB's business and management would
be disrupted, perhaps irreparably.

These provisions, individually and collectively, may impede or discourage a
merger, tender offer or proxy fight, even if such transaction or occurrence
may be favorable to the interests of the stockholders, and may delay or
frustrate the assumption of control by a holder of a large block of IB, HCS or
SEB Common Stock and the removal of incumbent management, even if such removal
might be beneficial to stockholders. Furthermore, these provisions may deter
or could be used to frustrate a future takeover attempt which is not approved
by the incumbent board of directors, but which the holders of a majority of
the shares may deem to be in their best interests or in which stockholders may
receive a substantial premium for their stock over prevailing market prices of
such stock. By discouraging takeover attempts these provisions might have the
incidental effect of inhibiting certain changes in management (some or all of
the members of which might be replaced in the course of a change of control)
and also the temporary fluctuations in the market price of the stock which
often result from actual and rumored takeover attempts.

Set forth below is a description of such provisions in the Charter and By-
Laws for each of HCS, IB and SEB. Such description is intended as a summary
only and is qualified in its entirety by reference to the proposed

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<PAGE>

amendment to the Company Charter set forth in Proposal Three and the Charter
Amendments set forth herein under "The Distribution Proposals--Proposal Four:
Approval of Amendment to the Certificate of Incorporation of the Company to
Change Certain Corporate Governance Provisions," and the Company Charter and
Company By-Laws, which are exhibits to the Company's Annual Report on Form 10-
K for the year ended October 2, 1998, and the IB and SEB Charters and By-Laws,
which will be filed as exhibits to the Registration Statements. Capitalized
terms used and not defined herein are defined in the HCS Charter or By-Laws
and IB or SEB Charters or By-Laws, as the case may be.

Classified Boards of Directors

The Company Charter provides, and the IB and SEB Charters will provide, for
their respective boards of directors to be divided into three classes serving
staggered terms. The classification of directors will have the effect of
making it more difficult for stockholders to change the composition of the
board of directors in a relatively short period of time. At least two annual
meetings of stockholders, instead of one, will generally be required to effect
a change in a majority of the board of directors. Such a delay may help ensure
that the board of directors, if confronted by a stockholder's attempt to force
a stock repurchase at a premium above market price, a proxy contest or an
extraordinary corporate transaction, will have sufficient time to review the
proposal and appropriate alternatives to the proposal and to act in what they
believe are the best interests of the stockholders. The Company also believes
that a classified board of directors will help to assure the continuity and
stability of the IB, SEB and HCS Boards and the business strategies and
policies of IB, SEB and HCS as determined by their respective boards of
directors, because generally a majority of the directors at any given time
will have had prior experience as directors of IB, SEB or HCS, as the case may
be.

The classified board provision could have the effect of discouraging a third
party from making a tender offer or otherwise attempting to obtain control of
IB, SEB or HCS, as the case may be, even though such an attempt might be
beneficial to the company and its stockholders. The classified board provision
could thus increase the likelihood that incumbent directors will retain their
positions.

Number of Directors; Removal; Filling Vacancies

The Company Charter currently provides that the number of directors
constituting the whole Company Board is fixed at 15. The proposed amendment to
the Company Charter set forth in Proposal Three provides, and the IB and SEB
Charters will provide, that the specific number of directors (which must be at
least three) shall be fixed by resolution of the board of directors. In
addition, the Charter Amendments provide and the IB and SEB Charters will
provide that, subject to any rights of the holders of preferred stock, only a
majority of the board of directors then in office shall have the authority to
fill any vacancies on the board of directors. Accordingly, the existing board
members could prevent any stockholder from obtaining majority representation
on the respective boards of directors by enlarging such board of directors and
filling the new directorships with its own nominees.

Moreover, the Charter Amendments provide, and the IB and SEB Charters will
provide, that directors may be removed only for cause by the affirmative vote
of holders of at least a majority of the voting power of all of the then-
outstanding shares of HCS, IB or SEB Common Stock, as the case may be. This
provision, when coupled with the provisions of the Charter Amendments and the
IB and SEB Charters authorizing only their respective boards of directors to
fill vacant directorships, would preclude stockholders from removing incumbent
directors without cause and filling the vacancies created by such removal with
their own nominees. These provisions reflect existing Delaware law absent a
contrary provision in a company's charter.

Limitations on Stockholder Action by Written Consent; Special Meetings

Under the DGCL, unless otherwise provided in the certificate of
incorporation, any action required or permitted to be taken by the
stockholders of a Delaware corporation may be taken without a meeting, without
prior notice and without a stockholder vote if a written consent setting forth
the action to be taken is signed by

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<PAGE>

the holders of outstanding stock having the requisite number of shares that
would be necessary to authorize such action at a meeting at which all shares
entitled to vote thereon were present and voted. The Company Charter does not
currently preclude stockholder action by written consent. The Charter
Amendments provide and the IB and SEB Charters will provide that stockholder
action can be taken only at an annual or special meeting of stockholders, and
prohibit stockholder action by written consent in lieu of a meeting. If the
Charter Amendments are approved, conforming changes would be made to the
Company By-Laws, as well as certain other changes to the Company By-Laws so as
to conform the Company By-Laws to the IB and SEB By-Laws (as so changed, the
"HCS By-Laws"). The HCS, IB and SEB By-Laws will each provide that, subject to
the rights of holders of any series of the relevant preferred stock, special
meetings of stockholders can be called only by the Chairman of the Board, the
Chief Executive Officer, the Vice-Chairman of the Board (if any) or the board
of directors. Stockholders are not permitted to call a special meeting or to
require that the respective board of directors call a special meeting of
stockholders. Moreover, the business permitted to be conducted at any special
meeting of stockholders will be limited to the purpose or purposes of the
meeting as stated in the notice of the meeting.

The provisions of the Charter Amendments and the IB and SEB Charters
restricting stockholder action by written consent may have the effect of
delaying consideration of a stockholder proposal until the next annual meeting
unless a special meeting is called by the Chairman of the Board, the Chief
Executive Officer, the Vice-Chairman of the Board (if any) or pursuant to a
board resolution. These provisions would also prevent the holders of a
majority of the voting power of Common Stock from using the written consent
procedure to take stockholder action and from taking action by consent without
giving all the stockholders entitled to vote on a proposed action the
opportunity to participate in determining such proposed action. Moreover, a
stockholder could not force stockholder consideration of a proposal over the
opposition of the board of directors by calling a special meeting of
stockholders prior to the time the board believed such consideration to be
appropriate.

Advance Notice Provisions for Stockholder Nominations and Stockholder
Proposals

The HCS, IB and SEB By-Laws will establish an advance notice procedure with
regard to the nomination, other than by or at the direction of the respective
boards of directors, of candidates for election as directors (the "Nomination
Procedure") and with regard to certain matters to be brought before an annual
meeting of stockholders (the "Business Procedure").

Pursuant to the HCS, IB and SEB By-Laws, the Nomination Procedure provides
that only persons who are nominated by, or at the direction of, the board of
directors or by a stockholder of record who has given timely prior written
notice to the Secretary prior to the meeting at which directors are to be
elected will be eligible for election as directors. The Business Procedure
provides that at an annual meeting only such business can be conducted as has
been brought before the meeting pursuant to the notice of the meeting, by, or
at the direction of, the board of directors or by a stockholder of record who
has given timely prior written notice to the Secretary of such stockholder's
intention to bring such business before the meeting. To be timely, notice must
generally be received by not less than 60 days nor more than 90 days prior to
the first anniversary of the mailing of the proxy statement in connection with
the previous year's annual meeting. For notice of a stockholder nomination to
be made at a special meeting at which directors are to be elected to be
timely, such notice must be received not earlier than the 90th day before such
meeting and not later than the later of (1) the 60th day prior to such meeting
and (2) the tenth day after public announcement of the date of such meeting is
first made.

Under the Nomination Procedure, notice from a stockholder who proposes to
nominate a person at a meeting for election as director must contain certain
information about that person, including such person's consent to be nominated
and such information as would be required to be included in a proxy statement
soliciting proxies for the election of the proposed nominee, and certain
information about the stockholder proposing to nominate that person or the
beneficial owner, if any, on whose behalf the nomination is made. Under the
Business Procedure, notice relating to the conduct of business must contain
certain information about such business and about the stockholder who proposes
to bring the business before the meeting including a brief description of the
business the stockholder proposes to bring before the meeting, the reasons for
conducting such business at such meeting, the class and number of shares of
stock beneficially owned by such stockholder, and by the beneficial owner, if

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<PAGE>

any, on whose behalf the proposal is made, and any material interest of such
stockholder, and such beneficial owner in the business so proposed. If the
Chairman or other officer presiding at a meeting determines that a person was
not nominated in accordance with the Nomination Procedure, such person will
not be eligible for election as a director, or if he or she determines that
other business was not properly brought before such meeting in accordance with
the Business Procedure, such business will not be conducted at such meeting.

The purpose of the Nomination Procedure is, by requiring advance notice of
nominations by stockholders, to afford the board a meaningful opportunity to
consider the qualifications of the proposed nominees and, to the extent deemed
necessary or desirable by such boards, to inform stockholders about such
qualifications. The purpose of the Business Procedure is, by requiring advance
notice of proposed business, to provide a more orderly procedure for
conducting annual meetings of stockholders and, to the extent deemed necessary
or desirable by the board to provide such board with a meaningful opportunity
to inform stockholders, prior to such meeting, of any business proposed to be
conducted at such meetings, together with any recommendation as to the board's
position or belief as to action to be taken with respect to such business, so
as to enable stockholders better to determine whether they desire to attend
such meeting or grant a proxy to the board as to the disposition of any such
business. Although the HCS, IB and SEB By-Laws will not give their respective
boards any power to approve or disapprove stockholder nominations for the
election of directors or of any other business desired by a stockholder to be
conducted at an annual meeting, the By-Laws may have the effect of precluding
a nomination for the election of directors or precluding the conducting of
business at a particular annual meeting if the proper procedures are not
followed, and may discourage or deter a third party from conducting a
solicitation of proxies to elect its own slate of directors or otherwise
attempting to obtain control of HCS, IB or SEB, as the case may be, even if
the conduct of such solicitation or such attempt might be beneficial to HCS,
IB or SEB and their respective stockholders.

Amendment of Certain Charter and By-Law Provisions

The Company Charter may currently be amended, with approval of the Board of
Directors, upon the affirmative vote of the majority of outstanding shares of
the Company's Common Stock. The Company By-Laws may currently be amended upon
the affirmative vote of a majority of shares of the Company's Common Stock
present at a meeting, or entitled to vote thereon, if acting by written
consent. The Charter Amendments contain, and the IB and SEB Charters will
contain, provisions requiring the affirmative vote of the holders of at least
66 2/3% of the outstanding HCS, IB or SEB Common Stock, respectively, to amend
the provisions of such charters pertaining to classification of the respective
boards of directors, filling vacancies in the respective boards of directors,
removal of directors and the requirement that stockholders can act only at
annual or special meetings and not by written consent. The Charter Amendments
require, and the IB and SEB Charters and By-Laws will also require, the vote
of at least 66 2/3% of the outstanding HCS, IB and SEB Common Stock,
respectively, for stockholders to adopt, amend or repeal any provision of the
HCS, IB or SEB By-Laws, respectively. These provisions will make it more
difficult for stockholders to change the HCS, IB and SEB Charters and By-Laws,
respectively, including changes designed to facilitate the exercise of control
over HCS, IB or SEB. In addition, the requirement for approval by at least a
66 2/3% stockholder vote will enable the holders of a minority of HCS's, IB's
or SEB's capital stock to prevent holders of a less than 66 2/3% majority from
amending the indicated provisions of the HCS, IB and SEB Charters and By-Laws,
respectively.

PREFERRED STOCK

The Company Charter authorizes and the IB and SEB Charters will authorize
their respective board of directors to establish series of preferred stock and
to determine, with respect to any series of preferred stock, the voting
powers, full or limited, or no voting powers, and such designations,
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof as are stated in the
board resolutions providing for such series. The number of authorized shares
of HCS Preferred Stock is 1,000,000 and the number of authorized shares of IB
Preferred Stock and SEB Preferred Stock will be 1,000,000 and 5,000,000,
respectively.

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The Company, IB and SEB believe that the availability of such preferred
stock will provide HCS, IB and SEB with increased flexibility in structuring
possible future financing and acquisitions, and in meeting other corporate
needs which might arise. Having such authorized shares available for issuance
will allow HCS, IB and SEB to issue shares of preferred stock without the
expense and delay of a special stockholders' meeting. The authorized shares of
preferred stock, as well as shares of common stock, will be available for
issuance without further action by stockholders, unless such action is
required by applicable law or the rules of any stock exchange on which the
securities may be listed. Although neither the HCS, IB nor SEB board of
directors has any intention at the present time of doing so, they could issue
a series of preferred stock that could, subject to certain limitations imposed
by the securities laws and stock exchange rules, depending on the terms of
such series, impede the completion of a merger, tender offer or other takeover
attempt. For instance, such series of preferred stock might impede a business
combination by including class-voting rights that would enable the holder to
block such a transaction. The HCS, IB and SEB boards will make any
determination to issue such shares based on their judgment as to the best
interests of such company and its then existing stockholders. The boards, in
so acting, could issue preferred stock having terms which could discourage an
acquisition attempt or other transaction that some, or a majority, of the
stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then market
price of such stock. The authorized and unissued preferred stock of each of
HCS, IB and SEB, as well as the authorized and unissued common stock of HCS,
IB and SEB would be available, and their respective charters explicitly
authorize use of their capital stock, for the above purposes.

In connection with their Rights Plans, the HCS board has authorized and the
IB and SEB boards will authorize shares of their Participating Preferred
Stock. No such shares of Participating Preferred Stock are outstanding. For a
description of the rights, powers and preferences of the HCS, IB and SEB
Participating Preferred Stock, see "Description of the Capital Stock--Rights
Plans."

COMMON STOCK

The HCS Charter authorizes the issuance of 99,000,000 shares of HCS Common
Stock. At the Distribution, the IB Charter and SEB Charter will authorize
their boards to issue up to 99,000,000 shares of IB Common Stock and
150,000,000 shares of SEB Common Stock, respectively.

The authorized but unissued Common Stock will provide IB, HCS and SEB with
the ability to meet future capital needs and to provide shares for possible
acquisitions and stock dividends or stock splits. The IB, HCS and SEB Boards
would each have the ability, in the event of a proposed merger, tender offer
or other attempt to gain control of the company that was not approved by such
board, to issue additional common stock that would dilute the stock ownership
of the acquiror.

RIGHTS PLANS

The Company has entered into the HCS Rights Plan and IB and SEB will enter
into the IB and SEB Rights Plans. The Rights to be distributed in accordance
with these Rights Plans will have certain anti-takeover effects. Each of the
Rights will cause substantial dilution to a person or group that attempts to
acquire HCS, IB or SEB and thereby effect a change in the composition of the
respective boards of directors on terms not approved by the board, including
by means of a tender offer at a premium to the market price. The Rights should
not interfere with any merger or business combination approved by the Board,
since the Rights may be redeemed by HCS, IB or SEB, respectively, at the
applicable redemption price prior to the time that a person or group has
become an Acquiring Person. See "Description of the Capital Stock--Rights
Plans."

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PROPOSAL ELEVEN: ELECTION OF DIRECTORS

The Board of Directors of the Company consists of 15 members. Pursuant to
the Company's Restated Certificate of Incorporation, the Board is divided into
three classes and five persons are elected each year for three-year terms. The
Board nominates five persons each year for consideration for election by the
Company's stockholders.

The following five persons have been nominated by the Board of Directors for
election at the Meeting for terms expiring at the Annual Meeting of
Stockholders in 2002 and when their respective successors are elected and
qualified: Angus A. McNaughton, John G. McDonald, Wayne R. Moon, Burton
Richter and Elizabeth E. Tallett. The Board of Directors recommends that
stockholders vote for these nominees.

At the Meeting the proxies will be voted to elect the five nominees listed
below. If the Distribution is not effected, all directors will continue to
have three-year terms.

If the Distribution is effected, all directors of the Company (including the
nominees set forth below), other than John Seely Brown, Samuel Hellman, Terry
R. Lautenbach, David W. Martin, Jr., Burton Richter and Richard W. Vieser, are
expected to resign from the Board of Directors of the Company effective as of
the Distribution Date and Richard M. Levy is expected to be added as a new
director. For biographical information with respect to each individual
expected to become a director of HCS following the Distribution, see
"Management of HCS--Board of Directors of HCS."

The nominees for directors have indicated their willingness to serve if
elected. The Company does not contemplate that any nominee will be unable to
serve. However, in the event that any nominee declines or becomes unable to
serve, proxies will be voted for the remainder of the nominees and such
substitute nominee as shall be designated by the proxy holders in their
discretion and in such order of preference as the proxy holders may determine
and to the exclusion of others. If the Distribution is effected, the nominees
for directors (other than Burton Richter) are expected to resign from the
Board of Directors of the Company and become directors of SEB or IB.

Set forth below is certain biographical information with respect to each
nominee for director and each director in the classes continuing in office
beyond the Meeting.

NOMINEES FOR TERMS EXPIRING IN 2002

ANGUS A. MACNAUGHTON

Mr. MacNaughton is President of Genstar Investment Corporation (a private
investment company), a position he has held since 1987. He is a director of
Canadian Pacific Limited, Sun Life Assurance Company of Canada, Sun Life
Assurance Company of Canada (U.S.), Sun Life Insurance & Annuity Company of
Canada (NY) and DCS Business Services, Inc. Mr. MacNaughton is also Vice-
Chairman of the Board of Barrick Gold Corporation. He has been a director of
the Company since 1986. Age: 67.

JOHN G. MCDONALD

Professor McDonald is The Industrial Bank of Japan Professor of Finance at
Stanford University's Graduate School of Business, where he has served on the
faculty since 1968. He is a director of Golden State Vintners, Inc.,
Scholastic Corporation and TriNet Corporate Realty Trust, Inc., and is an
independent trustee of eight mutual funds managed by Capital Research &
Management Co. and its affiliates. Professor McDonald has been a director of
the Company since 1988. Age: 61.

195
<PAGE>

WAYNE R. MOON

Mr. Moon is Chairman of the Board and Chief Executive Officer of Blue Shield
of California (a health care company), positions he has held since 1993. From
1990 to 1993, he served as President and Chief Operating Officer of Kaiser
Foundation Health Plan, Inc., and Kaiser Foundation Hospitals (health
maintenance organizations). Mr. Moon has been a director of the Company since
1995. Age: 58.

BURTON RICHTER

Dr. Richter is Director of the Stanford Linear Accelerator Center and Paul
Pigott Professor in Physical Sciences at Stanford University, positions he has
held since 1984 and 1980, respectively. He has been a director of the Company
since 1990. Age: 67.

ELIZABETH E. TALLETT

Ms. Tallett is President and Chief Executive Officer of Dioscor Inc. (a
biopharmaceutical company), positions she has held since 1996, and is
President and Chief Executive Officer of Ellard Pharmaceuticals Inc. (a
pharmaceutical company), positions she has held since 1998. From 1992 to 1996,
she was President and Chief Executive Officer of Transcell Technologies, Inc.
(a biotechnology company). Ms. Tallett is a director of The Principal Mutual
Life Insurance Company, Coventry Health Care Inc. and Integrated America Inc.,
and is Chairman of the Board of Huma Scan, Inc. She has been a director of the
Company since 1996. Age: 50.

DIRECTORS WHOSE TERMS EXPIRE IN 2001

JOHN SEELY BROWN

Dr. Brown is Vice President, director of the Xerox Palo Alto Research Center
and Chief Scientist of Xerox Corporation, positions he has held since 1986,
1990 and 1992, respectively. He is a director of Corning Incorporated and
General Instrument Corporation. He has been a director of the Company since
1998. Age: 58.

ROBERT W. DUTTON

Dr. Dutton is director of Research at the Center for Integrated Systems and
Professor of Electrical Engineering at Stanford University, positions he has
held since 1991 and 1971, respectively. Dr. Dutton has been a director of the
Company since 1996. Age: 54.

SAMUEL HELLMAN

Dr. Hellman is the A. N. Pritzker Distinguished Service Professor in the
Department of Radiation and Cellular Oncology at the University of Chicago, a
position he has held since 1993. From 1988 to 1993, he was Dean of that
University's Division of Biological Sciences and its Pritzker School of
Medicine, Vice President of the University's Medical Center, and the A. N.
Pritzker Professor in the Department of Radiation and Cellular Oncology. Dr.
Hellman has been a director of the Company since 1992. Age: 64.

TERRY R. LAUTENBACH

Mr. Lautenbach is a former Senior Vice President of International Business
Machines Corporation, a position he held from 1988 to 1992. He was responsible
for IBM's worldwide manufacturing and development and North American marketing
and services from 1990 to 1992, and served on IBM's Management Committee in
1991 and 1992. Mr. Lautenbach is a director of Air Products and Chemicals,
Inc., CVS Corporation and Footstar, Inc. He has been a director of the Company
since 1993. Age: 60.

196
<PAGE>

D. E. MUNDELL

Mr. Mundell is Chairman of the Board of ORIX USA Corporation and Advisor (a
board-level position) to ORIX Corporation (both financial services companies),
positions he has held since 1991. He is director of Beazer Homes USA, Inc. and
Stockton Holdings, Ltd. Mr. Mundell has been a director of the Company since
1992. Age: 67.

DIRECTORS WHOSE TERMS EXPIRE IN 2000

RUTH M. DAVIS

Dr. Davis is President and Chief Executive Officer of the Pymaturing Group,
Inc. (a technology management company), positions she has held since 1981. She
is a director of Air Products and Chemicals, Inc., BTG, Inc., Ceridian
Corporation, Consolidated Edison Company of New York, Inc., Premark
International, Inc., The Principal Mutual Life Insurance Company and
Tupperware Corporation. Dr. Davis is also Chairman of the Board of The
Aerospace Corporation. She has been a director of the Company since 1981. Age:
70.

DAVID W. MARTIN, JR.

Dr. Martin is President and Chief Executive Officer of EOS Biotechnology,
Inc. (a biotechnology company), positions he has held since 1997. From 1995 to
1996, he was President, Chief Operating Officer and director of LYNX
Therapeutics, Inc. (a biotechnology company), and from 1994 to 1995, he was
Senior Vice President of Chiron Corporation and President of Chiron
Therapeutics (both biotechnology companies). From 1990 through 1993, Dr.
Martin was Executive Vice President for Research and Development at The Du
Pont Merck Pharmaceutical Company. He is a director of Cubist Pharmaceuticals,
Inc. Dr. Martin has been a director of the Company since 1994. Age: 57.

J. TRACY O'ROURKE

Mr. O'Rourke is Chairman of the Board and Chief Executive Office of the
Company, positions he has held since 1990. He is a director of General
Instrument Corporation. Mr. O'Rourke has been a director of the Company since
1990. Age: 63.

JON D. TOMPKINS

Mr. Tompkins is Chairman of the Board of KLA-Tencor Corporation (a
semiconductor equipment company), a position he has held since 1998. From 1997
to 1998, he was Chief Executive Officer of KLA-Tencor Corporation. From 1993
to 1997, he was Chairman of Tencor Instruments, Inc. (a semiconductor
equipment company), where he also served as President, Chief Executive Officer
and director from 1991 to 1997. Mr. Tompkins has been a director of the
Company since 1997. Age: 58.

RICHARD W. VIESER

Mr. Vieser is former Chairman of the Board, Chief Executive Officer and
President of Lear Siegler, Inc. (a diversified manufacturing company),
positions he has held since 1987 to 1989. He is a director of Ceridian
Corporation, Global Industrial Technologies, Inc., International Wire Group,
Inc. and Sybron International Corporation. Mr. Vieser has been a director of
the Company since 1991. Age: 71.

Stockholder suggestions of persons to be nominated by the Board for election
as a director should be in writing and sent to the Secretary, Nominating
Committee, c/o Chairman of the Board, at the Company's address set forth
above. Stockholder suggestions of potential nominees should reach the
Secretary of the Nominating Committee by May 15 in any given year in order to
receive consideration by that Committee for possible nomination by the Board
for election at the Annual Meeting of Stockholders in the following year.

197
<PAGE>

Under the Company's By-Laws, nominations of persons for election as
directors may be made by a stockholder entitled to vote at an Annual Meeting
of Stockholders only if written notice of such stockholder's intent to make
such nomination is given by personal delivery or by U.S. mail, postage
prepaid, to the Company's Secretary not later than 60 days in advance of such
Annual Meeting, or in the case of a special meeting of stockholders for the
election of directors, not later than the close of business on the seventh day
following the date on which notice of such special meeting is first given to
stockholders. The notice must set forth certain information concerning each
proposed nominee and the stockholder proposing each nominee, including their
respective names and addresses; a representation that such stockholder is a
holder of record of the Company's stock entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to nominate the person
or persons specified in the notice; a description of all arrangements or
understandings between the stockholder and each proposed nominee and any other
person pursuant to which the nomination is to be made by the stockholder; such
other information as would be required to be included in a proxy statement
soliciting proxies for the election of each proposed nominee; and the consent
of each proposed nominee to serve if elected. No such notice was received with
respect to the Meeting. The chairman of the Meeting may refuse to acknowledge
the nomination of any person that is not made in compliance with the foregoing
procedures.

THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE FOR EACH OF THE
FOREGOING NOMINEES FOR DIRECTOR OF THE COMPANY.

ORGANIZATION AND COMPENSATION OF THE BOARD OF DIRECTORS

The Board of Directors of the Company has six standing committees: the
Executive Committee; the Audit and Corporate Responsibility Committee; the
Finance Committee; the Nominating Committee; the Organization and Compensation
Committee; and the Technology and Environmental Committee.

The Executive Committee consists of directors MacNaughton, McDonald
(Chairman), O'Rourke and Richter. This Committee is delegated all powers of
the Board of Directors, except certain powers reserved by law to the full
Board, and it meets between regular Board meetings when convening a full Board
meeting is impracticable. The Executive Committee held one meeting during
fiscal year 1998.

The Audit and Corporate Responsibility Committee consists of directors
Dutton, MacNaughton, McDonald (Chairman), Moon and Mundell. This Committee is
the principal link between the Board of Directors and the Company's
independent auditors, works with the Company's internal and external auditors
and counsel, reviews the scope and results of internal and external auditing,
and reviews certain compliance policies and programs. The Audit and Corporate
Responsibility Committee held three meetings during fiscal year 1998.

The Finance Committee consists of directors Davis, MacNaughton (Chairman),
McDonald, Mundell and Vieser. This Committee considers significant financial
policies and actions of the Company, and reviews and makes recommendations on
financial matters requiring Board of Directors' approval. The Finance
Committee held eight meetings during fiscal year 1998.

The Nominating Committee consists of directors Brown, Davis, Martin
(Chairman), Mundell, Richter and Tallett. This Committee identifies and
recommends to the Board of Directors prospective candidates for nominees for
election to the Board, considers stockholder suggestions for Board nominees,
and recommends Board committee assignments to the Board. The Nominating
Committee held four meetings during fiscal year 1998.

The Organization and Compensation Committee consists of directors Brown,
Hellman Lautenbach, MacNaughton, Moon, Richter, Tompkins and Vieser
(Chairman). This Committee consults with management and advises the Board of
Directors on organizational matters, approves officer compensation, approves
all salary and compensation actions in excess of specified levels, and is
responsible for the administration of the Company's stock plans and certain
other employee compensation and benefit plans. The Organization and
Compensation Committee held four meetings during fiscal year 1998.

198
<PAGE>

The Technology and Environmental Committee consists of directors Brown,
Davis (Chairman), Dutton, Hellman, Lautenbach, Martin, Richter, Tallett and
Tompkins. This Committee reviews the Company's technological and research and
development activities, considers the Company's products from a technological
perspective, and reviews significant environmental and safety issues affecting
the Company. The Technology and Environmental Committee held three meetings
during fiscal year 1998.

The Board also appointed an Advisory Committee during 1998 to consider and
advise on a possible reorganization of the Company. The Committee consisted of
directors MacNaughton, McDonald, Mundell and Vieser. The Committee held three
meetings during fiscal year 1998.

The Board of Directors held six meetings during fiscal year 1998. Each
director attended at least 75% of the total number of meetings of the Board
and committees of the Board, with the exception of Mr. Lautenbach (who
attended 62% of such meetings).

Each director who is not a Company employee receives an annual retainer fee
of $19,000, plus $1,000 for each Board and committee meeting attended.
Directors chairing standing committees of the Board each receive an additional
annual retainer fee of $7,000. Under the Company Omnibus Stock Plan, each
director who is not a Company employee also receives annually (a) a grant of
200 shares of the Company's Common stock, subject to payment to the Company of
the aggregate par value of such shares ($1 per share) and (b) a non-qualified
stock option (with an exercise price equal to the fair market value of the
Company's Common Stock on the date of grant, exercisable after one year from
the date of grant and with a ten-year term) to acquire 2,000 shares of the
Company's Common Stock. Directors who are Company employees receive no
compensation for their services as directors.

199
<PAGE>

STOCK OWNERSHIP

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information as of December 15, 1998
(except as otherwise noted) regarding the beneficial ownership by each person
who, to the Company's knowledge, beneficially owned more than 5% of the
outstanding shares (i) of the Company's Common Stock and (ii) of IB Common
Stock, SEB Common Stock and HCS Common Stock as of the Distribution Date (and
following the Distribution) as if the Distribution took place on December 15,
1998.

<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT OF
BENEFICIAL OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1)(2) SHARES(1)
------------------------------------ --------------- -----------
<S> <C> <C>
FMR Corp./Edward C. Johnson 3d/Abigail P.
Johnson......................................... 3,051,000(3) 10.2
82 Devonshire Street
Boston, Massachusetts 02109
Neuberger & Berman, LLC.......................... 2,389,150(4) 8.0
605 Third Avenue
New York, New York 10158
State Treasurer.................................. 2,075,760(5) 6.9
State of Michigan
c/o Director of Investments
P.O. Box 1128
Lansing, Michigan 48901
Oppenheimer Capital.............................. 1,908,400(6) 6.4
World Financial Center
New York, New York 10281
Princeton Services, Inc. /Merrill Lynch Asset
Management, Inc. ............................... 1,840,000(7) 6.2
Merrill Lynch Capital Fund, Inc. ................ 1,750,000(7) 5.9
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Sound Shore Management, Inc...................... 1,649,000(8) 5.5
8 Sound Shore Drive
Greenwich, Connecticut 06836
</TABLE>

- --------
(1) For purposes of this table, a person or group of persons is deemed to
have "beneficial ownership" of any shares which such person has the right
to acquire within 60 days following December 15, 1998. For purposes of
computing the percentage of outstanding shares held by each person or
group of persons named above, any security which such person or persons
has or have the right to acquire within 60 days following December 15,
1998 is deemed to be outstanding, but is not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person.

(2) To the Company's knowledge, unless otherwise indicated, the person named
in the table has sole voting and investment power with respect to the
shares.

(3) According to an amendment to a Schedule 13G dated January 10, 1998, FMR
Corp. has sole voting power over 163,100 of these shares and sole
dispositive power over all 3,051,000 shares. Fidelity Management Trust
Company ("FMTC"), a wholly owned subsidiary of FMR Corp., is the
beneficial owner of 293,000 of these shares in its capacity as investment
manager of certain institutional accounts. Edward C. Johnson 3d and
Abigail P. Johnson own 12.0% and 24.5%, respectively, of the voting stock
of FMR Corp. and therefore may be deemed to have beneficial ownership of
the shares referenced.

200
<PAGE>

(4) According to an amendment to a Schedule 13G dated February 9, 1998,
Neuberger & Berman, LLC has sole voting power over 1,367,524 of these
shares and shared dispositive power over all 2,389,150 shares. Also
according to that amendment to Schedule 13G, Newberger & Berman
Management, Inc. shares the voting and dispositive power with Neuberger &
Berman, LLC with respect to 774,800 of such shares.

(5) Based on a Schedule 13D dated August 12, 1997.

(6) According to a Schedule 13G dated February 27, 1998, Oppenheimer Capital
has shared voting and shared dispositive power over all these shares.

(7) According to a Schedule 13G dated January 29, 1998, Princeton Services,
Inc. and Merrill Lynch Asset Management, L.P. have shared voting power
and shared dispositive power over all 1,840,000 shares. Also according to
that Schedule 13G, Merrill Lynch Capital Fund, Inc. has shared voting
power and shared dispositive power over 1,750,000 of such shares.

(8) According to a Schedule 13G dated January 15, 1998, Sound Shore
Management, Inc. has sole voting power over 1,505,800 of such shares,
shared voting power over 32,200 of such shares and sole dispositive power
over all 1,649,00 shares.

201
<PAGE>

DIRECTORS AND OFFICERS OF THE COMPANY

The following table sets forth certain information as of December 15, 1998
regarding the beneficial ownership of the Company's Common Stock by each of
the executive officers named in the Company's Summary Compensation Table, (b)
each director of the Company and (c) all executive officers and directors of
the Company as a group:

<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT OF
BENEFICIAL OUTSTANDING
NAME OF BENEFICIAL OWNER OWNERSHIP(1)(2) SHARES(1)
------------------------ --------------- -----------
<S> <C> <C>
J. Tracy O'Rourke, Chairman of the Board and
Chief Executive Officer......................... 654,500(3) 2.2
Richard A. Aurelio, Executive Vice President..... 125,564(4) *
Allen J. Lauer, Executive Vice President......... 233,510(5) *
Richard M. Levy, Executive Vice President........ 145,655(6) *
Robert A. Lemos, Vice President, Finance and
Chief Financial Officer......................... 73,915(7) *
John Seely Brown, Director....................... 200 *
Ruth M. Davis, Director.......................... 10,451(8) *
Robert W. Dutton, Director....................... 4,600(9) *
Samuel Hellman, Director......................... 16,400(10) *
Terry R. Lautenbach, Director.................... 15,200(11) *
Angus A. MacNaughton, Director................... 26,800(12) *
David W. Martin, Jr., Director................... 9,000(13) *
John G. McDonald, Director....................... 19,800(14) *
Wayne R. Moon, Director.......................... 6,836(15) *
D. E. Mundell, Director.......................... 16,400(16) *
Burton Richter, Director......................... 18,600(17) *
Elizabeth E. Tallett, Director................... 5,100(18) *
Jon D. Tompkins, Director........................ 2,400(19) *
Richard W. Vieser, Director...................... 19,600(20) *
All Executive Officers and Directors as a Group
(23 Persons).................................... 1,582,134(21) 5.3
</TABLE>
- --------
* The percentage of shares of the Company's Common Stock beneficially owned
does not exceed one percent of the shares of the Company's Common Stock
outstanding at December 15, 1998.

(1) For purposes of this table, a person or group of persons is deemed to
have "beneficial ownership" of any shares of the Company's Common Stock
which such person has the right to acquire within 60 days following
December 15, 1998. For purposes of computing the percentage of
outstanding shares of the Company's Common Stock held by each person or
group of persons named above, any security which such person or persons
has or have the right to acquire within 60 days following December 15,
1998 is deemed to be outstanding, but is not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person.

(2) To the Company's knowledge, unless otherwise indicated, the person named
in the table has sole voting and investment power with respect to the
shares.

(3) Includes (a) 8,001 shares of restricted stock granted pursuant to the
Company Omnibus Stock Plan and (b) 564,000 shares which may be acquired
on or within 60 days of December 15, 1998 under stock options granted
pursuant to the 1982 Non-Qualified Stock Option Plan and the Company
Omnibus Stock Plan.

(4) Includes (a) 4,200 shares of restricted stock granted pursuant to the
Company Omnibus Stock Plan, (b) 102,000 shares which may be acquired on
or within 60 days of December 15, 1998 under stock options granted
pursuant to the Company Omnibus Stock Plan and (c) 217 shares held by Mr.
Aurelio's daughter.

(5) Includes (a) 4,200 shares of restricted stock granted pursuant to the
Company Omnibus Stock Plan and (b) 162,000 shares which may be acquired
on or within 60 days of December 15, 1998 under stock options granted
pursuant to the Company Omnibus Stock Plan and (c) 63,110 shares held in
a trust of which Mr. Lauer is co-trustee with his wife.

202
<PAGE>

(6) Includes (a) 4,200 shares of restricted stock granted pursuant to the
Company Omnibus Stock Plan, (b) 132,000 shares which may be acquired on
or within 60 days of December 15, 1998 under stock options granted
pursuant to the Company Omnibus Stock Plan and (c) 5,105 shares held in a
trust of which Dr. Levy is co-trustee with his wife.

(7) Includes (a) 2,400 shares of restricted stock granted pursuant to the
Company Omnibus Stock Plan and (b) 57,334 shares which may be acquired on
or within 60 days of December 15, 1998 under stock options granted
pursuant to the Company Omnibus Stock Plan.

(8) Includes 8,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan.

(9) Includes 4,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan.

(10) Includes (a) 10,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan and (b) 2,500
shares held by Dr. Hellman's wife.

(11) Includes 10,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan.

(12) Includes (a) 16,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan and (b) 5,000
shares held in a trust of which Mr. MacNaughton is sole trustee.

(13) Includes 8,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan.

(14) Includes 16,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan.

(15) Includes 6,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan.

(16) Includes (a) 12,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan and (b) 3,400
shares held in a trust of which Mr. Mundell is co-trustee with his wife.

(17) Includes (a) 14,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan and (b) 3,800
shares held in a trust of which Dr. Richter is co-trustee with his wife.

(18) Includes 4,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan.

(19) Includes 2,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan.

(20) Includes 14,000 shares which may be acquired under exercisable stock
options granted pursuant to the Company Omnibus Stock Plan.

(21) Includes (a) 29,801 shares of restricted stock granted to executive
officers pursuant to the Company Omnibus Stock Plan, (b) 1,290,100 shares
which may be acquired on or within 60 days of December 15, 1998 by
executive officers and directors under stock options granted pursuant to
the 1982 Non-Qualified Stock Option Plan and the Company Omnibus Stock
Plan and (c) 86,467 shares as to which voting and/or investment power is
shared (see certain of the foregoing footnotes).

203
<PAGE>

CERTAIN EXECUTIVE OFFICER COMPENSATION AND OTHER INFORMATION

The following tables set forth certain information with respect to the
Company's chief executive officer and the four other most highly compensated
executive officers in fiscal year 1998 for services rendered in all capacities
to the Company for the fiscal years indicated:

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------ -------------------------------
AWARDS PAYOUTS
--------------------- ---------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARD(S) OPTIONS/ PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2) ($)(3) SARS(#)(4) ($)(5) ($)(6)
- --------------------------- ---- ------- --------- ------------ ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J. Tracy O'Rourke ........ 1998 838,300 371,309 245,193 0 75,000 787,563 289,671
Chairman of the Board 1997 799,160 972,085 199,255 465,500 75,000 1,575,120 343,716
and Chief Executive 1996 769,290 1,556,897 203,313 389,000 75,000 1,512,720 298,168
Officer
Richard A. Aurelio........ 1998 338,910 80,995 34,319 0 36,000 463,501 110,863
Executive Vice President 1997 323,148 533,492 20,602 244,388 36,000 653,016 122,904
1996 310,990 645,915 21,258 204,225 36,000 628,056 105,818
Allen J. Lauer............ 1998 338,910 232,936 33,050 0 36,000 347,454 101,096
Executive Vice 1997 323,148 359,300 22,594 244,388 36,000 461,552 117,958
President 1996 310,990 532,363 35,458 204,225 36,000 628,056 93,274
Richard M. Levy .......... 1998 338,910 250,607 21,620 0 36,000 195,763 85,676
Executive Vice 1997 323,148 206,984 18,249 244,388 36,000 391,810 108,374
President 1996 310,990 432,879 43,736 204,225 36,000 628,056 99,753
Robert A. Lemos .......... 1998 258,878 89,710 29,301 0 18,000 187,154 67,538
Vice President, Finance 1997 245,960 232,027 37,783 139,650 18,000 372,762 81,480
and Chief Financial 1996 236,930 372,172 20,094 116,700 18,000 358,566 70,455
Officer
</TABLE>
- --------
(1) Consists of Company Management Incentive Plan awards and Cash Profit-
Sharing Plan allocations, and in the case of Dr. Levy, a special cash
bonus for fiscal year 1998.

(2) Consists of amounts reimbursed for the payment of taxes on certain
perquisites and personal benefits and (in some cases) cash payments for
unused accrued vacation time. The amounts reported for Mr. O'Rourke also
include aggregate incremental costs of perquisites and personal benefits
(including $106,276, $127,056 and $99,593 for his use of the Company
aircraft in fiscal years 1998, 1997 and 1996, respectively).

(3) Consists of restricted shares of the Company's Common Stock (valued at
the closing market price on the date of grant), which shares are released
from restrictions in three equal installments over a three-year period
(the principal restriction being continued employment until the
respective release dates), during which dividends, if any, are paid on
such shares. The number and value (at $34.375 per share) of aggregate
restricted stock holdings at the end of fiscal year 1998 were as follows:
Mr. O'Rourke, 16,000 shares, $550,000; Mr. Aurelio, 8,400 shares,
$288,750; Mr. Lauer, 8,400 shares, $288,750; Dr. Levy, 8,400 shares,
$288,750; and Mr. Lemos, 4,800 shares, $165,000. Shares of restricted
stock awarded for fiscal years 1998, 1997 and 1996, respectively, which
partially vest in under three years were as follows: Mr. O'Rourke, 0
shares, 8,000 shares and 8,000 shares; Mr. Aurelio, 0 shares, 4,200
shares and 4,200 shares; Mr. Lauer, 0 shares, 4,200 shares and 4,200
shares; Dr. Levy, 0 shares, 4,200 shares and 4,200 shares; and Mr. Lemos,
0 shares, 2,400 shares and 2,400 shares.

(4) Consists of shares of the Company's Common Stock that may be acquired
under stock options granted pursuant to the Company Omnibus Stock Plan
(no stock appreciation rights have been granted).

204
<PAGE>

(6) Consists of (a) Company contributions (including interest) to Retirement
and Profit-Sharing Program and Supplemental Retirement Plan accounts for
fiscal years 1998, 1997 and 1996, respectively (Mr. O'Rourke, $264,897,
$319,654 and $274,832; Mr. Aurelio, $110,847, $121,103 and $104,378; Mr.
Lauer, $98,941, $116,157 and $91,816; Dr. Levy, $83,521, $106,573 and
$98,313; and Mr. Lemos, $65,888, $80,108 and $69,359); (b) Company-paid
premiums for group term life insurance in fiscal years 1998, 1997 and
1996, respectively (Mr. O'Rourke, $3,210, $2,784 and $2,316; Mr. Aurelio,
$17, $1,801 and $1,440; Mr. Lauer, $2,155, $1,801 and $1,458; Dr. Levy,
$2,155, $1,801 and $1,440; and Mr. Lemos, $1,650, $1,372 and $1,097); and
(c) Company-paid premiums for supplemental disability insurance for Mr.
O'Rourke in fiscal years 1998, 1997 and 1996, respectively ($21,564,
$21,278 and $21,019).

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------
NUMBER OF POTENTIAL REALIZABLE VALUE
SECURITIES PERCENT OF AT ASSUMED ANNUAL RATES OF
UNDERLYING TOTAL OPTIONS/ EXERCISE STOCK PRICE APPRECIATION
OPTIONS/ SARS GRANTED OR BASE FOR OPTION TERM(2)
SARS GRANTED TO EMPLOYEES PRICE EXPIRATION ----------------------------
NAME (#)(1) IN FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
---- ------------ -------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Tracy O'Rourke....... 75,000 7.40 58.1563 11/20/07 2,743,064 6,951,462
Richard A. Aurelio...... 36,000 3.55 58.1563 11/20/07 1,316,671 3,336,702
Allen J. Lauer.......... 36,000 3.55 58.1563 11/20/07 1,316,671 3,336,702
Richard M. Levy......... 36,000 3.55 58.1563 11/20/07 1,316,671 3,336,702
Robert A. Lemos......... 18,000 1.77 58.1563 11/20/07 658,335 1,668,351
All Optionees(3)........ 1,014,200 100% 58.1563 11/20/07 37,093,538 94,002,308
All Stockholders(4)..... 30,092,576 58.1563 11/20/07 1,100,611,429 2,789,165,453
All Optionees' Gain as a
Percentage of All
Stockholders' Gain..... 3.4% 3.4%
</TABLE>
- --------
(1) Consists of stock options, which were granted at an exercise price of 100%
of the market price of the underlying shares on the date of grant, become
exercisable over three years at the rate of approximately one-third each
year and expire ten years from the date of grant. Payment of the exercise
price may be made under a promissory note or by delivery of already-owned
shares.

(3) For "All Optionees," the number of options granted in the total of all
options granted to Company employees in fiscal year 1998, and the
potential realizable value is based on the $58.1563 per share exercise
price of the options granted to the named executive officers on November
20, 1997, a November 20, 1997 grant date, and a ten-year option term (the
term of all options granted to employees in fiscal year 1998).

(4) For "All Stockholders," the potential realizable value is based on ten-
year appreciation of the 30,092,576 shares outstanding on November 20,
1997, and the $58.1563 per share price of the options granted to the named
executive officers on that date.

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AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS/SARS AT OPTIONS/SARS AT
ON VALUE FISCAL YEAR-END (#) FISCAL YEAR-END ($)(2)
EXERCISE REALIZED ------------------------- -------------------------
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- -------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Tracy O'Rourke....... 178,000 7,545,745 571,000 150,000 8,667,890 0
Richard A. Aurelio...... 10,000 387,488 66,000 72,000 0 0
Allen J. Lauer.......... 0 0 126,000 72,000 717,150 0
Richard M. Levy......... 0 0 96,000 72,000 270,900 0
Robert A. Lemos......... 0 0 39,334 36,000 48,166 0
</TABLE>
- --------
(1) Based on the fair market value of the underlying shares on the exercise
date.

(2) Based on the closing market price of the underlying shares at the end of
fiscal year 1998 ($34.375 per share).

LONG-TERM INCENTIVE PLANS-- AWARDS IN LAST FISCAL YEAR(1)

<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
PERFORMANCE UNDER
NUMBER OF OR OTHER NON-STOCK PRICE-BASED
SHARES, PERIOD PLANS
UNITS OR UNTIL -------------------------
OTHER MATURATION THRESHOLD TARGET MAXIMUM
NAME RIGHTS (#) OR PAYOUT ($)(2) ($)(3) ($)(4)
---- --------- ----------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
J. Tracy O'Rourke............. N/A 1998-2000 $123,600 $ 0 --
Richard A. Aurelio............ N/A 1998-2000 $ 25,604 $ 0 --
Allen J. Lauer................ N/A 1998-2000 $ 25,604 $67,423 --
Richard M. Levy............... N/A 1998-2000 $ 25,604 $47,793 --
Robert A. Lemos............... N/A 1998-2000 $ 29,660 $ 0 --
</TABLE>
- --------
(1) Determinations by the Committee that a named executive officer may
participate in the long-term incentive feature of the Company Omnibus
Stock Plan ("LTI") and might receive a payout for a specified period is an
award for purposes of this table. Awards (i.e., the determination of
participation in the LTI) for the 1998-2000 cycle were made in fiscal year
1998. Under the LTI, each named executive officer is eligible to receive
compensation payable in cash or in Common Stock, or a combination thereof,
based upon the Company's achievement of objectives for average annual
return on net assets ("RONA") and revenue growth ("RG") over a three-year
cycle. No estimate or assumption made in connection with this table is
intended to represent a forecast of possible future performance of the
Company.

(2) If the minimum level of RONA or RG established by the Committee at the
beginning of the three-year cycle is achieved, the minimum amount payable
ranges from 11.25% to 15% of annual base salary as of the end of the last
fiscal year of the cycle. If neither RONA nor RG for the three-year cycle
equals the applicable minimum level, no amount will be paid. The minimum
amount payable, if any amount is paid at all, depends on each named
executive's base salary in the last year of the cycle, and the amounts
set forth above assume that each named executive officer's annual base
salary at the end of fiscal year 2000 will be identical to the executive
officer's 1999 annual base salary.

(3) A "Target" award is not determinable under the LTI. The amounts shown are
estimates of the payout for the three-year cycle assuming (a) that the
RONA and revenues for the remaining years of the cycle are the same as
RONA and revenues for fiscal year 1998 and (b) that each named executive
officer's annual base salary at the end of fiscal year 2000 will be
identical to his 1999 annual base salary. The actual payment for the
three-year cycle may be greater or less than the estimates shown in this
column, depending upon the actual RONA and revenues for fiscal years
1998, 1999 and 2000 the actual base salary of the named executive officer
at the end of fiscal year 1999, and the aggregate payout to all
participants (see footnote 4 below).

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<PAGE>

(4) The maximum amount payable is not determinable or estimable prior to the
end of the three-year cycle for the following reason: If the maximum
levels of RONA and RG established by the Committee at the beginning of
the three-year cycle are achieved or exceeded, the maximum amount payable
is 200% of annual base salary (except for Mr. Lemos, whose maximum amount
payable is 150% of his annual base salary) as of the end of the last
fiscal year of the cycle. The maximum amount payable is reduced, however,
if the aggregate LTI payout to all participants (including the named
executive officers) would exceed 5% (before such payouts) of the
Company's pre-tax operating earnings in the last fiscal year of the
three-year cycle. This variable makes the maximum amount not determinable
or estimable.

MANAGEMENT INDEBTEDNESS AND CERTAIN TRANSACTIONS

In connection with the February 1990, recruitment and subsequent relocation
of Mr. O'Rourke, the Company provided to Mr. O'Rourke financing in the amount
of $1,260,000 to purchase a residence in California. This financing is
evidenced by two promissory notes, each secured by a deed of trust on the
property. One note is for $700,000 and bears an interest rate based on the
appreciation of the property, and no interest is payable (nor can the actual
interest rate be determined) until the note becomes due. The other note is for
$560,000 and does not bear interest. Periodic payments of principal are not
required and the notes become due (a) upon sale of the property, (b) one year
after Mr. O'Rourke's employment by the Company terminates or (c) 30 years
after the date of the notes, whichever occurs first. Mr. O'Rourke may, while
employed by the Company, substitute the property securing the notes with a
replacement principal residence. If Mr. O'Rourke retires while the notes
remain unpaid, he may convert the notes to a replacement note at a principal
amount determined by an appraisal of the property and a calculation of the
outstanding principal and interest as if the property had been sold at the
appraised value within one year after Mr. O'Rourke's retirement. The
replacement note would bear interest at an annual rate of 8%, with principal
and interest amortized in equal monthly payments over 15 years from the first
anniversary of Mr. O'Rourke's retirement, principal and interest being due
upon sale of the property or use of the property other than as Mr. O'Rourke's
residence. In connection with the termination of Mr. O'Rourke's employment by
the Company after the Distribution, Mr. O'Rourke has agreed to repay on the
Distribution Date all amounts then outstanding under both of the foregoing
notes.

In connection with the March 1991 recruitment and subsequent relocation of
Mr. Aurelio, the Company provided to Mr. Aurelio financing in the amount of
$500,000 to purchase a residence in California. The financing is evidenced by
a promissory note secured by a deed of trust on the property. The note bears
an interest rate based on the appreciation of the property, and no interest is
payable under the note (nor can the actual interest rate be determined) until
the note becomes due. Periodic payments of principal are not required and the
note becomes due (a) upon sale of the property, (b) either one year or three
years after Mr. Aurelio's employment by the Company terminates (depending on
the circumstances of that termination) or (c) 30 years after the date of the
note, whichever occurs first. In connection with Mr. Aurelio's employment by
SEB after the Distribution, Mr. Aurelio will exchange the existing note for a
comparable promissory note secured by a deed of trust on the property for the
benefit of SEB.

CHANGE IN CONTROL AND OTHER AGREEMENTS

CHANGE IN CONTROL AGREEMENTS

The Board of Directors has approved amended and restated agreements (each,
the "Agreement") between the Company and Mr. O'Rourke and the four other
executive officers named in the Summary Compensation Table (the "Senior
Executives") which provide for the payment of specified compensation and
benefits upon certain terminations of their employment following a change in
control of the Company. Each Agreement is in effect unless and until
terminated by the Board of Directors in accordance with the Agreement.

A change in control of the Company is defined in each Agreement to occur (a)
if any individual or group becomes the beneficial owner of 30% or more of the
combined voting power of the Company's outstanding

207
<PAGE>

securities, (b) if "continuing directors" (defined as the directors of the
Company as of the date of the Agreement and any successor to any such
directors who was nominated or selected by a majority of the directors in
office at the time of his nomination or selection and who is not affiliated or
associated in any way with an individual or group who is a beneficial owner of
more than 10% of the combined voting power of the Company's outstanding
securities) cease to constitute at least a majority of the Board of Directors,
or (c) if there occurs a reorganization, merger, consolidation or other
corporate transaction involving the Company in which the stockholders of the
Company do not own more than 50% of the combined voting power of the Company
or other corporation resulting from such transaction, or (d) if all or
substantially all of the Company's assets are sold, liquidated or distributed.
The Distribution will not be deemed a change in control under the Agreements.

In their respective Agreements, Mr. O'Rourke and the Senior Executives
agreed that they will not voluntarily leave the Company's employ during a
tender or exchange offer, proxy solicitation in opposition to the Board of
Directors or other effort by any party to effect a change in control of the
Company. This is intended to assure that management will continue to act in
the interest of the stockholders rather than be affected by personal
uncertainties during any attempts to effect a change in control of the
Company, and to enhance the Company's ability to attract and to retain
executives.

Each Agreement provides that if within 18 months of a change in control (i)
the Company terminates the employee's employment other than by reason of his
death, disability, retirement or for cause (as defined in the Agreement) or
(ii) the employee terminates his employment for "good reason," the employee
will receive a lump sum severance payment equal to 2.99 (in the case of Mr.
O'Rourke) and 2.50 (in the case of the Senior Executives) times the sum of the
employee's annual base salary plus the highest annual bonus paid to the
employee in any of the three years ending prior to the date of termination.
"Good reason" is defined as the following after a change in control of the
Company; certain material changes in assignment of duties; certain reductions
in compensation; certain material changes in employee benefits and
perquisites; a change in the site of employment; the Company's failure to
obtain the written assumption by its successor of the obligations contained in
the Agreement; attempted termination of employment for cause on grounds
insufficient to constitute a basis of termination for cause under the terms of
the Agreement; or the Company's failure to promptly make any payment required
under the terms of the Agreement in the event of a dispute relating to
employment termination.

Each Agreement provides that upon termination or resignation occurring under
the circumstances described above, the employee will receive a continuation of
all insurance and other benefits on the same terms as if he remained an
employee or equivalent benefits will be provided until the earlier to occur of
commencement of substantially equivalent full-time employment with a new
employer or 24 months after the date of termination of employment with the
Company. Each Agreement also provides that all stock options granted become
exercisable in full according to their terms, and that any unreleased
restricted stock be released from restrictions. Each Agreement also provides
that all outstanding long-term incentive award cycles under the Company
Omnibus Stock Plan shall be paid out at the "target" level without pro-rating
for remaining periods under these cycles. Each Agreement further provides that
in the event that any payments and benefits received by the employee from the
Company would subject that person to the excise tax contained in Section 280G
of the Code the employee will be entitled to receive an additional payment
that will place the employee in the same after-tax economic position that the
employee would have enjoyed if such excise tax had not applied.

SEVERANCE AGREEMENTS

In connection with the Distribution, the Board of Directors of the Company
has approved severance agreements (each, an "Agreement") between the Company
and seven employees of the Company (each, an "Employee"), including Mr.
O'Rourke, Mr. Lemos, Joseph B. Phair, Vice President, General Counsel and
Secretary of the Company, and Wayne P. Somrak, Vice President and Controller
of the Company, that provide for the resignation or retirement of these
executives and the payment of specified compensation and benefits upon the
consummation of the Distribution or upon such earlier date as may be mutually
agreed by the parties (the "Termination Date").

208
<PAGE>

Each Agreement provides that Employee will resign or retire from all of his
positions within the Company as of the Termination Date. The Agreement
contemplates that Employee will remain in the employ of the Company and
continue to perform Employee's regular duties until the Termination Date. In
that connection, the Agreement provides that the Agreement will lapse and be
of no further force or effect upon the occurrence of any of the following
events:(i) Employee voluntarily terminates employment prior to the Termination
Date, (ii) the Company terminates Employee's employment for cause or (iii) the
death, disability or retirement of Employee prior to the Termination Date. If
the Company terminates the employment of Employee prior to the Termination
Date without cause, Employee will be entitled to the payments and benefits
provided for in the Agreement as of the Termination Date. If the Company
terminates Employee's employment for cause, the Company will pay Employee's
base salary through the Termination Date, but will have no further obligation
to Employee under the Agreement.

Each Agreement provides that, subject to delivery of a release by Employee,
upon the resignation or retirement of Employee the Company will pay to
Employee a lump sum severance amount equal to 2.99 (in the case of
Mr. O'Rourke), 2.50 (in the case of Mr. Lemos, Mr. Phair and one other
employee) and 2.00 (in the case of Mr. Somrak and two other employees) (in
each case, the "Severance Factor") times the sum of such Employee's base
salary and his highest Company Management Incentive Plan bonus in any of the
three years ending prior to the Termination Date.

In addition to the lump sum severance payment described above, the Agreement
also provides for the following benefits to be provided to Employee upon
resignation or retirement: a lump sum payment equal to a pro-rata portion
(based on the number of days elapsed in the year of termination) of Employee's
target bonus under the Company Management Incentive Plan for the year of
termination, all stock options granted to Employee will become exercisable in
full according to their terms and any unreleased restricted stock will be
released from restrictions; Employee will receive a continuation of all
insurance and other benefits on the same terms as if he remained an employee
or equivalent benefits will be provided until the earlier to occur of
commencement of substantially equivalent full-time employment with a new
employer or 24 months after the date of termination of employment with the
Company; Employee may elect to purchase any automobile then in possession of
Employee and subject to a lease held by the Company at the residual value of
the car as set forth in the lease; and Employee's outstanding awards for the
1997-99 and 1998-00 cycles under the long-term incentive feature of the
Company Omnibus Stock Plan will be settled for each such award's target payout
amount without pro-rating for remaining periods for those awards, and the
outstanding award for the 1999-01 cycle will be settled for such award's
target payout amount pro-rated based on the number of days elapsed in the
cycle.

The Company may offset any payments owed Employee under the Agreement by any
amount of Related Income received by Employee during the Severance Period. The
Agreement defines "Related Income" to mean any salary and/or bonus paid to
Employee by a post Distribution company (HCS, IB or SEB) for services
performed in Employee's capacity as an employee, but shall not include (i) any
fees earned by Employee in connection with Employee's service as a non-
employee officer or member of the board of directors of or a consultant to a
post-Distribution company or (ii) a fraction of the salary and or bonus earned
by Employee as an employee of a post-Distribution company as set forth in the
Agreement. The Agreement defines "Severance Period" to mean the whole and
partial number of years determined by multiplying the Severance Factor by
one year.

The Agreement prohibits Employee from soliciting away from the Company or
interfering in any way with any customer or client of the Company. In the case
of Mr. O'Rourke, the non-compete clause also prohibits him from participating
in any way with an entity that is engaged in any business in which HCS, IB or
SEB is actively engaged at the time.

It is anticipated that upon termination of Mr. Phair's and Mr. Somrak's
employment pursuant to their respective Agreements, Mr. Phair will enter into
a consulting agreement with HCS, upon terms to be agreed between HCS and Mr.
Phair, and Mr. Somrak will enter into a consulting agreement with IB, upon
terms to be agreed between IB and Mr. Somrak.

209
<PAGE>

REPORT OF THE ORGANIZATION AND COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION

The Organization and Compensation Committee of the Board of Directors (the
"Committee") is responsible for compensation of the Company's executive
officers. The Committee is comprised of the eight outside directors whose
names appear at the conclusion of this report.

COMPENSATION POLICIES APPLICABLE TO EXECUTIVE OFFICERS

Overall Philosophy

The Committee's executive compensation philosophy is that compensation
programs should:

. be closely aligned with the interests of the Company's stockholders;

. be linked with the Company's business goals and strategies;

. be competitive within the Company's industry and community so that the
Company can attract and retain high quality executives;

. base a substantial portion of executive officer compensation on the
Company's financial performance measured against pre-determined
objectives; and

. reward executive officers for good performance.

Base Salaries

Annual base salaries are designed primarily to attract and retain
executives, but are intended to contribute less to total compensation than
incentive-based compensation. Executive officer salaries in fiscal year 1998
were determined by the Committee after consideration of each executive
officer's fiscal year 1997 compensation (including the relative mix of fixed,
annual incentive and long-term incentive compensation), each executive
officer's potential incentive compensation in fiscal year 1998, each executive
officer's position and responsibilities, survey data on 1997 salaries paid to
69 "Group Head" executives of electrical/electronic businesses with comparable
sales volume (the Committee approved increases in Executive Vice President
salaries which placed them at or above the 75th percentile), published market
data on other companies' anticipated salary increases for 1998 (the Committee
approved increases which were generally below the survey average), and the
Company's financial performance in fiscal year 1997.

Annual Incentive Awards

Annual incentives for executives are created through potential cash awards
under the Company Management Incentive Plan, which is intended to link
compensation directly to improved financial performance. Executive officer
awards for fiscal year 1998 were determined by a formula which measured
Company and business unit performance against pre-determined objectives for
return on sales ("ROS"). For executive officers with operational
responsibilities, 50% of their award formula was based on business unit ROS
and the other 50% was based on Company ROS. Awards could have ranged from zero
to 200% of an executive officer's annual base salary, depending on the ROS
achieved and the pre-determined participation level for that executive
officer. Fiscal year 1998 objectives for ROS were determined by the Committee
after consideration of historical ROS (which were compared with historical ROS
of 21 other companies similar to the Company's three businesses), historical
ROS objectives and ROS forecasts. Each executive officer's participation level
was determined by the Committee after consideration of the executive officer's
relative position and responsibilities, relative mix of fixed and incentive
compensation in fiscal year 1997, previous awards and potential award for that
participation level.

Stock Options

Non-qualified stock options are granted annually under the Company Omnibus
Stock Plan in order to retain talented executive officers and to closely align
their compensation with stockholder value. Because stock options

210
<PAGE>

are granted with an exercise price equal to the market price of the Company's
stock on the grant date and vest in equal installments over three years
assuming continued employment, stock options compensate executive officers
only if the Company's stock price increases after the date of grant and the
executive officer remains employed for the periods required for the stock
option to become exercisable.

Executive officer stock option grants in fiscal year 1998 were determined by
the Committee after consideration of certain data from the 1997 iQuantic High-
Tech Equity Practices Survey of stock option practices at 70 high technology
companies, and stock option data reported in proxy statements for 11
comparable companies. The Committee did not attempt to determine grants in any
relationship to that data, but notes that stock options granted to the
Company's five most highly compensated executive officers for fiscal year 1998
were the same as granted in the previous two fiscal years and were well below
the 75th percentile of the survey data.

In determining fiscal year 1998 executive officer stock option grants, the
Committee also considered each executive officer's position and
responsibilities, stock option grants in each of the four previous fiscal
years and unexercised option shares from prior grants. In determining grants
to the Company's Chief Executive Officer and next four most highly compensated
executive officers, the Committee also considered for each of them the
potential realizable value of stock options granted in fiscal year 1997, stock
options exercised during fiscal year 1997, and the value of all outstanding
stock options at the end of fiscal year 1997.

Restricted Stock

The restricted stock feature of the Company Omnibus Stock Plan is structured
to create incentives for executives to improve financial performance, to
promote stockholder value and to remain with the Company. Except for
significant promotions or initial retentions, restricted stock is granted to
executive officers only if pre-determined financial objectives are achieved,
and once granted requires continued employment in order to vest (in equal
installments over three years). Executive officer grants for fiscal year 1998
were determined by a formula which measured Company performance against pre-
determined objectives for return on equity ("ROE"). Fiscal year 1998
objectives for ROE were determined by the Committee after consideration of
historical ROE (which were compared with historical ROE of 21 other companies
similar to the Company's three businesses), historical ROE objectives and
forecasted ROE. Each executive officer's participation level (the number of
shares which could be granted to that executive officer upon achieving
specified ROE objectives) was determined by the Committee after consideration
of the executive officer's relative position and responsibilities; with
respect to the Company's Chief Executive Officer and the next four most highly
compensated executive officers, the Committee also considered the actual and
relative mix of their fixed and incentive compensation in fiscal year 1997.

Long-Term Incentive Awards

Additional long-term retention and performance incentives for executives are
created through potential cash and/or stock awards under the long-term
incentive feature of the Company Omnibus Stock Plan. Executive officer awards
(which were paid in cash) for a three-year cycle beginning with fiscal year
1996 and ending with fiscal year 1998 were determined by a formula which
measured Company and business unit performance against pre-determined
objectives for return on net assets ("RONA"). For executive officers with
operational responsibilities, 40% of their award formula was based on core
business RONA and the other 60% was based on Company RONA. Awards could have
ranged from zero to 200% of an executive officer's base salary, depending on
the RONA achieved and the pre-determined level of that executive officer's
participation. The fiscal years 1996-1998 objectives for RONA were determined
by the Committee after consideration of historical RONA, historical RONA
objectives and RONA forecasts. Each executive officer's participation level
was determined by the Committee after consideration of the executive officer's
relative position and responsibilities, relative mix of fixed and incentive
compensation in fiscal year 1997, and potential awards (including for pending
cycles). At the last Annual Meeting, stockholders approved revenue growth as
an additional performance measure for possible use by the Committee in
determining long-term incentive awards, and the Committee accordingly
established pre-determined objectives for RONA and revenue growth during the
fiscal years 1998-2000 cycle.

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<PAGE>

Other Compensation

In order to attract and retain talented executive officers, the Committee
has also approved arrangements providing executive officers with certain
perquisites, such as use and purchase of an automobile under the Company's
Executive Car Program, use of the Company aircraft, reimbursement for tax
planning and return preparation and financial counseling services,
reimbursement for the payment of taxes on certain perquisites and
reimbursement for annual medical examinations. In order to make retirement
contributions which could not be contributed to executive officers' qualified
retirement plan accounts due to Code limitations, the Committee has also
approved the Supplemental Retirement Plan under which the Company makes
unfunded supplemental retirement contributions. Executive officers are also
eligible to participate in compensation and benefit programs generally
available to other employees, such as the Company's Cash Profit-Sharing Plan,
Employee Stock Purchase Plan, Retirement and Profit-Sharing Program and
supplemental life and disability insurance programs.

While the Committee generally limits executive officer compensation to the
plans and arrangements described above, the Committee considers it appropriate
in certain limited circumstances to otherwise reward an executive officer for
extraordinary contributions. In the case of Dr. Richard M. Levy, Executive
Vice President, the Committee decided to award a special cash bonus for fiscal
year 1998, in recognition of Dr. Levy's success in leading the Health Care
Systems business through difficult business and market conditions.

Tax Deductibility of Executive Compensation

Section 162(m) of the Code generally provides that publicly-held
corporations may not deduct in any taxable year certain compensation in excess
of $1,000,000 paid to the chief executive officer and the next four most
highly compensated executive officers. At the 1995 Annual Meeting of
Stockholders, the Company's stockholders approved amendments to the Company
Omnibus Stock Plan and adoption of the Company Management Incentive Plan, and
at the 1997 Annual Meeting stockholders again amended the Company Omnibus
Stock Plan, in each case in order for awards under those plans to be eligible
for continued tax deductibility. Awards under those plans for fiscal year 1998
were made in accordance with the requirements of Section 162(m) so as to be
tax deductible. However, the Committee considers one of its primary
responsibilities to be structuring a compensation program that will attract,
retain and reward executive talent necessary to maximize stockholder return.
Accordingly, the Committee believes that the Company's interests are best
served in some circumstances by providing compensation (such as salary,
perquisites and special cash bonuses) which might be subject to the tax
deductibility limitation of Section 162(m).

BASES FOR CEO COMPENSATION

The same policies and programs described above were followed by the
Committee in determining fiscal year 1998 compensation for Mr. O'Rourke, the
Company's Chairman and Chief Executive Officer.

The Committee set Mr. O'Rourke's annual base salary in fiscal year 1998
(which was increased by 2.5% from the previous year) in accordance with the
policy and considerations described above (under the caption "Compensation
Policies Applicable to Executive Officers--Base Salaries"), also taking into
account generally Mr. O'Rourke's salary and other compensation paid in each of
the previous seven fiscal years, the relative mix of Mr. O'Rourke's fixed,
annual incentive and long-term incentive compensation in the previous year and
a general survey of chief executive officer salaries at 29
electrical/electronic companies with comparable sales volume (which survey
showed that Mr. O'Rourke's previous year's salary was at the 90th percentile).

Mr. O'Rourke was paid an annual incentive award for fiscal year 1998 in
accordance with the Company Management Incentive Plan described above (under
the caption "Compensation Policies Applicable to Executive Officers--Annual
Incentive Awards"). Fiscal year 1998 ROS and the pre-determined formula
resulted in a cash award to Mr. O'Rourke equal to 43.40% of his annual base
salary. Mr. O'Rourke was also paid a long-term incentive award for the three-
year cycle ended with fiscal year 1998 in accordance with the long-term
incentive feature of the Company Omnibus Stock Plan described above (under the
caption "Compensation Policies

212
<PAGE>

Applicable to Executive Officers--Long-Term Incentive Awards"). Fiscal years
1996-98 RONA and the pre-determined formula resulted in a cash award to Mr.
O'Rourke equal to 97.49% of his annual base salary. Under the restricted stock
feature of the Company Omnibus Stock Plan described above (under the caption
"Compensation Policies Applicable to Executive Officers--Restricted Stock"),
Mr. O'Rourke did not receive any grant of restricted stock for fiscal year
1998 because the minimum ROE required under the pre-determined formula was not
achieved.

Mr. O'Rourke was granted a 75,000 share stock option in fiscal year 1998
(which will vest in equal installments over three years, with an exercise
price equal to the market price of the Company's Common Stock on the grant
date), based on the policy and considerations described above (under the
caption "Compensation Policies Applicable to Executive Officers--Stock
Options"), and also taking into account generally Mr. O'Rourke's overall
compensation package.

<TABLE>
<S> <C>
John Seely Brown Wayne R. Moon
Samuel Hellman Burton Richter
Terry R. Lautenbach Jon D. Tompkins
Angus A. MacNaughton Richard W. Vieser (Chairman)
</TABLE>

213
<PAGE>

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN AMONG THE COMPANY, STANDARD &
POOR'S 500 COMPOSITE INDEX AND STANDARD & POOR'S HIGH TECHNOLOGY COMPOSITE
INDEX

The following graph compares the cumulative total return (change in stock
price plus reinvested dividends) of the Company's Common Stock in fiscal years
1994 through 1998 (from October 4, 1993 through October 2, 1998) with the
Standard & Poor's 500 Composite Index and the Standard & Poor's High
Technology Composite Index. The graph assumes that the value of the investment
in the Company's Common Stock and in each index on October 4, 1993 was $100.
Standard & Poor's is the source of the data on the indices. The comparisons in
this graph are not intended to represent a forecast of possible future
performance of the Company's Common Stock or stockholder returns.

PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
Measurement Period S&P S&P
(Fiscal Year Covered) VARIAN 500 INDEX HIGH TECHNOLOGY
- ------------------- ---------- --------- ---------------
<S> <C> <C> <C>
Measurement Pt- 1993 $100 $100 $100
FYE 1994 $149 $100 $114
FYE 1995 $220 $127 $179
FYE 1996 $198 $149 $219
FYE 1997 $251 $205 $352
FYE 1998 $144 $217 $376
</TABLE>

214
<PAGE>

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires that the Company's directors and
executive officers file reports of ownership and changes in ownership of
Company securities with the Commission. Based solely on the Company's review
of the reporting forms and written representations received by it from such
directors and executive officers, the Company believes that for the fiscal
year ended October 2, 1998, all reporting requirements applicable to such
directors and executive officers were timely satisfied.

ANNUAL REPORT

The Company's Annual Report for fiscal year 1998, which includes financial
statements for the periods specified therein, was mailed to all stockholders
prior to the mailing of this Proxy Statement.

STOCKHOLDER PROPOSALS

The attached proxy card grants the proxy holders discretionary authority to
vote on any matter raised at the meeting. Any stockholder who wishes to
present a proposal for action at the Company's 2000 Annual Meeting of
Stockholders and who wishes to have it set forth in the Proxy Statement and
identified in the form of Proxy prepared by the Company must notify the
Company in such a manner that such notice is received by the Company's
Secretary not later than September 17, 1999 at the Company's address set forth
on the first page of this Proxy Statement. In addition, such a proposal must
be in such form as is required under the rules and regulations promulgated by
the Securities and Exchange Commission. In accordance with SEC Rule 14a-5(e),
stockholder proxies obtained by the Board of Directors of the Company in
connection with the Company's 2000 Annual Meeting of Stockholders will confer
on the proxy holders discretionary authority to vote on any matters presented
at the meeting, unless notice of the matter is provided to the Company's
Secretary not later than December 20, 1999 (or, if the Distribution has
occurred, not later than December 1, 1999) at the Company's address set forth
on the first page of this Proxy Statement.

INDEPENDENT ACCOUNTANTS

The firm of PricewaterhouseCoopers LLP has been selected by the Board of
Directors as the Company's independent public accountants for fiscal year
1999. PricewaterhouseCoopers LLP also acted as the Company's independent
accountants for fiscal year 1998. A PricewaterhouseCoopers LLP representative
will attend the Meeting and will have the opportunity to make a statement if
he or she so desires and to respond to appropriate questions from
stockholders.

BY ORDER OF THE BOARD OF DIRECTORS

/s/ JOSEPH B. PHAIR
JOSEPH B. PHAIR
Secretary

January 14, 1999
Palo Alto, California

215
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.
- -----------------------------------------------
<S> <C>
Report of Independent Accountants........................................ F-2
Combined Statements of Earnings for the three fiscal years ended October
2, 1998................................................................. F-3
Combined Balance Sheets at October 2, 1998 and September 26, 1997........ F-4
Combined Statements of Divisional Equity for the three fiscal years ended
October 2, 1998......................................................... F-5
Combined Statements of Cash Flows for the three fiscal years ended
October 2, 1998......................................................... F-6
Notes to Combined Financial Statements................................... F-7
<CAPTION>
SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.
- -----------------------------------------------------------
<S> <C>
Report of Independent Accountants........................................ F-20
Combined Statements of Earnings for the three fiscal years ended October
2, 1998................................................................. F-21
Combined Balance Sheets at October 2, 1998 and September 26, 1997........ F-22
Combined Statements of Divisional Equity for the three fiscal years ended
October 2, 1998......................................................... F-23
Combined Statements of Cash Flows for the three fiscal years ended
October 2, 1998......................................................... F-24
Notes to Combined Financial Statements................................... F-25
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Stockholders of Varian Associates, Inc.:

In our opinion, the accompanying combined balance sheets and the related
combined statements of earnings, divisional equity, and cash flows present
fairly, in all material respects, the financial position of the Instruments
Business of Varian Associates, Inc. (the "Company") at October 2, 1998 and
September 26, 1997, and the results of its operations and its cash flows for
each of the three years in the period ended October 2, 1998, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.

/s/ PricewaterhouseCoopers LLP
-------------------------------
PricewaterhouseCoopers LLP
San Jose, California
October 31, 1998

F-2
<PAGE>

INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.

COMBINED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Sales............................................... $557,770 $541,946 $504,394
-------- -------- --------
Operating Costs and Expenses
Cost of sales..................................... 336,387 330,845 310,753
Research and development.......................... 29,620 31,987 29,897
Marketing......................................... 113,854 110,009 107,244
General and administrative........................ 38,745 42,303 45,053
-------- -------- --------
Total operating costs and expenses................ 518,606 515,144 492,947
-------- -------- --------
Operating Earnings before Taxes..................... 39,164 26,802 11,447
Taxes on earnings................................. 15,736 12,597 5,277
-------- -------- --------
Net Earnings........................................ $ 23,428 $ 14,205 $ 6,170
======== ======== ========
Pro Forma Net Earnings Per Share.................... $ 0.78 $ 0.47 $ 0.20
======== ======== ========
Shares used in pro forma per share computations..... 29,910 30,451 31,024
======== ======== ========
</TABLE>

See accompanying Notes to the Combined Financial Statements.

F-3
<PAGE>

INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.

COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
FISCAL YEAR-END
-------------------------
1998 1997
--------- ---------
(DOLLARS IN
THOUSANDS)
ASSETS
------
<S> <C> <C> <C>
Current Assets
Accounts receivable.................................. $ 143,836 $ 131,641
Inventories.......................................... 71,575 64,797
Other current assets................................. 26,260 24,723
--------- ---------
Total Current Assets............................... 241,671 221,161
--------- ---------
Property, Plant, and Equipment......................... 219,385 201,373
Accumulated depreciation and amortization............ (124,666) (114,448)
--------- ---------
Net Property, Plant, and Equipment................... 94,719 86,925
--------- ---------
Other Assets........................................... 67,709 49,820
--------- ---------
Total Assets....................................... $ 404,099 $ 357,906
========= =========
<CAPTION>
LIABILITIES AND DIVISIONAL EQUITY
---------------------------------
<S> <C> <C> <C>
Current Liabilities
Accounts payable--trade.............................. $ 34,320 $ 34,968
Accrued expenses..................................... 102,470 92,704
Product warranty..................................... 7,608 7,173
Advance payments from customers...................... 5,180 9,214
--------- ---------
Total Current Liabilities.......................... 149,578 144,059
Long-Term Accrued Expenses............................. 6,862 6,245
Deferred Taxes......................................... 4,192 4,306
--------- ---------
Total Liabilities.................................. 160,632 154,610
--------- ---------
Commitments and Contingencies (Notes 9 and 10)
Divisional Equity...................................... 243,467 203,296
--------- ---------
Total Liabilities and Divisional Equity............ $ 404,099 $ 357,906
========= =========
</TABLE>

See accompanying Notes to the Combined Financial Statements.

F-4
<PAGE>

INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.

COMBINED STATEMENTS OF DIVISIONAL EQUITY

<TABLE>
<CAPTION>
(DOLLARS
IN
THOUSANDS)
<S> <C>
Balance, Fiscal Year-End, 1995....................................... $150,813
Net earnings for the year.......................................... 6,170
Net transfers (to) from Varian Associates, Inc..................... (2,090)
--------
Balance, Fiscal Year-End, 1996....................................... 154,893
Net earnings for the year.......................................... 14,205
Net transfers (to) from Varian Associates, Inc..................... 34,198
--------
Balance, Fiscal Year-End, 1997....................................... 203,296
Net earnings for the year.......................................... 23,428
Net transfers (to) from Varian Associates, Inc..................... 16,743
--------
Balance, Fiscal Year-End, 1998....................................... $243,467
========
</TABLE>

See accompanying Notes to the Combined Financial Statements.

F-5
<PAGE>

INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FISCAL YEARS
----------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities
Net Cash Provided by Operating Activities...... $ 36,856 $ 16,627 $ 22,779
-------- -------- --------
Investing Activities
Purchase of property, plant, and equipment..... (19,358) (20,803) (17,915)
Purchase of businesses, net of cash acquired... (34,707) (30,998) (4,396)
-------- -------- --------
Net Cash Used in Investing Activities........ (54,065) (51,801) (22,311)
-------- -------- --------
Financing Activities
Net transfers (to) from Varian Associates,
Inc........................................... 16,743 34,198 (2,090)
-------- -------- --------
Net Cash Provided by (Used in) Financing Ac-
tivities.................................... 16,743 34,198 (2,090)
-------- -------- --------
Effects of Exchange Rate Changes on Cash......... 466 976 1,622
-------- -------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents................................. -- -- --
Cash and Cash Equivalents at Beginning of
Fiscal Year................................. -- -- --
-------- -------- --------
Cash and Cash Equivalents at End of Fiscal
Year........................................ $ -- $ -- $ --
-------- -------- --------
Detail of Net Cash Provided by Operating Activi-
ties
Net Earnings................................... $ 23,428 $ 14,205 $ 6,170
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation................................. 17,541 19,449 15,975
Deferred taxes............................... (2,225) (811) (458)
Changes in assets and liabilities
Accounts receivable........................ 2,063 (15,201) (12,997)
Inventories................................ (1,269) (6,172) (3,942)
Other current assets....................... 98 (125) 1,689
Accounts payable--trade.................... (9,012) 7,531 2,884
Accrued expenses........................... 958 3,893 (750)
Product warranty........................... 637 1,578 714
Advance payments from customers............ (4,511) (3,384) 6,425
Long-term accrued expenses................. 617 284 5,961
Other...................................... 8,531 (4,620) 1,108
-------- -------- --------
Net Cash Provided by Operating Activities.... $ 36,856 $ 16,627 $ 22,779
======== ======== ========
</TABLE>

See accompanying Notes to the Combined Financial Statements.

F-6
<PAGE>

INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

On August 21, 1998, the Board of Directors of Varian Associates, Inc.
("VAI") announced a plan to reorganize into three publicly traded independent
companies by spinning off two of its businesses to stockholders in a tax-free
distribution (the "Distribution"). The Distribution is subject to final
approval by VAI's Board of Directors. Among other things, this approval is
conditioned upon the receipt of a ruling from the Internal Revenue Service
that the spin-off of the two businesses will be a tax free transaction for VAI
stockholders, VAI, the Semiconductor Equipment Business of VAI ("SEB"), and
the Instruments Business of VAI (the "Company") and upon the approval of the
plan for the Distribution by VAI stockholders.

Under the plan for the Distribution, the Company and SEB will be
incorporated as Varian, Inc. and Varian Semiconductor Equipment Associates,
Inc., respectively, and will become publicly traded companies. Also under the
plan for the Distribution, each of VAI and the Company will have between $50
and $100 million of outstanding indebtedness under VAI's term loans and notes
payable, and VAI will contribute cash to SEB so that at the Distribution, SEB
will have approximately $100 million in cash and cash equivalents and
consolidated debt not exceeding $5 million. The Company will include VAI's
business units that manufacture and sell analytical and research
instrumentation and related equipment for studying the chemical composition of
substances. Significant products of the VAI business units that will comprise
the Company include nuclear magnetic resonance instruments, chromatography
systems, optical spectroscopy instruments, vacuum products, and printed wiring
assemblies. The Company will be incorporated in Delaware in December 1998,
with 99,000,000 shares of common stock and 1,000,000 shares of preferred stock
authorized. Upon incorporation, all outstanding shares of the Company's common
stock will be owned by VAI. For purposes of these financial statements and
notes to these financial statements, the Company includes the assets,
liabilities, operating results and cash flows of the VAI business units
described above that will comprise the Company under the plan for the
Distribution.

The combined financial statements of the Company have been prepared using
VAI's historical bases in the assets and liabilities and historical results of
operations of the Company's businesses, except for the accounting for income
taxes (see Note 2).

The combined financial statements of the Company include the accounts of the
Company's businesses after elimination of inter-business balances and
transactions.

The Company's fiscal years reported are the 52- or 53-week period ended on
the Friday nearest September 30. Fiscal year 1998 comprises the 53-week period
ended on October 2, 1998. Fiscal years 1997 and 1996 comprise the 52-week
periods ended on September 26, 1997 and September 27, 1996, respectively.

The combined financial statements generally reflect the financial position,
operating results, and cash flows of the Company as if it were a separate
entity for all periods presented. Where it was practicable to identify
specifically VAI corporate amounts with the activities of the Company, such
amounts have been included in the accounts of the Company. The combined
financial statements also include allocations of certain VAI corporate assets
(including pension assets), liabilities (including profit sharing and pension
benefits), and expenses (including legal, accounting, employee benefits,
insurance services, information technology services, treasury, and other VAI
corporate overhead) to the Company. These amounts have been allocated to the
Company on the basis that is considered by management to reflect most fairly
or reasonably the utilization of the services provided to or the benefit
obtained by the Company. Typical measures and activity indicators used for
allocation purposes include headcount, sales revenue, and payroll expense.
Management believes that the methods used to allocate these amounts are
reasonable. However, these allocations are not necessarily indicative of the
amounts that would have been or that will be recorded by the Company on a
stand-alone basis.

For purposes of governing certain of the ongoing relationships between the
Company, VAI, and SEB after the Distribution and to provide for an orderly
transition, the Company, VAI, and SEB have entered or will enter

F-7
<PAGE>

INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

into various agreements including a distribution agreement, tax sharing
agreement, employee benefits allocation agreement, intellectual property
agreement, and transition services agreement (collectively, the "Distribution
Related Agreements").

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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

Foreign Currency Translation

For non-U.S. operations, the U.S. dollar is the functional currency.
Monetary assets and liabilities of foreign subsidiaries are translated into
U.S. dollars at current exchange rates. Nonmonetary assets such as inventories
and property, plant, and equipment are translated at historical rates. Income
and expense items are translated at effective rates of exchange prevailing
during each year, except that inventories and depreciation charged to
operations are translated at historical rates. The aggregate exchange loss
included in general and administrative expenses for fiscal years 1998, 1997,
and 1996 was $2.0 million, $2.6 million, and $.3 million, respectively.

Revenue Recognition

Sales and related costs of sales are recognized upon shipment of
products.The Company's products are generally subject to warranty, and the
Company provides for the estimated future costs of repair, replacement, or
customer accommodation in costs of sales. Sales and related costs of sales
under long-term contracts to commercial customers and the U.S. Government are
recognized as units are delivered. Service revenue is recognized ratably over
the period of the related contract.

Legal Expenses

The Company accrues estimated amounts for legal fees expected to be incurred
in connection with loss contingencies.

Financial Instruments

The Company considers currency on hand, demand deposits, and all highly
liquid debt securities with an original maturity of three months or less to be
cash and cash equivalents.

Financial instruments that potentially subject the Company to concentrations
of credit risk comprise trade accounts receivable and forward exchange
contracts. The Company sells its products and extends trade credit to a large
number of customers, who are dispersed across many different industries and
geographies. The Company performs ongoing credit evaluations of these
customers and generally does not require collateral from them. Trade accounts
receivable are stated net of allowances for doubtful accounts of $713,000 at
the end of fiscal year 1998 and $321,000 at the end of fiscal year 1997.

F-8
<PAGE>

INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

instruments are recognized in income when the related revenues and expenses
are recognized. All forward exchange contracts hedging operational exposure
are designated and highly effective as hedges. The critical terms of all
forward exchange contracts hedging operational exposure and of the forecasted
transactions being hedged are substantially identical. Accordingly, the
Company expects that changes in the fair value or cash flows of the hedging
instruments and the hedged transactions (for the risk that is being hedged)
will completely offset at the hedge's inception and on an ongoing basis. When
foreign exchange contracts hedge balance sheet exposure, such effects are
recognized in income when the exchange rate changes in accordance with the
requirements for other foreign currency transactions. Gains and losses on
hedges of existing assets or liabilities are included in the carrying amounts
of those assets or liabilities and are ultimately recognized in income as part
of those carrying amounts. Gains and losses related to qualifying hedges of
firm commitments also are deferred and are recognized in income or as
adjustments of carrying amounts when the hedged transaction occurs. Any
deferred gains or losses are included in accrued expenses in the balance
sheet. If a hedging instrument is sold or terminated prior to maturity, gains
and losses continue to be deferred until the hedged item is recognized in
income. If a hedging instrument ceases to qualify as a hedge, any subsequent
gains and losses are recognized currently in income. The Company's forward
exchange contracts generally range from one to three months in original
maturity.

Because the impact of movements in currency exchange rates on foreign
exchange contracts generally offsets the related impact on the underlying
items being hedged, forward exchange contracts do not subject the Company to
risk that would otherwise result from changes in currency exchange rates. The
Company's forward exchange contracts contain credit risk in that its banking
counter-parties may be unable to meet the terms of the agreements. The Company
seeks to minimize such risk by limiting its counter-parties to major financial
institutions. Also, the potential risk of loss with any one party resulting
from this type of credit risk is monitored by management of the Company. The
fair value of forward exchange contracts generally reflects the estimated
amounts that the Company would receive or pay to terminate the contracts at
the reporting date, thereby taking into account and approximating the current
unrealized and realized gains or losses of open contracts. The notional
amounts of forward exchange contracts are not a measure of the Company's
exposure.

Pro Forma Net Earnings per Share

The computation of pro forma net earnings per share for fiscal years 1998,
1997, and 1996 is based on the weighted average number of shares of VAI common
stock outstanding during the respective periods, reflecting the anticipated
ratio of one share of Company common stock for each share of VAI common stock
at the time of Distribution.

Divisional Equity

Divisional equity includes historical investments and advances from VAI,
including net transfers to/from VAI, third party liabilities paid on behalf of
the Company by VAI, amounts due from affiliates related to sales, amounts due
to/from VAI for services and other charges, and current period net earnings of
the Company.

Interim Financial Statements (Unaudited)

The unaudited condensed combined interim financial information reflects all
adjustments, which consist of only normal, recurring adjustments, necessary to
present fairly the results of operations of the Company for each fiscal
quarter during fiscal years 1998 and 1997.

Inventories

Inventories are valued at the lower of cost or market (realizable value)
using last-in, first-out (LIFO) cost for the U.S. inventories. All other
inventories are valued principally at average cost. If the first-in, first-out
(FIFO) method had been used for those operations valuing inventories on a LIFO
basis, inventories would have been higher than reported by $13.7 million in
fiscal 1998, $14.0 million in fiscal 1997, and $12.7 million in fiscal 1996.

F-9
<PAGE>

INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

Property, Plant, and Equipment

Property, plant, and equipment are stated at cost. Major improvements are
capitalized, while maintenance and repairs are expensed currently. Plant and
equipment are depreciated over their estimated useful lives using the
straight-line method for financial reporting purposes and accelerated methods
for tax purposes. Machinery and equipment lives vary from 1 to 40 years, and
buildings are depreciated from 3 to 40 years. Leasehold improvements are
amortized using the straight-line method over their estimated useful lives, or
the remaining term of the lease, whichever is less. When assets are retired or
otherwise disposed of, the assets and related accumulated depreciation are
removed from the accounts. Gains or losses resulting from retirements or
disposals are included in earnings from operations.

Other Assets

Goodwill, which is the excess of the cost of acquired businesses over the
sum of the amounts assigned to identifiable assets acquired less liabilities
assumed, is amortized on a straight-line basis over periods ranging from 3 to
40 years. Investments in affiliated companies over whose operations the
Company has significant influence but not control are accounted for under the
equity method.

Impairment of Long-Lived Assets

Whenever events or changes in circumstances indicate that the carrying
amounts of long-lived assets and goodwill related to those assets may not be
recoverable, the Company estimates the future cash flows, undiscounted and
without interest charges, expected to result from the use of those assets and
their eventual disposition. If the sum of the future cash flows is less than
the carrying amount of those assets, the Company recognizes an impairment loss
based on the excess of the carrying amount over the fair value of the assets.

Research and Development

Company-sponsored research and development costs related to both present and
future products are expensed currently. Costs related to research and
development contracts are included in inventory and charged to cost of sales
upon recognition of related revenue. Total expenditures on research and
development for fiscal years 1998, 1997, and 1996, were $31.2 million, $33.1
million, and $31.2 million, respectively, of which $1.6 million, $1.1 million,
and $1.3 million, respectively, were funded by customers.

Taxes on Earnings

The Company's operating results historically have been included in VAI's
consolidated U.S. and state income tax returns and in tax returns of certain
VAI foreign subsidiaries. Except for the utilization of foreign tax credits,
the provision for income taxes in the Company's combined financial statements
has been determined on a separate-return basis, under which the Company's
provision for income taxes comprises its estimated tax liability and the
change in its deferred income taxes. Foreign tax credits are benefited to the
extent they were utilized in VAI's consolidated tax returns. Deferred tax
assets and liabilities are recognized for the expected tax consequences of
temporary differences between the tax bases of assets and liabilities and
their reported amounts. Income taxes paid on behalf of the Company by VAI are
included in divisional equity.

Effective after the Distribution, the Company will file separate income tax
returns.

Recent Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. It is effective for the Company's fiscal year
1999. The impact of the implementation of SFAS No. 130 on the combined
financial statements of the Company has not yet been determined.

F-10
<PAGE>

INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 changes current practice
under SFAS No. 14 by establishing a new framework on which to base segment
reporting (referred to as the "management" approach) and also requires interim
reporting of segment information. It is effective for the Company's fiscal
year 1999. The Company has not determined the impact of its implementation on
the reporting of the Company's segment information.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and is effective for the
Company's fiscal year 2000. The impact of the implementation of SFAS No. 133
on the combined financial statements of the Company has not yet been
determined.

NOTE 3. BALANCE SHEET DETAIL

Inventories

<TABLE>
<CAPTION>
1998 1997
----- -----
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Raw materials and parts.......................................... $42.6 $54.3
Work in process.................................................. 8.9 6.4
Finished goods................................................... 20.1 4.1
----- -----
Total Inventories............................................ $71.6 $64.8
===== =====
</TABLE>

Property, Plant, and Equipment

<TABLE>
<CAPTION>
1998 1997
------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Land and land improvements.................................... $ 5.3 $ 5.1
Buildings..................................................... 76.8 65.0
Machinery and equipment....................................... 135.4 127.3
Construction in progress...................................... 1.9 4.0
------ ------
Total Property, Plant, and Equipment...................... $219.4 $201.4
====== ======
</TABLE>

Other Assets

<TABLE>
<CAPTION>
1998 1997
----- -----
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Goodwill........................................................ $66.1 $44.7
Less accumulated amortization................................... 6.5 5.1
----- -----
Net goodwill.................................................... 59.6 39.6
----- -----
Other........................................................... 8.1 10.2
----- -----
Total Other Assets.......................................... $67.7 $49.8
===== =====
</TABLE>
Amortization expense for goodwill was $1.4 million, $1.0 million, and $0.5
million for fiscal years 1998, 1997, and 1996, respectively.

F-11
<PAGE>

INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

Accrued Expenses

<TABLE>
<CAPTION>
1998 1997
------ -----
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Payroll and employee benefits................................... $ 33.1 $35.1
Foreign income taxes payable.................................... 19.2 13.6
Deferred income................................................. 14.7 13.1
Group and risk insurance........................................ 7.7 7.8
Other........................................................... 27.8 23.1
------ -----
Total Accrued Expenses...................................... $102.5 $92.7
====== =====
</TABLE>

NOTE 4. ACQUISITIONS

In July 1998, the Company acquired all of the outstanding common stock of
Chrompack International B.V. ("Chrompack") for approximately $28.9 million in
cash and the extinguishment of debt. Chrompack is a manufacturer of
chromatography products and analytical instruments used by scientific and
industrial laboratories. This acquisition has been accounted for under the
purchase method; accordingly, the Company's combined operating results include
100% of the operating results of Chrompack subsequent to the acquisition date.
The Company is amortizing acquired goodwill of $20.9 million over 40 years.

In June 1998, the Company acquired the outstanding minority ownership
interest of Varian Iberica, S.L. ("Iberica") for approximately $6.7 million in
cash. Iberica is engaged in the business of buying and selling scientific
apparatuses, products for laboratories, and chemical and medical products in
general. The acquisition of the minority ownership interest has been accounted
for using the purchase method; accordingly, the Company's combined operating
results include the operating results of Iberica subsequent to the acquisition
date. The Company is amortizing acquired goodwill of $0.8 million over 13
years.

In October 1996, the Company acquired the principal assets and properties of
the high pressure liquid chromatography and columns business of Rainin
Instrument Company, Inc. ("Rainin") for approximately $24.0 million in cash
and the extinguishment of debt. This acquisition has been accounted for under
the purchase method; accordingly, the Company's combined operating results
include 100% of the operating results of Rainin subsequent to the acquisition
date. The Company is amortizing acquired goodwill of $21.7 million over 40
years.

Pro forma sales, earnings from operations, net earnings, and net earnings
per share have not been presented because the effects of these acquisitions
were not material on either an individual or an aggregated basis.

F-12
<PAGE>

INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

NOTE 5. FORWARD EXCHANGE CONTRACTS

Forward exchange contracts outstanding and their unrealized gains and losses
as of fiscal year-end 1998 are summarized as follows:

<TABLE>
<CAPTION>
NOTIONAL NOTIONAL
VALUE VALUE UNREALIZED FAIR
PURCHASED SOLD GAIN/(LOSS) VALUE
--------- -------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Japanese yen........................... $ -- $ 1,637 $ 5 $ 31
French francs.......................... -- 11,550 -- (467)
Canadian dollars....................... -- 7,042 206 260
British pounds......................... 12,044 4,050 537 515
Italian lira........................... -- 4,196 -- (217)
German marks........................... -- 1,955 -- (100)
Spanish pesetas........................ -- 691 -- (38)
Korean won............................. -- 283 -- 1
Australian dollars..................... 6,396 -- -- 23
Swiss francs........................... 246 -- -- 10
Swedish krona.......................... 4,789 -- -- (5)
------- ------- ---- -----
Total.................................. $23,475 $31,404 $748 $ 13
======= ======= ==== =====
</TABLE>

NOTE 6. EMPLOYEE STOCK PLANS

Under VAI's Omnibus Stock and Employee Stock Purchase Plans, certain
employees of the Company are eligible for the grant of stock options and
restricted stock and are eligible to purchase VAI common stock. The exercise
price for incentive and non-qualified stock options granted under the Omnibus
Stock Plan may not be less than 100% of the fair market value of VAI common
stock at the date of grant. Options granted are exercisable at such times and
are subject to such restrictions and conditions as determined by the
Organization and Compensation Committee of the Board of Directors of VAI, but
no option shall be exercisable later than ten years from the date of grant.
Options granted are generally exercisable in cumulative installments of one-
third each year, commencing one year following the date of grant, and expire
if not exercised within seven or ten years from the date of grant. Restricted
stock grants may be awarded at prices ranging from 0% to 50% of the fair
market value of VAI common stock and may be subject to restrictions on
transferability and continued employment as determined by the Organization and
Compensation Committee. Participants in the Employee Stock Purchase Plan are
eligible to purchase VAI common stock at the lower of 85% of the closing
market price of VAI common stock on the first trading day of the VAI fiscal
quarter of the first trading day of the next VAI fiscal quarter. This discount
is treated as equivalent to the cost of issuing common stock for financial
reporting purposes. VAI intends to suspend the Employee Stock Purchase Plan
prior to the Distribution.

At fiscal year-end 1998, outstanding options for VAI common stock held by
Company employees totaled approximately 958,000, of which approximately
506,000 had vested and were exercisable. At fiscal year-end 1998, the exercise
prices of outstanding options range from $10.91 to $61.31.

At fiscal year-end 1997, outstanding options for VAI common stock held by
Company employees totaled approximately 740,000, of which approximately
332,000 had vested and were exercisable. At fiscal year-end 1997, the exercise
prices of outstanding options range from $10.91 to $61.31.

At fiscal year-end 1996, outstanding options for VAI common stock held by
Company employees totaled approximately 748,000, of which approximately
327,000 had vested and were exercisable. At fiscal year-end 1996, the exercise
prices of outstanding options range from $10.60 to $61.31.

F-13
<PAGE>

INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

Immediately following the Distribution, it is anticipated that the majority
of outstanding awards under the VAI Omnibus Stock Plan held by Company
employees will be replaced by substitute awards under the IB Omnibus Stock
Plan. The substitute awards will have the same ratio of the exercise price per
share to the market value per share, the same aggregate difference between
market value and exercise price, and the same vesting provisions, option
periods, and other terms and conditions as the awards they replace.

The Company will comply with the pro forma disclosure requirements set forth
in SFAS No. 123, "Accounting for Stock-Based Compensation," once the number of
shares and related exercise prices under substitute awards are determined.
These determinations cannot be made until subsequent to the Distribution.

NOTE 7. RETIREMENT PLANS

Certain employees of the Company in the United States and Canada are
eligible to participate in the VAI-sponsored defined contribution plan. The
Company's major obligation is to contribute an amount based on a percentage of
each participant's base pay. The Company also contributes 5% of its combined
operating earnings, as adjusted for discretionary items, as retirement plan
profit sharing. Participants are entitled, upon termination or retirement, to
their portion of the retirement fund assets, which are held by a third-party
trustee. Included in the accompanying combined statements of earnings is an
allocation of total pension expense for Company employees under the VAI-
sponsored defined contribution plan of $5.9 million, $5.6 million, and
$6.6 million, for fiscal years 1998, 1997, and 1996, respectively.

At the Distribution, the Company will assume responsibility for pension and
postretirement benefits for active employees of the Company; the
responsibility for all others, principally retirees of VAI, will remain with
VAI. An allocation of assets and liabilities for foreign defined benefit
pension, postemployment, and postretirement benefits, which are not material
to the Company's financial statements, has been included in these combined
financial statements.

NOTE 8. TAXES ON EARNINGS

Taxes on earnings from operations are as follows:

<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Current
U.S. federal.......................................... $ -- $ 0.4 $ --
Non-U.S............................................... 16.7 11.4 9.8
State and local....................................... 1.5 1.6 0.5
----- ----- -----
Total current....................................... 18.2 13.4 10.3
----- ----- -----
Deferred
U.S. federal.......................................... (2.7) (1.1) (4.6)
Non-U.S............................................... 0.2 0.3 (0.4)
----- ----- -----
Total deferred...................................... (2.5) (0.8) (5.0)
----- ----- -----
Taxes on Earnings....................................... $15.7 $12.6 $ 5.3
===== ===== =====
</TABLE>

F-14
<PAGE>

INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

Significant items making up deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
1998 1997
----- -----
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Assets:
Product warranty.............................................. $ 1.9 $ 1.5
Deferred compensation......................................... 1.3 2.5
Inventory adjustments......................................... 8.6 5.2
Deferred income............................................... 3.7 3.6
Other......................................................... 4.0 5.2
----- -----
19.5 18.0
----- -----
Liabilities:
Accelerated depreciation...................................... 3.1 3.2
Other......................................................... 1.1 1.1
----- -----
4.2 4.3
----- -----
Net deferred tax asset.......................................... $15.3 $13.7
===== =====
</TABLE>

The classification of the net deferred tax asset on the combined balance
sheets is as follows:

<TABLE>
<CAPTION>
1998 1997
----- -----
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Net current deferred tax asset (included in other current
assets).................................................... $19.5 $18.0
Net long-term deferred tax liability........................ (4.2) (4.3)
----- -----
Net deferred tax asset...................................... $15.3 $13.7
===== =====
</TABLE>

Operating earnings before taxes consist of the following:

<TABLE>
<CAPTION>
1998 1997 1996
---------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
U.S................................................... $ 5.0 $ 7.9 $(14.2)
Foreign............................................... 34.2 18.9 25.6
------ ------ -------
$39.2 $26.8 $11.4
====== ====== =======
</TABLE>

The effective tax rate on earnings from operations differs from the U.S.
federal statutory tax rate as a result of the following:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate.......................... 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit.......... 2.6 3.9 2.7
Foreign taxes in excess of U.S. statutory rate, net........ 5.3 13.9 7.8
Foreign sales corporation.................................. (1.2) (2.4) (3.6)
Other...................................................... (1.5) (3.4) 4.2
---- ---- ----
Effective tax rate......................................... 40.2% 47.0% 46.1%
==== ==== ====
</TABLE>

F-15
<PAGE>

INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

NOTE 9. LEASE COMMITMENTS

At fiscal year-end 1998, the Company was committed to minimum rentals under
non-cancellable operating leases for fiscal years 1999 through 2003 and
thereafter, as follows, in millions: $4.7, $3.7, $2.6, $2.1, $1.6, and $10.1,
respectively. Rental expense for fiscal years 1998, 1997, and 1996, in
millions, was $7.6, $8.6, and $8.4, respectively.

Prior to the Distribution, the Company will enter into certain lease or
sublease agreements with VAI, an affiliate, or third parties for certain lease
facilities and other equipment, which agreements principally are a
continuation of existing lease commitments at market rates. These commitments
are included in the amounts above.

NOTE 10. CONTINGENCIES

Environmental Remediation

VAI 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 the Company is alleged to have shipped manufacturing waste
for recycling or disposal. VAI is also involved in various stages of
environmental investigation and/or remediation under the direction of, or in
consultation with, federal, state, and/or local agencies at certain current or
former VAI facilities (including facilities disposed of in connection with
VAI's sale of its Electron Devices Business during fiscal 1995, and the sale
of the Thin Film Systems business of SEB during fiscal 1997). VAI's
expenditures for environmental investigation and remediation amounted to $4.9
million in fiscal 1998, compared with $2.3 million in fiscal 1997 and with
$5.2 million in fiscal 1996.

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 2, 1998, VAI nonetheless estimated that the future
exposure for environmental related investigation and remediation costs for
these sites ranged in the aggregate from $21.6 million to $48.9 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 2, 1998.
VAI 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, VAI has accrued $21.6 million in estimated environmental
costs as of October 2, 1998. This amount accrued by VAI has not been
discounted to present value.

As to other sites and facilities, VAI has gained sufficient knowledge to be
able to better estimate the scope and costs of future environmental
activities. As of October 2, 1998, VAI estimated that the future exposure for
environmental related investigation and remediation costs for these sites
ranged in the aggregate from $39.7 million to $73.7 million. The time frame
over which these costs are expected to be incurred varies with each site,
ranging up to approximately 30 years as of October 2, 1998. As to each of
these sites and facilities, VAI management has 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 $51.1 million at October 2, 1998. VAI accordingly has
accrued $22.3 million, which represents this best estimate of the future costs
discounted at 4%, net of inflation. This VAI reserve is in addition to the
$21.6 million described above.

Under the Distribution Related Agreements, the Company has agreed to
indemnify VAI and SEB for one-third of these environmental investigation and
remediation costs, as adjusted for insurance proceeds in respect of these
environmental costs and for the tax benefits expected to be realized by VAI
upon the payment of the Company's portion of these environmental costs (Note
11). As of October 2, 1998, the Company's reserve for

F-16
<PAGE>

INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

its portion of environmental liabilities, based upon future environmental
related costs estimated by VAI as of that date and included in long-term and
current accrued expenses, is calculated as follows:

<TABLE>
<CAPTION>
TOTAL
RECURRING NON-RECURRING ANTICIPATED
YEAR COSTS COSTS FUTURE COSTS
---- --------- ------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
1999.................................... $ 0.4 $0.7 $1.1
2000.................................... 0.5 0.2 0.7
2001.................................... 0.5 0.1 0.6
2002.................................... 0.5 0.0 0.5
2003.................................... 0.5 0.0 0.5
Thereafter.............................. 9.6 0.8 10.4
----- ---- ----
Total costs............................. $12.0 $1.8 13.8
----- ---- ----
Imputed interest........................ (6.0)
----
Total reserve........................... $7.8
====
</TABLE>

The amounts set forth in the foregoing table are only estimates of
anticipated future environmental related costs, and the amounts actually spent
in the years indicated may be greater or less than such estimates. The
aggregate range of cost estimates reflects various uncertainties inherent in
many environmental investigation and remediation activities and the large
number of sites where VAI is undertaking such investigation and remediation
activities. VAI believes that most of these cost ranges will narrow as
investigation and remediation activities progress. The Company believes that
its reserves are adequate, but as the scope of the obligations becomes more
clearly defined, these reserves may be modified and related charges against
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 the
Company'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, the Company's management believes that the costs of these
environmental related matters are not reasonably likely to have a material
adverse effect on the combined financial statements of the Company.

Legal Proceedings

Under the Distribution Related Agreements, the Company has agreed to
reimburse VAI for one-third of the costs and expenses, adjusted for any tax
benefits recognized or realized by VAI from the incurrence or payment of these
amounts, with respect to certain legal proceedings relating to discontinued
operations of VAI (Note 11).

Also, from time to time, the Company is involved in a number of legal
actions and could incur an uninsured liability in one or more of them. While
the ultimate outcome of all of the above legal matters is not determinable,
management believes the resolution of these matters will not have a material
adverse effect on the financial condition, results of operations, or cash
flows of the Company.

NOTE 11. OTHER TRANSACTIONS WITH AFFILIATES

Sales to VAI and SEB for fiscal years 1998, 1997, and 1996 totaled $14.6
million, $14.8 million, and $23.3 million, respectively.

F-17
<PAGE>

INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

VAI uses a centralized cash management system to finance its operations.
Cash deposits from most of the Company's businesses are transferred to VAI on
a daily basis, and VAI funds the Company's required disbursements. No interest
has been charged or credited to the Company for these transactions.

VAI provided certain centralized services (see Note 1 to the combined
financial statements) to the Company. Cost allocations relating to these
centralized services were $26.5 million, $27.1 million, and $25.9 million in
fiscal years 1998, 1997, and 1996, respectively, and are included in operating
costs in the combined statements of earnings. Amounts due to VAI for these
expenses are included in Divisional Equity.

Net transfers to or from VAI, included in Divisional Equity, include
advances and loans from affiliates, net cash transfers to or from VAI, third
party liabilities paid on behalf of the Company by VAI, amounts due from
affiliates related to sales, amounts due to or from VAI for services and other
charges, and income taxes paid on behalf of the Company by VAI. The weighted
average balance due to VAI was $213 million, $200 million, and $140 million
for fiscal years 1998, 1997 and 1996, respectively.

The activity in net transfers (to) from VAI for fiscal years 1998, 1997, and
1996 included in divisional equity in the combined statements of divisional
equity is summarized as follows:

<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
VAI services and other charges.......................... $26.5 $27.1 $25.9
Cash transfers, net..................................... (9.8) 7.1 (28.0)
----- ----- -----
Net transfers (to) from VAI............................. $16.7 $34.2 $(2.1)
===== ===== =====
</TABLE>

The Distribution Related Agreements provide that, from, and after the
Distribution, VAI, SEB, and the Company will indemnify each and their
respective subsidiaries, directors, officers, employees and agents against all
losses arising in connection with shared liabilities (including certain
environmental and legal liabilities). All shared liabilities will be managed
and administered by VAI and expenses and losses, net of proceeds and other
receivables, will be borne one-third each by VAI, SEB, and the Company; the
Distribution Related Agreements also provide that the Company shall assume all
Company liabilities, other than shared liabilities (including accounts
payable, accrued payroll, and pension liabilities) in accordance with their
terms.

NOTE 12. INDUSTRY AND GEOGRAPHIC SEGMENTS

The Company operates in one industry segment: instrumentation, equipment and
accessories for analytical, research, industrial, and scientific applications.
Company products are used in biological and biochemical research; in
independent test labs; in quality control and research in industries such as
pharmaceuticals, foods, metals, chemicals, and petroleum; for environmental
monitoring and analysis; in semiconductor and automotive manufacturing; in
high-energy physics; in surface analysis, space research and petrochemical
refining.

The Company operates various manufacturing and marketing operations outside
the United States. Inter-business sales between geographic areas are accounted
for at cost plus prevailing markups arrived at through negotiations between
otherwise independent profit centers (Note 1).

No customer accounted for more than 10% of total sales in fiscal years 1998,
1997, and 1996.

F-18
<PAGE>

INSTRUMENTS BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

Included in the total of United States sales are export sales of $30 million
in fiscal 1998, $36 million in fiscal 1997, and $32 million in fiscal 1996.
Sales under prime contracts from the U.S. Government were approximately $7
million in fiscal 1998, $9 million in fiscal 1997, and $8 million in fiscal
1996.

<TABLE>
<CAPTION>
SALES TO INTERGEOGRAPHIC
UNAFFILIATED SALES TO PRE-TAX IDENTIFIABLE
CUSTOMERS(1) AFFILIATES TOTAL SALES EARNINGS ASSETS
-------------- ------------------- ------------------- ---------------- --------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States.......... $327 $325 $284 $ 116 $ 114 $ 109 $ 443 $ 439 $ 393 $ 39 $ 43 $ 32 $214 $193 $140
International.......... 223 216 219 112 97 98 335 313 317 34 23 25 159 130 144
---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ----
Total geographic
segments............. 550 541 503 228 211 207 778 752 710 73 66 57 373 323 284
Eliminations, corporate
& other............... 8 1 1 (228) (211) (207) (220) (210) (206) (34) (39) (46) 31 35 17
---- ---- ---- ----- ----- ----- ----- ----- ----- ---- ---- ---- ---- ---- ----
Total Company......... $558 $542 $504 $ -- $ -- $ -- $ 558 $ 542 $ 504 $ 39 $ 27 $ 11 $404 $358 $301
==== ==== ==== ===== ===== ===== ===== ===== ===== ==== ==== ==== ==== ==== ====
</TABLE>
- -------
(1) Includes sales to VAI and SEB (Note 11).

Total sales is based on the location of the operation furnishing goods and
services. International sales based on final destination of products sold are
$261 million in fiscal 1998, $253 million in fiscal 1997, and $250 million in
fiscal 1996.

NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales................... $141.0 $141.0 $129.9 $145.9 $124.9 $134.9 $137.5 $144.6
------ ------ ------ ------ ------ ------ ------ ------
Gross profit............ 54.5 55.8 53.9 57.2 49.8 52.0 53.7 55.6
------ ------ ------ ------ ------ ------ ------ ------
Net Earnings............ 5.8 6.4 5.2 6.0 3.5 3.5 3.7 3.5
====== ====== ====== ====== ====== ====== ====== ======
Pro forma net earnings
per share.............. $ 0.19 $ 0.22 $ 0.17 $ 0.20 $ 0.12 $ 0.11 $ 0.13 $ 0.11
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>

F-19
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Stockholders of Varian Associates, Inc.:

In our opinion, the accompanying combined balance sheets and the related
combined statements of earnings, divisional equity, and cash flows present
fairly, in all material respects, the financial position of the Semiconductor
Equipment Business of Varian Associates, Inc. (the "Company") at October 2,
1998 and September 26, 1997, and the results of its operations and its cash
flows for each of the three years in the period ended October 2, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.

/s/ PricewaterhouseCoopers
LLP
-------------------------------
PricewaterhouseCoopers LLP
San Jose, California
October 31, 1998

F-20
<PAGE>

SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.

COMBINED STATEMENTS OF EARNINGS

<TABLE>
<CAPTION>
FISCAL YEARS
---------------------------
1998 1997 1996
-------- -------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue............................................ $342,944 $448,322 $667,246
-------- -------- --------
Operating Costs and Expenses
Cost of revenue.................................. 225,237 263,639 400,117
Research and development......................... 40,823 47,195 55,642
Marketing........................................ 35,211 50,783 52,721
General and administrative....................... 25,363 31,893 36,419
Gain on sale of Thin Film Systems business....... -- (51,039) --
-------- -------- --------
Total operating costs and expenses............... 326,634 342,471 544,899
-------- -------- --------
Operating Earnings before Taxes.................... 16,310 105,851 122,347
Taxes on earnings................................ 4,913 34,855 43,004
-------- -------- --------
Net Earnings....................................... $ 11,397 $ 70,996 $ 79,343
======== ======== ========
Pro Forma Net Earnings Per Share................... $ 0.38 $ 2.33 $ 2.56
======== ======== ========
Shares used in pro forma per share computations.... 29,910 30,451 31,024
======== ======== ========
</TABLE>

See accompanying Notes to the Combined Financial Statements.

F-21
<PAGE>

SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.

COMBINED BALANCE SHEETS

<TABLE>
<CAPTION>
FISCAL YEAR-END
------------------
1998 1997
-------- --------
(DOLLARS IN
THOUSANDS)
ASSETS
------
<S> <C> <C>
Current Assets
Accounts receivable........................................ $ 62,677 $ 98,678
Inventories................................................ 60,692 50,233
Other current assets....................................... 38,754 41,404
-------- --------
Total Current Assets..................................... 162,123 190,315
-------- --------
Property, Plant, and Equipment............................... 84,128 65,885
Accumulated depreciation and amortization.................. (45,314) (37,271)
-------- --------
Net Property, Plant, and Equipment....................... 38,814 28,614
-------- --------
Other Assets................................................. 23,689 14,370
-------- --------
Total Assets............................................. $224,626 $233,299
======== ========
<CAPTION>
LIABILITIES AND DIVISIONAL EQUITY
---------------------------------
<S> <C> <C>
Current Liabilities
Accounts payable--trade.................................... $ 10,513 $ 19,465
Accrued expenses........................................... 77,050 90,793
Product warranty........................................... 21,435 16,948
Advance payments from customers............................ 3,631 2,065
-------- --------
Total Current Liabilities................................ 112,629 129,271
Long-Term Accrued Expenses................................... 6,796 6,247
Deferred Taxes............................................... 1,952 3,044
-------- --------
Total Liabilities........................................ 121,377 138,562
-------- --------
Commitments and Contingencies (Notes 9 and 10)
Divisional Equity............................................ 103,249 94,737
-------- --------
Total Liabilities and Divisional Equity.................. $224,626 $233,299
======== ========
</TABLE>

See accompanying Notes to the Combined Financial Statements.

F-22
<PAGE>

SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.

COMBINED STATEMENTS OF DIVISIONAL EQUITY

<TABLE>
<CAPTION>
(DOLLARS
IN
THOUSANDS)
<S> <C>
Balance, Fiscal Year-End, 1995...................................... $ 133,536
Net earnings for the year......................................... 79,343
Net transfers (to) from Varian Associates, Inc.................... (49,573)
---------
Balance, Fiscal Year-End, 1996...................................... 163,306
Net earnings for the year......................................... 70,996
Net transfers (to) from Varian Associates, Inc.................... (139,565)
---------
Balance, Fiscal Year-End, 1997...................................... 94,737
Net earnings for the year......................................... 11,397
Net transfers (to) from Varian Associates, Inc.................... (2,885)
---------
Balance, Fiscal Year-End, 1998...................................... $ 103,249
=========
</TABLE>

See accompanying Notes to the Combined Financial Statements.

F-23
<PAGE>

SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.

COMBINED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FISCAL YEARS
-----------------------------
1998 1997 1996
-------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Operating Activities
Net Cash Provided by (Used in) Operating
Activities................................ $ 40,219 $ (2,706) $ 71,577
-------- --------- --------
Investing Activities
Proceeds from sale of Thin Film Systems...... -- 145,500 --
Purchase of property, plant, and equipment... (7,191) (10,732) (22,418)
Purchase of businesses, net of cash ac-
quired...................................... (31,014) -- --
Other........................................ -- 6,535 --
-------- --------- --------
Net Cash Provided by (Used in) Investing
Activities.................................... (38,205) 141,303 (22,418)
-------- --------- --------
Financing Activities
Net transfers (to) from Varian Associates,
Inc......................................... (2,885) (139,565) (49,573)
-------- --------- --------
Net Cash Provided by (Used in) Financing
Activities................................ (2,885) (139,565) (49,573)
-------- --------- --------
Effects of Exchange Rate Changes on Cash....... 871 968 414
-------- --------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... -- -- --
Cash and Cash Equivalents at Beginning of
Fiscal Year............................... -- -- --
-------- --------- --------
Cash and Cash Equivalents at End of Fiscal
Year...................................... $ -- $ -- $ --
======== ========= ========
Detail of Net Cash Provided by (Used in) Oper-
ating Activities
Net Earnings................................. $ 11,397 $ 70,996 $ 79,343
Adjustments to reconcile net earnings to net
cash
provided by (used in) operating activities
Depreciation................................. 7,290 11,180 9,295
Gain on sale of Thin Film Systems business... -- (51,039) --
Deferred taxes............................... 4,500 (8,593) (7,713)
Changes in assets and liabilities:
Accounts receivable........................ 38,185 (675) (12,190)
Inventories................................ 3,676 47 (4,336)
Other current assets....................... (2,480) 3,600 (1,780)
Accounts payable--trade.................... (10,047) (541) (8,981)
Accrued expenses........................... (15,697) (23,675) 995
Product warranty........................... (1,821) (4,431) 1,638
Advance payments from customers............ 1,605 (5,086) 10,297
Long-term accrued expenses................. 549 4,792 5,961
Other...................................... 3,062 719 (952)
-------- --------- --------
Net Cash Provided by (Used in) Operating
Activities................................ $ 40,219 $ (2,706) $ 71,577
======== ========= ========
</TABLE>

See accompanying Notes to the Combined Financial Statements.

F-24
<PAGE>

SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

On August 21, 1998, the Board of Directors of Varian Associates, Inc.
("VAI") announced a plan to reorganize into three publicly traded independent
companies by spinning off two of its businesses to stockholders in a tax-free
distribution (the "Distribution"). The Distribution is subject to final
approval by VAI's Board of Directors. Among other things, this approval is
conditioned upon the receipt of a ruling from the Internal Revenue Service
that the spin-off of the two businesses will be a tax free transaction for VAI
stockholders, VAI, the Instruments Business of VAI ("IB"), and the
Semiconductor Equipment Business of VAI (the "Company") and upon the approval
of the plan for the Distribution by VAI stockholders.

Under the plan for the Distribution, the Company and IB will be incorporated
as Varian Semiconductor Equipment Associates, Inc. and Varian, Inc.,
respectively, and will become publicly traded companies. Also under the plan
for the Distribution, each of VAI and IB will have between $50 and $100
million of outstanding indebtedness under VAI's term loans and notes payable,
and VAI will contribute cash to the Company so that at the Distribution, the
Company will have approximately $100 million in cash and cash equivalents and
consolidated debt not exceeding $5 million. The Company will include VAI's
business units that manufacture, sell and service ion implantation and thin
film deposition equipment for use in semiconductor wafer fabrication. Also
under the plan for Distribution, the Company will be incorporated in Delaware
in December 1998, with 150,000,000 shares of common stock and 5,000,000 shares
of preferred stock authorized. Upon incorporation, all outstanding shares of
the Company's common stock will be owned by VAI. For purposes of these
financial statements and notes to these financial statements, the Company
includes the assets, liabilities, operating results and cash flows of the VAI
business units described above that will comprise the Company under the plan
for the Distribution.

The combined financial statements of the Company include the accounts of the
Company's businesses after elimination of inter-business balances and
transactions.

For purposes of governing certain of the ongoing relationships between the
Company, VAI, and IB after the Distribution and to provide for an orderly
transition, the Company, VAI, and IB have entered or will enter into various
agreements including a distribution agreement, tax sharing agreement, employee
benefits allocation agreement, intellectual property agreement, and transition
services agreement (collectively, the "Distribution Related Agreements").

F-25
<PAGE>

SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

Foreign Currency Translation

For non-U.S. operations, the U.S. dollar is the functional currency.
Monetary assets and liabilities of foreign subsidiaries are translated into
U.S. dollars at current exchange rates. Non-monetary assets such as
inventories and property, plant, and equipment are translated at historical
rates. Income and expense items are translated at effective rates of exchange
prevailing during each year, except that inventories and depreciation charged
to operations are translated at historical rates. The aggregate exchange loss
included in general and administrative expenses for fiscal years 1998, 1997,
and 1996 was $0.9 million, $1.1 million, and $.2 million, respectively.

Revenue Recognition

Revenue related to systems is recognized upon shipment, which usually
precedes customer acceptance as the performance of installation obligations is
essentially perfunctory and there is a demonstrated history of customer
acceptance of such systems following shipment. The Company's products are
generally subject to installation and warranty, and the Company provides for
the estimated future costs of installation, repair, replacement, or customer
accommodation in cost of revenue when revenue is recognized. Service revenue
is recognized ratably over the period of the related contract. Royalty revenue
is recognized upon notification of sale by the Company's licencees. The terms
of the royalty agreements generally require licensees to give notification to
the Company and to pay royalties within 30 to 60 days of the end of the
quarter during which the sales take place.

Legal Expenses

The Company accrues estimated amounts for legal fees expected to be incurred
in connection with loss contingencies.

Financial Instruments

The Company considers currency on hand, demand deposits, and all highly
liquid debt securities with an original maturity of three months or less to be
cash and cash equivalents.

Financial instruments that potentially subject the Company to concentrations
of credit risk comprise trade accounts receivable and forward exchange
contracts. The Company sells its products and extends trade credit to a large
number of customers, who are dispersed across many different geographies. The
Company performs ongoing credit evaluations of these customers and generally
does not require collateral from them. Trade accounts receivable are stated
net of allowances for doubtful accounts of $602,000 at the end of fiscal year
1998 and $556,000 at the end of fiscal year 1997.

The Company enters into forward exchange contracts to mitigate the effects
of operational (sales orders and purchase commitments) and balance sheet
exposures to fluctuations in foreign currency exchange rates. The Company does
not enter into forward exchange contracts for trading purposes. When the
Company's foreign exchange contracts hedge operational exposure, the effects
of movements in currency exchange rates on these instruments are recognized in
income when the related revenues and expenses are recognized. All forward
exchange contracts hedging operational exposure are designated and highly
effective as hedges. The critical

F-26
<PAGE>

SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

terms of all forward exchange contracts hedging operational exposure and of
the forecasted transactions being hedged are substantially identical.
Accordingly, the Company expects that changes in the fair value or cash flows
of the hedging instruments and the hedged transactions (for the risk that is
being hedged) will completely offset at the hedge's inception and on an
ongoing basis. When foreign exchange contracts hedge balance sheet exposure,
such effects are recognized in income when the exchange rate changes in
accordance with the requirements for other foreign currency transactions.
Gains and losses on hedges of existing assets or liabilities are included in
the carrying amounts of those assets or liabilities and are ultimately
recognized in income as part of those carrying amounts. Gains and losses
related to qualifying hedges of firm commitments also are deferred and are
recognized in income or as adjustments of carrying amounts when the hedged
transaction occurs. Any deferred gains or losses are included in accrued
expenses in the balance sheet. If a hedging instrument is sold or terminated
prior to maturity, gains and losses continue to be deferred until the hedged
item is recognized in income. If a hedging instrument ceases to qualify as a
hedge, any subsequent gains and losses are recognized currently in income. The
Company's forward exchange contracts generally range from one to three months
in original maturity.

Pro Forma Net Earnings per Share

Divisional Equity

Divisional equity includes historical investments and advances from VAI,
including net transfers to/from VAI, third party liabilities paid on behalf of
the Company by VAI, amounts due to affiliates related to purchases, amounts
due to/from VAI for services and other charges, and current period net
earnings of the Company.

Interim Financial Statements (Unaudited)

Inventories

Inventories are valued at the lower of cost or market (realizable value)
using last-in, first-out (LIFO) cost for the U.S. inventories. All other
inventories are valued principally at average cost. If the first-in, first-out
(FIFO) method had been used for those operations valuing inventories on a LIFO
basis, inventories would have been higher than reported by $20.3 million in
fiscal 1998, $20.6 million in fiscal 1997, and $18.0 million in fiscal 1996.

F-27
<PAGE>

SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

The Company's inventories include high technology parts and components that
may be specialized in nature or subject to rapid technological obsolescence.
While the Company has programs to minimize the required inventories on hand
and considers technological obsolescence in estimating the required allowance
to reduce recorded amounts to market values, such estimates could change in
the future.

Property, Plant, and Equipment

Property, plant, and equipment are stated at cost. Major improvements are
capitalized, while maintenance and repairs are expensed currently. Plant and
equipment are depreciated over their estimated useful lives using the
straight-line method for financial reporting purposes and accelerated methods
for tax purposes. Machinery and equipment lives vary from 1 to 15 years, and
buildings are depreciated from 3 to 40 years. Leasehold improvements are
amortized using the straight-line method over their estimated useful lives, or
the remaining term of the lease, whichever is less. When assets are retired or
otherwise disposed of, the assets and related accumulated depreciation are
removed from the accounts. Gains or losses resulting from retirements or
disposals are included in earnings from operations.

Other Assets

Goodwill, which is the excess of the cost of acquired businesses over the
sum of the amounts assigned to identifiable assets acquired less liabilities
assumed, is amortized on a straight-line basis over periods ranging from 5 to
40 years. Investments in affiliated companies over whose operations the
Company has significant influence but not control are accounted for under the
equity method.

Impairment of Long-Lived Assets

Research and Development

Company-sponsored research and development costs related to both present and
future products are expensed currently. Costs related to research and
development contracts are included in inventory and charged to cost of revenue
upon recognition of related revenue. Total expenditures on research and
development for fiscal years 1998, 1997, and 1996, were $40.8 million, $48.1
million, and $56.9 million, respectively, of which $0.9 million and $1.3
million has been funded by customers in fiscal years 1997 and 1996. No
research and development expenditures were funded by customers in fiscal 1998.

Taxes on Earnings

Effective after the Distribution, the Company will file separate income tax
returns.

F-28
<PAGE>

SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

Recent Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. It is effective for the Company's fiscal year
1999. The impact of the implementation of SFAS No. 130 on the combined
financial statements of the Company has not yet been determined.

In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 changes current practice
under SFAS No. 14 by establishing a new framework on which to base segment
reporting (referred to as the "management" approach) and also requires interim
reporting of segment information. It is effective for the Company's fiscal
year 1999. The Company has not determined the impact of its implementation on
the reporting of the Company's segment information.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes a new model for
accounting for derivatives and hedging activities and is effective for the
Company's fiscal year 2000. The impact of the implementation of SFAS No. 133
on the combined financial statements of the Company has not yet been
determined.

NOTE 3. BALANCE SHEET DETAIL

Inventories

<TABLE>
<CAPTION>
1998 1997
----- -----
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Raw materials and parts.......................................... $24.7 $23.8
Work in process.................................................. 22.5 22.9
Finished goods................................................... 13.5 3.5
----- -----
Total Inventories............................................ $60.7 $50.2
===== =====
</TABLE>

Property, Plant, and Equipment

<TABLE>
<CAPTION>
1998 1997
----- -----
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Land and land improvements...................................... $ 2.4 $ 0.9
Buildings....................................................... 30.1 25.5
Machinery and equipment......................................... 50.4 38.0
Construction in progress........................................ 1.2 1.5
----- -----
Total Property, Plant, and Equipment........................ $84.1 $65.9
===== =====
</TABLE>

Other Assets

<TABLE>
<CAPTION>
1998 1997
----- -----
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Goodwill........................................................ $19.4 $ --
Less accumulated amortization................................... 0.4 --
----- -----
Net goodwill.................................................... 19.0 --
----- -----
Other........................................................... 4.7 14.4
----- -----
Total Other Assets.......................................... $23.7 $14.4
===== =====
</TABLE>

F-29
<PAGE>

SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

Amortization expense for goodwill was $0.4 million for fiscal year 1998.
There was no amortization expense for goodwill for fiscal years 1997 and 1996.

Accrued Expenses

<TABLE>
<CAPTION>
1998 1997
----- -----
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Payroll and employee benefits................................... $13.6 $19.6
Foreign income taxes payable.................................... 10.3 10.4
Estimated loss contingencies.................................... 34.0 41.2
Other........................................................... 19.2 19.6
----- -----
Total Accrued Expenses.......................................... $77.1 $90.8
===== =====
</TABLE>

NOTE 4. FORWARD EXCHANGE CONTRACTS

Forward exchange contracts outstanding as of fiscal year-end 1998 are
summarized as follows:

<TABLE>
<CAPTION>
NOTIONAL
VALUE NOTIONAL FAIR
PURCHASED VALUE SOLD VALUE
--------- ---------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Japanese yen..................................... $ -- $ 231 $ 7
French francs.................................... -- 2,884 (117)
British pounds................................... -- 55 --
Italian lira..................................... 90 -- (5)
German marks..................................... -- 2,011 (108)
Taiwan dollars................................... -- 910 (25)
Korean won....................................... -- 7,738 18
Swiss francs..................................... 6 -- --
----- ------- -----
Total............................................ $96 $13,829 $(230)
===== ======= =====
</TABLE>

There were no unrealized gains or losses for the forward exchange contracts
as of fiscal year-end 1998.

NOTE 5. ACQUISITIONS AND SALE OF BUSINESS

In July 1998, the Company acquired certain assets and assumed certain
liabilities of the ion implantation division of Genus, Inc. ("Genus") for
approximately $24.15 million in cash, plus additional payments if certain
sales and cash collection targets are met by December 31, 1998. The ion
implantation division of Genus was a supplier of high energy ion implantation
equipment for use in semiconductor wafer fabrication. This acquisition has
been accounted for under the purchase method. The Company is amortizing
acquired goodwill of $16.6 million over 10 years.

In January 1998, the Company acquired the outstanding minority ownership
interest of Varian Korea Ltd. ("VKL") for approximately $7.8 million in cash.
VKL is engaged in the manufacturing, installation, servicing, and sales of
semiconductor manufacturing equipment and other products. The acquisition of
the minority ownership interest has been accounted for using the purchase
method; accordingly, the Company's combined operating results include 100% of
the operating results of VKL subsequent to the acquisition date. The Company
is amortizing acquired goodwill of $2.8 million over 40 years.

The Company's pro forma revenue, earnings from operations, net earnings, and
net earnings per share for fiscal years 1998 and 1997, assuming the VKL
acquisition occurred at the beginning of such years, would not have been
materially different from the actual amounts reported for such periods.

F-30
<PAGE>

SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

In June 1997, VAI completed the sale of its Thin Film Systems operations, a
product line of the Company ("TFS"). Total proceeds received from the sale of
TFS were $145.5 million in cash. A $51.5 million reserve was recorded to
cover, among other items, purchase price disputes, retained liabilities,
transactions costs, employee terminations, facilities separation costs,
indemnification obligations, litigation expense, and other contingencies.
During the remainder of fiscal 1997, $10.3 million of this reserve was
utilized (primarily for the cash settlement of transaction and legal
indemnification and defense costs). During fiscal 1998, an additional $7.2
million of this reserve was utilized (primarily for the cash settlement of
transaction, employee termination, facilities separation, and legal
indemnification and defense costs). The gain on the sale was $33.2 million
(net of income taxes of $17.8 million). The reserve as of October 2, 1998 was
$34.0 million and related to costs associated with pending litigation and
indemnity obligations relating to certain patent infringement claims by
Applied Materials, Inc. as well as purchase price disputes with Novellus
Systems, Inc. arising out of the sale of TFS (See Note 10).

NOTE 6. EMPLOYEE STOCK PLANS

At fiscal year-end 1998, outstanding options for VAI common stock held by
Company employees totaled approximately 768,000, of which approximately
329,000 had vested and were exercisable. At fiscal year-end 1998, the exercise
prices of outstanding options range from $10.91 to $58.31.

At fiscal year-end 1997, outstanding options for VAI common stock held by
Company employees totaled approximately 600,000, of which approximately
183,000 had vested and were exercisable. At fiscal year-end 1997, the exercise
prices of outstanding options range from $10.91 to $58.31.

At fiscal year-end 1996, outstanding options for VAI common stock held by
Company employees totaled approximately 604,000, of which approximately
121,000 had vested and were exercisable. At fiscal year-end 1996, the exercise
prices of outstanding options range from $10.91 to $61.19.

Immediately following the Distribution, it is anticipated that the majority
of outstanding awards under the VAI Omnibus Stock Plan held by Company
employees will be replaced by substitute awards under the SEB Omnibus Stock
Plan. The substitute awards will have the same ratio of the exercise price per
share to the market value per share, the same aggregate difference between
market value and exercise price, and the same vesting provisions, option
periods, and other terms and conditions as the awards they replace.

The Company will comply with the pro forma disclosure requirements set forth
in SFAS No. 123, "Accounting for Stock-Based Compensation," once the number of
substitute awards and related exercise prices are determined. These
determinations cannot be made until subsequent to the Distribution.

F-31
<PAGE>

SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

NOTE 7. RETIREMENT PLANS

Certain employees of the Company in the United States are eligible to
participate in the VAI-sponsored defined contribution plan. The Company's
major obligation is to contribute an amount based on a percentage of each
participant's base pay. The Company also contributes 5% of its combined
operating earnings, as adjusted for discretionary items, as retirement plan
profit sharing. Participants are entitled, upon termination or retirement, to
their portion of the retirement fund assets, which are held by a third-party
trustee. Included in the accompanying combined statements of earnings is an
allocation of total pension expense for Company employees under the VAI-
sponsored defined contribution plan of $3.4 million, $4.0 million, and $4.8
million, for fiscal years 1998, 1997, and 1996, respectively.

NOTE 8. TAXES ON EARNINGS

Taxes on earnings from operations are as follows:

<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Current
U.S. federal.......................................... $(1.7) $38.2 $39.3
Non-U.S............................................... 1.5 1.7 1.2
State and local....................................... 0.6 3.5 6.4
----- ----- -----
Total current....................................... 0.4 43.4 46.9
----- ----- -----
Deferred
U.S. federal.......................................... 4.5 (8.5) (3.9)
----- ----- -----
Total deferred...................................... 4.5 (8.5) (3.9)
----- ----- -----
Taxes on Earnings....................................... $ 4.9 $34.9 $43.0
===== ===== =====
</TABLE>

F-32
<PAGE>

SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

Significant items making up deferred tax assets and liabilities are as
follows:

<TABLE>
<CAPTION>
1998 1997
----- -----
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Assets:
Product warranty........................................... $ 5.4 $ 5.9
Special provisions......................................... 13.4 15.1
Inventory adjustments...................................... 12.5 13.7
Other...................................................... 3.0 5.1
----- -----
34.3 39.8
----- -----
Liabilities:
Accelerated depreciation................................... 2.0 2.5
Other...................................................... -- 0.5
----- -----
2.0 3.0
----- -----
Net deferred tax asset....................................... $32.3 $36.8
===== =====

The classification of the net deferred tax asset on the combined balance
sheets is as follows:

<CAPTION>
1998 1997
----- -----
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Net current deferred tax asset (included in other current
assets)..................................................... $34.3 $39.8
Net long-term deferred tax liability......................... (2.0) (3.0)
----- -----
Net deferred tax asset....................................... $32.3 $36.8
===== =====
</TABLE>

Operating earnings before taxes consist of the following:

<TABLE>
<CAPTION>
1998 1997 1996
----- ------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
U.S..................................................... $12.3 $106.1 $121.4
Foreign................................................. 4.0 (0.2) 0.9
----- ------ ------
$16.3 $105.9 $122.3
===== ====== ======
</TABLE>

The effective tax rate on earnings from operations differs from the U.S.
federal statutory tax rate as a result of the following:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate.......................... 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit.......... 2.6 2.1 3.4
Foreign sales corporation.................................. (3.0) (1.8) (2.9)
Other...................................................... (4.5) (2.4) (0.3)
---- ---- ----
Effective tax rate......................................... 30.1% 32.9% 35.2%
==== ==== ====
</TABLE>

F-33
<PAGE>

SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

NOTE 9. LEASE COMMITMENTS

At fiscal year-end 1998, the Company was committed to minimum rentals under
non-cancellable operating leases for fiscal years 1999 through 2003 and
thereafter, as follows, in millions: $1.8, $1.3, $1.2, $1.2, $1.0, and $10.9,
respectively. Rental expense for fiscal years 1998, 1997, and 1996, in
millions, was $3.3, $2.4, and $2.8, respectively.

NOTE 10. CONTINGENCIES

Environmental Remediation

VAI 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 the Company is alleged to have shipped manufacturing waste
for recycling or disposal. VAI is also involved in various stages of
environmental investigation and/or remediation under the direction of, or in
consultation with, federal, state, and/or local agencies at certain current or
former VAI facilities (including facilities disposed of in connection with
VAI's sale of its Electron Devices Business during fiscal 1995, and the sale
of TFS during fiscal 1997). VAI's expenditures for environmental investigation
and remediation amounted to $4.9 million in fiscal 1998, compared with $2.3
million in fiscal 1997 and with $5.2 million in fiscal 1996.

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 2, 1998, VAI nonetheless estimated that the future
exposure for environmental related investigation and remediation costs for
these sites ranged in the aggregate from $21.6 million to $48.9 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 2, 1998.
VAI 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, VAI has accrued $21.6 million in estimated environmental
costs as of October 2, 1998. This amount accrued by VAI has not been
discounted to present value.

Under the Distribution Related Agreements, the Company has agreed to
indemnify VAI and IB for one-third of these environmental investigation and
remediation costs, as adjusted for insurance proceeds in respect of these
environmental costs and for the tax benefits expected to be realized by VAI
upon the payment of the Company's portion of these environmental costs (Note
11). As of October 2, 1998, the Company's reserve for its

F-34
<PAGE>

SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

portion of environmental liabilities, based upon future environmental related
costs estimated by VAI as of that date and included in long-term and current
accrued expenses, is calculated as follows:

Legal Proceedings

In June 1997, Applied Materials, Inc. ("Applied") filed a civil action
against VAI in the U.S. District Court for the Northern District of California
alleging infringement of four patents relating to sputter coating systems.
Applied contends that its patents are infringed by the M2i, MB/2/ (TM) and
Inova (TM) systems that were manufactured and sold by TFS prior to VAI's sale
of TFS to Novellus Systems, Inc. ("Novellus") in June 1997. The complaint
requests unspecified money damages and an injunction preventing further
alleged infringement and requests that any damages awarded be increased up to
three-fold for VAI's and Novellus' alleged willful infringement. Novellus was
subsequently added as a defendant in this action and, as part of the sale of
TFS, VAI agreed to indemnify Novellus for certain damages it may suffer as a
result of such litigation and to reimburse Novellus for up to $7.5 million of
its litigation expenses. VAI's answer denied infringement and asserted that
the Applied patents that are subject to the claims are invalid and that one of
the asserted patents is unenforceable. VAI also filed a separate suit seeking
damages and injunctive relief against Applied contending that certain of
Applied's business practices violated antitrust laws. That action has been
procedurally related to the infringement case and is pending before the same
judge. Novellus has asserted three of its patents, obtained as part of its
purchases of TFS, against Applied. Discovery has begun, but no date has been
set for completion of discovery. During the fourth quarter of fiscal 1998, VAI
and Applied began informal discussions concerning the possibility of resolving

F-35
<PAGE>

SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

some or all of the issues raised by the Applied litigation and VAI's antitrust
suit through settlement or mediation. Discussions regarding a proposed
procedure for non-binding mediation are continuing but have not yet resulted
in a definitive mediation arrangement.

In the event of an outcome unfavorable to the Company, the Company may be
liable for damages for past sales through the June 1997 closing date of the
sale of TFS to Novellus and may be liable to Novellus under the
indemnification obligations described above. The Company has accrued certain
amounts associated with the cost of resolving these matters (See Note 5).

As permitted under the asset sale agreement between VAI and Novellus for the
sale of TFS, Novellus has demanded an arbitration arising out of disputes over
the closing balance sheet. Management believes that the Company has
meritorious defenses to the Novellus demands.

The Company has agreed to indemnify VAI and IB for any costs, liabilities or
expenses relating to the Company's legal matters, including the Applied and
Novellus matters. Under the Distribution Related Agreements, the Company has
agreed to reimburse VAI for one-third of the costs, liabilities, and expenses,
adjusted for any related tax benefits recognized or realized by VAI, with
respect to certain legal proceedings relating to discontinued operations of
VAI (Note 11).

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

NOTE 11. OTHER TRANSACTIONS WITH AFFILIATES

Purchases from IB for fiscal years 1998, 1997, and 1996 totaled $8.2
million, $9.2 million, and $18.0 million, respectively.

VAI provided certain centralized services (Note 1) to the Company. Cost
allocations relating to these centralized services were $17.3 million, $16.7
million, and $17.8 million in fiscal years 1998, 1997, and 1996, respectively,
and are included in operating costs in the combined statements of earnings.
Amounts due to VAI for these expenses are included in Divisional Equity.

Net transfers to or from VAI, included in Divisional Equity, include
advances and loans from affiliates, net cash transfers to or from VAI, third
party liabilities paid on behalf of the Company by VAI, amounts due to
affiliates related to purchases, amounts due to or from VAI for services and
other charges, and income taxes paid on behalf of the Company by VAI. The
weighted average balance due to VAI was $162 million, $149 million, and $89
million for fiscal years 1998, 1997 and 1996, respectively.

The activity in net transfers (to) from VAI for fiscal years 1998, 1997, and
1996 included in divisional equity in the combined statements of divisional
equity is summarized as follows:

<TABLE>
<CAPTION>
1998 1997 1996
------ ------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
VAI services and other charges..................... $ 17.3 $ 16.7 $ 17.8
Cash transfers, net................................ (20.2) (156.3) (67.4)
------ ------- ------
Net transfers (to) from VAI........................ $ (2.9) $(139.6) $(49.6)
====== ======= ======
</TABLE>

F-36
<PAGE>

SEMICONDUCTOR EQUIPMENT BUSINESS OF VARIAN ASSOCIATES, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED

The Distribution Related Agreements provide that, from and after the
Distribution, VAI, IB, and the Company will indemnify each and their
respective subsidiaries, directors, officers, employees and agents against all
losses arising in connection with shared liabilities (including certain
environmental and legal liabilities). All shared liabilities will be managed
and administered by VAI and expenses and losses, net of proceeds and other
receivables, will be borne one-third each by VAI, IB, and the Company; the
Distribution Related Agreements also provide that the Company shall assume all
Company liabilities, other than shared liabilities (including accounts
payable, accrued payroll, and pension liabilities) in accordance with their
terms.
NOTE 12. INDUSTRY AND GEOGRAPHIC SEGMENTS

The Company operates in one industry segment: semiconductor wafer
fabrication equipment. Company products are used by major semiconductor
manufacturers in the United States, Europe, Japan, Korea, and throughout the
Asia Pacific region.

The Company operates various manufacturing and marketing operations outside
the United States. Interbusiness sales between geographic areas are accounted
for at cost plus prevailing markups arrived at through negotiations between
otherwise independent profit centers (Note 1).

One customer accounted for 14% of total revenue in fiscal year 1998, and
another customer accounted for 13% of total revenue in fiscal year 1996. No
customer accounted for more than 10% of total revenue in fiscal year 1997.

Included in the total of United States revenue is export revenue of $131
million in fiscal 1998, $162 million in fiscal 1997, and $347 million in
fiscal 1996. Sales to customers located in Korea accounted for 11% and 24% of
total revenues in fiscal years 1997 and 1996, respectively. Sales to customers
located in Taiwan accounted for 24%, 17%, and 12% of total revenues in fiscal
years 1998, 1997, and 1996, respectively. Sales to customers located in Japan
accounted for 14% of total revenues in fiscal year 1996.

<TABLE>
<CAPTION>
REVENUE FROM INTERGEOGRAPHIC
UNAFFILIATED REVENUE FROM PRE-TAX IDENTIFIABLE
CUSTOMERS AFFILIATES TOTAL REVENUE EARNINGS ASSETS
-------------- ------------------- ---------------- ---------------- --------------
1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ----- ----- ----- ---- ---- ---- ---- ---- ---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States........... $228 $370 $583 $ 85 $ 58 $ 75 $313 $428 $658 $32 $ 87 $161 $148 $165 $230
International........... 109 70 84 12 12 1 121 82 85 (1) (9) (2) 61 32 40
---- ---- ---- ----- ----- ----- ---- ---- ---- --- ---- ---- ---- ---- ----
Total geographic
segments.............. 337 440 667 97 70 76 434 510 743 31 78 159 209 197 270
Eliminations, corporate
& other................ 6 8 -- (97) (70) (76) (91) (62) (76) (15) 28 (37) 16 36 42
---- ---- ---- ----- ----- ----- ---- ---- ---- --- ---- ---- ---- ---- ----
Total Company.......... $343 $448 $667 $ -- $ -- $ -- $343 $448 $667 $16 $106 $122 $225 $233 $312
==== ==== ==== ===== ===== ===== ==== ==== ==== === ==== ==== ==== ==== ====
</TABLE>

Total revenue is based on the location of the operation furnishing goods and
services. International revenue based on final destination of products sold is
$239 million in fiscal 1998, $231 million in fiscal 1997, and $430 million in
fiscal 1996.

NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
1998 1997
------------------------------- -------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $114.2 $101.7 $85.2 $ 41.8 $106.0 $105.9 $121.9 $114.5
------ ------ ----- ------ ------ ------ ------ ------
Gross profit............ 49.4 37.7 26.4 4.2 38.6 46.4 48.6 51.1
------ ------ ----- ------ ------ ------ ------ ------
Net Earnings............ 14.9 10.5 0.7 (14.7) 5.5 10.7 46.1 8.7
====== ====== ===== ====== ====== ====== ====== ======
Pro forma net earnings
per share.............. $ 0.49 $ 0.35 $0.03 $(0.49) $ 0.18 $ 0.35 $ 1.51 $ 0.29
====== ====== ===== ====== ====== ====== ====== ======
</TABLE>

Third quarter 1997 net earnings include a $33.2 million ($1.09 pro forma per
share) after-tax gain on the sale of TFS.

F-37
<PAGE>
ANNEX A

CERTIFICATE OF AMENDMENT TO
RESTATED CERTIFICATE OF INCORPORATION
OF
VARIAN ASSOCIATES, INC.
A Delaware Corporation

Varian Associates, Inc., a corporation organized and existing under the
General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:

FIRST: The name of the Corporation is Varian Associates, Inc. and the name
under which the Corporation was originally incorporated was Varian Delaware,
Inc. The Corporation's original Certificate of Incorporation was filed with the
Secretary of State of Delaware on January 22, 1976.

SECOND: The Board of Directors of the Corporation (the "Board of
Directors") duly adopted resolutions at a meeting of the Board of Directors
setting forth proposed amendments of the Restated Certificate of Incorporation
of the Corporation, declaring such amendments to be advisable and directing that
such amendments be considered at a meeting of the stockholders of the
Corporation. The resolutions setting forth the proposed amendments are as
follows:

RESOLVED, that the Restated Certificate of Incorporation of the Corporation
be amended by amending and restating ARTICLE I thereof to read in its
entirety as follows:

ARTICLE I

The name of this corporation is Varian Medical Systems, Inc.

FURTHER RESOLVED, that the Restated Certificate of Incorporation of the
Corporation be amended by amending and restating ARTICLE V thereof to read
in its entirety as follows:

ARTICLE V

Subject to the rights of the holders of any series of Preferred Stock
to elect additional directors under specified circumstances, the number of
directors of this corporation shall be fixed from time to time exclusively
by the Board of Directors pursuant to a resolution adopted by a majority of
the then authorized number of directors of this corporation, but in no
event shall the number of directors be fewer than three. The directors,
other than those who may be elected solely by the holders of any series of
Preferred Stock (unless the relevant Preferred Stock certificate of
designation shall so provide), shall be divided into three classes, as
nearly equal in number as possible, designated "Class I," "Class II" and
"Class III." Directors of each class shall serve for a term ending on the
third annual meeting of stockholders following the annual meeting at which
such class was elected. The foregoing notwithstanding, each director shall
serve until his or her successor shall have been duly elected and
qualified, unless such director shall die, resign, retire or be
disqualified or removed.

At each annual election the directors chosen to succeed those whose
terms then expire shall be identified as being of the same class as the
directors they succeed. If for any reason the number of directors in the
various classes shall not be as nearly equal as possible, the Board of
Directors may redesignate any director into a different class in order
that the balance of directors in such classes shall be as nearly equal as
possible.

Every act or decision done or made by a majority of the whole Board of
Directors, acting at a meeting duly held at which a quorum is present, or
acting by written consent, shall be regarded as the act of the Board of
Directors unless a greater number be required by law or by this Certificate
of Incorporation.

A-1
<PAGE>

Subject to the rights of the holders of any series of Preferred Stock
to elect additional directors under specified circumstances, and unless the
Board of Directors otherwise determines, vacancies in the Board of
Directors resulting from one or more directors' death, resignation,
retirement, disqualification, removal from office or other cause, and newly
created directorships resulting from any increase in the authorized number
of directors, may be filled only by the affirmative vote of a majority of
the remaining directors, though less than a quorum of the Board of
Directors, or by a sole remaining director, and directors so chosen shall
hold office for a term expiring at the annual meeting of stockholders at
which the term of office of the class to which they have been elected
expires and until such director's successor shall have been duly elected
and qualified. No decrease in the number of authorized directors
constituting the Board of Directors shall shorten the term of any incumbent
director.

Subject to the rights of the holders of any series of Preferred Stock
to elect additional directors under specified circumstances, any director
may be removed from office at any time, but only for cause and only by the
affirmative vote of the holders of at least a majority of the voting power
of the then outstanding Voting Stock, voting together as a single class, at
a meeting called for that purpose.

Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, and in addition to approval by the Board of
Directors, the affirmative vote of the holders of at least 66 2/3% of the
voting power of the then outstanding Voting Stock, voting together as a
single class, shall be required to amend, repeal or adopt any provision
inconsistent with this Article V. For purposes of this Certificate of
Incorporation, "Voting Stock" shall mean the outstanding shares of capital
stock of this corporation entitled to vote generally in the election of
directors.

RESOLVED FURTHER, that the Restated Certificate of Incorporation of the
Corporation be amended by changing ARTICLE VI thereof to add, immediately
after the first sentence thereof, the following:

Notwithstanding any other provision of this Certificate of Incorporation or
any provision of law which might otherwise permit a lesser vote or no vote,
but in addition to any affirmative vote of the holders of any series of
Preferred Stock required by applicable law, this Certificate of
Incorporation or any Preferred Stock designation, the affirmative vote of
the holders of at least 66 2/3% of the voting power of the then outstanding
Voting Stock, voting together as a single class, shall be required for
stockholders to adopt, amend or repeal any provision of the By-Laws of this
corporation. Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, and in addition to approval by the Board of
Directors, the affirmative vote of the holders of at least 66 2/3% of the
voting power of the then outstanding Voting Stock, voting together as a
single class, shall be required to amend, repeal or adopt any provision
inconsistent with this Article VI.

RESOLVED FURTHER, that the Restated Certificate of Incorporation of the
Corporation be amended by renumbering ARTICLE X thereof as ARTICLE XI and
adopting a new Article X to read as follows:

ARTICLE X

Any action required or permitted to be taken by the stockholders of
this corporation must be effected at a duly called annual or special
meeting of stockholders of this corporation and may not be effected by any
consent in writing in lieu of a meeting of such stockholders.
Notwithstanding anything contained in this Certificate of Incorporation to
the contrary, and in addition to approval by the Board of Directors, the
affirmative vote of at least 66 2/3% of the voting power of the then
outstanding Voting Stock, voting together as a single class, shall be
required to amend, repeal or adopt any provision inconsistent with this
Article X.

A-2
<PAGE>

THIRD: Thereafter, the necessary number of shares as required by statute
were voted in favor of such amendments at the combined annual and special
meeting of stockholders of the Corporation held on February 18, 1999 upon notice
in accordance with Section 222 of the General Corporation Law of the State of
Delaware.

FOURTH: Such amendment was duly adopted in accordance with the provisions
of Section 242 of the General Corporation Law of the State of Delaware.

IN WITNESS WHEREOF, we have hereunto set our hands as Chairman and Chief
Executive Officer, and Secretary, respectively, of Varian Associates, Inc. and
hereby affirm under penalties of perjury that the foregoing is our act and deed
and the facts herein stated are true, and accordingly have hereunto set forth
our hands this ___ day of ________, 1999.

________________________________________
[Name of Chairman and Chief Executive
Officer], Chairman and Chief Executive
Officer

ATTEST:_________________________________
[Name of Secretary], Secretary

A-3
<PAGE>

[LOGO] WARBURG DILLON READ

WARBURG DILLON READ LLC
555 California
Street, Suite 4650
San Francisco, CA 94104
Telephone 415 352-5500
www.wdr.com

ANNEX B

January 14, 1999

Board of Directors
Varian Associates, Inc.
3050 Hansen Way
Palo Alto, CA 94304

Ladies and Gentlemen:

We are acting as financial advisors to Varian Associates, Inc. ("VAI" or the
"Company") in connection with the proposed distribution of all shares of
Varian, Inc. ("IB") common stock and all of the shares of Varian Semiconductor
Equipment Associates, Inc. ("SEB") common stock to the holders of VAI common
stock, on a pro rata basis, as more fully described in the Proxy Statement
dated January 14, 1999 (the "Distribution"). We understand that the
Distribution will separate the Company into three publicly traded companies
and that following the Distribution, the Company will change its name to
Varian Medical Systems, Inc. ("HCS") and continue to conduct the Health Care
Systems Business, IB will conduct the Instruments Business and SEB will
conduct the Semiconductor Equipment Business. You have requested our opinion,
as of the date hereof, whether the proposed Distribution is fair, from a
financial point of view, to the holders of VAI common stock.

Warburg Dillon Read LLC ("WDR"), as part of its investment banking business,
is regularly engaged in the evaluation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive bids, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
For its services, WDR will receive a fee, part of which is contingent upon the
consummation of the Distribution. In the ordinary course of business, WDR, its
successors and affiliates may have traded securities of the Company for their
own accounts and, accordingly, may at any time hold a long or short position
in such securities.

In arriving at our opinion, we have: (i) conducted discussions with members of
the senior management of the Company and with the senior management of HCS,
IB, and SEB with regard to the business and prospects of each company; (ii)
analyzed certain historical business and financial information related to the
Company, HCS, IB and SEB prepared by management of the Company, HCS, IB and
SEB, respectively; (iii) reviewed certain financial projections for the
Company, HCS, IB and SEB prepared by management of the Company, HCS, IB and
SEB, respectively; (iv) reviewed public information relating to the Company,
including the Company's Annual Report on Form 10-K for the five fiscal years
ended October 2, 1998 and Quarterly Reports on Form 10-Q for the quarters
ending January 2, April 3, and July 3, 1998; (v) reviewed public information
with respect to certain other companies engaged in businesses which we
believed to be generally comparable to certain of the businesses conducted by
the Company, HCS, IB and SEB; (vi) reviewed the Proxy Statement; and (vii)
conducted such other studies, analyses and investigations and reviewed such
other economic and market data as we deemed necessary or appropriate.

We have, with your consent, assumed and relied upon, without independent
verification, the accuracy and completeness of the information reviewed by us
for the purposes of this opinion. With respect to the financial budgets and
forecasts, we have, at your direction, assumed that they were reasonably
prepared on the bases reflecting the best currently available estimates and
judgments of the financial performance of the Company, HCS, IB, and SEB. We
have not made any independent valuation or appraisal of the assets or
liabilities, contingent or otherwise, of the Company, HCS, IB and SEB, nor
have we been furnished with any such evaluation or appraisal. Further, our
opinion is based on economic, monetary and market conditions existing on the
date hereof and assumes that the Distribution will be completed substantially
on the basis set out in the Proxy Statement.

WARBURG DILLON READ LLC IS A SUBSIDIARY OF UBS AG.
WARBURG DILLON READ IS THE INVESTMENT BANKING DIVISION OF UBS AG.
MEMBER SIPC

MEMBER NEW YORK
STOCK EXCHANGE
AND OTHER PRINCIPAL
EXCHANGES

B-1
<PAGE>

WARBURG DILLON READ
[LOGO]

We have noted that the Company, as a condition to the Distribution, expects to
receive a favorable ruling from the Internal Revenue Service or opinion from
counsel to the effect, among other things, that receipt of shares of IB common
stock and SEB common stock by stockholders of the Company will be tax free to
stockholders of the Company under federal income tax laws and that the Company
will not recognize income, gain or loss as a result of the Distribution. In
that regard, we have, with your consent, assumed that the Company will receive
such ruling or opinion.

In rendering our opinion we are not opining as to the price at which the
common stock of HCS, IB and SEB will trade after the Distribution is effected
or as to the valuation or long-term viability of HCS, IB or SEB as independent
public companies following the Distribution. This opinion does not constitute
a recommendation to any current or prospective shareholder of either the
Company, HCS, IB or SEB as to any action or investment decision such party or
person may take.

Based upon and subject to the foregoing and recognizing that the proposed
Distribution is pro-rata to holders of
shares of VAI common stock, we are of the opinion as of the date hereof that
the proposed Distribution is fair, from a financial point of view, to the
holders of shares of VAI common stock.

Very truly yours,

WARBURG DILLON READ LLC

B-2
<PAGE>

ANNEX C

VARIAN, INC.

OMNIBUS STOCK PLAN
<PAGE>

TABLE OF CONTENTS
Page

SECTION 1 BACKGROUND, PURPOSE AND DURATION..1

1.1 Effective Date.................................................. 1
1.2 Purpose of the Plan............................................. 1

SECTION 2 DEFINITIONS.................................................. 1

2.1 "1934 Act"...................................................... 1
2.2 "Affiliate"..................................................... 1
2.3 "Award"......................................................... 1
2.4 "Award Agreement"............................................... 1
2.5 "Board"......................................................... 1
2.6 "Code".......................................................... 1
2.7 "Committee"..................................................... 1
2.8 "Company"....................................................... 1
2.9 "Consultant".................................................... 1
2.10 "Director"...................................................... 1
2.11 "Disability".................................................... 2
2.12 "EBIT".......................................................... 2
2.13 "EBITDA"........................................................ 2
2.14 "Earnings Per Share"............................................ 2
2.15 "Employee"...................................................... 2
2.16 "Exercise Price"................................................ 2
2.17 "Fair Market Value"............................................. 2
2.18 "Fiscal Year"................................................... 2
2.19 "Grant Date".................................................... 2
2.20 "Incentive Stock Option"........................................ 2
2.21 "Net Income".................................................... 2
2.22 "Non-employee Director"......................................... 2
2.23 "Non-qualified Stock Option".................................... 2
2.24 "Operating Cash Flow"........................................... 2
2.25 "Option"........................................................ 2
2.26 "Participant"................................................... 3
2.27 "Performance Goals"............................................. 3
2.28 "Performance Period"............................................ 3
2.29 "Performance Share"............................................. 3
2.30 "Performance Unit".............................................. 3
2.31 "Period of Restriction"......................................... 3
2.32 "Plan".......................................................... 3
2.33 "Restricted Stock".............................................. 3
2.34 "Retirement".................................................... 3
2.35 "Return on Assets".............................................. 3
2.36 "Return on Equity............................................... 3
2.37 "Return on Sales"............................................... 3
2.38 "Revenue"....................................................... 3
2.39 "Rule 16b-3".................................................... 3
2.40 "Section 16 Person"............................................. 4
2.41 "Shareholder Return"............................................ 4
2.42 "Shares"........................................................ 4
2.43 "Stock Appreciation Right"...................................... 4
2.44 "Subsidiary".................................................... 4
2.45 "Termination of Service"........................................ 4
2.46 "VAI"........................................................... 4

-i-
<PAGE>

TABLE OF CONTENTS
(continued)

SECTION 3 ADMINISTRATION............................................... 4

3.1 The Committee................................................... 4
3.2 Authority of the Committee...................................... 4
3.3 Delegation by the Committee..................................... 4
3.4 Non-employee Directors.......................................... 5
3.5 Decisions Binding............................................... 5

SECTION 4 SHARES SUBJECT TO THE PLAN................................... 5

4.1 Number of Shares................................................ 5
4.2 Lapsed Awards................................................... 5
4.3 Adjustments in Awards and Authorized Shares..................... 5

SECTION 5 STOCK OPTIONS................................................ 5

5.1 Grant of Options................................................ 5
5.2 Award Agreement................................................. 5
5.3 Exercise Price.................................................. 5

5.3.1 Non-qualified Stock Options.............................. 6
5.3.2 Incentive Stock Options.................................. 6
5.3.3 Substitute Options....................................... 6

5.4 Expiration of Options........................................... 6

5.4.1 Expiration Dates......................................... 6
5.4.2 Death of Participant..................................... 6
5.4.3 Committee Discretion..................................... 6

5.5 Exercisability of Options....................................... 6
5.6 Payment......................................................... 7
5.7 Restrictions on Share Transferability........................... 7
5.8 Certain Additional Provisions for Incentive Stock Options....... 7

5.8.1 Exercisability........................................... 7
5.8.2 Termination of Service................................... 7
5.8.3 Company and Subsidiaries Only............................ 7
5.8.4 Expiration............................................... 7

5.9 Grant of Reload Options......................................... 7

SECTION 6 STOCK APPRECIATION RIGHTS.................................... 8

6.1 Grant of SARs................................................... 8
6.2 Exercise Price and Other Terms.................................. 8
6.3 SAR Agreement................................................... 8
6.4 Expiration of SARs.............................................. 8
6.5 Payment of SAR Amount........................................... 8
6.6 Payment Upon Exercise of SAR.................................... 8

SECTION 7 RESTRICTED STOCK............................................. 8

7.1 Grant of Restricted Stock....................................... 8
7.2 Restricted Stock Agreement...................................... 8
7.3 Transferability................................................. 8
7.4 Other Restrictions.............................................. 8

7.4.1 General Restrictions..................................... 9
7.4.2 Section 162(m) Performance Restrictions.................. 9
7.4.3 Legend on Certificates................................... 9

-ii-
<PAGE>

TABLE OF CONTENTS
(continued)

7.5 Removal of Restrictions......................................... 9
7.6 Voting Rights................................................... 9
7.7 Dividends and Other Distributions............................... 9
7.8 Return of Restricted Stock to Company........................... 9

SECTION 8 PERFORMANCE UNITS AND PERFORMANCE SHARES..................... 9

8.1 Grant of Performance Units and Shares........................... 9
8.2 Initial Value................................................... 9
8.3 Performance Objectives and Other Terms..........................10

8.3.1 General Performance Objectives...........................10
8.3.2 Section 162(m) Performance Objectives....................10

8.4 Earning of Performance Units and Performance Shares.............10
8.5 Form and Timing of Payment......................................10
8.6 Cancellation....................................................10

SECTION 9 NON-EMPLOYEE DIRECTORS.......................................10

9.1 Granting of Options.............................................10

9.1.1 Non-employee Directors...................................10
9.1.2 Chairman.................................................11

9.2 Terms of Options................................................11

9.2.1 Option Agreement.........................................11
9.2.2 Exercise Price...........................................11
9.2.3 Exercisability...........................................11
9.2.4 Expiration of Options....................................11
9.2.5 Death of Director........................................11
9.2.6 Not Incentive Stock Options..............................11
9.2.7 Other Terms..............................................11

9.3 Substitute Options..............................................11
9.4 Elections by Non-employee Directors.............................12

SECTION 10 MISCELLANEOUS...............................................12

10.1 No Effect on Employment or Service..............................12
10.2 Participation...................................................12
10.3 Indemnification.................................................12
10.4 Successors......................................................12
10.5 Beneficiary Designations........................................12
10.6 Nontransferability of Awards....................................12
10.7 No Rights as Stockholder........................................12
10.8 Withholding Requirements........................................13
10.9 Withholding Arrangements........................................13
10.10 Deferrals.......................................................13

SECTION 11 AMENDMENT, TERMINATION AND DURATION.........................13

11.1 Amendment, Suspension or Termination............................13
11.2 Duration of the Plan............................................13

SECTION 12 LEGAL CONSTRUCTION..........................................13

12.1 Gender and Number...............................................13
12.2 Severability....................................................13
12.3 Requirements of Law.............................................13
12.4 Governing Law...................................................13
12.5 Captions........................................................14

-iii-
<PAGE>

VARIAN, INC.
OMNIBUS STOCK PLAN

SECTION 1
BACKGROUND, PURPOSE AND DURATION

1.1 Effective Date. The Plan is effective as of the date on which VAI
--------------
distributes the Company's Shares to the stockholders of VAI, subject to the
approval of the Plan by a majority of the shares of the common stock of VAI
which are present in person or by proxy and entitled to vote at the 1999 Annual
and Special Meeting of the Stockholders of VAI.

1.2 Purpose of the Plan. The Plan is intended to increase incentives and
-------------------
to encourage Share ownership on the part of (1) employees of the Company and its
Affiliates, (2) consultants who provide significant services to the Company and
its Affiliates, and (3) directors of the Company who are employees of neither
the Company nor any Affiliate. The Plan also is intended to further the growth
and profitability of the Company. The Plan is intended to permit the grant of
Awards that qualify as performance-based compensation under section 162(m) of
the Code.

SECTION 2
DEFINITIONS

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

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

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

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

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

2.5 "Board" means the Board of Directors of the Company.
-----

2.6 "Code" means the Internal Revenue Code of 1986, as amended.
----
Reference to a specific section of the Code or regulation thereunder shall
include such section or regulation, any valid regulation promulgated
thereunder, and any comparable provision of any future legislation or
regulation amending, supplementing or superseding such section or regulation.

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

2.8 "Company" means Varian, Inc., a Delaware corporation, or any successor
-------
thereto.

2.9 "Consultant" means any consultant, independent contractor, or other
----------
person who provides significant services to the Company or its Affiliates, but
who is neither an Employee nor a Director.

2.10 "Director" means any individual who is a member of the Board.
--------
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<PAGE>

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

2.12 "EBIT" means as to any Performance Period, the Company's or a
----
business unit's income before reductions for interest and taxes, determined in
accordance with generally accepted accounting principles.

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

2.14 "Earnings Per Share" means as to any Performance Period, the
------------------
Company's or a business unit's Net Income, divided by a weighted average
number of common shares outstanding and dilutive common equivalent shares
deemed outstanding, determined in accordance with generally accepted
accounting principles.

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

2.16 "Exercise Price" means the price at which a Share may be purchased
--------------
by a Participant pursuant to the exercise of an Option.

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

2.18 "Fiscal Year" means the fiscal year of the Company.
-----------

2.19 "Grant Date" means, with respect to an Award, the date that the
----------
Award was granted.

2.20 "Incentive Stock Option" means an Option to purchase Shares which is
----------------------
designated as an Incentive Stock Option and is intended to meet the requirements
of section 422 of the Code.

2.21 "Net Income" means as to any Performance Period, the Company's or a
----------
business unit's income after taxes, determined in accordance with generally
accepted accounting principles.

2.22 "Non-employee Director" means a Director who is an employee of
---------------------
neither the Company nor of any Affiliate.

2.23 "Non-qualified Stock Option" means an option to purchase Shares
--------------------------
which is not intended to be an Incentive Stock Option.

2.24 "Operating Cash Flow" means as to any Performance Period, the
-------------------
Company's or a business unit's sum of Net Income plus depreciation and
amortization less capital expenditures plus changes in working capital
comprised of accounts receivable, inventories, other current assets, trade
accounts payable, accrued expenses, product warranty, advance payments from
customers and long-term accrued expenses, determined in accordance with
generally acceptable accounting principles.

2.25 "Option" means an Incentive Stock Option or a Non-qualified Stock
------
Option.

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<PAGE>

2.26 "Participant" means an Employee, Consultant, or Non-employee
-----------
Director who has an outstanding Award.

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

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

2.29 "Performance Share" means a Performance Share granted to a
-----------------
Participant pursuant to Section 8.

2.30 "Performance Unit" means a Performance Unit granted to a Participant
----------------
pursuant to Section 8.

2.31 "Period of Restriction" means the period during which shares of
---------------------
Restricted Stock are subject to forfeiture and/or restrictions on
transferability.

2.32 "Plan" means the Varian, Inc. Omnibus Stock Plan, as set forth in
----
this instrument and as hereafter amended from time to time.

2.33 "Restricted Stock" means an Award granted to a Participant pursuant
----------------
to Section 7.

2.34 "Retirement" means, in the case of an Employee or a Non-employee
----------
Director, "Retirement" as defined pursuant to the Company's or the Board's
Retirement Policies, as they may be established from time to time. With
respect to a Consultant, no Termination of Service shall be deemed to be on
account of "Retirement."

2.35 "Return on Assets" means as to any Performance Period, the percentage
----------------
equal to the Company's or a business unit's EBIT before incentive compensation,
divided by average net Company or business unit, as applicable, assets,
determined in accordance with generally accepted accounting principles.

2.36 "Return on Equity" means as to any Performance Period, the percentage
----------------
equal to the Company's Net Income divided by average stockholder's equity,
determined in accordance with generally accepted accounting principles.

2.37 "Return on Sales" means as to any Performance Period, the percentage
---------------
equal to the Company's or a business unit's EBIT before incentive compensation,
divided by the Company's or the business unit's, as applicable, Revenue,
determined in accordance with generally accepted accounting principles.

2.38 "Revenue" means as to any Performance Period, the Company's or a
-------
business unit's net sales, determined in accordance with generally accepted
accounting principles.

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

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<PAGE>

2.40 "Section 16 Person" means a person who, with respect to the Shares,
-----------------
is subject to section 16 of the 1934 Act.

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

2.42 "Shares" means shares of the Company's common stock, $.01 par value.
------

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

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

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

2.46 "VAI" means Varian Associates, Inc., a Delaware corporation.
---

SECTION 3
ADMINISTRATION

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

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

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

C-4
<PAGE>

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

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

SECTION 4
SHARES SUBJECT TO THE PLAN

4.1 Number of Shares. Subject to adjustment as provided in Section 4.3,
----------------
the total number of Shares available for grant under the Plan shall not exceed
4,200,000, plus such number of Shares as are granted pursuant to substitute
Options under Sections 5.3.3 and 9.3 in connection with the distribution of
Shares to the stockholders of VAI. Shares granted under the Plan may be either
authorized but unissued Shares or treasury Shares.

4.2 Lapsed Awards. If an Award terminates, expires, or lapses for any
-------------
reason, any Shares subject to such Award again shall be available to be the
subject of an Award. In addition, if any Shares are tendered to the Company
(whether by physical delivery or attestation) as full or partial payment for
the exercise of an Option or in satisfaction of a tax withholding obligation
pursuant to an Award, only the net Shares issued shall be deemed granted for
purposes of determining the maximum number of Shares that may be granted under
Section 4.1. Also, Shares granted pursuant to Awards assumed or granted in
substitution of other awards in connection with the acquisition by the Company
of an unrelated entity shall not reduce the maximum number of Shares issuable
under Section 4.1.

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

SECTION 5
STOCK OPTIONS

5.1 Grant of Options. Subject to the terms and provisions of the Plan,
----------------
Options may be granted to Employees and Consultants at any time and from time
to time as determined by the Committee in its sole discretion. The Committee,
in its sole discretion, shall determine the number of Shares subject to each
Option, provided that during any Fiscal Year, no Participant shall be granted
Options covering more than 1,000,000 Shares. The Committee may grant Incentive
Stock Options, Non-qualified Stock Options, or a combination thereof.

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

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

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<PAGE>

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

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

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

5.4 Expiration of Options.
---------------------

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

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

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

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

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

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

5.4.2 Death of Participant. Notwithstanding Section 5.4.1, if a
--------------------
Participant who is an Employee dies prior to the expiration of his or her
Options, his or her Options shall be exercisable until the expiration of three
(3) years after the date of death. If a Participant who is a Consultant dies
prior to the expiration of his or her Options, the Committee, in its
discretion, may provide that his or her Options shall be exercisable for up to
three (3) years after the date of death.

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

5.5 Exercisability of Options. Options granted under the Plan shall be
-------------------------
exercisable at such times and be subject to such restrictions and conditions as
the Committee shall determine in its sole discretion. After an Option is
granted, the Committee, in its sole discretion, may accelerate the
exercisability of the Option. If a

C-6
<PAGE>

Participant dies while an Employee, the exercisability of his or her Options
shall be fully accelerated to the date of Termination of Service.

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

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

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

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

5.8 Certain Additional Provisions for Incentive Stock Options.
---------------------------------------------------------

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

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

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

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

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

C-7
<PAGE>

SECTION 6
STOCK APPRECIATION RIGHTS

6.1 Grant of SARs. Subject to the terms and conditions of the Plan, SARs
-------------
may be granted to Employees and Consultants at any time and from time to time as
shall be determined by the Committee, in its sole discretion. The Committee
shall have complete discretion to determine the number of SARs granted to any
Participant, provided that during any Fiscal Year, no Participant shall be
granted SARs covering more than 1,000,000 Shares.

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

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

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

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

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

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

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

SECTION 7
RESTRICTED STOCK

7.1 Grant of Restricted Stock. Subject to the terms and provisions of the
-------------------------
Plan, the Committee, at any time and from time to time, may grant Shares of
Restricted Stock to Employees and Consultants in such amounts as the Committee,
in its sole discretion, shall determine. The Committee, in its sole discretion,
shall determine the number of Shares to be granted to each Participant, provided
that during any Fiscal Year, no Participant shall be granted more than 100,000
Shares of Restricted Stock.

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

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

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

C-8
<PAGE>

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

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

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

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

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

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

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

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

SECTION 8
PERFORMANCE UNITS AND PERFORMANCE SHARES

8.1 Grant of Performance Units and Shares. Performance Units and
-------------------------------------
Performance Shares may be granted to Employees and Consultants at any time and
from time to time, as shall be determined by the Committee, in its sole
discretion. The Committee shall have complete discretion in determining the
number of Performance Units and Performance Shares granted to any Participant,
provided that during any Fiscal Year no more than 100,000 Performance Units or
Performance Shares may be granted to any Participant.

C-9
<PAGE>

on the Grant Date. Each Performance Share shall have an initial value equal to
the Fair Market Value of a Share on the Grant Date.

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

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

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

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

8.5 Form and Timing of Payment. Payment of earned Performance Units or
--------------------------
Performance Shares shall be made as soon as practicable after the expiration of
the applicable Performance Period. The Committee, in its sole discretion, may
pay such earned Awards in cash, Shares or a combination thereof.

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

SECTION 9
NON-EMPLOYEE DIRECTORS

9.1 Granting of Options.
-------------------

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

C-10
<PAGE>

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

9.2 Terms of Options.
----------------

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

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

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

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

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

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

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

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

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

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

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

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

C-11
<PAGE>

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

SECTION 10
MISCELLANEOUS

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

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

10.3 Indemnification. Each person who is or shall have been a member of
---------------
the Committee, or of the Board, shall be indemnified and held harmless by the
Company against and from (a) any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by him or her in connection with or
resulting from any claim, action, suit, or proceeding to which he or she may be
a party or in which he or she may be involved by reason of any action taken or
failure to act under the Plan or any Award Agreement, and (b) from any and all
amounts paid by him or her in settlement thereof, with the Company's approval,
or paid by him or her in satisfaction of any judgment in any such claim, action,
suit, or proceeding against him or her, provided he or she shall give the
Company an opportunity, at its own expense, to handle and defend the same before
he or she undertakes to handle and defend it on his or her own behalf. The
foregoing right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Company's
Certificate of Incorporation or Bylaws, by contract, as a matter of law, or
otherwise, or under any power that the Company may have to indemnify them or
hold them harmless.

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

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

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

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

C-12
<PAGE>

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

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

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

SECTION 11
AMENDMENT, TERMINATION AND DURATION

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

11.2 Duration of the Plan. The Plan shall commence on the date specified
--------------------
herein, and subject to Section 11.1 (regarding the Board's right to amend or
terminate the Plan), shall remain in effect thereafter. However, without
further stockholder approval, no Incentive Stock Option may be granted under the
Plan after ten (10) years from the Effective Date.

SECTION 12
LEGAL CONSTRUCTION

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

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

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

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

C-13
<PAGE>

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

EXECUTION

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

VARIAN, INC.

Dated: _______________, ____ By_________________________________
Name:
Title:

C-14
<PAGE>

ANNEX D

VARIAN, INC.

MANAGEMENT INCENTIVE PLAN
<PAGE>

TABLE OF CONTENTS

Page

SECTION 1 BACKGROUND, PURPOSE AND DURATION............................ 1

1.1 Effective Date................................................. 1
1.2 Purpose of the Plan............................................ 1

SECTION 2 DEFINITIONS................................................. 1

2.1 "Actual Award"................................................. 1
2.2 "Affiliate".................................................... 1
2.3 "Base Salary".................................................. 1
2.4 "Board"........................................................ 1
2.5 "Code"......................................................... 1
2.6 "Committee".................................................... 1
2.7 Company"...................................................... 1
2.8 "Disability"................................................... 1
2.9 "EBIT"......................................................... 1
2.10 "EBITDA"....................................................... 2
2.11 "Earnings Per Share"........................................... 2
2.12 "Employee"..................................................... 2
2.13 "Fiscal Year".................................................. 2
2.14 "Maximum Award"................................................ 2
2.15 "Net Income"................................................... 2
2.16 "Operating Cash Flow".......................................... 2
2.17 "Participant".................................................. 2
2.18 "Payout Formula"............................................... 2
2.19 "Performance Goals"............................................ 2
2.20 "Performance Period"........................................... 2
2.21 "Plan"......................................................... 2
2.22 "Retirement"................................................... 2
2.23 "Return on Assets"............................................. 3
2.24 "Return on Equity"............................................. 3
2.25 "Return on Sales".............................................. 3
2.26 "Revenue"...................................................... 3
2.27 "Shareholder Return"........................................... 3
2.28 "Shares"....................................................... 3
2.29 "Target Award"................................................. 3
2.30 "VAI".......................................................... 3

SECTION 3 SELECTION OF PARTICIPANTS AND DETERMINATION OF AWARDS....... 3

3.1 Selection of Participants...................................... 3
3.2 Determination of Performance Goals............................. 3
3.3 Determination of Target Awards................................. 3
3.4 Determination of Payout Formula or Formulae.................... 3
3.5 Determination of Actual Awards................................. 3

SECTION 4 PAYMENT OF AWARDS........................................... 4

4.1 Right to Receive Payment....................................... 4
4.2 Timing of Payment.............................................. 4
4.3 Form of Payment................................................ 4
4.4 Payment in the Event of Death.................................. 4

SECTION 5 ADMINISTRATION.............................................. 4

5.1 Committee is the Administrator................................. 4
5.2 Committee Authority............................................ 4
5.3 Decisions Binding.............................................. 4
5.4 Delegation by the Committee.................................... 5

-i-
<PAGE>

SECTION 6 GENERAL PROVISIONS.......................................... 5

6.1 Tax Withholding................................................ 5
6.2 No Effect on Employment or Service............................. 5
6.3 Participation.................................................. 5
6.4 Indemnification................................................ 5
6.5 Successors..................................................... 5
6.6 Beneficiary Designations....................................... 5
6.7 Nontransferability of Awards................................... 5
6.8 Deferrals...................................................... 6

SECTION 7 AMENDMENT, TERMINATION AND DURATION......................... 6

7.1 Amendment, Suspension or Termination........................... 6
7.2 Duration of the Plan........................................... 6

SECTION 8 LEGAL CONSTRUCTION.......................................... 6

8.1 Gender and Number.............................................. 6
8.2 Severability................................................... 6
8.3 Requirements of Law............................................ 6
8.4 Governing Law.................................................. 6
8.5 Captions....................................................... 6

-ii-
<PAGE>

VARIAN, INC.
MANAGEMENT INCENTIVE PLAN

SECTION 1
BACKGROUND, PURPOSE AND DURATION

1.1 Effective Date. The Plan is effective as of the date
--------------
on which VAI distributes shares of the Company's common stock to the
stockholders of VAI, subject to the approval of the Plan by a majority of the
shares of the common stock of VAI which are present in person or by proxy and
entitled to vote at the 1999 Annual and Special Meeting of Stockholders of VAI.

1.2 Purpose of the Plan. The Plan is intended to increase shareholder
-------------------
value and the success of the Company by motivating key executives (1) to
perform to the best of their abilities, and (2) to achieve the Company's
objectives. The Plan's goals are to be achieved by providing such executives
with incentive awards based on the achievement of goals relating to the
performance of the Company and its business units. The Plan is intended to
permit the grant of awards that qualify as performance-based compensation
under section 162(m) of the Code.

SECTION 2
DEFINITIONS

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

2.1 "Actual Award" means as to any Performance Period, the actual award
------------
(if any) payable to a Participant for the Performance Period. Each Actual
Award is determined by the Payout Formula for the Performance Period, subject
to the Committee's authority uder Section 3.5 to reduce the award otherwise
determined by the Payout Formula.

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

2.3 "Base Salary" means as to any Performance Period, the Participant's
-----------
annualized salary rate on the last day of the Performance Period. Such Base
Salary shall be before both (a) deductions for taxes or benefits, and (b)
deferrals of compensation pursuant to Company-sponsored plans.

2.4 "Board" means the Board of Directors of the Company.
-----

2.5 "Code" means the Internal Revenue Code of 1986, as amended.
----
Reference to a specific section of the Code or regulation thereunder shall
include such section or regulation, any valid regulation promulgated
thereunder, and any comparable provision of any future legislation or
regulation amending, supplementing or superseding such section or regulation.

2.6 "Committee" means the committee appointed by the Board (pursuant to
---------
Section 5.1) to administer the Plan.

2.7 Company" means Varian, Inc., a Delaware corporation, or any successor
-------
thereto.

2.8 "Disability" means a permanent and total disability determined in
----------
accordance with uniform and nondiscriminatory standards adopted by the Committee
from time to time.

2.9 "EBIT" means as to any Performance Period, the Company's or a business
----
unit's income before reductions for interest and taxes, determined in accordance
with generally accepted accounting principles.

D-1
<PAGE>

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

2.11 "Earnings Per Share" means as to any Performance Period, the
------------------
Company's or a business unit's Net Income, divided by a weighted average
number of common shares outstanding and dilutive common equivalent shares
deemed outstanding, determined in accordance with generally accepted
accounting principles.

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

2.13 "Fiscal Year" means any fiscal year of the Company.
-----------

2.14 "Maximum Award" means as to any Actual Award to any Participant for
-------------
any Performance Period, the lesser of two hundred percent (200%) of Base
Salary or $2 million.

2.15 "Net Income" means as to any Performance Period, the Company's or a
----------
business unit's income after taxes, determined in accordance with generally
accepted accounting principles.

2.16 "Operating Cash Flow" means as to any Performance Period, the
-------------------
Company's or a business unit's sum of Net Income plus depreciation and
amortization less capital expenditures plus changes in working capital
comprised of accounts receivable, inventories, other current assets, trade
accounts payable, accrued expenses, product warranty, advance payments from
customers and long-term accrued expenses, determined in accordance with
generally acceptable accounting principles.

2.17 "Participant" means as to any Performance Period, an Employee who
-----------
has been selected by the Committee for participation in the Plan for that
Performance Period.

2.18 "Payout Formula" means as to any Performance Period, the formula or
--------------
payout matrix established by the Committee pursuant to Section 3.4 in order to
determine the Actual Awards (if any) to be paid to Participants. The formula or
matrix may differ from Participant to Participant.

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

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

2.21 "Plan" means the Varian, Inc. Management Incentive Plan, as set
----
forth in this instrument and as hereafter amended from time to time.

2.22 "Retirement" means, with respect to any Participant, "Retirement" as
----------
defined by the Company's Retirement Policies, as they may be established from
time to time.

D-2
<PAGE>

2.23 "Return on Assets" means as to any Performance Period, the percentage
----------------
equal to the Company's or a business unit's EBIT before incentive compensation,
divided by average net Company or business unit, as applicable, assets,
determined in accordance with generally accepted accounting principles.

2.24 "Return on Equity" means as to any Performance Period, the percentage
----------------
equal to the Company's Net Income divided by average stockholder's equity,
determined in accordance with generally accepted accounting principles.

2.25 "Return on Sales" means as to any Performance Period, the percentage
---------------
equal to the Company's or a business unit's EBIT before incentive compensation,
divided by the Company's or the business unit's, as applicable, Revenue,
determined in accordance with generally accepted accounting principles.

2.26 "Revenue" means as to any Performance Period, the Company's or a
-------
business unit's net sales, determined in accordance with generally accepted
accounting principles.

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

2.28 "Shares" means shares of the Company's common stock, $.01 par value.
------

2.29 "Target Award" means the target award payable under the Plan to a
------------
Participant for the Performance Period, expressed as a percentage of his or her
Base Salary, as determined by the Committee in accordance with Section 3.3.

2.30 "VAI" means Varian Associates, Inc., a Delaware corporation.
---

SECTION 3
SELECTION OF PARTICIPANTS AND DETERMINATION OF AWARDS

3.1 Selection of Participants. The Committee, in its sole discretion,
-------------------------
shall select the Employees of the Company who shall be Participants for any
Performance Period. Participation in the Plan is in the sole discretion of the
Committee, and on a Performance Period by Performance Period basis.
Accordingly, an Employee who is a Participant for a given Performance Period in
no way is guaranteed or assured of being selected for participation in any
subsequent Performance Period or Periods.

3.2 Determination of Performance Goals. The Committee, in its sole
----------------------------------
discretion, shall establish the Performance Goals for each Participant for the
Performance Period. Such Performance Goals shall be set forth in writing.

3.3 Determination of Target Awards. The Committee, in its sole
------------------------------
discretion, shall establish a Target Award for each Participant. Each
Participant's Target Award shall be determined by the Committee in its sole
discretion, and each Target Award shall be set forth in writing.

3.4 Determination of Payout Formula or Formulae. On or prior to the
-------------------------------------------
Determination Date, the Committee, in its sole discretion, shall establish a
Payout Formula or Formulae for purposes of determining the Actual Award (if any)
payable to each Participant. Each Payout Formula shall (a) be in writing, (b)
be based on a comparison of actual performance to the Performance Goals, (c)
provide for the payment of a Participant's Target Award if the Performance Goals
for the Performance Period are achieved, and (d) provide for an Actual Award
greater than or less than the Participant's Target Award, depending upon the
extent to which actual performance exceeds or falls below the Performance Goals.
Notwithstanding the preceding, no Participant's Actual Award under the Plan may
exceed his or her Maximum Award.

3.5 Determination of Actual Awards. After the end of each Performance
------------------------------
Period, the Committee shall certify in writing the extent to which the
Performance Goals applicable to each Participant for the Performance Period
were achieved or exceeded. The Actual Award for each Participant shall be
determined by

D-3
<PAGE>

applying the Payout Formula to the level of actual performance which has been
certified by the Committee. Notwithstanding any contrary provision of the
Plan, the Committee, in its sole discretion, may (a) eliminate or reduce the
Actual Award payable to any Participant below that which otherwise would be
payable under the Payout Formula, and (b) determine what Actual Award, if any,
will be paid in the event of a termination of employment prior to the end of
the Performance Period. The total aggregate Actual Awards under the Plan with
respect to any Performance Period shall not exceed eight percent (8%) of the
Company's EBIT (but before incentive compensation) for the most recent
completed Fiscal Year. If the total aggregate Actual Awards with respect to a
Performance Period would exceed this aggregate limit, all such Actual Awards
shall be pro-rated on an equal basis among all Participants according to a
formula established by the Committee.

SECTION 4
PAYMENT OF AWARDS

4.1 Right to Receive Payment. Each Actual Award that may become payable
------------------------
under the Plan shall be paid solely from the general assets of the Company.
Nothing in this Plan shall be construed to create a trust or to establish or
evidence any Participant's claim of any right other than as an unsecured
general creditor with respect to any payment to which he or she may be
entitled.

4.2 Timing of Payment. Payment of each Actual Award shall be made within
-----------------
120 days after the end of the Performance Period during which the Award was
earned.

4.3 Form of Payment. Each Actual Award normally shall be paid in cash
---------------
(or its equivalent) in a single lump sum. However, the Committee, in its sole
discretion, may declare any Actual Award, in whole or in part, payable in stock
granted under the Company's Omnibus Stock Plan. The number of Shares granted
shall be determined by dividing the cash amount foregone by the fair market
value of a Share on the date that the cash payment otherwise would have been
made. For this purpose, "fair market value" shall mean the closing price on the
Nasdaq National Market for the day in question.

4.4 Payment in the Event of Death. If a Participant dies prior to the
-----------------------------
payment of an Actual Award earned by him or her prior to death for a prior
Performance Period, the Award shall be paid to his or her estate.

SECTION 5
ADMINISTRATION

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

5.2 Committee Authority. It shall be the duty of the Committee to
-------------------
administer the Plan in accordance with the Plan's provisions. The Committee
shall have all powers and discretion necessary or appropriate to administer
the Plan and to control its operation, including, but not limited to, the
power to (a) determine which Employees shall be granted awards, (b) prescribe
the terms and conditions of awards, (c) interpret the Plan and the awards, (d)
adopt such procedures and subplans as are necessary or appropriate to permit
participation in the Plan by Employees who are foreign nationals or employed
outside of the United States, (e) adopt rules for the administration,
interpretation and application of the Plan as are consistent therewith, and
(f) interpret, amend or revoke any such rules.

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

D-4
<PAGE>

5.4 Delegation by the Committee. The Committee, in its sole discretion
---------------------------
and on such terms and conditions as it may provide, may delegate all or part
of its authority and powers under the Plan to one or more directors and/or
officers of the Company; provided, however, that the Committee may delegate
its authority and powers only with respect to awards that are not intended to
qualify as performance-based compensation under section 162(m) of the Code.

SECTION 6
GENERAL PROVISIONS

6.1 Tax Withholding. The Company shall withhold all applicable taxes
---------------
from any Actual Award, including any federal, state and local taxes (including
the Participant's FICA obligation).

6.2 No Effect on Employment or Service. Nothing in the Plan shall
----------------------------------
interfere with or limit in any way the right of the Company to terminate any
Participant's employment or service at any time, with or without cause. For
purposes of the Plan, transfer of employment of a Participant between the
Company and any one of its Affiliates (or between Affiliates) shall not be
deemed a Termination of Service. Employment with the Company and its
Affiliates is on an at-will basis only. The Company expressly reserves the
right, which may be exercised at any time and without regard to when during a
Performance Period such exercise occurs, to terminate any individual's
employment with or without cause, and to treat him or her without regard to
the effect which such treatment might have upon him or her as a Participant.

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

6.4 Indemnification. Each person who is or shall have been a member of
---------------
the Committee, or of the Board, shall be indemnified and held harmless by the
Company against and from (a) any loss, cost, liability, or expense that may be
imposed upon or reasonably incurred by him or her in connection with or
resulting from any claim, action, suit, or proceeding to which he or she may be
a party or in which he or she may be involved by reason of any action taken or
failure to act under the Plan or any award, and (b) from any and all amounts
paid by him or her in settlement thereof, with the Company's approval, or paid
by him or her in satisfaction of any judgment in any such claim, action, suit,
or proceeding against him or her, provided he or she shall give the Company an
opportunity, at its own expense, to handle and defend the same before he or she
undertakes to handle and defend it on his or her own behalf. The foregoing
right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Company's
Certificate of Incorporation or Bylaws, by contract, as a matter of law, or
otherwise, or under any power that the Company may have to indemnify them or
hold them harmless.

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

6.6 Beneficiary Designations. If permitted by the Committee, a
------------------------
Participant under the Plan may name a beneficiary or beneficiaries to whom any
vested but unpaid award shall be paid in the event of the Participant's death.
Each such designation shall revoke all prior designations by the Participant
and shall be effective only if given in a form and manner acceptable to the
Committee. In the absence of any such designation, any vested benefits
remaining unpaid at the Participant's death shall be paid to the Participant's
estate.

6.7 Nontransferability of Awards. No award granted under the Plan may
----------------------------
be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will, by the laws of descent and distribution, or
to the limited extent provided in Section 6.6. All rights with respect to an
award granted to a Participant shall be available during his or her lifetime
only to the Participant.

D-5
<PAGE>

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

SECTION 7
AMENDMENT, TERMINATION AND DURATION

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

7.2 Duration of the Plan. The Plan shall commence on the date specified
--------------------
herein, and subject to Section 7.1 (regarding the Board's right to amend or
terminate the Plan), shall remain in effect thereafter.

SECTION 8
LEGAL CONSTRUCTION

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

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

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

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

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

EXECUTION

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

VARIAN, INC.

Dated:_____________________ By:____________________________________
Name:
Title:
<PAGE>

ANNEX E

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

OMNIBUS STOCK PLAN
<PAGE>

TABLE OF CONTENTS

Page

<S> <C> <C>
SECTION 1 BACKGROUND, PURPOSE AND DURATION........................... 1

1.1 Effective Date................................................ 1
1.2 Purpose of the Plan........................................... 1

SECTION 2 DEFINITIONS................................................ 1

2.1 "1934 Act".................................................... 1
2.2 "Affiliate"................................................... 1
2.3 "Award"....................................................... 1
2.4 "Award Agreement"............................................. 1
2.5 "Board"....................................................... 1
2.6 "Code"........................................................ 1
2.7 "Committee"................................................... 1
2.8 "Company"..................................................... 1
2.9 "Consultant".................................................. 1
2.10 "Director".................................................... 2
2.11 "Disability".................................................. 2
2.12 "EBIT"........................................................ 2
2.13 "EBITDA"...................................................... 2
2.14 "Earnings Per Share".......................................... 2
2.15 "Employee".................................................... 2
2.16 "Exercise Price".............................................. 2
2.17 "Fair Market Value"........................................... 2
2.18 "Fiscal Year"................................................. 2
2.19 "Grant Date".................................................. 2
2.20 "Incentive Stock Option"...................................... 2
2.21 "Net Income".................................................. 2
2.22 "Non-employee Director"....................................... 2
2.23 "Non-qualified Stock Option".................................. 2
2.24 "Operating Cash Flow"......................................... 2
2.25 "Option"...................................................... 2
2.26 "Participant"................................................. 3
2.27 "Performance Goals"........................................... 3
2.28 "Performance Period".......................................... 3
2.29 "Performance Share"........................................... 3
2.30 "Performance Unit"............................................ 3
2.31 "Period of Restriction"....................................... 3
2.32 "Plan"........................................................ 3
2.33 "Restricted Stock"............................................ 3
2.34 "Retirement".................................................. 3
2.35 "Return on Assets"............................................ 3
2.36 "Return on Equity............................................. 3
2.37 "Return on Sales"............................................. 3
2.38 "Revenue"..................................................... 3
2.39 "Rule 16b-3".................................................. 3
2.40 "Section 16 Person"........................................... 4
2.41 "Shareholder Return".......................................... 4
2.42 "Shares"...................................................... 4
2.43 "Stock Appreciation Right".................................... 4
2.44 "Subsidiary".................................................. 4
2.45 "Termination of Service"...................................... 4
2.46 "VAI"......................................................... 4
</TABLE>

-i-

<PAGE>

TABLE OF CONTENTS
(continued)

SECTION 3 ADMINISTRATION.............................................. 4

3.1 The Committee.................................................. 4
3.2 Authority of the Committee..................................... 4
3.3 Delegation by the Committee.................................... 4
3.4 Non-employee Directors......................................... 5
3.5 Decisions Binding.............................................. 5

SECTION 4 SHARES SUBJECT TO THE PLAN.................................. 5

4.1 Number of Shares............................................... 5
4.2 Lapsed Awards.................................................. 5
4.3 Adjustments in Awards and Authorized Shares.................... 5

SECTION 5 STOCK OPTIONS............................................... 5

5.1 Grant of Options............................................... 5
5.2 Award Agreement................................................ 5
5.3 Exercise Price................................................. 5

5.3.1 Non-qualified Stock Options............................. 6
5.3.2 Incentive Stock Options................................. 6
5.3.3 Substitute Options...................................... 6

5.4 Expiration of Options.......................................... 6

5.4.1 Expiration Dates........................................ 6
5.4.2 Death of Participant.................................... 6
5.4.3 Committee Discretion.................................... 6

5.5 Exercisability of Options...................................... 6
5.6 Payment........................................................ 7
5.7 Restrictions on Share Transferability.......................... 7
5.8 Certain Additional Provisions for Incentive Stock Options...... 7

5.8.1 Exercisability.......................................... 7
5.8.2 Termination of Service.................................. 7
5.8.3 Company and Subsidiaries Only........................... 7
5.8.4 Expiration.............................................. 7

5.9 Grant of Reload Options........................................ 7

SECTION 6 STOCK APPRECIATION RIGHTS................................... 8

6.1 Grant of SARs.................................................. 8
6.2 Exercise Price and Other Terms................................. 8
6.3 SAR Agreement.................................................. 8
6.4 Expiration of SARs............................................. 8
6.5 Payment of SAR Amount.......................................... 8
6.6 Payment Upon Exercise of SAR................................... 8

SECTION 7 RESTRICTED STOCK............................................ 8

7.1 Grant of Restricted Stock...................................... 8
7.2 Restricted Stock Agreement..................................... 8
7.3 Transferability................................................ 8
7.4 Other Restrictions............................................. 8

7.4.1 General Restrictions.................................... 9
7.4.2 Section 162(m) Performance Restrictions................. 9
7.4.3 Legend on Certificates.................................. 9

-ii-
<PAGE>

TABLE OF CONTENTS
(continued)

<TABLE>
<CAPTION>
Page

<S> <C> <C>
7.5 Removal of Restrictions...................................... 9
7.6 Voting Rights................................................ 9
7.7 Dividends and Other Distributions............................ 9
7.8 Return of Restricted Stock to Company........................ 9

SECTION 8 PERFORMANCE UNITS AND PERFORMANCE SHARES.................. 9

8.1 Grant of Performance Units and Shares........................ 9
8.2 Initial Value................................................ 10
8.3 Performance Objectives and Other Terms....................... 10

8.3.1 General Performance Objectives........................ 10
8.3.2 Section 162(m) Performance Objectives................. 10

8.4 Earning of Performance Units and Performance Shares.......... 10
8.5 Form and Timing of Payment................................... 10
8.6 Cancellation................................................. 10

SECTION 9 NON-EMPLOYEE DIRECTORS.................................... 10

9.1 Granting of Options.......................................... 10

9.1.1 Non-employee Directors................................. 10
9.1.2 Chairman............................................... 11

9.2 Terms of Options.............................................. 11

9.2.1 Option Agreement....................................... 11
9.2.2 Exercise Price......................................... 11
9.2.3 Exercisability......................................... 11
9.2.4 Expiration of Options.................................. 11
9.2.5 Death of Director...................................... 11
9.2.6 Not Incentive Stock Options............................ 11
9.2.7 Other Terms............................................ 11

9.3 Substitute Options............................................ 11

SECTION 10 MISCELLANEOUS.............................................. 12

10.1 No Effect on Employment or Service............................ 12
10.2 Participation................................................. 12
10.3 Indemnification............................................... 12
10.4 Successors.................................................... 12
10.5 Beneficiary Designations...................................... 12
10.6 Nontransferability of Awards.................................. 12
10.7 No Rights as Stockholder...................................... 12
10.8 Withholding Requirements...................................... 13
10.9 Withholding Arrangements...................................... 13
10.10 Deferrals..................................................... 13

SECTION 11 AMENDMENT, TERMINATION AND DURATION........................ 13

11.1 Amendment, Suspension or Termination.......................... 13
11.2 Duration of the Plan.......................................... 13

SECTION 12 LEGAL CONSTRUCTION......................................... 13

12.1 Gender and Number............................................. 13
12.2 Severability.................................................. 13
12.3 Requirements of Law........................................... 13
12.4 Governing Law................................................. 13
12.5 Captions...................................................... 14
</TABLE>

-iii-
<PAGE>

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
OMNIBUS STOCK PLAN

SECTION 1
BACKGROUND, PURPOSE AND DURATION

SECTION 2
DEFINITIONS

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

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

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

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

2.5 "Board" means the Board of Directors of the Company.
-----

2.6 "Code" means the Internal Revenue Code of 1986, as amended. Reference
----
to a specific section of the Code or regulation thereunder shall include such
section or regulation, any valid regulation promulgated thereunder, and any
comparable provision of any future legislation or regulation amending,
supplementing or superseding such section or regulation.

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

2.8 "Company" means Varian Semiconductor Equipment Associates, Inc., a
-------
Delaware corporation, or any successor thereto.

E-1
<PAGE>

2.10 "Director" means any individual who is a member of the Board.
--------

2.16 "Exercise Price" means the price at which a Share may be purchased
--------------
by a Participant pursuant to the exercise of an Option.

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

2.18 "Fiscal Year" means the fiscal year of the Company.
-----------

2.19 "Grant Date" means, with respect to an Award, the date that the
----------
Award was granted.

2.21 "Net Income" means as to any Performance Period, the Company's or a
----------
business unit's income after taxes, determined in accordance with generally
accepted accounting principles.

2.22 "Non-employee Director" means a Director who is an employee of
---------------------
neither the Company nor of any Affiliate.

2.23 "Non-qualified Stock Option" means an option to purchase Shares
--------------------------
which is not intended to be an Incentive Stock Option.

2.24 "Operating Cash Flow" means as to any Performance Period, the
-------------------
Company's or a business unit's sum of Net Income plus depreciation and
amortization less capital expenditures plus changes in working capital comprised
of accounts receivable, inventories, other current assets, trade accounts
payable, accrued expenses, product warranty, advance payments from customers and
long-term accrued expenses, determined in accordance with generally acceptable
accounting principles.

2.25 "Option" means an Incentive Stock Option or a Non-qualified Stock
------
Option.

E-2
<PAGE>

2.26 "Participant" means an Employee, Consultant, or Non-employee
-----------
Director who has an outstanding Award.

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

2.29 "Performance Share" means a Performance Share granted to a
-----------------
Participant pursuant to Section 8.

2.30 "Performance Unit" means a Performance Unit granted to a Participant
----------------
pursuant to Section 8.

2.31 "Period of Restriction" means the period during which shares of
---------------------
Restricted Stock are subject to forfeiture and/or restrictions on
transferability.

2.32 "Plan" means the Varian Semiconductor Equipment Associates, Inc.
----
Omnibus Stock Plan, as set forth in this instrument and as hereafter amended
from time to time.

2.33 "Restricted Stock" means an Award granted to a Participant pursuant
----------------
to Section 7.

2.35 "Return on Assets" means as to any Performance Period, the
----------------
percentage equal to the Company's or a business unit's EBIT before incentive
compensation, divided by average net Company or business unit, as applicable,
assets, determined in accordance with generally accepted accounting
principles.

2.36 "Return on Equity" means as to any Performance Period, the
----------------
percentage equal to the Company's Net Income divided by average stockholder's
equity, determined in accordance with generally accepted accounting
principles.

2.37 "Return on Sales" means as to any Performance Period, the percentage
---------------
equal to the Company's or a business unit's EBIT before incentive
compensation, divided by the Company's or the business unit's, as applicable,
Revenue, determined in accordance with generally accepted accounting
principles.

2.38 "Revenue" means as to any Performance Period, the Company's or a
-------
business unit's net sales, determined in accordance with generally accepted
accounting principles.

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

E-3
<PAGE>

2.40 "Section 16 Person" means a person who, with respect to the Shares,
-----------------
is subject to section 16 of the 1934 Act.

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

2.42 "Shares" means shares of the Company's common stock, $.01 par value.
------

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

2.46 "VAI" means Varian Associates, Inc., a Delaware corporation.
---

SECTION 3
ADMINISTRATION

E-4
<PAGE>

SECTION 4
SHARES SUBJECT TO THE PLAN

4.1 Number of Shares. Subject to adjustment as provided in Section 4.3,
----------------
the total number of Shares available for grant under the Plan shall not exceed
6,000,000, plus such number of Shares as are granted pursuant to substitute
Options under Sections 5.3.3 and 9.3 in connection with the distribution of
Shares to the stockholders of VAI. Shares granted under the Plan may be either
authorized but unissued Shares or treasury Shares.

4.2 Lapsed Awards. If an Award terminates, expires, or lapses for any
-------------
reason, any Shares subject to such Award again shall be available to be the
subject of an Award. In addition, if any Shares are tendered to the Company
(whether by physical delivery or attestation) as full or partial payment for the
exercise of an Option or in satisfaction of a tax withholding obligation
pursuant to an Award, only the net Shares issued shall be deemed delivered for
purposes of determining the maximum number of Shares that may be delivered under
Section 4.1. Also, Shares issued pursuant to Awards assumed or granted in
substitution of other awards in connection with the acquisition by the Company
of an unrelated entity shall not reduce the maximum number of Shares issuable
under Section 4.1.

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

SECTION 5
STOCK OPTIONS

5.1 Grant of Options. Subject to the terms and provisions of the Plan,
----------------
Options may be granted to Employees and Consultants at any time and from time to
time as determined by the Committee in its sole discretion. The Committee, in
its sole discretion, shall determine the number of Shares subject to each
Option, provided that during any Fiscal Year, no Participant shall be granted
Options covering more than 1,000,000 Shares. The Committee may grant Incentive
Stock Options, Non-qualified Stock Options, or a combination thereof.

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

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

E-5
<PAGE>

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

5.4 Expiration of Options.
---------------------

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

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

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

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

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

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

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

5.5 Exercisability of Options. Options granted under the Plan
-------------------------
shall be exercisable at such times and be subject to such restrictions and
conditions as the Committee shall determine in its sole discretion. After an
Option is granted, the Committee, in its sole discretion, may accelerate the
exercisability of the Option. If a

E-6
<PAGE>

Participant dies while an Employee, the exercisability of his or her Options
shall be fully accelerated to the date of Termination of Service.

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

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

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

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

5.8 Certain Additional Provisions for Incentive Stock Options.
---------------------------------------------------------

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

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

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

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

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

E-7
<PAGE>

SECTION 6
STOCK APPRECIATION RIGHTS

6.1 Grant of SARs. Subject to the terms and conditions of the Plan,
-------------
SARs may be granted to Employees and Consultants at any time and from time to
time as shall be determined by the Committee, in its sole discretion. The
Committee shall have complete discretion to determine the number of SARs
granted to any Participant, provided that during any Fiscal Year, no
Participant shall be granted SARs covering more than 1,000,000 Shares.

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

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

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

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

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

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

SECTION 7
RESTRICTED STOCK

7.1 Grant of Restricted Stock. Subject to the terms and provisions of
-------------------------
the Plan, the Committee, at any time and from time to time, may grant Shares
of Restricted Stock to Employees and Consultants in such amounts as the
Committee, in its sole discretion, shall determine. The Committee, in its sole
discretion, shall determine the number of Shares to be granted to each
Participant, provided that during any Fiscal Year, no Participant shall be
granted more than 100,000 Shares of Restricted Stock.

E-8
<PAGE>

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

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

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

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

SECTION 8
PERFORMANCE UNITS AND PERFORMANCE SHARES

E-9
<PAGE>

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

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

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

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

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

SECTION 9
NON-EMPLOYEE DIRECTORS

9.1 Granting of Options.
-------------------

9.1.1 Non-employee Directors. Each Non-employee Director shall be
----------------------
granted an Option to purchase 50,000 Shares (an "Initial Grant") on the later of
the Effective Date of the Plan or the date of the Non-employee Director's
appointment or election as a Non-employee Director. Beginning on the first
business day after the second Annual Meeting of Stockholders following the Non-
employee Director's appointment or election, and on the first business day after
each Annual Meeting of Stockholders thereafter, for so long as the Non-employee
Director serves as such, he or she annually shall be granted an Option for an
additional 5,000 Shares (each a "Subsequent Grant"), but only if the Non-
employee Director has continuously served as such through the Grant Date.

E-10
<PAGE>

9.1.2 Chairman. Each Chairman of the Company who is a Non-employee
--------
Director shall be granted an Option to purchase 200,000 Shares (an "Initial
Chairman's Grant") on the later of the Effective Date of the Plan or the date
such individual becomes Chairman. Any Initial Chairman's Grant shall be in lieu
of any Initial Grant or Subsequent Grant the Chairman otherwise would be
entitled to under Section 9.1.1 while he or she serves as Chairman. If a
Chairman ceases to serve as such but remains a Non-employee Director, he or she
shall be entitled to Subsequent Grants under Section 9.1.1, provided he or she
has continuously served as a Non-employee Director through the applicable Grant
Date.

9.2 Terms of Options.
----------------

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

9.2.3 Exercisability. Each Option granted pursuant to this Section 9
--------------
shall become exercisable in full one (1) year after the date the Option is
granted. If a Non-employee Director incurs a Termination of Service for a reason
other than completion of his or her term as a Director, Retirement, death or
Disability, his or her Options which are not exercisable on the date of such
Termination shall never become exercisable. If the Termination of Service is on
account of completion of the Non-employee Director's term, Retirement, death or
Disability, the Option shall become exercisable in full on the date of the
Termination of Service.

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

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

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

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

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

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

9.3 Substitute Options. Notwithstanding the provisions of Section
------------------
9.2.2, in the event that the Company or an Affiliate consummates a transaction
described in section 424(a) of the Code (e.g., the acquisition of

E-11
<PAGE>

property or stock from an unrelated corporation), persons who become Non-
employee Directors on account of such transaction may be granted Options in
substitution for options granted by their former employer. If such substitute
Options are granted, the Committee, in its sole discretion and consistent with
section 424(a) of the Code, shall determine the exercise price of such
substitute Options.

SECTION 10
MISCELLANEOUS

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

E-12
<PAGE>

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

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

SECTION 11
AMENDMENT, TERMINATION AND DURATION

SECTION 12
LEGAL CONSTRUCTION

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

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

E-13
<PAGE>

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

EXECUTION

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

VARIAN SEMICONDUCTOR EQUIPMENT
ASSOCIATES, INC.

Dated: _______________, ____ By _______________________________
Name:
Title:

E-14
<PAGE>

ANNEX F

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

MANAGEMENT INCENTIVE PLAN
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page

<C> <S> <C>
SECTION 1 BACKGROUND, PURPOSE AND DURATION........................... 1

1.1 Effective Date................................................ 1
1.2 Purpose of the Plan........................................... 1

SECTION 2 DEFINITIONS................................................ 1

2.1 "Actual Award"................................................ 1
2.2 "Affiliate"................................................... 1
2.3 "Base Salary"................................................. 1
2.4 "Board"....................................................... 1
2.5 "Code"........................................................ 1
2.6 "Committee"................................................... 1
2.7 Company"...................................................... 1
2.8 "Disability".................................................. 1
2.9 "EBIT"........................................................ 1
2.10 "EBITDA"...................................................... 2
2.11 "Earnings Per Share".......................................... 2
2.12 "Employee".................................................... 2
2.13 "Fiscal Year"................................................. 2
2.14 "Maximum Award"............................................... 2
2.15 "Net Income".................................................. 2
2.17 "Participant"................................................. 2
2.18 "Payout Formula".............................................. 2
2.19 "Performance Goals"........................................... 2
2.20 "Performance Period".......................................... 2
2.21 "Plan"........................................................ 2
2.22 "Retirement".................................................. 2
2.23 "Return on Assets"............................................ 3
2.24 "Return on Equity"............................................ 3
2.25 "Return on Sales"............................................. 3
2.26 "Revenue"..................................................... 3
2.27 "Shareholder Return".......................................... 3
2.28 "Shares"...................................................... 3
2.29 "Target Award"................................................ 3
2.30 "VAI"......................................................... 3

SECTION 3 SELECTION OF PARTICIPANTS AND DETERMINATION OF AWARDS...... 3

3.1 Selection of Participants..................................... 3
3.2 Determination of Performance Goals............................ 3
3.3 Determination of Target Awards................................ 3
3.4 Determination of Payout Formula or Formulae................... 3
3.5 Determination of Actual Awards................................ 3

SECTION 4 PAYMENT OF AWARDS.......................................... 4

4.1 Right to Receive Payment...................................... 4
4.2 Timing of Payment............................................. 4
4.3 Form of Payment............................................... 4
4.4 Payment in the Event of Death................................. 4

SECTION 5 ADMINISTRATION............................................. 4

5.1 Committee is the Administrator................................ 4
5.2 Committee Authority........................................... 4
5.3 Decisions Binding............................................. 4
5.4 Delegation by the Committee................................... 5
</TABLE>

-i-
<PAGE>

TABLE OF CONTENTS
(continued)

Page
<TABLE>
<CAPTION>

<S> <C> <C>
SECTION 6 GENERAL PROVISIONS......................................... 5

6.1 Tax Withholding............................................... 5
6.2 No Effect on Employment or Service............................ 5
6.3 Participation................................................. 5
6.4 Indemnification............................................... 5
6.5 Successors.................................................... 5
6.6 Beneficiary Designations...................................... 5
6.7 Nontransferability of Awards.................................. 5
6.8 Deferrals..................................................... 6

SECTION 7 AMENDMENT, TERMINATION AND DURATION........................ 6

7.1 Amendment, Suspension or Termination.......................... 6
7.2 Duration of the Plan.......................................... 6

SECTION 8 LEGAL CONSTRUCTION......................................... 6

8.1 Gender and Number............................................. 6
8.2 Severability.................................................. 6
8.3 Requirements of Law........................................... 6
8.4 Governing Law................................................. 6
8.5 Captions...................................................... 6
</TABLE>

-ii-
<PAGE>

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.
MANAGEMENT INCENTIVE PLAN

SECTION 1
BACKGROUND, PURPOSE AND DURATION

1.1 Effective Date. The Plan is effective as of the date on which
--------------
VAI distributes shares of the Company's common stock to the stockholders of VAI,
subject to the approval of the Plan by a majority of the shares of the common
stock of VAI which are present in person or by proxy and entitled to vote at the
1999 Annual and Special Meeting of Stockholders of VAI.

1.2 Purpose of the Plan. The Plan is intended to increase
-------------------
shareholder value and the success of the Company by motivating key executives
(1) to perform to the best of their abilities, and (2) to achieve the Company's
objectives. The Plan's goals are to be achieved by providing such executives
with incentive awards based on the achievement of goals relating to the
performance of the Company and its business units. The Plan is intended to
permit the grant of awards that qualify as performance-based compensation under
section 162(m) of the Code.

SECTION 2
DEFINITIONS

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

2.1 "Actual Award" means as to any Performance Period, the actual
------------
award (if any) payable to a Participant for the Performance Period. Each Actual
Award is determined by the Payout Formula for the Performance Period, subject to
the Committee's authority under Section 3.5 to reduce the award otherwise
determined by the Payout Formula.

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

2.3 "Base Salary" means as to any Performance Period, the
-----------
Participant's annualized salary rate on the last day of the Performance Period.
Such Base Salary shall be before both (a) deductions for taxes or benefits, and
(b) deferrals of compensation pursuant to Company-sponsored plans.

2.4 "Board" means the Board of Directors of the Company.
-----

2.5 "Code" means the Internal Revenue Code of 1986, as amended.
----
Reference to a specific section of the Code or regulation thereunder shall
include such section or regulation, any valid regulation promulgated thereunder,
and any comparable provision of any future legislation or regulation amending,
supplementing or superseding such section or regulation.

2.6 "Committee" means the committee appointed by the Board
---------
(pursuant to Section 5.1) to administer the Plan.

2.7 Company" means Varian Semiconductor Equipment Associates,
-------
Inc., a Delaware corporation, or any successor thereto.

2.8 "Disability" means a permanent and total disability determined
----------
in accordance with uniform and nondiscriminatory standards adopted by the
Committee from time to time.

2.9 "EBIT" means as to any Performance Period, the Company's or a
----
business unit's income before reductions for interest and taxes, determined in
accordance with generally accepted accounting principles.

F-1
<PAGE>

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

2.11 "Earnings Per Share" means as to any Performance Period, the
------------------
Company's or a business unit's Net Income, divided by a weighted average number
of common shares outstanding and dilutive common equivalent shares deemed
outstanding, determined in accordance with generally accepted accounting
principles.

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

2.13 "Fiscal Year" means any fiscal year of the Company.
-----------

2.14 "Maximum Award" means as to any Actual Award to any
-------------
Participant for any Performance Period, the lesser of four hundred percent
(400%) of Base Salary or $4 million.

2.15 "Net Income" means as to any Performance Period, the Company's
----------
or a business unit's income after taxes, determined in accordance with generally
accepted accounting principles.

2.16 "Operating Cash Flow" means as to any Performance Period, the
-------------------
Company's or a business unit's sum of Net Income plus depreciation and
amortization less capital expenditures plus changes in working capital comprised
of accounts receivable, inventories, other current assets, trade accounts
payable, accrued expenses, product warranty, advance payments from customers and
long-term accrued expenses, determined in accordance with generally acceptable
accounting principles.

2.17 "Participant" means as to any Performance Period, an Employee
-----------
who has been selected by the Committee for participation in the Plan for that
Performance Period.

2.18 "Payout Formula" means as to any Performance Period, the
--------------
formula or payout matrix established by the Committee pursuant to Section 3.4 in
order to determine the Actual Awards (if any) to be paid to Participants. The
formula or matrix may differ from Participant to Participant.

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

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

2.21 "Plan" means the Varian Semiconductor Equipment Associates,
----
Inc. Management Incentive Plan, as set forth in this instrument and as hereafter
amended from time to time.

2.22 "Retirement" means, with respect to any Participant,
----------
"Retirement" as defined by the Company's Retirement Policies, as they may be
established from time to time.

F-2
<PAGE>

2.23 "Return on Assets" means as to any Performance Period, the
----------------
percentage equal to the Company's or a business unit's EBIT before incentive
compensation, divided by average net Company or business unit, as applicable,
assets, determined in accordance with generally accepted accounting principles.

2.24 "Return on Equity" means as to any Performance Period, the
----------------
percentage equal to the Company's Net Income divided by average stockholder's
equity, determined in accordance with generally accepted accounting principles.

2.25 "Return on Sales" means as to any Performance Period, the
---------------
percentage equal to the Company's or a business unit's EBIT before incentive
compensation, divided by the Company's or the business unit's, as applicable,
Revenue, determined in accordance with generally accepted accounting principles.

2.26 "Revenue" means as to any Performance Period, the Company's
-------
or a business unit's net sales, determined in accordance with generally accepted
accounting principles.

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

2.28 "Shares" means shares of the Company's common stock, $.01 par
------
value.

2.29 "Target Award" means the target award payable under the Plan
------------
to a Participant for the Performance Period, expressed as a percentage of his or
her Base Salary, as determined by the Committee in accordance with Section 3.3.

2.30 "VAI" means Varian Associates, Inc., a Delaware corporation.
---

SECTION 3
SELECTION OF PARTICIPANTS AND DETERMINATION OF AWARDS

3.1 Selection of Participants. The Committee, in its sole
-------------------------
discretion, shall select the Employees of the Company who shall be Participants
for any Performance Period. Participation in the Plan is in the sole discretion
of the Committee, and on a Performance Period by Performance Period basis.
Accordingly, an Employee who is a Participant for a given Performance Period in
no way is guaranteed or assured of being selected for participation in any
subsequent Performance Period or Periods.

3.2 Determination of Performance Goals. The Committee, in its
----------------------------------
sole discretion, shall establish the Performance Goals for each Participant for
the Performance Period. Such Performance Goals shall be set forth in writing.

3.4 Determination of Payout Formula or Formulae. On or prior to
-------------------------------------------
the Determination Date, the Committee, in its sole discretion, shall establish a
Payout Formula or Formulae for purposes of determining the Actual Award (if any)
payable to each Participant. Each Payout Formula shall (a) be in writing, (b) be
based on a comparison of actual performance to the Performance Goals, (c)
provide for the payment of a Participant's Target Award if the Performance Goals
for the Performance Period are achieved, and (d) provide for an Actual Award
greater than or less than the Participant's Target Award, depending upon the
extent to which actual performance exceeds or falls below the Performance Goals.
Notwithstanding the preceding, no Participant's Actual Award under the Plan may
exceed his or her Maximum Award.

3.5 Determination of Actual Awards. After the end of each
------------------------------
Performance Period, the Committee shall certify in writing the extent to which
the Performance Goals applicable to each Participant for the Performance Period
were achieved or exceeded. The Actual Award for each Participant shall be
determined by

F-3
<PAGE>

applying the Payout Formula to the level of actual performance which has been
certified by the Committee. Notwithstanding any contrary provision of the Plan,
the Committee, in its sole discretion, may (a) eliminate or reduce the Actual
Award payable to any Participant below that which otherwise would be payable
under the Payout Formula, and (b) determine what Actual Award, if any, will be
paid in the event of a termination of employment prior to the end of the
Performance Period. The total aggregate Actual Awards under the Plan with
respect to any Performance Period shall not exceed eight percent (8%) of the
Company's EBIT (but before incentive compensation) for the most recent completed
Fiscal Year. If the total aggregate Actual Awards with respect to a Performance
Period would exceed this aggregate limit, all such Actual Awards shall be pro-
rated on an equal basis among all Participants according to a formula
established by the Committee.

SECTION 4
PAYMENT OF AWARDS

4.1 Right to Receive Payment. Each Actual Award that may become
------------------------
payable under the Plan shall be paid solely from the general assets of the
Company. Nothing in this Plan shall be construed to create a trust or to
establish or evidence any Participant's claim of any right other than as an
unsecured general creditor with respect to any payment to which he or she may be
entitled.

4.2 Timing of Payment. Payment of each Actual Award shall be made
-----------------
within 120 days after the end of the Performance Period during which the Award
was earned.

4.3 Form of Payment. Each Actual Award normally shall be paid in
---------------
cash (or its equivalent) in a single lump sum. However, the Committee, in its
sole discretion, may declare any Actual Award, in whole or in part, payable in
stock granted under the Company's Omnibus Stock Plan. The number of Shares
granted shall be determined by dividing the cash amount foregone by the fair
market value of a Share on the date that the cash payment otherwise would have
been made. For this purpose, "fair market value" shall mean the closing price on
the Nasdaq National Market for the day in question.

4.4 Payment in the Event of Death. If a Participant dies prior
-----------------------------
to the payment of an Actual Award earned by him or her prior to death for a
prior Performance Period, the Award shall be paid to his or her estate.

SECTION 5
ADMINISTRATION

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

5.2 Committee Authority. It shall be the duty of the Committee to
-------------------
administer the Plan in accordance with the Plan's provisions. The Committee
shall have all powers and discretion necessary or appropriate to administer the
Plan and to control its operation, including, but not limited to, the power to
(a) determine which Employees shall be granted awards, (b) prescribe the terms
and conditions of awards, (c) interpret the Plan and the awards, (d) adopt such
procedures and subplans as are necessary or appropriate to permit participation
in the Plan by Employees who are foreign nationals or employed outside of the
United States, (e) adopt rules for the administration, interpretation and
application of the Plan as are consistent therewith, and (f) interpret, amend or
revoke any such rules.

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

F-4
<PAGE>

5.4 Delegation by the Committee. The Committee, in its sole
---------------------------
discretion and on such terms and conditions as it may provide, may delegate all
or part of its authority and powers under the Plan to one or more directors
and/or officers of the Company; provided, however, that the Committee may
delegate its authority and powers only with respect to awards that are not
intended to qualify as performance-based compensation under section 162(m) of
the Code.

SECTION 6
GENERAL PROVISIONS

6.1 Tax Withholding. The Company shall withhold all applicable
---------------
taxes from any Actual Award, including any federal, state and local taxes
(including the Participant's FICA obligation).

6.2 No Effect on Employment or Service. Nothing in the Plan shall
----------------------------------
interfere with or limit in any way the right of the Company to terminate any
Participant's employment or service at any time, with or without cause. For
purposes of the Plan, transfer of employment of a Participant between the
Company and any one of its Affiliates (or between Affiliates) shall not be
deemed a Termination of Service. Employment with the Company and its Affiliates
is on an at-will basis only. The Company expressly reserves the right, which may
be exercised at any time and without regard to when during a Performance Period
such exercise occurs, to terminate any individual's employment with or without
cause, and to treat him or her without regard to the effect which such treatment
might have upon him or her as a Participant.

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

6.4 Indemnification. Each person who is or shall have been a
---------------
member of the Committee, or of the Board, shall be indemnified and held harmless
by the Company against and from (a) any loss, cost, liability, or expense that
may be imposed upon or reasonably incurred by him or her in connection with or
resulting from any claim, action, suit, or proceeding to which he or she may be
a party or in which he or she may be involved by reason of any action taken or
failure to act under the Plan or any award, and (b) from any and all amounts
paid by him or her in settlement thereof, with the Company's approval, or paid
by him or her in satisfaction of any judgment in any such claim, action, suit,
or proceeding against him or her, provided he or she shall give the Company an
opportunity, at its own expense, to handle and defend the same before he or she
undertakes to handle and defend it on his or her own behalf. The foregoing right
of indemnification shall not be exclusive of any other rights of indemnification
to which such persons may be entitled under the Company's Certificate of
Incorporation or Bylaws, by contract, as a matter of law, or otherwise, or under
any power that the Company may have to indemnify them or hold them harmless.

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

6.6 Beneficiary Designations. If permitted by the Committee, a
------------------------
Participant under the Plan may name a beneficiary or beneficiaries to whom any
vested but unpaid award shall be paid in the event of the Participant's death.
Each such designation shall revoke all prior designations by the Participant and
shall be effective only if given in a form and manner acceptable to the
Committee. In the absence of any such designation, any vested benefits remaining
unpaid at the Participant's death shall be paid to the Participant's estate.

6.7 Nontransferability of Awards. No award granted under the
----------------------------
Plan may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will, by the laws of descent and distribution, or to
the limited extent provided in Section 6.6. All rights with respect to an award
granted to a Participant shall be available during his or her lifetime only to
the Participant.

F-5
<PAGE>

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

SECTION 7
AMENDMENT, TERMINATION AND DURATION

7.2 Duration of the Plan. The Plan shall commence on the date
--------------------
specified herein, and subject to Section 7.1 (regarding the Board's right to
amend or terminate the Plan), shall remain in effect thereafter.

SECTION 8
LEGAL CONSTRUCTION

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

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

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

8.4 Governing Law. The Plan and all awards shall be construed in
-------------
accordance with and governed by the laws of the State of Delaware, but without
regard to its conflict of law provisions.

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

EXECUTION

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

VARIAN SEMICONDUCTOR EQUIPMENT
ASSOCIATES, INC.

Dated: __________________ By: _______________________________
Name:
Title:

F-6
<PAGE>

ANNEX G

VARIAN MEDICAL SYSTEMS, INC.

OMNIBUS STOCK PLAN
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page

<S> <C> <C>
SECTION 1 BACKGROUND, PURPOSE AND DURATION........................... 1

1.1 Effective Date................................................ 1
1.2 Purpose of the Plan........................................... 1

SECTION 2 DEFINITIONS................................................ 1

-i-
<PAGE>

TABLE OF CONTENTS
(continued)

Page

<C> <S> <C>
SECTION 3 ADMINISTRATION............................................. 4

3.1 The Committee................................................. 4
3.2 Authority of the Committee.................................... 4
3.3 Delegation by the Committee................................... 4
3.4 Non-employee Directors........................................ 5
3.5 Decisions Binding............................................. 5

SECTION 4 SHARES SUBJECT TO THE PLAN................................. 5

4.1 Number of Shares.............................................. 5
4.2 Lapsed Awards................................................. 5
4.3 Adjustments in Awards and Authorized Shares................... 5

SECTION 5 STOCK OPTIONS.............................................. 5

5.1 Grant of Options.............................................. 5
5.2 Award Agreement............................................... 5
5.3 Exercise Price................................................ 5

5.3.1 Non-qualified Stock Options............................ 6
5.3.2 Incentive Stock Options................................ 6
5.3.3 Substitute Options..................................... 6

5.4 Expiration of Options......................................... 6

5.4.1 Expiration Dates....................................... 6
5.4.2 Death of Participant................................... 6
5.4.3 Committee Discretion................................... 6

5.5 Exercisability of Options..................................... 6
5.6 Payment....................................................... 7
5.7 Restrictions on Share Transferability......................... 7
5.8 Certain Additional Provisions for Incentive Stock Options..... 7

5.8.1 Exercisability......................................... 7
5.8.2 Termination of Service................................. 7
5.8.3 Company and Subsidiaries Only.......................... 7
5.8.4 Expiration............................................. 7

5.9 Grant of Reload Options....................................... 7

SECTION 6 STOCK APPRECIATION RIGHTS.................................. 8

6.1 Grant of SARs................................................. 8
6.2 Exercise Price and Other Terms................................ 8
6.3 SAR Agreement................................................. 8
6.4 Expiration of SARs............................................ 8
6.5 Payment of SAR Amount......................................... 8
6.6 Payment Upon Exercise of SAR.................................. 8

SECTION 7 RESTRICTED STOCK........................................... 8

7.1 Grant of Restricted Stock..................................... 8
7.2 Restricted Stock Agreement.................................... 8
7.3 Transferability............................................... 8
7.4 Other Restrictions............................................ 8

7.4.1 General Restrictions................................... 9
7.4.2 Section 162(m) Performance Restrictions................ 9
7.4.3 Legend on Certificates................................. 9
</TABLE>

-ii-
<PAGE>

TABLE OF CONTENTS
(continued)

<TABLE>
<CAPTION>
Page

<C> <S> <C>
7.5 Removal of Restrictions...................................... 9
7.6 Voting Rights................................................ 9
7.7 Dividends and Other Distributions............................ 9
7.8 Return of Restricted Stock to Company........................ 9

SECTION 8 PERFORMANCE UNITS AND PERFORMANCE SHARES.................. 9

8.1 Grant of Performance Units and Shares........................ 9
8.2 Initial Value................................................ 9
8.3 Performance Objectives and Other Terms....................... 10

8.3.1 General Performance Objectives........................ 10
8.3.2 Section 162(m) Performance Objectives................. 10

SECTION 9 NON-EMPLOYEE DIRECTORS.................................... 10

9.1 Granting of Options.......................................... 10

9.1.1 Non-employee Directors................................ 10
9.1.2 Chairman.............................................. 10

9.2 Terms of Options............................................. 11

9.2.1 Option Agreement...................................... 11
9.2.2 Exercise Price........................................ 11
9.2.3 Exercisability........................................ 11
9.2.4 Expiration of Options................................. 11
9.2.5 Death of Director..................................... 11
9.2.6 Not Incentive Stock Options........................... 11
9.2.7 Other Terms........................................... 11

9.3 Substitute Options........................................... 11
9.4 Elections by Non-employee Directors.......................... 12

SECTION 10 MISCELLANEOUS............................................. 12

10.1 No Effect on Employment or Service........................... 12
10.2 Participation................................................ 12
10.3 Indemnification.............................................. 12
10.4 Successors................................................... 12
10.5 Beneficiary Designations..................................... 12
10.6 Nontransferability of Awards................................. 12
10.7 No Rights as Stockholder..................................... 13
10.8 Withholding Requirements..................................... 13
10.9 Withholding Arrangements..................................... 13
10.10 Deferrals.................................................... 13

SECTION 11 AMENDMENT, TERMINATION AND DURATION....................... 13

11.1 Amendment, Suspension or Termination......................... 13
11.2 Duration of the Plan......................................... 13

SECTION 12 LEGAL CONSTRUCTION........................................ 13

12.1 Gender and Number............................................ 13
12.2 Severability................................................. 14
12.3 Requirements of Law.......................................... 14
12.4 Governing Law................................................ 14
12.5 Captions..................................................... 14
</TABLE>

-iii-
<PAGE>

VARIAN MEDICAL SYSTEMS, INC.
OMNIBUS STOCK PLAN

SECTION 1
BACKGROUND, PURPOSE AND DURATION

1.1 Effective Date. This amended and restated Plan is effective
--------------
as of the date on which VAI distributes the shares of the common stock of
Varian, Inc. and Varian Semiconductor Equipment Associates, Inc. to the
stockholders of VAI, subject to the approval of the Plan by a majority of the
shares of the common stock of VAI which are present in person or by proxy and
entitled to vote at the 1999 Annual and Special Meeting of the Stockholders of
VAI.

1.2 Purpose of the Plan. The Plan is intended to increase
-------------------
incentives and to encourage Share ownership on the part of (1) employees of the
Company and its Affiliates, (2) consultants who provide significant services to
the Company and its Affiliates, and (3) directors of the Company who are
employees of neither the Company nor any Affiliate. The Plan also is intended to
further the growth and profitability of the Company. The Plan is intended to
permit the grant of Awards that qualify as performance-based compensation under
section 162(m) of the Code.

SECTION 2
DEFINITIONS

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

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

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

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

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

2.5 "Board" means the Board of Directors of the Company.
-----

2.6 "Code" means the Internal Revenue Code of 1986, as amended.
----
Reference to a specific section of the Code or regulation thereunder shall
include such section or regulation, any valid regulation promulgated thereunder,
and any comparable provision of any future legislation or regulation amending,
supplementing or superseding such section or regulation.

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

2.8 "Company" means Varian Medical Systems, Inc., a Delaware
-------
corporation, or any successor thereto.

2.9 "Consultant" means any consultant, independent contractor, or
----------
other person who provides significant services to the Company or its Affiliates,
but who is neither an Employee nor a Director.

G-1
<PAGE>

2.10 "Director" means any individual who is a member of the Board.
--------

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

2.14 "Earnings Per Share" means as to any Performance Period, the
------------------
Company's or a business unit's Net Income, divided by a weighted average number
of common shares outstanding and dilutive common equivalent shares deemed
outstanding, determined in accordance with generally accepted accounting
principles.

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

2.16 "Exercise Price" means the price at which a Share may be
--------------
purchased by a Participant pursuant to the exercise of an Option.

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

2.18 "Fiscal Year" means the fiscal year of the Company.
-----------

2.19 "Grant Date" means, with respect to an Award, the date that
----------
the Award was granted.

2.20 "Incentive Stock Option" means an Option to purchase Shares
----------------------
which is designated as an Incentive Stock Option and is intended to meet the
requirements of section 422 of the Code.

2.21 "Net Income" means as to any Performance Period, the Company's
----------
or a business unit's income after taxes, determined in accordance with generally
accepted accounting principles.

2.22 "Non-employee Director" means a Director who is an employee of
---------------------
neither the Company nor of any Affiliate.

2.23 "Non-qualified Stock Option" means an option to purchase
--------------------------
Shares which is not intended to be an Incentive Stock Option.

2.24 "Operating Cash Flow" means as to any Performance Period, the
-------------------
Company's or a business unit's sum of Net Income plus depreciation and
amortization less capital expenditures plus changes in working capital comprised
of accounts receivable, inventories, other current assets, trade accounts
payable, accrued expenses, product warranty, advance payments from customers and
long-term accrued expenses, determined in accordance with generally acceptable
accounting principles.

2.25 "Option" means an Incentive Stock Option or a Non-qualified
------
Stock Option.

G-2
<PAGE>

2.26 "Participant" means an Employee, Consultant, or Non-employee
-----------
Director who has an outstanding Award.

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

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

2.29 "Performance Share" means a Performance Share granted to a
-----------------
Participant pursuant to Section 8.

2.30 "Performance Unit" means a Performance Unit granted to a
----------------
Participant pursuant to Section 8.

2.31 "Period of Restriction" means the period during which shares of
---------------------
Restricted Stock are subject to forfeiture and/or restrictions on
transferability.

2.32 "Plan" means the Varian Medical Systems, Inc. Omnibus Stock
----
Plan, as set forth in this instrument and as hereafter amended from time to
time.

2.33 "Restricted Stock" means an Award granted to a Participant
----------------
pursuant to Section 7.

2.34 "Retirement" means, in the case of an Employee or a
----------
Non-employee Director, "Retirement" as defined pursuant to the Company's or the
Board's Retirement Policies, as they may be established from time to time. With
respect to a Consultant, no Termination of Service shall be deemed to be on
account of "Retirement."

2.37 "Return on Sales" means as to any Performance Period, the
---------------
percentage equal to the Company's or a business unit's EBIT before incentive
compensation, divided by the Company's or the business unit's, as applicable,
Revenue, determined in accordance with generally accepted accounting principles.

2.38 "Revenue" means as to any Performance Period, the Company's
-------
or a business unit's net sales, determined in accordance with generally accepted
accounting principles.

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

G-3
<PAGE>

2.40 "Section 16 Person" means a person who, with respect to the
-----------------
Shares, is subject to section 16 of the 1934 Act.

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

2.42 "Shares" means shares of the Company's common stock, $.01 par
------
value.

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

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

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

2.46 "VAI" means Varian Associates, Inc., a Delaware corporation.
---

SECTION 3
ADMINISTRATION

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

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

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

G-4
<PAGE>

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

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

SECTION 4
SHARES SUBJECT TO THE PLAN

4.1 Number of Shares. Subject to adjustment as provided in
----------------
Section 4.3, the total number of Shares available for grant under the Plan shall
not exceed 5,000,000, plus such number of Shares as are granted pursuant to
substitute Options under Sections 5.3.3 and 9.3 in connection with the
distribution of Shares to the stockholders of VAI. Shares granted under the Plan
may be either authorized but unissued Shares or treasury Shares.

4.2 Lapsed Awards. If an Award terminates, expires, or lapses
-------------
for any reason, any Shares subject to such Award again shall be available to be
the subject of an Award. In addition, if any Shares are tendered to the Company
(whether by physical delivery or attestation) as full or partial payment for the
exercise of an Option or in satisfaction of a tax withholding obligation
pursuant to an Award, only the net Shares issued shall be deemed granted for
purposes of determining the maximum number of Shares that may be granted under
Section 4.1. Also, Shares granted pursuant to Awards assumed or granted in
substitution of other awards in connection with the acquisition by the Company
of an unrelated entity shall not reduce the maximum number of Shares issuable
under Section 4.1.

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

SECTION 5
STOCK OPTIONS

5.1 Grant of Options. Subject to the terms and provisions of the
----------------
Plan, Options may be granted to Employees and Consultants at any time and from
time to time as determined by the Committee in its sole discretion. The
Committee, in its sole discretion, shall determine the number of Shares subject
to each Option, provided that during any Fiscal Year, no Participant shall be
granted Options covering more than 1,000,000 Shares. The Committee may grant
Incentive Stock Options, Non-qualified Stock Options, or a combination thereof.

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

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

G-5
<PAGE>

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

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

5.4 Expiration of Options.
---------------------

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

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

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

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

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

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

5.4.2 Death of Participant. Notwithstanding Section 5.4.1,
--------------------
if a Participant who is an Employee dies prior to the expiration of his or her
Options, his or her Options shall be exercisable until the expiration of three
(3) years after the date of death. If a Participant who is a Consultant dies
prior to the expiration of his or her Options, the Committee, in its discretion,
may provide that his or her Options shall be exercisable for up to three (3)
years after the date of death.

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

G-6
<PAGE>

Participant dies while an Employee, the exercisability of his or her Options
shall be fully accelerated to the date of Termination of Service.

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

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

5.8 Certain Additional Provisions for Incentive Stock Options.
---------------------------------------------------------

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

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<PAGE>

SECTION 6
STOCK APPRECIATION RIGHTS

6.1 Grant of SARs. Subject to the terms and conditions of the
-------------
Plan, SARs may be granted to Employees and Consultants at any time and from time
to time as shall be determined by the Committee, in its sole discretion. The
Committee shall have complete discretion to determine the number of SARs granted
to any Participant, provided that during any Fiscal Year, no Participant shall
be granted SARs covering more than 1,000,000 Shares.

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

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

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

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

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

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

SECTION 7
RESTRICTED STOCK

7.1 Grant of Restricted Stock. Subject to the terms and
-------------------------
provisions of the Plan, the Committee, at any time and from time to time, may
grant Shares of Restricted Stock to Employees and Consultants in such amounts as
the Committee, in its sole discretion, shall determine. The Committee, in its
sole discretion, shall determine the number of Shares to be granted to each
Participant, provided that during any Fiscal Year, no Participant shall be
granted more than 100,000 Shares of Restricted Stock.

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

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

G-8
<PAGE>

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

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

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

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

SECTION 8
PERFORMANCE UNITS AND PERFORMANCE SHARES

8.1 Grant of Performance Units and Shares. Performance Units and
-------------------------------------
Performance Shares may be granted to Employees and Consultants at any time and
from time to time, as shall be determined by the Committee, in its sole
discretion. The Committee shall have complete discretion in determining the
number of Performance Units and Performance Shares granted to any Participant,
provided that during any Fiscal Year, no more than 100,000 Performance Shares or
Performance Units may be granted to any Participant.

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

G-9
<PAGE>

on the Grant Date. Each Performance Share shall have an initial value equal to
the Fair Market Value of a Share on the Grant Date.

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

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

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

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

8.5 Form and Timing of Payment. Payment of earned Performance
--------------------------
Units or Performance Shares shall be made as soon as practicable after the
expiration of the applicable Performance Period. The Committee, in its sole
discretion, may pay such earned Awards in cash, Shares or a combination thereof.

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

SECTION 9
NON-EMPLOYEE DIRECTORS

9.1 Granting of Options.
-------------------

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

9.1.2 Chairman. Each Chairman of the Company who is a
--------
Non-employee Director shall be granted an Option to purchase 100,000 Shares (an
"Initial Chairman's Grant") on the later of the Effective

G-10
<PAGE>

Date of the Plan or the date such individual becomes Chairman. Thereafter, for
so long as such individual serves as Chairman, he or she annually will be
granted an Option for an additional 5,000 Shares (each a "Subsequent Chairman's
Grant"). Each such Subsequent Chairman's Grant shall be made on the first
business day after each Annual Meeting of Stockholders occurring after the date
of the Initial Chairman's Grant or previous Subsequent Chairman's Grant, but
only if the individual has continuously served as Chairman through the Grant
Date. Any Initial Chairman's Grant or Subsequent Chairman's Grant shall be in
lieu of any Initial Grant or Subsequent Grant the Chairman otherwise would be
entitled to under Section 9.1.1.

9.2 Terms of Options.
----------------

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

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

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

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

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

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

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

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

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

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

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

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

G-11
<PAGE>

9.4 Elections by Non-employee Directors. Pursuant to such
-----------------------------------
procedures as the Board (in its discretion) may adopt from time to time, each
Non-employee Director may elect to forego receipt of all or a portion of the
annual retainer, committee chair fees, meeting attendance fees and other cash
compensation otherwise due to the Non-employee Director in exchange for Shares.
The number of Shares received by any Non-employee Director shall equal the
amount of foregone compensation divided by the Fair Market Value of a Share on
the date that the compensation otherwise would have been paid to the Non-
employee Director, rounded up to the nearest whole number of Shares. In
addition, pursuant to such procedures as the Board (in its discretion) may adopt
from time to time, each Non-employee Director may elect to forego receipt of all
or a portion of the annual retainer, committee chair and meeting attendance fees
and other cash compensation otherwise due to the Non-employee Director in
exchange for an Option to purchase Shares. The number of Shares subject to such
an Option received by any Non-employee Director shall equal the amount of
foregone compensation multiplied by four (4) and divided by the Fair Market
Value of a Share on the date that the compensation otherwise would have been
paid to the Non-employee Director, rounded up to the nearest whole number of
Shares. All Options granted pursuant to this Section 9.4 shall be subject to the
restrictions of Section 9.2.

SECTION 10
MISCELLANEOUS

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

10.3 Indemnification. Each person who is or shall have been a
---------------
member of the Committee, or of the Board, shall be indemnified and held harmless
by the Company against and from (a) any loss, cost, liability, or expense that
may be imposed upon or reasonably incurred by him or her in connection with or
resulting from any claim, action, suit, or proceeding to which he or she may be
a party or in which he or she may be involved by reason of any action taken or
failure to act under the Plan or any Award Agreement, and (b) from any and all
amounts paid by him or her in settlement thereof, with the Company's approval,
or paid by him or her in satisfaction of any judgment in any such claim, action,
suit, or proceeding against him or her, provided he or she shall give the
Company an opportunity, at its own expense, to handle and defend the same before
he or she undertakes to handle and defend it on his or her own behalf. The
foregoing right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Company's
Certificate of Incorporation or Bylaws, by contract, as a matter of law, or
otherwise, or under any power that the Company may have to indemnify them or
hold them harmless.

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

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

10.6 Nontransferability of Awards. No Award granted under the Plan
----------------------------
may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will, by the laws of descent and

G-12
<PAGE>

distribution, or to the limited extent provided in Section 10.5. All rights with
respect to an Award granted to a Participant shall be available during his or
her lifetime only to the Participant.

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

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

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

SECTION 11
AMENDMENT, TERMINATION AND DURATION

11.2 Duration of the Plan. The Plan shall commence on the date
--------------------
specified herein, and subject to Section 11.1 (regarding the Board's right to
amend or terminate the Plan), shall remain in effect thereafter. However,
without further stockholder approval, no Incentive Stock Option may be granted
under the Plan after ten (10) years from the Effective Date.

SECTION 12
LEGAL CONSTRUCTION

G-13
<PAGE>

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

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

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

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

EXECUTION

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

VARIAN MEDICAL SYSTEMS, INC.

Dated: _______________, ____ By _________________________________
Name:
Title:
<PAGE>

ANNEX H

VARIAN MEDICAL SYSTEMS, INC.

MANAGEMENT INCENTIVE PLAN

<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page

<S> <C> <C>
SECTION 1 BACKGROUND, PURPOSE AND DURATION........................... 1

1.1 Effective Date................................................ 1
1.2 Purpose of the Plan........................................... 1

SECTION 2 DEFINITIONS................................................ 1

2.1 "Actual Award"................................................ 1
2.2 "Affiliate"................................................... 1
2.3 "Base Salary"................................................. 1
2.4 "Board"....................................................... 1
2.5 "Code"........................................................ 1
2.6 "Committee"................................................... 1
2.7 Company"..................................................... 1
2.8 "Disability".................................................. 1
2.9 "EBIT"........................................................ 1
2.10 "EBITDA"...................................................... 2
2.11 "Earnings Per Share".......................................... 2
2.12 "Employee".................................................... 2
2.13 "Fiscal Year"................................................. 2
2.14 "Maximum Award"............................................... 2
2.15 "Net Income".................................................. 2
2.16 "Operating Cash Flow"......................................... 2
2.17 "Participant"................................................. 2
2.18 "Payout Formula".............................................. 2
2.19 "Performance Goals"........................................... 2
2.20 "Performance Period".......................................... 2
2.21 "Plan"........................................................ 2
2.22 "Retirement".................................................. 2
2.23 "Return on Assets"............................................ 3
2.24 "Return on Equity"............................................ 3
2.25 "Return on Sales"............................................. 3
2.26 "Revenue"..................................................... 3
2.27 "Shareholder Return".......................................... 3
2.28 "Shares"...................................................... 3
2.29 "Target Award"................................................ 3
2.30 "VAI"......................................................... 3

SECTION 3 SELECTION OF PARTICIPANTS AND DETERMINATION OF AWARDS...... 3

SECTION 4 PAYMENT OF AWARDS.......................................... 4

SECTION 5 ADMINISTRATION............................................. 4

-i-
<PAGE>

TABLE OF CONTENTS
(continued)

<TABLE>
<CAPTION>
Page

<S> <C> <C>
SECTION 6 GENERAL PROVISIONS......................................... 5

SECTION 7 AMENDMENT, TERMINATION AND DURATION........................ 6

7.1 Amendment, Suspension or Termination.......................... 6
7.2 Duration of the Plan.......................................... 6

SECTION 8 LEGAL CONSTRUCTION......................................... 6

-ii-
<PAGE>

VARIAN MEDICAL SYSTEMS, INC.
MANAGEMENT INCENTIVE PLAN

SECTION 1
BACKGROUND, PURPOSE AND DURATION

1.1 Effective Date. This amended and restated Plan is effective as
--------------
of the date on which VAI distributes shares of the common stock of Varian, Inc.
and Varian Semiconductor Equipment Associates, Inc. to the stockholders of VAI,
subject to the approval of the Plan by a majority of the shares of the common
stock of VAI which are present in person or by proxy and entitled to vote at the
1999 Annual and Special Meeting of Stockholders of VAI.

SECTION 2
DEFINITIONS

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

2.1 "Actual Award" means as to any Performance Period, the actual
------------
award (if any) payable to a Participant for the Performance Period. Each Actual
Award is determined by the Payout Formula for the Performance Period, subject to
the Committee's authority uder Section 3.5 to reduce the award otherwise
determined by the Payout Formula.

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

2.4 "Board" means the Board of Directors of the Company.
-----

2.5 "Code" means the Internal Revenue Code of 1986, as amended.
----
Reference to a specific section of the Code or regulation thereunder shall
include such section or regulation, any valid regulation promulgated thereunder,
and any comparable provision of any future legislation or regulation amending,
supplementing or superseding such section or regulation.

2.6 "Committee" means the committee appointed by the Board
---------
(pursuant to Section 5.1) to administer the Plan.

2.7 Company" means Varian Medical Systems, Inc., a Delaware
-------
corporation, or any successor thereto.

2.8 "Disability" means a permanent and total disability determined
----------
in accordance with uniform and nondiscriminatory standards adopted by the
Committee from time to time.

H-1
<PAGE>

2.11 "Earnings Per Share" means as to any Performance Period, the
------------------
Company's or a business unit's Net Income, divided by a weighted average number
of common shares outstanding and dilutive common equivalent shares deemed
outstanding, determined in accordance with generally accepted accounting
principles.

2.13 "Fiscal Year" means any fiscal year of the Company.
-----------

2.14 "Maximum Award" means as to any Actual Award to any
-------------
Participant for any Performance Period, the lesser of two hundred percent (200%)
of Base Salary or $2 million.

2.15 "Net Income" means as to any Performance Period, the Company's
----------
or a business unit's income after taxes, determined in accordance with generally
accepted accounting principles.

2.16 "Operating Cash Flow" means as to any Performance Period, the
-------------------
Company's or a business unit's sum of Net Income plus depreciation and
amortization less capital expenditures plus changes in working capital comprised
of accounts receivable, inventories, other current assets, trade accounts
payable, accrued expenses, product warranty, advance payments from customers and
long-term accrued expenses, determined in accordance with generally acceptable
accounting principles.

2.17 "Participant" means as to any Performance Period, an Employee
-----------
who has been selected by the Committee for participation in the Plan for that
Performance Period.

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

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

2.21 "Plan" means the Varian Medical Systems, Inc. Management
----
Incentive Plan, as set forth in this instrument and as hereafter amended from
time to time.

2.22 "Retirement" means, with respect to any Participant,
----------
"Retirement" as defined by the Company's Retirement Policies, as they may be
established from time to time.

H-2
<PAGE>

2.26 "Revenue" means as to any Performance Period, the Company's
-------
or a business unit's net sales, determined in accordance with generally accepted
accounting principles.

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

2.28 "Shares" means shares of the Company's common stock, $.01 par
------
value.

2.30 "VAI" means Varian Associates, Inc., a Delaware corporation.
---

SECTION 3
SELECTION OF PARTICIPANTS AND DETERMINATION OF AWARDS

H-3
<PAGE>

applying the Payout Formula to the level of actual performance which has been
certified by the Committee. Notwithstanding any contrary provision of the Plan,
the Committee, in its sole discretion, may (a) eliminate or reduce the Actual
Award payable to any Participant below that which otherwise would be payable
under the Payout Formula, and (b) determine what Actual Award, if any, will be
paid in the event of a termination of employment prior to the end of the
Performance Period. The total aggregate Actual Awards under the Plan with
respect to any Performance Period shall not exceed eight percent (8%) of the
Company's EBIT (but before incentive compensation) for the most recent completed
Fiscal Year. If the total aggregate Actual Awards with respect to a Performance
Period would exceed this aggregate limit, all such Actual Awards shall be pro-
rated on an equal basis among all Participants according to a formula
established by the Committee.

SECTION 4
PAYMENT OF AWARDS

4.2 Timing of Payment. Payment of each Actual Award shall be made
-----------------
within 120 days after the end of the Performance Period during which the Award
was earned.

SECTION 5
ADMINISTRATION

5.2 Committee Authority. It shall be the duty of the Committee to
-------------------
administer the Plan in accordance with the Plan's provisions. The Committee
shall have all powers and discretion necessary or appropriate to administer the
Plan and to control its operation, including, but not limited to, the power to
(a) determine which Employees shall be granted awards, (b) prescribe the terms
and conditions of awards, (c) interpret the Plan and the awards, (d) adopt such
procedures and subplans as are necessary or appropriate to permit participation
in the Plan by Employees who are foreign nationals or employed outside of the
United States, (e) adopt rules for the administration, interpretation and
application of the Plan as are consistent therewith, and (f) interpret, amend or
revoke any such rules.

H-4
<PAGE>

SECTION 6
GENERAL PROVISIONS

6.1 Tax Withholding. The Company shall withhold all applicable
---------------
taxes from any Actual Award, including any federal, state and local taxes
(including the Participant's FICA obligation).

6.2 No Effect on Employment or Service. Nothing in the Plan shall
----------------------------------
interfere with or limit in any way the right of the Company to terminate any
Participant's employment or service at any time, with or without cause. For
purposes of the Plan, transfer of employment of a Participant between the
Company and any one of its Affiliates (or between Affiliates) shall not be
deemed a Termination of Service. Employment with the Company and its Affiliates
is on an at-will basis only. The Company expressly reserves the right, which may
be exercised at any time and without regard to when during a Performance Period
such exercise occurs, to terminate any individual's employment with or without
cause, and to treat him or her without regard to the effect which such treatment
might have upon him or her as a Participant.

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

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

6.6 Beneficiary Designations. If permitted by the Committee, a
------------------------
Participant under the Plan may name a beneficiary or beneficiaries to whom any
vested but unpaid award shall be paid in the event of the Participant's death.
Each such designation shall revoke all prior designations by the Participant and
shall be effective only if given in a form and manner acceptable to the
Committee. In the absence of any such designation, any vested benefits remaining
unpaid at the Participant's death shall be paid to the Participant's estate.

H-5
<PAGE>

SECTION 7
AMENDMENT, TERMINATION AND DURATION

SECTION 8
LEGAL CONSTRUCTION

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

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

EXECUTION

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

VARIAN MEDICAL SYSTEMS, INC.

Dated: _________________ By: _________________________________
Name:
Title:

H-6
<PAGE>

ANNEX I

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

DISTRIBUTION AGREEMENT

AMONG

VARIAN ASSOCIATES, INC.,

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

AND

VARIAN, INC.

Dated as of

January 14, 1999

- --------------------------------------------------------------------------------
<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE I DEFINITIONS......................................................................................... 1
Section 1.01. General............................................................................................. 1
Section 1.02. References; Interpretation.......................................................................... 17
ARTICLE II PRE-DISTRIBUTION TRANSACTIONS; CERTAIN COVENANTS.................................................... 17
Section 2.01. Corporate Reorganization Transactions; Dispositions................................................. 17
Section 2.02. Conveyance of Assets................................................................................ 17
Section 2.03. Transfer and Assignment of Certain Licenses and Permits............................................. 18
Section 2.04. Transfer and Assignment of Certain Agreements....................................................... 18
Section 2.05. Certain Financial and Other Arrangements............................................................ 19
Section 2.06. Assumption and Satisfaction of Liabilities.......................................................... 20
Section 2.07. Stock Issuance; Dividends........................................................................... 21
Section 2.08. Charters; By-laws; Rights Plans..................................................................... 21
Section 2.09. Directors, Officers and Employees................................................................... 21
Section 2.10. Other Transactions.................................................................................. 22
Section 2.11. Meeting; Proxy Statement; Other Filings............................................................. 22
Section 2.12. State Securities Laws............................................................................... 22
Section 2.13. Listing Application................................................................................. 22
Section 2.14. Transfers Not Effected Before the Distributions; Transfers Deemed Effective as of the Effective Time 22
Section 2.15. Ancillary Agreements................................................................................ 23
Section 2.16. Operations in Ordinary Course....................................................................... 23
ARTICLE III THE DISTRIBUTIONS................................................................................... 23
Section 3.01. Record Date and Distribution Date................................................................... 23
Section 3.02. The Distributions................................................................................... 23
ARTICLE IV CONDITIONS TO THE DISTRIBUTIONS..................................................................... 24
Section 4.01. Conditions Precedent to the Distributions........................................................... 24
Section 4.02. Waivers............................................................................................. 25
ARTICLE V COVENANTS........................................................................................... 25
Section 5.01. Further Assurances; Consents........................................................................ 25
Section 5.02. Intellectual Property Matters....................................................................... 25
Section 5.03. Employees; Employee Benefits........................................................................ 26
Section 5.04. Tax Matters......................................................................................... 26
Section 5.05. No Representations or Warranties.................................................................... 26
Section 5.06. Removal of Certain Guarantees; Releases from Liabilities............................................ 27
Section 5.07. Intercompany Agreements............................................................................. 27
Section 5.08. Nondisclosure Agreements............................................................................ 27
Section 5.09. Receipts after the Distribution Date................................................................ 27
Section 5.10. Post-Distribution Audit............................................................................. 28
ARTICLE VI ACCESS TO INFORMATION; CONFIDENTIALITY.............................................................. 28
Section 6.01. Provision, Transfer and Delivery of Applicable Corporate Records.................................... 28
Section 6.02. Access to Books and Records......................................................................... 29
Section 6.03. Confidentiality..................................................................................... 29
Section 6.04. Witness Services.................................................................................... 29
Section 6.05. Reimbursement; Other Matters........................................................................ 30
Section 6.06. Retention of Records................................................................................ 30
Section 6.07. Privileged Matters.................................................................................. 30
</TABLE>

<PAGE>

TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C> <C>
ARTICLE VII INDEMNIFICATION............................................................................. 31
Section 7.01. Survival of Agreements...................................................................... 31
Section 7.02. Taxes....................................................................................... 31
Section 7.03. Indemnification by HCS...................................................................... 31
Section 7.04. Indemnification by SEB...................................................................... 31
Section 7.05. Indemnification by IB....................................................................... 31
Section 7.06. Limitations on Indemnification Obligations.................................................. 32
Section 7.07. Procedures for Indemnification.............................................................. 33
Section 7.08. Indemnification Payments.................................................................... 35
Section 7.09. Certain Legal Proceedings................................................................... 35
Section 7.10. Survival of Indemnities..................................................................... 35
Section 7.11. Contribution................................................................................ 35
Section 7.12. Exclusive Mechanism; Waiver of Jury Trial................................................... 36
Section 7.13. Failure to Satisfy Indemnification Obligation............................................... 36
Section 7.14. Treatment of Shared Assets.................................................................. 36
ARTICLE VIII INSURANCE................................................................................... 36
Section 8.01. Policies and Rights Included within Assets.................................................. 36
Section 8.02. Claims...................................................................................... 37
Section 8.03. Administration; Other Matters............................................................... 38
Section 8.04. Retrospectively Calculated Insurance Premiums............................................... 39
Section 8.05. Allocation of Insurance Proceeds; Cooperation............................................... 39
Section 8.06. Reimbursement of Expenses................................................................... 40
Section 8.07. Insurer Insolvency or Coverage Controversy.................................................. 40
Section 8.08. Agreement for Waiver of Conflict and Shared Defense......................................... 40
Section 8.09. Direct Responsibility for Claims; Additional Insurance; No Modifications.................... 40
ARTICLE IX DISPUTE RESOLUTION.......................................................................... 41
Section 9.01. Separation Committee........................................................................ 41
Section 9.02. Binding Arbitration......................................................................... 41
Section 9.03. Disputes Regarding Closing Balance Sheets; Payments......................................... 42
Section 9.04. Post Distribution Adjustment in Respect of Transaction Expenditures and Disposition Proceeds 44
Section 9.05. Specific Performance........................................................................ 44
ARTICLE X MISCELLANEOUS............................................................................... 44
Section 10.01. Complete Agreement; Construction............................................................ 44
Section 10.02. Ancillary Agreements........................................................................ 44
Section 10.03. Counterparts................................................................................ 44
Section 10.04. Responsibility for Expenses................................................................. 44
Section 10.05. Notices..................................................................................... 44
Section 10.06. Waivers..................................................................................... 46
Section 10.07. Amendments.................................................................................. 46
Section 10.08. Assignment.................................................................................. 46
Section 10.09. Successors and Assigns...................................................................... 47
Section 10.10. Termination................................................................................. 47
Section 10.11. Third Party Beneficiaries................................................................... 47
Section 10.12. Exhibits and Schedules...................................................................... 47
Section 10.13. Governing Law............................................................................... 47
Section 10.14. Severability................................................................................ 47
Section 10.15. Subsidiaries................................................................................ 47
Section 10.16. Titles and Headings......................................................................... 47
Section 10.17. Consent to Jurisdiction..................................................................... 47

Exhibit A Corporate Reorganization Transactions.................................................................... A-1
Exhibit B Employee Benefits Allocation Agreement................................................................... B-1
</TABLE>

ii
<PAGE>

Exhibit C Intellectual Property Agreement................................. C-1
Exhibit D Tax Sharing Agreement........................................... D-1
Exhibit E Transition Services Agreement................................... E-1
Exhibit F HCS Pro Forma Balance Sheet..................................... F-1
Exhibit G IB Pro Forma Balance Sheet...................................... G-1
Exhibit H SEB Pro Forma Balance Sheet..................................... H-1
Exhibit I HCS Subsidiaries................................................ I-1
Exhibit J IB Subsidiaries................................................. J-1
Exhibit K SEB Subsidiaries................................................ K-1
Exhibit L Varian By-Laws.................................................. L-1

-iii-
<PAGE>

DISTRIBUTION AGREEMENT

THIS DISTRIBUTION AGREEMENT is made and entered into as of this 14th day of
January, 1999, among VARIAN ASSOCIATES, INC., a Delaware corporation ("Varian"),
VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC., a Delaware corporation ("SEB"),
and VARIAN, INC., a Delaware corporation ("IB").

R E C I T A L S

WHEREAS, the Board of Directors of Varian has deemed it appropriate and
desirable to:

(a) separate and divide the existing businesses of Varian so that (i) the
business of the manufacture, sale and service of ion implanters for
semiconductor equipment fabrication facilities will be owned and conducted
directly or indirectly by SEB, (ii) the business of the manufacture, sale and
service of analytical and research instruments and high vacuum products and
fabrication of circuit boards and electronic subassemblies will be owned and
conducted directly or indirectly by IB, and (iii) the business of the
manufacture, sale and service of integrated cancer-care systems, including
medical linear accelerators and brachytherapy systems for treatment, simulators
for therapy planning and verification, and ancillary equipment, software and
networking systems and related data management, and of x-ray tubes for the
diagnostic imaging industry and imaging subsystems, will be retained and
conducted directly or indirectly by Varian, which will be renamed Varian Medical
Systems, Inc. immediately following the Distributions (as hereinafter defined);
and

(b) distribute, after such separation and division, as a dividend to the
holders of shares of common stock, par value $1.00 per share, of Varian (the
"VAI Common Stock"), all of the then-outstanding shares of common stock, par
value $.01 per share, of SEB (the "SEB Common Stock"), and all of the then-
outstanding shares of common stock, par value $.01 per share, of IB (the "IB
Common Stock"); and

WHEREAS, each of Varian, SEB and IB has determined that it is necessary and
desirable to set forth the principal corporate transactions required to effect
such separation, division and Distributions and to set forth agreements that
will govern certain other matters before and after the Distributions.

NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained in this Agreement, the parties hereto agree as follows:

ARTICLE I
DEFINITIONS

Section 1.01. General. As used in this Agreement, the following terms
-------
have the following meanings:

"AAA" has the meaning ascribed to such term in Section 9.02(b).
---

"AAA Rules" has the meaning ascribed to such term in Section 9.02(c).
---------

"Action" means any action, suit, arbitration, inquiry, proceeding or
------
investigation by or before any Governmental Authority or any arbitration
tribunal.

"Affiliate" means, when used with respect to a specified Person, another
---------
Person that directly, or indirectly through one or more intermediaries, controls
or is controlled by or is under common control with the Person specified.

"After-tax Differential" means the positive or negative amount determined
----------------------
by adding the amounts of the Disposition Proceeds received after the Effective
Time and the Tax Benefit and subtracting therefrom the amounts of the
Transaction Expenditures paid after the Effective Time and the Tax Cost.

I-1
<PAGE>

"Agent" means First Chicago Trust Company of New York, or such other trust
-----
company or bank designated by Varian, who shall act as agent for the holders of
VAI Common Stock in connection with the Distributions.

"Agreement" means this Distribution Agreement among Varian, SEB and IB,
---------
including all amendments hereto and all Schedules and Exhibits hereto.

"Agreement Date" means the date set forth in the first paragraph of this
--------------
Agreement.

"Agreement Disputes" has the meaning ascribed to such term in Section
------------------
9.01(a).

"Aircraft Disposition" has the meaning ascribed to such term in Section
--------------------
2.01(b).

"Ancillary Agreements" means, collectively, the Employee Benefits
--------------------
Allocation Agreement, the Tax Sharing Agreement, the Transition Services
Agreement and the Intellectual Property Agreement.

"Arbitration Demand Notice" has the meaning ascribed to such term in
-------------------------
Section 9.02(b).

"Assets" means assets, properties and rights (including goodwill), wherever
------
located (including in the possession of vendors or other third parties or
elsewhere), whether real, personal or mixed, tangible, intangible or contingent,
in each case whether or not recorded or reflected or required to be recorded or
reflected on the books and records or financial statements of any Person,
including:

(i) all accounting and other books, records and files whether in paper,
microfilm, microfiche, computer tape or disc, magnetic tape or any other form;

(ii) all apparatus, computers and other electronic data processing
equipment, fixtures, machinery, equipment, capital and other spares, furniture,
office equipment, automobiles, trucks, aircraft and other transportation
equipment, special and general tools, test devices, prototypes and models and
other tangible personal property;

(iii) all inventories of materials, parts, raw materials, supplies, work-
in-process, consigned goods, finished goods, packaging and all products and
product samples;

(iv) all interests in real property of whatever nature, including
easements, leases and licenses, whether as owner, mortgagee or holder of a
Security Interest in real property, lessor, sublessor, lessee, sublessee or
otherwise;

(v) all buildings and other improvements to real property;

(vi) all interests in any capital stock or other equity interests of any
Subsidiary or any other Person, all bonds, notes, debentures or other securities
issued by any Subsidiary or any other Person, all loans, advances or other
extensions of credit or capital contributions to any Subsidiary or any other
Person and all other investments in securities of any Person;

(vii) all license agreements, leases of personal property, open purchase
orders for raw materials, supplies, parts or services, unfilled orders for the
manufacture and sale of products, other sales or purchase agreements,
distributions arrangements, and other contracts, agreements or commitments;

(viii) all deposits, letters of credit and performance and surety bonds;

(ix) all technical information, data, research and development information,
engineering drawings, operating and maintenance manuals, and materials and
analyses prepared by consultants and other third parties;

(x) all Intellectual Property;

I-2
<PAGE>

(xi) all cost information, sales and pricing data, customer prospect lists,
supplier records, customer and supplier lists, customer and vendor data,
correspondence and lists, product literature, artwork, design, development and
manufacturing files, vendor and customer drawings, formulations and
specifications, quality records and reports and other books, records, studies,
surveys, reports, plans and documents;

(xii) all prepaid expenses, trade accounts and other accounts and notes
receivables;

(xiii) all rights under contracts, agreements, warranties or guarantees,
all claims or rights or judgments against any Person, all rights in connection
with any bids or offers and all claims, choses in action, rights of recovery and
rights of set-off or similar rights, whether accrued or contingent, and refunds
and deposits;

(xiv) all rights under insurance policies and all rights in the nature of
insurance, indemnification or contribution;

(xv) all licenses, permits, approvals and authorizations which have been
issued by any Governmental Authority;

(xvi) advertising and marketing materials and other printed or written
materials;

(xvii) employee contracts, including any rights thereunder to restrict an
employee or former employee from competing in certain respects and personnel and
medical files and records;

(xviii) Cash and Cash Equivalents, bank accounts, lock boxes and other
deposit arrangements; and

(xix) interest rate, currency, commodity or other swap, collar, cap or
other hedging or similar agreements or arrangements.

"Assignee" has the meaning ascribed to such term in Section 2.04(b).
--------

"Auditors" has the meaning ascribed to such term in Section 5.10(a).
--------

"Books and Records" means all books, records, manuals, agreements and other
-----------------
materials (in any form or medium), including all mortgages, licenses,
indentures, contracts, financial data, customer lists, marketing materials and
studies, advertising materials, price lists, correspondence, distribution lists,
supplier lists, production data, sales and promotional materials and records,
purchasing materials and records, personnel records, manufacturing and quality
control records and procedures, blue prints, research and development files,
records, data and laboratory books, accounts records, sales order files,
litigation files, computer files, microfiche, tape recordings and photographs.

"Cash and Cash Equivalents" has the meaning ascribed to such term under
-------------------------
GAAP.

"Claims Administration" means the processing of claims made under the
---------------------
Company Policies, including the reporting of losses, management and defense of
claims (except to the extent settlement authority remains with another party as
contemplated by Section 7.07) and providing for appropriate releases upon
settlement of claims.

"Code" means the Internal Revenue Code of 1986, as amended.
----

"Commission" means the Securities and Exchange Commission.
----------

"Company Policies" means all Policies, current or past, which are as of the
----------------
Effective Time, or at any time were, maintained by, on behalf of, or for the
benefit or protection of Varian or any of its Subsidiaries or any of its
predecessors which relate to any Shared Liability, the Instruments Business, the
Health Care Systems Business or the Semiconductor Equipment Business, or current
or past directors, officers, employees or agents of any of the foregoing.

I-3
<PAGE>

"Consent" means any approval, consent or waiver required to be obtained
-------
from any Governmental Authority or other third party for the consummation of a
specified transaction, including any option, right of first refusal or other
similar right of a third party triggered by a specified transaction.

"Consolidated Debt" means with respect to any Person (without duplication),
-----------------
every obligation of such Person and its consolidated Subsidiaries (i) for money
borrowed, (ii) evidenced by bonds, debentures, notes or other similar
instruments, (iii) for reimbursement with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of such Person or its
consolidated Subsidiaries, (iv) for the deferred purchase price of property or
services if, and to the extent that, such obligation would appear as a Liability
upon a balance sheet of such Person or its consolidated Subsidiaries prepared in
accordance with GAAP (but excluding trade accounts payable or accrued
Liabilities arising in the ordinary course of business), excluding capital
leases, and (v) to guarantee or otherwise be liable for, any obligation of the
type referred to in clauses (i) through (iv) of another Person.

"Conveyancing and Assumption Instruments" means, collectively, the various
---------------------------------------
written agreements, instruments and other documents to be entered into to effect
the Corporate Reorganization Transactions or otherwise to effect the transfer of
Assets and the assumption of Liabilities in the manner contemplated by this
Agreement and the Ancillary Agreements.

"Corporate Reorganization Transactions" means, collectively, each of the
-------------------------------------
distributions, transfers, conveyances, contributions, assignments and other
transactions described and set forth on Exhibit A, and those described or
contemplated by the Proxy Statement and the private ruling request submissions
made to the Internal Revenue Service in connection therewith, which are intended
to separate and divide the existing businesses of Varian so that, except as
otherwise expressly provided on Exhibit A:

(i) the Semiconductor Equipment Assets, Semiconductor Equipment
Liabilities and Semiconductor Equipment Business shall be owned or held,
directly or indirectly, by SEB;

(ii) the Instruments Assets, Instruments Liabilities and Instruments
Business shall be owned or held, directly or indirectly, by IB; and

(iii) the businesses, Assets and Liabilities of Varian that remain after
the transactions described in clauses (i) and (ii) above, after giving effect to
the Distributions, including the Health Care Systems Assets, Health Care Systems
Liabilities and Health Care Systems Business shall be owned or held, directly or
indirectly, by HCS.

"Cost" means (i) the salary, fringe benefits and overhead expense of
----
personnel (or an allocable portion thereof) plus (ii) out-of-pocket expenses.

"DGCL" means the Delaware General Corporation Law, as amended.
----

"Dispositions" means, collectively, the Palo Alto Property Disposition and
------------
the Aircraft Disposition.

"Disposition Proceeds" means the proceeds from the Palo Alto Property
--------------------
Disposition (or any of its component parts) or the Aircraft Disposition, net of
the expenses of such sale or other disposition.

"Disputing Party" has the meaning ascribed to such term in Section 9.03(a).
---------------

"Distribution Date" means the date determined by the Board of Directors of
-----------------
Varian as of which the Distributions shall be effected.

"Distribution Proposals" means, collectively, Proposals One through Ten
----------------------
set forth in the Proxy Statement.

"Distribution Record Date" means the time designated by the Board of
------------------------
Directors of Varian for the purpose of determining the holders of record of VAI
Common Stock entitled to receive the Distributions.

"Distributions" means, collectively, the SEB Distribution and the IB
-------------
Distribution.

"Effective Time" means 11:59 p.m. California time on the Distribution Date.
--------------

I-4
<PAGE>

"Employee Benefits Allocation Agreement" means the Employee Benefits
--------------------------------------
Allocation Agreement among Varian, SEB and IB (including all exhibits and
schedules thereto) substantially in the form of Exhibit B.

"Environmental Laws" means any and all federal, state, local and foreign
------------------
statutes, Laws, regulations, ordinances, rules, principles of common law,
judgments, orders, decrees, permits, concessions, grants, franchises, licenses,
agreements or other governmental restrictions (including the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601, et
seq.), whether now or hereafter in existence, relating to the environment,
natural resources, human health or safety, endangered or threatened species of
fish, wildlife and plants, or to emissions, discharges or releases of
pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic or hazardous substances or wastes into the environment
(including indoor or outdoor air, surface water, groundwater and surface or
subsurface soils), or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
pollutants, contaminants, petroleum or petroleum products, chemicals or
industrial, toxic or hazardous substances or wastes or the investigation,
cleanup or other remediation thereof.

"Environmental Matters" means all matters relating in any way to (i) soil,
---------------------
air and water and groundwater pollution or contamination, including any on-site
or off-site pollution or contamination, (ii) damages to the natural environment
or natural resources, (iii) Releases or discharges of waste, Hazardous
Materials, or pollutants or contaminants, or (iv) recycling or disposal of
Hazardous Materials or wastes (including garbage, refuse, slag, sludge and other
discarded materials, whether solid, liquid, semisolid or gaseous and whether on-
site or off-site).

"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------

"GAAP" means United States generally accepted accounting principles and
----
practices, as in effect on the date of this Agreement, as promulgated by the
Financial Accounting Standards Board and its predecessors.

"Governmental Authority" means any government or any agency, bureau, board,
----------------------
commission, court, department, official, political subdivision, tribunal or
other instrumentality of any government, whether federal, state or local,
domestic or foreign.

"Group" means (i) with respect to HCS, the Health Care Systems Group, (ii)
-----
with respect to SEB, the Semiconductor Equipment Group, and (iii) with respect
to IB, the Instruments Group.

"Hazardous Materials" means those elements, compounds and substances
-------------------
identified in any of the Environmental Laws as "hazardous materials," "hazardous
substances," or "hazardous waste," as well as any other elements, compounds or
substances which are listed or identified as "pollutants," "contaminants,"
"hazardous," "toxic" (or other term of similar meaning) under any Environmental
Law. The term "Hazardous Materials" expressly includes radioactive materials,
petroleum products and asbestos.

"HCS" means Varian, after giving effect to the Corporate Reorganization
---
Transactions and the Distributions or as if the Corporate Reorganization
Transactions and the Distributions had occurred, as the context requires.

"HCS Adjusted Closing Balance Sheet" has the meaning ascribed to such term
----------------------------------
in Section 9.03(b).

"HCS Closing Balance Sheet" has the meaning ascribed to such term in
-------------------------
Section 5.10(a).

"HCS Common Stock" means VAI Common Stock after the Distributions.
----------------

"HCS Dispute" has the meaning ascribed to such term in Section 9.03(a).
-----------

"HCS Indemnitees" means HCS, the HCS Subsidiaries and each Affiliate
---------------
thereof after giving effect to the Corporate Reorganization Transactions and the
Distributions, and each of the past, present and future directors, officers,
employees and agents of any of the foregoing and each of the heirs, executors,
successors and assigns of such directors, officers, employees and agents.

I-5
<PAGE>

"HCS Pro Forma Balance Sheet" means the pro forma balance sheet of HCS at
---------------------------
October 2, 1998, attached as Exhibit F and the accounting records supporting
such balance sheet.

"HCS Records" has the meaning ascribed to such term in Section 6.01(c).
-----------

"HCS Subsidiaries" means the Subsidiaries of Varian listed on Exhibit I and
----------------
all other Subsidiaries of Varian other than IB, SEB, the IB Subsidiaries and the
SEB Subsidiaries.

"Health Care Systems Assets" means, collectively, all the Assets that are
--------------------------
owned or held by HCS or any HCS Subsidiary as of the Effective Time (and those
Assets to be transferred to HCS or a HCS Subsidiary at a later time as provided
in Section 2.14), including:

(i) the capital stock of, or other ownership interests in, the HCS
Subsidiaries;

(ii) all the Assets included on the HCS Pro Forma Balance Sheet that are
owned or held by HCS or any HCS Subsidiary as of the Effective Time;

(iii) all the Assets acquired by Varian or any of its Subsidiaries after
the date of the HCS Pro Forma Balance Sheet which are owned or held by Varian or
any of its Subsidiaries as of the Effective Time and which are of a nature or
type that would have resulted in such Assets being included as Assets on the HCS
Pro Forma Balance Sheet had they been acquired on or before the date of the HCS
Pro Forma Balance Sheet, determined on a basis consistent with the determination
of the Assets included on the HCS Pro Forma Balance Sheet;

(iv) all the Assets expressly allocated to or retained by HCS or any HCS
Subsidiary under this Agreement or any Ancillary Agreement, including the
Corporate Reorganization Transactions;

(v) rights to the Company Policies to the extent set forth in Article VIII;
and

(vi) the rights of HCS and the HCS Subsidiaries under this Agreement and
the Ancillary Agreements.

Notwithstanding the foregoing, the Health Care Systems Assets shall
not include any and all Assets that are expressly contemplated by this Agreement
or any Ancillary Agreement as Assets to be allocated to or retained by any
member of the Instruments Group or the Semiconductor Equipment Group.

"Health Care Systems Business" means the business that, after giving effect
----------------------------
to the Corporate Reorganization Transactions and the Distributions, is conducted
by HCS, the HCS Subsidiaries and/or any other member of the Health Care Systems
Group.

"Health Care Systems Group" means HCS, the HCS Subsidiaries and the Persons
-------------------------
that become Subsidiaries of HCS after the consummation of the Corporate
Reorganization Transactions and the Distributions.

"Health Care Systems Liabilities" means, collectively, all the Liabilities
-------------------------------
of HCS, the HCS Subsidiaries and the other members of the Health Care Systems
Group after giving effect to the Corporate Reorganization Transactions and the
Distributions, including:

(i) all the Liabilities included on the HCS Pro Forma Balance Sheet that
remain outstanding as of the Effective Time;

(ii) all the Liabilities of Varian arising or assumed after the date of the
HCS Pro Forma Balance Sheet and that remain outstanding as of the Effective
Time, which are of a nature or type that would have resulted in such Liabilities
being included as Liabilities on the HCS Pro Forma Balance Sheet had they arisen
or been assumed on or before the date of the HCS Pro Forma Balance Sheet,
determined on a basis consistent with the determination of the Liabilities of
HCS on the HCS Pro Forma Balance Sheet;

(iii) all the Liabilities expressly assumed or retained by HCS, any HCS
Subsidiary and any other member of the Health Care Systems Group under this
Agreement or any Ancillary Agreement, including the Corporate Reorganization
Transactions;

I-6
<PAGE>

(iv) the obligations of HCS, the HCS Subsidiaries and any other member of
the Health Care Systems Group under this Agreement and the Ancillary Agreements;

(v) all actual or alleged Liabilities (regardless of whether any claim with
respect to such Liabilities is asserted before, on or after the Distribution
Date) relating to Environmental Matters or arising under any Environmental Laws
(including all claims for death, bodily injury, personal injury and property
damage relating to Environmental Matters or arising under any Environmental
Laws) arising out of, relating to or resulting from (A) the activities,
operations, acts or omissions at, from or with respect to the Health Care
Systems Business or the Health Care Systems Assets before, on or after the
Distribution Date, and (B) Remediation of any Release arising out of, relating
to or resulting from activities, operations, acts or omissions at, from or with
respect to the Health Care Systems Business or the Health Care Systems Assets
before, on or after the Distribution Date wherever such Remediation may be
performed;

(vi) all actual or alleged Liabilities of HCS and any other member of the
Health Care Systems Group to third parties (regarding of whether any claim with
respect to such Liabilities is asserted before, on or after the Distribution
Date) arising out of, relating to or resulting from the transportation,
handling, possession, processing, treatment, storage, disposal, manufacture,
further manufacture, use, reuse, sale or resale of any goods manufactured,
processed, sold or distributed at any time on or before the Distribution Date by
the Health Care Systems Business, including all such Liability for personal
injury, bodily injury (including death or aggravation of previously existing
illness, injury disability or condition) or property damage;

(vii) all Liabilities to persons employed by Varian or its Subsidiaries on
or before the Effective Time, the services of whom were primarily dedicated to
the Health Care Systems Business, including Liabilities arising out of, relating
to or resulting from the termination or alleged termination of such person's
employment as a result of the Corporate Reorganization Transactions or the
Distributions and Liabilities arising out of, relating to or resulting from the
assertion by any such person of employment by a member of another Group as a
result of the Corporate Reorganization Transactions; and

(viii) all the Liabilities of the parties or their respective Subsidiaries
(whether arising before, on or after the Distribution Date) arising out of,
relating to or resulting from the management or conduct before, on or after the
Distribution Date of the Health Care Systems Business or ownership of the Health
Care Systems Assets (including Securities Liabilities to the extent arising out
of, relating to or resulting from information concerning the management,
business or operations of HCS, the HCS Subsidiaries or the other members of the
Health Care Systems Group in the Registration Statements or the Proxy
Statement), except as otherwise expressly provided herein.

Notwithstanding the foregoing, the Health Care Systems Liabilities
shall not include:

(x) any Liability set forth on Schedule 1.01(a); or

(y) any and all Liabilities that are expressly contemplated by this
Agreement or any Ancillary Agreement as Liabilities to be assumed or
retained by any member of the Instruments Group or the Semiconductor
Equipment Group.

"IB" has the meaning ascribed to such term in the first paragraph of this
--
Agreement.

"IB Adjusted Closing Balance Sheet" has the meaning ascribed to such term
---------------------------------
in Section 9.03(b).

"IB Claim" has the meaning ascribed to such term in Section 8.01(b).
--------

"IB Closing Balance Sheet" has the meaning ascribed to such term in Section
------------------------
5.10(a).

"IB Common Shares" means the shares of IB Common Stock owned by Varian
----------------
immediately before the Distributions.

"IB Common Stock" has the meaning ascribed to such term in the recitals to
---------------
this Agreement.

I-7
<PAGE>

"IB Distribution" means the distribution, on the Distribution Date, as a
---------------
dividend by Varian to the Varian Holders of the IB Common Shares on the basis
provided in Section 3.02.

"IB Dispute" has the meaning ascribed to such term in Section 9.03(a).
----------

"IB Indemnitees" means IB, the IB Subsidiaries and each Affiliate thereof
--------------
after giving effect to the Corporate Reorganization Transactions and the
Distributions, and each of the past, present and future directors, officers,
employees and agents of the foregoing and each of the heirs, executors,
successors and assigns of such directors, officers, employees and agents.

"IB Pro Forma Balance Sheet" means the pro forma balance sheet of IB at
--------------------------
October 2, 1998, attached as Exhibit G and the accounting records supporting
such balance sheet.

"IB Records" has the meaning ascribed to such term in Section 6.01(b).
----------

"IB Notes Payable" means the Notes Payable assumed by IB pursuant to
----------------
Sections 2.05(c) and (d).

"IB Subsidiaries" means the Subsidiaries listed on Exhibit J.
---------------

"IB Term Loans" has the meaning ascribed to such term in Section
-------------
2.05(c)(i).

"Income Tax" means (i) any Tax imposed by Subtitle A or F of the Code, (ii)
----------
any Tax imposed by any state of the United States or by any political
subdivision of any such state which is imposed on or measured by net income,
including state and local franchise or similar Taxes measured by net income, and
(iii) any Tax imposed by any foreign country or any possession of the United
States, or by any political subdivision of any foreign country or United States
possession that is an income tax as defined in Treasury Regulation Section
1.901-2.

"Indemnifiable Losses" means, with respect to any Person, any and all
--------------------
losses, obligations, claims, damages, deficiencies, penalties, judgments,
settlements, payments, fines, interest, costs and expenses (including reasonable
attorneys', accountants', consultants' or other professionals' fees,
investigation expenses and any and all other out-of-pocket expenses) or other
Liabilities whatsoever that are assessed, imposed, awarded against or incurred
by such Person excluding exemplary, special or punitive damages or lost profits
except to the extent actually paid by an Indemnitee in respect of a Third Party
Claim or Action either (i) in investigating, preparing for, defending against
any Actions, any potential or threatened Actions or any Third Party Claims or
potential or threatened Third Party Claims or in settling any of the foregoing
or in satisfaction of any judgment, fine or penalty rendered in or resulting
from any of the foregoing or otherwise arising out of, relating to or resulting
from any Actions, any potential or threatened Actions or any Third Party Claims
or potential or threatened Third Party Claims for which such Person would be
entitled to indemnification under Article VII hereof, or (ii) in respect of any
other event, occurrence or matter for which such Person would be entitled to
indemnification under Article VII hereof, in each case whether accrued before,
on or after the date of this Agreement.

"Indemnifying Party" has the meaning ascribed to such term in Section
------------------
7.06(a).

"Indemnitee" has the meaning ascribed to such term in Section 7.06(a).
----------

"Independent Auditors" has the meaning ascribed to such term in Section
--------------------
9.03(b).

"Instruments Assets" means, collectively, all the Assets that are owned or
------------------
held by IB or any IB Subsidiary as of the Effective Time (and those Assets to be
transferred to IB or an IB Subsidiary at a later time as provided in Section
2.14), including:

(i) the capital stock of, or other ownership interests in, the IB
Subsidiaries;

(ii) all the Assets included on the IB Pro Forma Balance Sheet that are
owned or held by IB or any IB Subsidiary as of the Effective Time;

I-8
<PAGE>

(iii) all the Assets acquired by Varian or any of its Subsidiaries after
the date of the IB Pro Forma Balance Sheet which are owned or held by Varian or
any of its Subsidiaries as of the Effective Time and which are of a nature or
type that would have resulted in such Assets being included as Assets on the IB
Pro Forma Balance Sheet had they been acquired on or before the date of the IB
Pro Forma Balance Sheet, determined on a basis consistent with the determination
of the Assets included on the IB Pro Forma Balance Sheet;

(iv) all the Assets expressly allocated to or retained by IB or any IB
Subsidiary under this Agreement or any Ancillary Agreement, including the
Corporate Reorganization Transactions;

(v) rights to the Company Policies to the extent set forth in Article VIII;
and

(vi) the rights of IB and the IB Subsidiaries under this Agreement and the
Ancillary Agreements.

Notwithstanding the foregoing, the Instruments Assets shall not
include any and all Assets that are expressly contemplated by this Agreement or
any Ancillary Agreement as Assets to be allocated to or retained by any member
of the Semiconductor Equipment Group or the Health Care Systems Group.

"Instruments Business" means the business that, after giving effect to the
--------------------
Corporate Reorganization Transactions and the Distributions, is conducted by IB,
the IB Subsidiaries and/or any other member of the Instruments Group.

"Instruments Group" means IB, the IB Subsidiaries and the Persons that
-----------------
become Subsidiaries of IB after the consummation of the Corporate Reorganization
Transactions and the Distributions.

"Instruments Liabilities" means, collectively, all the Liabilities of IB,
-----------------------
the IB Subsidiaries and the other members of the Instruments Group after giving
effect to the Corporate Reorganization Transactions and the Distributions,
including:

(i) all the Liabilities included on the IB Pro Forma Balance Sheet that
remain outstanding as of the Effective Time;

(ii) all the Liabilities of Varian arising or assumed after the date of the
IB Pro Forma Balance Sheet and that remain outstanding as of the Effective Time,
which are of a nature or type that would have resulted in such Liabilities being
included as Liabilities on the IB Pro Forma Balance Sheet had they arisen or
been assumed on or before the date of the IB Pro Forma Balance Sheet, determined
on a basis consistent with the determination of the Liabilities of IB on the IB
Pro Forma Balance Sheet;

(iii) all the Liabilities expressly assumed or retained by IB, any IB
Subsidiary and any other member of the Instruments Group under this Agreement or
any Ancillary Agreement, including the Corporate Reorganization Transactions,
the IB Term Loans and the IB Notes Payable;

(iv) the obligations of IB, the IB Subsidiaries and any other member of the
Instruments Group under this Agreement and the Ancillary Agreements;

(v) all actual or alleged Liabilities (regardless of whether any claim with
respect to such Liabilities is asserted before, on or after the Distribution
Date) relating to Environmental Matters or arising under any Environmental Laws
(including all claims for death, bodily injury, personal injury and property
damage relating to Environmental Matters or arising under any Environmental
Laws) arising out of, relating to or resulting from (A) the activities,
operations, acts or omissions at, from or with respect to the Instruments
Business or the Instruments Assets before, on or after the Distribution Date,
and (B) Remediation of any Release arising out of, relating to or resulting from
activities, operations, acts or omissions at, from or with respect to the
Instruments Business or the Instruments Assets before, on or after the
Distribution Date wherever such Remediation may be performed;

(vi) all actual or alleged Liabilities of IB and any other member of the
Instruments Group to third parties (regarding of whether any claim with respect
to such Liabilities is asserted before, on or after the Distribution Date)
arising out of, relating to or resulting from the transportation, handling,
possession, processing, treatment, storage, disposal, manufacture, further
manufacture, use, reuse, sale or resale of any goods manufactured, processed,

I-9
<PAGE>

sold or distributed at any time on or before the Distribution Date by the
Instruments Business, including all such Liability for personal injury, bodily
injury (including death or aggravation of previously existing illness, injury
disability or condition) or property damage;

(vii) all Liabilities to persons employed by Varian or its Subsidiaries on
or before the Effective Time, the services of whom were primarily dedicated to
the Instruments Business, including Liabilities arising out of, relating to or
resulting from the termination or alleged termination of such person's
employment as a result of the Corporate Reorganization Transactions or the
Distributions and Liabilities arising out of, relating to or resulting from the
assertion by any such person of employment by a member of another Group as a
result of the Corporate Reorganization Transactions; and

(viii) all the Liabilities of the parties or their respective Subsidiaries
(whether arising before, on or after the Distribution Date) arising out of,
relating to or resulting from the management or conduct before, on or after the
Distribution Date of the Instruments Business or ownership of the Instruments
Assets (including Securities Liabilities to the extent arising out of, relating
to or resulting from information concerning the management, business or
operations of IB, the IB Subsidiaries or the other members of the Instruments
Group in the Registration Statements or the Proxy Statement), except as
otherwise expressly provided herein.

Notwithstanding the foregoing, the Instruments Liabilities shall not
include:

(x) any Liability set forth on Schedule 1.01(a);

(y) any and all Liabilities that are expressly contemplated by this
Agreement or any Ancillary Agreement as Liabilities to be assumed or
retained by any member of the Semiconductor Equipment Group or the Health
Care Systems Group.

"Insurance Administration" means, with respect to each Company Policy, the
------------------------
accounting for premiums, retrospectively calculated additional or return
premiums or assessments, policy dividends or audited exposure, defense costs,
indemnity payments, deductibles and retentions, as appropriate, under the terms
and conditions of each of the Company Policies; the reporting to excess
insurance carriers of any losses or claims that may cause the per occurrence,
per claim or aggregate limits of any Company Policy to be exceeded and the
distribution of Insurance Proceeds as contemplated by this Agreement.

"Insurance Proceeds" means, with respect to any insured party, those
------------------
monies, net of any applicable premium adjustment, retrospectively calculated
premium, deductible, retention or cost of reserve paid or held by or for the
benefit of such insured, which are either:

(i) received by an insured from an insurer; or

(ii) paid by an insurer on behalf of an insured.

"Insured Claims" means those Liabilities that, individually or in the
--------------
aggregate, are covered within the terms and conditions of any of the Company
Policies, whether or not subject to deductibles, co-insurance, uncollectability
or retrospectively calculated premium adjustments.

"Intellectual Property" means the intellectual property rights owned,
---------------------
licensed to or otherwise held throughout the world by any person, including,
without limitation, all of the rights, title and interests in the following:

(i) all United States and foreign patents, patent applications (including
any continuations, continuation-in-part and divisionals), patent applications
under preparation, invention disclosures and invention disclosures under
preparation;

(ii) all United States and foreign registered and unregistered copyrights
and mask works, including applications and applications under preparation
therefor;

I-10
<PAGE>

(iii) all United States and foreign registered and unregistered trademarks,
trade names, trade dress, service marks, services names, artwork, logos and
other marks, including applications and applications under preparation therefor;

(iv) all trade secrets, know-how, ideas, concepts, discoveries,
improvements, processes, procedures, methods, recipes, formulae, data and
specifications;

(v) all computer programs and other software (in executable or source code
format), including operating software, applications, networks software,
firmware, middleware, design software, design tools, test and diagnostic
software and systems configurations; and

(vi) all documentation, schematics, drawings, designs, manuals, reports,
records, instructions, studies, surveys, plans, books or other written materials
(whether in hard copy or magnetic form) relating to or including any of the (i)
through (v) above.

"Intellectual Property Agreement" means the Intellectual Property Agreement
-------------------------------
among Varian, SEB and IB (including all exhibits and schedules thereto),
substantially in the form of Exhibit C.

"Law" means all laws, statutes, ordinances, regulations, rules, orders and
---
regulations of any Governmental Authority.

"Liabilities" means any and all debts, liabilities, obligations,
-----------
responsibilities, charges, claims, actions, injuries, losses, damages (whether
compensatory, punitive or treble), fines, penalties and sanctions, absolute or
contingent, matured or unmatured, liquidated or unliquidated, foreseen or
unforeseen, joint, several or individual, asserted or unasserted, accrued or
unaccrued, known or unknown, whenever arising, including those arising under or
in connection with any Law (including any Environmental Law), Action, threatened
Action, order or consent decree of any Governmental Authority or any award of
any arbitrator, and those arising under any contract, guarantee, commitment or
undertaking, whether sought to be imposed by a Governmental Authority, private
party or party to this Agreement, whether based in contract, tort, implied or
express warranty, strict liability, criminal or civil statute, or otherwise, and
including any costs, expenses, interest, attorneys' fees, disbursements and
expenses of counsel, experts' and consultants' fees and costs related thereto or
to investigating, preparing for or defending or settling any of the foregoing.

"Managing Party" has the meaning ascribed to such term in Section 7.07(c).
--------------

"Meeting" means the Combined Annual and Special Meeting of holders of VAI
-------
Common Stock to consider the Distribution Proposals and the other proposals
included by the Board of Directors of Varian in the notice of the Meeting.

"Meeting Date" means the date determined by the Board of Directors of
------------
Varian for the Meeting.

"Meeting Record Date" means the time determined by the Board of Directors
-------------------
of Varian for the purpose of determining the holders of record of VAI Common
Stock entitled to vote at the Meeting.

"Nasdaq" means The Nasdaq Stock Market.
------

"Net Debt" means the difference between (i) the sum of the Notes Payable
--------
and VAI Term Loans assumed or retained by a party as of the date of
determination and (ii) the amount of Cash and Cash Equivalents of such party as
of the date of determination.

"Net Worth" has the meaning ascribed to such term under GAAP, as calculated
---------
in accordance with this Agreement, but without giving effect to any Liabilities
or expenditures related to the discretionary restructuring of a business between
the date hereof and the Effective Time, including reductions in force,
facilities' closures, product line abandonment and revaluing impaired assets.

"Nondisclosure Agreements" means all of the nondisclosure or
------------------------
confidentiality agreements entered into by Varian and its Subsidiaries from time
to time before the Distribution Date.

I-11
<PAGE>

"Notes Payable" has the meaning ascribed to such term in Varian's audited
-------------
consolidated financial statements for the fiscal year ended October 2, 1998.

"Notice" has the meaning ascribed to such term in Section 10.05.
------

"NYSE" means the New York Stock Exchange, Inc.
----

"Palo Alto Property Disposition" has the meaning ascribed to such term in
------------------------------
Section 2.01(b).

"Panel" has the meaning ascribed to such term in Section 9.02(c).
-----

"Person" means any natural person, corporation, business trust, joint
------
venture, association, company, partnership, limited liability company or other
entity or any Governmental Authority.

"Policies" means insurance policies and insurance contracts of any kind
--------
(other than life and benefits policies or contracts), including primary, excess
and umbrella policies, commercial general liability policies, officers'
liability, fiduciary liability, automobile, aircraft, property and casualty,
workers' compensation and employee dishonesty insurance policies, bonds and
self-insurance and captive insurance arrangements, together with the rights,
benefits and privileges thereunder.

"Privilege" has the meaning ascribed to such term in Section 6.07(a).
---------

"Privileged Information" has the meaning ascribed to such term in Section
----------------------
6.07(b).

"Proxy Statement" means the Proxy Statement sent to the holders of VAI
---------------
Common Stock in connection with the Meeting, including any amendments or
supplements thereto.

"Registration Statements" means the Registration Statements on Form 10 to
-----------------------
be filed by SEB and IB with the Commission pursuant to the requirements of the
Exchange Act and the rules and regulations thereunder in order to register the
SEB Common Stock and the IB Common Stock, respectively, under the Exchange Act,
including any amendments thereto.

"Release" means any spilling, leaking, pumping, pouring, emitting,
-------
discharging, injecting, escaping, leaching, dumping or disposing into the
environment of any Hazardous Material, including the abandonment or discarding
of containers and other receptacles containing any Hazardous Materials and any
passive migration of any Hazardous Material.

"Remediation" means any investigation, remediation, prevention, containment
-----------
or abatement of releases or threatened releases of materials into the workplace
or the environment and the assessment and mitigation of risks and/or restoration
of any harm arising therefrom and any related actions.

"Representative" means, with respect to any Person, any of such Person's
--------------
directors, officers, employees, agents, consultants, advisors, accountants,
attorneys and representatives.

"SEB" has the meaning ascribed to such term in the first paragraph of this
---
Agreement.

"SEB Adjusted Closing Balance Sheet" has the meaning ascribed to such term
----------------------------------
in Section 9.03(b).

"SEB Claim" has the meaning ascribed to such term in Section 8.01(c).
---------

"SEB Closing Balance Sheet" has the meaning ascribed to such term in
-------------------------
Section 5.10(a).

"SEB Common Shares" means the shares of SEB Common Stock owned by Varian
-----------------
immediately before the Distributions.

"SEB Common Stock" has the meaning ascribed to such term in the recitals to
----------------
this Agreement.

I-12
<PAGE>

"SEB Dispute" has the meaning ascribed to such term in Section 9.03(a).
-----------

"SEB Distribution" means the distribution, on the Distribution Date, as a
----------------
dividend by Varian to the Varian Holders of the SEB Common Shares on the basis
provided in Section 3.02.

"SEB Indemnitees" means SEB, the SEB Subsidiaries and each Affiliate
---------------
thereof after giving effect to the Corporate Reorganization Transactions and the
Distributions, and each of the past, present and future directors, officers,
employees and agents of the foregoing and each of the heirs, executors,
successors and assigns of such directors, officers, employees and agents.

"SEB Pro Forma Balance Sheet" means the pro forma balance sheet of SEB at
---------------------------
October 2, 1998, attached as Exhibit H and the accounting records supporting
such balance sheet.

"SEB Records" has the meaning ascribed to such term in Section 6.01(a).
-----------

"SEB Subsidiaries" means the Subsidiaries listed on Exhibit K.
----------------

"Securities Act" means the Securities Act of 1933, as amended.
--------------

"Securities Liabilities" means any Liabilities whatsoever that are
----------------------
assessed, imposed, awarded against, incurred or accrued by a Person arising out
of, relating to or resulting from, in whole or in part, any Action, any
potential or threatened Action or any Third Party Claim (or any potential or
threatened Third Party Claim) by any Governmental Authority or any other Person
that is based on any violations or alleged violations of the Securities Act,
Exchange Act, any of the rules or regulations of the Commission promulgated
under the Securities Act or Exchange Act, or any other securities or other
similar Law, or on any alleged breach of duty by a Person in causing, permitting
or failing to prevent any such violation or alleged violation.

"Security Interest" means any mortgage, security interest, pledge, lien,
-----------------
charge, claim, option, right to acquire, voting or other restriction, right-of-
way, covenant, condition, easement, encroachment, restriction on transfer, or
other encumbrance of any nature whatsoever.

"Semiconductor Equipment Assets" means, collectively, all the Assets that
------------------------------
are owned or held by SEB or any SEB Subsidiary as of the Effective Time (and
those Assets to be transferred to SEB or a SEB Subsidiary at a later time as
provided in Section 2.14), including:

(i) the capital stock of, or other ownership interests in, the SEB
Subsidiaries;

(ii) all the Assets included on the SEB Pro Forma Balance Sheet that are
owned or held by SEB or any SEB Subsidiary as of the Effective Time;

(iii) all the Assets acquired by Varian or any of its Subsidiaries after
the date of the SEB Pro Forma Balance Sheet which are owned or held by Varian or
any of its Subsidiaries as of the Effective Time and which are of a nature or
type that would have resulted in such Assets being included as Assets on the SEB
Pro Forma Balance Sheet had they been acquired on or before the date of the SEB
Pro Forma Balance Sheet, determined on a basis consistent with the determination
of the Assets included on the SEB Pro Forma Balance Sheet;

(iv) all the Assets expressly allocated to or retained by SEB or any SEB
Subsidiary under this Agreement or any Ancillary Agreement, including the
Corporate Reorganization Transactions;

(v) rights to the Company Policies to the extent set forth in Article VIII;
and

(vi) the rights of SEB and the SEB Subsidiaries under this Agreement and
the Ancillary Agreements.

Notwithstanding the foregoing, the Semiconductor Equipment Assets
shall not include any and all Assets that are expressly contemplated by this
Agreement or any Ancillary Agreement as Assets to be allocated to or retained by
any member of the Instruments Group or the Health Care Systems Group.

I-13
<PAGE>

"Semiconductor Equipment Business" means the business that, after giving
--------------------------------
effect to the Corporate Reorganization Transactions and the Distributions, is
conducted by SEB, the SEB Subsidiaries and/or any other member of the
Semiconductor Equipment Group.

"Semiconductor Equipment Group" means SEB, the SEB Subsidiaries and the
-----------------------------
Persons that become Subsidiaries of SEB after the consummation of the Corporate
Reorganization Transactions and the Distributions.

"Semiconductor Equipment Liabilities" means, collectively, all of the
-----------------------------------
Liabilities of SEB, the SEB Subsidiaries and the other members of the
Semiconductor Equipment Group after giving effect to the Corporate
Reorganization Transactions and the Distributions, including:

(i) all the Liabilities included on the SEB Pro Forma Balance Sheet that
remain outstanding as of the Effective Time;

(ii) all the Liabilities of Varian arising or assumed after the date of the
SEB Pro Forma Balance Sheet that remain outstanding as of the Effective Time,
which are of a nature or type that would have resulted in such Liabilities being
included as Liabilities on the SEB Pro Forma Balance Sheet had they arisen or
been assumed on or before the date of the SEB Pro Forma Balance Sheet,
determined on a basis consistent with the determination of the Liabilities of
SEB on the SEB Pro Forma Balance Sheet;

(iii) all the Liabilities expressly assumed or retained by SEB, any SEB
Subsidiary and any other member of the Semiconductor Equipment Group under this
Agreement or any Ancillary Agreement, including the Corporate Reorganization
Transactions;

(iv) the obligations of SEB, the SEB Subsidiaries and any other member of
the Semiconductor Equipment Group under this Agreement and the Ancillary
Agreements;

(v) all actual or alleged Liabilities (regardless of whether any claim with
respect to such Liabilities is asserted before, on or after the Distribution
Date) relating to Environmental Matters or arising under any Environmental Laws
(including all claims for death, bodily injury, personal injury and property
damage relating to Environmental Matters or arising under any Environmental
Laws) arising out of, relating to or resulting from (A) the activities,
operations, acts or omissions at, from or with respect to the Semiconductor
Equipment Business or the Semiconductor Equipment Assets before, on or after the
Distribution Date and (B) Remediation of any Release arising out of, relating to
or resulting from activities, operations, acts or omissions at, from or with
respect to the Semiconductor Equipment Business or the Semiconductor Equipment
Assets before, on or after the Distribution Date wherever such Remediation may
be performed;

(vi) all actual or alleged Liabilities of SEB and any other member of the
Semiconductor Equipment Group to third parties (regardless of whether any claim
with respect to such Liabilities is asserted before, on or after the
Distribution Date) arising out of, relating to or resulting from the
transportation, handling, possession, processing, treatment, storage, disposal,
manufacture, further manufacture, use, reuse, sale or resale of any goods
manufactured, processed, sold or distributed at any time on or before the
Distribution Date by the Semiconductor Equipment Business, including all such
Liability for personal injury, bodily injury (including death or aggravation of
previously existing illness, injury disability or condition) or property damage;

(vii) all the Liabilities of the parties or their respective Subsidiaries,
(whether arising before, on or after the Distribution Date) arising out of,
relating to or resulting from the management or conduct before, on or after the
Distribution Date of the Semiconductor Equipment Business or ownership of the
Semiconductor Equipment Assets (including Securities Liabilities to the extent
arising out of, relating to or resulting from information concerning the
management, business or operations of SEB, the SEB Subsidiaries or the other
members of the Semiconductor Equipment Group in the Registration Statements and
Proxy Statement), except as otherwise expressly provided herein;

(viii) all Liabilities to persons employed by Varian or its Subsidiaries
on or before the Effective Time, the services of whom were primarily dedicated
to the Semiconductor Equipment Business, including Liabilities arising out of,
relating to or resulting from the termination or alleged termination of such
person's employment as a result of the Corporate Reorganization Transactions or
the Distributions and Liabilities arising out of, relating to or

I-14
<PAGE>

resulting from the assertion by any such person of employment by a member of
another Group as a result of the Corporate Reorganization Transactions; and

(ix) all Liabilities, including those expressly enumerated in clauses (i)
through (vii), arising out of, related to, or resulting from the Thin Film
Systems Business and the acquisition, ownership, use and disposition of the
Assets related thereto.

Notwithstanding the foregoing, the Semiconductor Equipment Liabilities
shall not include:

(x) any Liability set forth on Schedule 1.01(a); or

"Separation Committee" has the meaning ascribed to such term in Section
--------------------
9.01(a).

"Shared Assets" means (i) the Assets listed on Schedule 1.02, (ii) any
-------------
claim or right of Varian or its Subsidiaries (before giving effect to the
Corporate Reorganization Transactions and the Distributions) arising out of,
relating to or resulting from, the management or conduct before the
Distributions of the business of Varian or its Subsidiaries (before giving
effect to the Corporate Reorganization Transactions and the Distributions),
which Asset is not expressly included in the definitions of "Health Care Systems
Assets," "Instruments Assets" or "Semiconductor Equipment Assets" and which
claim or right, whenever arising, has accrued before the Distribution Date and
(iii) any Asset received in respect of a Shared Liability, the amount of which
exceeds the amount of the Shared Liability then due and owing.

"Shared Liabilities" means (i) the Liabilities listed on Schedule 1.01(a),
------------------
(ii) any Liability (whether arising before, on or after the Distributions) of
Varian or its Subsidiaries (before giving effect to the Corporate Reorganization
Transactions and the Distributions) arising out of, relating to or resulting
from, the management or conduct before the Distributions of the businesses of
Varian or its Subsidiaries (before giving effect to the Corporate Reorganization
Transactions and the Distributions) or their respective Assets, which Liability
is not expressly included in the definitions of "Health Care Systems
Liabilities," "Instruments Liabilities" or "Semiconductor Equipment
Liabilities," including those Liabilities listed on Schedule 1.01(b), Securities
Liabilities of Varian and its Subsidiaries (before giving effect to the
Corporate Reorganization Transactions and Distributions) and/or any of its and
their respective directors, officers, employees, agents or representative at or
before the Distributions (other than
Securities Liabilities specifically assumed by HCS, SEB and IB in this
Agreement) and Liabilities arising out of, relating to or resulting from any
alleged breach of fiduciary duty by the Board of Directors of Varian or any
member thereof at or before the Distributions, (iii) the Costs of personnel and
third party service providers involved in Insurance Administration with respect
to the Company Policies, and (iv) the cost of any Policies, letters of credit or
surety bonds insuring against or otherwise covering the Liabilities included in
clauses (i) and (ii) and the Costs of personnel and third party service
providers involved in Insurance Administration or Claims Administration with
respect to such Policies.

"Subsidiary" means, with respect to any Person:
----------

(i) any corporation of which at least a majority in interest of the
outstanding voting stock (having by the terms thereof voting power under
ordinary circumstances to elect a majority of the directors of such corporation,
irrespective of whether or not at the time stock of any other class or classes
of such corporation shall have or might have voting power by reason of the
happening of a contingency) is at the time, directly or indirectly, owned or
controlled by such Person or by such Person and one or more of its Subsidiaries;
or

(ii) any non-corporate entity in which such Person or such Person and one
or more Subsidiaries of such Person either (A) directly or indirectly, at the
date of determination thereof, has at least majority ownership interest, or (B)
at the date of determination is a general partner or an entity performing
similar functions (e.g., manager of a limited liability company or a trustee of
a trust).

I-15
<PAGE>

"Tax" or "Taxes" means any income, gross income, gross receipts, profits,
--- -----
capital stock, franchise, withholding, payroll, social security, workers'
compensation, unemployment, registration, disability, property, ad valorem,
stamp, excise, severance, occupation, service, sales, use, license, lease,
transfer, import, export, value added, alternative minimum, estimated, or other
similar tax (including any fee, assessment or other charge in the nature of or
in lieu of any tax) imposed by any Governmental Authority, and any interest,
penalties, additions to tax, or additional amounts in respect of the foregoing.

"Tax Benefit" means the product determined by multiplying the sum of all
-----------
Transaction Expenditures (whether paid before, on or after the Effective Time)
that are deductible for U.S. federal income tax purposes by 38%.

"Tax Cost" means the sum of the products determined by multiplying the
--------
gains on the Dispositions (whether recognized before, on or after the Effective
Time) for U.S. federal income tax purposes by 38%.

"Tax Sharing Agreement" means the Tax Sharing Agreement among Varian, IB
---------------------
and SEB (including all exhibits or schedules thereto) substantially in the form
of Exhibit D.

"Thin Film Systems Business" means the business of the development,
--------------------------
manufacture, sale and service of products for physical vapor disposition and
chemical vapor disposition of thin films sold to Novellus Systems, Inc.
effective June 13, 1997.

"Third Party Claim" has the meaning ascribed to such term in Section
-----------------
7.07(a).

"Transaction Expenditures" means all cash costs, expenses or other
------------------------
expenditures incurred before or after the date hereof in connection with the
preparation, execution and delivery of this Agreement and the Ancillary
Agreements and the effectuation of the Corporate Reorganization Transactions and
the Distributions, including the items listed on Schedule 1.03, but excluding
(i) taxes, (ii) the costs associated with the termination of personnel employed
other than in the United States, (iii) Liabilities and expenditures related to
the discretionary restructuring of a business, and (iv) Shared Liabilities.

"Transition Services Agreement" means the Transition Services Agreement
-----------------------------
among SEB, IB and Varian (including all exhibits or schedules thereto),
substantially in the form of Exhibit E.

"VAI Common Stock" has the meaning ascribed to such term in the recitals to
----------------
this Agreement.

"VAI Term Loans" means the indebtedness outstanding under the Senior Notes
--------------
of Varian issued and outstanding under the Master Shelf Agreement dated as of
May 11, 1992 and the Note Purchase and Private Master Shelf Agreement dated as
of October 18, 1996.

"Varian" has the meaning ascribed to such term in the first paragraph of
------
this Agreement.

"Varian Holders" means the holders of record of VAI Common Stock as of the
--------------
Distribution Record Date.

Section 1.02. References; Interpretation. References in this Agreement to
--------------------------
any gender include references to all genders, and references to the singular
include references to the plural and vice versa. The words "include," "includes"
and "including" when used in this Agreement shall be deemed to be followed by
the phrase "without limitation." Unless the context otherwise requires,
references in this Agreement to Articles, Sections, Exhibits and Schedules shall
be deemed references to Articles and Sections of, and Exhibits and Schedules to,
this Agreement. Unless the context otherwise requires, the words "hereof,"
"hereby" and "herein" and words of similar meaning when used in this Agreement
refer to this Agreement in its entirety and not to any particular Article,
Section or provision of this Agreement.

I-16
<PAGE>

ARTICLE II
PRE-DISTRIBUTION TRANSACTIONS;
CERTAIN COVENANTS

Section 2.01. Corporate Reorganization Transactions; Dispositions.
---------------------------------------------------
(a) Corporate Reorganization. On or before the Distribution Date (but
------------------------
in all events before the Distributions), each of Varian, IB and SEB shall, and
shall cause each of their respective Subsidiaries to, as applicable, take such
action or actions as is necessary or appropriate to cause, effect and consummate
the Corporate Reorganization Transactions in accordance with the terms and
provisions set forth in Exhibit A. Notwithstanding the foregoing, each of
Varian, IB and SEB agrees that before the Distributions, one or more of the
Corporate Reorganization Transactions may be amended, modified, supplemented or
eliminated by Varian in any manner determined by Varian in its sole discretion
to be necessary or appropriate, including to qualify any of such transactions
for tax-free treatment under the Code; provided, however, that no Corporate
-------- -------
Reorganization Transaction may be amended, modified, supplemented or eliminated
after the Varian stockholders approve the Distributions, unless it would not be
materially adverse to the Varian stockholders.

(b) Dispositions.
------------

(i) Varian shall use commercially reasonable efforts to sell Varian's
leasehold interest in and buildings and fixtures for four of its buildings
in the Stanford Research Park (the Ginzton Research Center at 3075 Hansen
Way and the three buildings at 3030-3050 Hansen Way, Palo Alto) before the
Distribution Date (the "Palo Alto Property Disposition").

(ii) Varian shall use commercially reasonable efforts to sell its Gulf
Stream III aircraft, model year 1980 before the Distribution Date (the
"Aircraft Disposition").

Section 2.02. Conveyance of Assets. Except as otherwise expressly provided
--------------------
in this Agreement or the Ancillary Agreements, on or before the Distribution
Date,

(a) Health Care Systems Transfers. Varian shall, on behalf of itself and
-----------------------------
the HCS Subsidiaries, transfer or cause to be transferred to IB or an IB
Subsidiary all of Varian's and the HCS Subsidiaries' right, title and interest
in the Instruments Assets. Varian shall, on behalf of itself and the HCS
Subsidiaries, transfer or cause to be transferred to SEB or a SEB Subsidiary all
of Varian's and the HCS Subsidiaries' right, title and interest in the
Semiconductor Equipment Assets.

(b) Instruments Transfers. IB shall, on behalf of itself and the IB
---------------------
Subsidiaries, transfer or cause to be transferred to Varian or a HCS Subsidiary
all of IB's and the IB Subsidiaries' right, title and interest in the Health
Care Systems Assets. IB shall, on behalf of itself and the IB Subsidiaries,
transfer or cause to be transferred to SEB or a SEB Subsidiary, all of IB's and
the IB Subsidiaries' right, title and interest in the Semiconductor Equipment
Assets.

(c) Semiconductor Equipment Transfers. SEB shall, on behalf of itself
---------------------------------
and the SEB Subsidiaries, transfer or cause to be transferred to Varian or a HCS
Subsidiary all of SEB's and the SEB Subsidiaries' right, title and interest in
the Health Care Systems Assets. SEB shall, on behalf of itself and the SEB
Subsidiaries, transfer or cause to be transferred to IB or an IB Subsidiary all
of SEB's and the SEB Subsidiaries' right, title and interest in the Instruments
Assets.

(d) Designation of Owner. Each of Varian, IB and SEB may designate the
--------------------
member of its Group to which each Asset is to be transferred.

Section 2.03. Transfer and Assignment of Certain Licenses and Permits.
-------------------------------------------------------
Without limiting the generality of Section 2.02 and except as otherwise
expressly provided in this Agreement or the Ancillary Agreements, on or before
the Distribution Date:

(a) Semiconductor Equipment Licenses. Each of Varian and IB shall (and,
--------------------------------
if applicable, shall cause any other Person over which it has direct or indirect
control to), duly and validly transfer or cause to be duly and

I-17
<PAGE>

validly transferred to the appropriate member of the Semiconductor Equipment
Group all transferable licenses, permits and authorizations issued by any
Governmental Authority which are held in the name of any member of the Health
Care Systems Group or the Instruments Group, or any of their respective
employees, officers, directors, stockholders or agents that relate to the
Semiconductor Equipment Business and are not otherwise required by the Health
Care Systems Business or the Instruments Business, respectively.

(b) Instruments Licenses. Each of Varian and SEB shall (and, if
--------------------
applicable, shall cause any other Person over which it has direct or indirect
control to), duly and validly transfer or cause to be duly and validly
transferred to the appropriate member of the Instruments Group all transferable
licenses, permits and authorizations issued by any Governmental Authority which
are held in the name of any member of the Health Care Systems Group or the
Semiconductor Equipment Group, or any of their respective employees, officers,
directors, stockholders or agents that relate to the Instruments Business and
are not otherwise required by the Health Care Systems Business or the
Semiconductor Equipment Business, respectively.

(c) Health Care Systems Licenses. Each of SEB and IB shall (and, if
----------------------------
applicable, shall cause any other Person over which it has direct or indirect
control to), duly and validly transfer or cause to be duly and validly
transferred to the appropriate member of the Health Care Systems Group all
transferable licenses, permits and authorizations issued by any Governmental
Authority which are held in the name of any member of the Semiconductor
Equipment Group or the Instruments Group, or any of their respective employees,
officers, directors, stockholders or agents that relate to the Health Care
Systems Business and are not otherwise required by the Semiconductor Equipment
Group or the Instruments Group, respectively.

Section 2.04. Transfer and Assignment of Certain Agreements.
---------------------------------------------

(a) Transfers. Without limiting the generality of Section 2.02 and
---------
except as otherwise expressly provided in this Agreement or the Ancillary
Agreements, on or before the Distribution Date, and subject to the limitations
set forth in this Section 2.04:

(i) Each of SEB and IB shall (and, if applicable, shall cause any
other Person over which it has direct or indirect control to), assign,
transfer and convey to the appropriate member of the Health Care Systems
Group all its (or such other Person's) right, title and interest in and to
any and all agreements that relate exclusively to the Health Care Systems
Business or any member of the Health Care Systems Group.

(ii) Each of Varian and IB shall (and, if applicable, shall cause any
other Person over which it has direct or indirect control to) assign,
transfer and convey to the appropriate member of the Semiconductor
Equipment Group all its (or such other Person's) right, title and interest
in and to any and all agreements that relate exclusively to the
Semiconductor Equipment Business or any member of the Semiconductor
Equipment Group.

(iii) Each of Varian and SEB shall (and, if applicable, shall cause
any other Person over which it has direct or indirect control to) assign,
transfer and convey to the appropriate member of the Instruments Group all
its (or such other Person's) right, title and interest in and to any and
all agreements that relate exclusively to the Instruments Business or any
member of the Instruments Group.

(b) Obligations of Assignees. The assignee of any agreement assigned,
------------------------
in whole or in part, under this Agreement (an "Assignee") shall assume and agree
to pay, perform and fully discharge all obligations of the assignor under such
agreement (whether such obligations arose or were incurred before, on or after
the Distribution Date and irrespective of whether such obligations have been
asserted as of the Distribution Date) or, in the case of a partial assignment,
such Assignee's portion of such obligations.

(c) No Assignment of Certain Agreements. Notwithstanding anything in this
-----------------------------------
Agreement to the contrary, this Agreement shall not constitute an agreement to
assign any agreement, in whole or in part, or any rights thereunder if the
agreement to assign or attempt to assign, without the consent of a third party,
would constitute a breach thereof or in any way adversely affect the rights of
the Assignee thereof. Until such consent is obtained or if an attempted
assignment thereof would be ineffective or would adversely affect the rights of
any party so that the Assignee would not, in fact, receive all such rights, the
provisions of Section 2.14 shall apply to such agreement.

I-18
<PAGE>

Section 2.05. Certain Financial and Other Arrangements.
----------------------------------------
(a) Settlement of Intercompany Accounts. All intercompany receivables,
-----------------------------------
payables and loans (other than receivables, payables and loans otherwise
expressly provided for in this Agreement or an Ancillary Agreement), including
in respect of any cash balances, any cash balances representing deposited checks
or drafts for which only a provisional credit has been allowed or any cash held
in any centralized cash management system, (i) between any member of the
Semiconductor Equipment Group, on the one hand, and any member of the Health
Care Systems Group, on the other hand, (ii) between any member of the Health
Care Systems Group, on the one hand, and any member of the Instruments Group, on
the other hand, and (iii) between any member of the Instruments Group, on the
one hand, and any member of the Semiconductor Equipment Group, on the other
hand, shall, as of the Effective Time, be settled, capitalized or converted into
ordinary trade accounts in accordance with the Corporate Reorganization
Transactions and, if applicable, shall be paid or settled in the ordinary course
of business in a manner consistent with payment or settlement of similar
accounts arising from transactions with third parties.

(b) SEB Capital Contribution; Consolidated Debt.
-------------------------------------------

(i) Capital Contributions. In addition to any other obligations
---------------------
under this Agreement, on or before the Distribution Date, Varian shall
contribute to SEB an amount of Cash and Cash Equivalents such that after
giving effect to the Corporate Reorganization Transactions (A) the
aggregate Cash and Cash Equivalents of the members of the Semiconductor
Equipment Group as of the Effective Time would equal at least $100,000,000
and (B) SEB would have a consolidated Net Worth as of the Effective Time of
at least $150,000,000. Such contribution shall be based on Varian's good
faith estimate of the Cash and Cash Equivalents of the Semiconductor
Equipment Group and the consolidated Net Worth of SEB as of the Effective
Time and shall be subject to adjustment as provided in Section 9.03(c)(i).

(ii) Consolidated Debt. Varian shall not cause or permit the transfer
-----------------
to or retention by any member of the Semiconductor Equipment Group of Notes
Payable or other Consolidated Debt if, as a result thereof, the
Consolidated Debt of SEB as of the Effective Time would exceed $5,000,000.
If as a result of the Corporate Reorganization Transactions, the
Consolidated Debt of SEB would exceed such amount, Varian shall take such
actions as shall be necessary, which may include but shall not be limited
to, payment, partial payment or provision for payment in the form of the
contribution of additional Cash and Cash Equivalents of one or more
Liabilities comprising such Consolidated Debt to reduce the amount thereof
to no more than $5,000,000. The Consolidated Debt caused or permitted to be
transferred or retained shall be based on Varian's good faith estimate of
the Notes Payable and other Consolidated Debt of the Semiconductor
Equipment Group as of the Effective Time and shall be subject to adjustment
as provided in Secetion 9.03(c)(i).

(c) IB Capital Contribution; Term Loans; Notes Payable.
--------------------------------------------------
(i) Term Loans. As of the Effective Time, IB shall assume as an
----------
Instruments Liability 50% of the VAI Term Loans outstanding as of the
Effective Time (the "IB Term Loans").

(ii) Notes Payable; IB Capital Contribution. As of the Effective
--------------------------------------
Time, the Instruments Group shall assume or retain as an Instruments
Liability an amount of the Notes Payable and shall retain or have
contributed to it as of the Effective Time an aggregate amount of Cash and
Cash Equivalents such that the Net Debt of IB as of the Effective Time
would be equal to 50% of the combined Net Debt of HCS and IB as of the
Effective Time, after giving effect to the provisions of Section 2.05(b)
but before giving effect to the provisions of Section 2.05(d).
Notwithstanding the foregoing, if the assumptions, contributions and
retentions contemplated by the immediately preceding sentence (after giving
effect to the provisions of Section 2.05(b) but before giving effect to the
provisions of Section 2.05(d)) would cause the consolidated Net Worth of
HCS as of the Effective Time (A) to exceed 50% of the combined consolidated
Net Worths of HCS and IB as of the Effective Time or (B) to be less than
40% of the combined consolidated Net Worths of HCS and IB as of the
Effective Time, then, in the case of (A) the amount of Notes Payable to be
assumed or retained by the Instruments Group shall be decreased (and/or the
Cash and Cash Equivalents contributed to IB by Varian increased) such that
the consolidated Net Worth of HCS as of the Effective Time would equal 50%
of the combined consolidated Net Worths of HCS and IB as of the Effective
Time and, in the case of (B) the amount of Notes Payable to be assumed or
retained by the Instrument Group

I-19
<PAGE>

shall be increased (and/or the Cash and Cash Equivalents contributed to IB
by Varian decreased) such that the consolidated Net Worth of HCS as of the
Effective Time would equal 40% of the combined consolidated Net Worths of
HCS and IB as of the Effective Time. For purposes of this Section
2.05(c)(ii), the consolidated Net Worth of HCS shall be determined without
giving effect to any Transaction Expenditures or Dispositions (including
associated tax benefit and tax cost) that have been accrued, paid or
received by HCS as of the Effective Time. The amounts of Notes Payable,
Cash and Cash Equivalents and Net Worth used to determine the assumptions,
contributions and retentions provided in this Section 2.05(c)(ii) shall be
based on Varian's good faith estimates and shall be subject to adjustment
as provided in Section 9.03(c)(ii).

(d) Additional Allocations. In addition to the Notes Payable to be
----------------------
assumed or retained by the Instruments Group and/or the capital contributions to
be made to IB by Varian contemplated by paragraph (c) above, if the After-tax
Differential is a positive number, then the amount of Notes Payable to be
assumed or retained by the Instruments Group shall be decreased (and/or the Cash
and Cash Equivalents contributed to IB by Varian increased) by an amount equal
to 50% of the After-tax Differential. If, instead, the After-tax Differential is
a negative number, then the amount of Notes Payable to be assumed or retained by
the Instruments Group shall be increased (and/or the Cash and Cash Equivalents
contributed to IB by Varian decreased) by an amount equal to 50% of the absolute
After-tax Differential (i.e., irrespective of its negative sign). The components
of the After-tax Differential which are not determined as of the Effective Time
shall be based on Varian's good faith estimates immediately before the Effective
Time and shall be subject to adjustment as provided in Section 9.04.

(e) Renegotiation and Allocation. Varian shall use its reasonable
----------------------------
efforts to obtain, before the Distribution Date, all required consents, waivers
or amendments or other actions by the lenders under the VAI Term Loans and the
Notes Payable to permit the transfers, assumptions and retentions contemplated
by Sections 2.05(b), (c) and (d). Notwithstanding the foregoing, Notes Payable
shall first be transferred to or retained by the member of the Group to which
any related Asset is transferred, or by which any related Asset is retained, and
shall only be allocated to another Group to the extent otherwise required by
this Section 2.05.

Section 2.06. Assumption and Satisfaction of Liabilities. Except as
------------------------------------------
otherwise expressly provided in this Agreement or any Ancillary Agreement, from
and after the Effective Time,

(a) Health Care Systems Liabilities. HCS shall, and shall cause the other
-------------------------------
members of the Health Care Systems Group to, assume, pay, perform and discharge
all Health Care Systems Liabilities in accordance with their terms, when
determinable, and otherwise in accordance with the practice of the parties
before the Distributions;

(b) Semiconductor Equipment Liabilities. SEB shall, and shall cause the
-----------------------------------
other members of the Semiconductor Equipment Group to, assume, pay, perform and
discharge all Semiconductor Equipment Liabilities in accordance with their
terms, when determinable, and otherwise in accordance with the practice of the
parties before the Distributions; and

(c) Instruments Liabilities. IB shall, and shall cause the other members
-----------------------
of the Instruments Group to, assume, pay, perform and discharge all Instruments
Liabilities in accordance with their terms, when determinable, and otherwise in
accordance with the practice of the parties before the Distributions.

Section 2.07. Stock Issuance; Dividends. On or before the Distribution
-------------------------
Date (but in all events before the Distributions),

(a) IB Common Stock. IB shall take all necessary actions so that on the
---------------
Distribution Date, the number of shares of IB Common Stock outstanding and
held by Varian is equal to the number of shares of VAI Common Stock
outstanding on the Distribution Record Date.

(b) SEB Common Stock. SEB shall take all necessary actions so that on
----------------
the Distribution Date, the number of shares of SEB Common Stock outstanding
and held by Varian is equal to the number of shares of VAI Common Stock
outstanding on the Distribution Record Date.

Section 2.08. Charters; By-laws; Rights Plans. On or before the
-------------------------------
Distribution Date (but in all events before the Distributions):

I-20
<PAGE>

(a) SEB Governance Matters. Each of Varian and SEB shall take all
----------------------
necessary actions so that as of the Effective Time the Certificate of
Incorporation and By-laws of SEB will be substantially in the forms filed as
exhibits to SEB's Registration Statement at the time it becomes effective and a
Rights Agreement in substantially the form filed as an exhibit to SEB's
Registration Statement at the time it becomes effective shall have been executed
and delivered.

(b) IB Governance Matters. Each of Varian and IB shall take all necessary
---------------------
actions so that as of the Effective Time the Certificate of Incorporation and
By-laws of IB will be substantially in the forms filed as exhibits to IB's
Registration Statement at the time it becomes effective and a Rights Agreement
in substantially the form filed as an exhibit to IB's Registration Statement at
the time it becomes effective shall have been executed and delivered.

(c) HCS Governance Matters. Varian shall take all necessary actions so
----------------------
that as of the Effective Time the Amended and Restated Certificate of
Incorporation or Certificate of Amendment of Varian will be substantially in the
form attached as an annex to the Proxy Statement, the By-laws of Varian will be
in substantially the form of Exhibit L.

Section 2.09. Directors, Officers and Employees.
---------------------------------
(a) Election of Directors of IB and SEB. On or before the Distribution
-----------------------------------
Date:

(i) Each of Varian and SEB shall take all necessary actions so that as
of the Effective Time the directors of SEB will be as set forth in the
Proxy Statement.

(ii) Each of Varian and IB shall take all necessary actions so that as
of the Effective Time the directors of IB will be as set forth in the Proxy
Statement.

(b) Election of Officers. On or before the Distribution Date, each of
--------------------
Varian, SEB and IB, as applicable, shall take all necessary actions so that as
of the Effective Time the officers of Varian, SEB and IB, respectively, will be
as set forth in the Proxy Statement.

(c) Resignations. Subject to the provisions of Sections 2.09(a) and
------------
2.09(b), each of Varian, SEB and IB, shall take all necessary action to cause
their respective directors and employees, and those of the members of their
respective Groups, to resign, as of the Effective Time, from all boards of
directors or similar governing bodies of each member of the other Groups on
which they serve, and from all positions as officers or employees of any member
of such other Groups, except as otherwise set forth in the Proxy Statement or
mutually agreed to in writing on or before the Distribution Date by Varian, on
the one hand, and, as applicable, SEB and/or IB, on the other hand.

Section 2.10. Other Transactions. On or before the Distributions, each
------------------
of Varian, IB and SEB shall have consummated those other transactions in
connection with the Corporate Reorganization Transactions and the Distributions
that are contemplated by the Proxy Statement and the ruling request submission
by Varian to the Internal Revenue Service and not specifically referred to in
Sections 2.01 through 2.09, subject, however, to the limitation set forth in
Section 2.01.

Section 2.11. Meeting; Proxy Statement; Other Filings.
---------------------------------------

(a) Meeting. The Board of Directors of Varian shall establish the Meeting
-------
Record Date and the Meeting Date and shall take all necessary or appropriate
actions with respect to the Meeting. At the Meeting there shall be submitted to
the Varian stockholders for their vote the Distribution Proposals and such other
proposals as are included in the notice of the Meeting.

(b) Proxy Statement; Registration Statements; NYSE Notice. Varian, SEB
-----------------------------------------------------
and IB shall prepare the Proxy Statement and the Registration Statements. Varian
shall file the Proxy Statement with the Commission and shall mail the Proxy
Statement to the holders of VAI Common Stock as of the Meeting Record Date. Each
of SEB and IB shall file their respective Registration Statements with the
Commission. Varian shall, to the extent possible, give the NYSE not less than
ten days advance notice of the Distribution Record Date in compliance with Rule
10b-

I-21
<PAGE>

17 under the Exchange Act. Each of Varian, SEB and IB shall use reasonable
commercial efforts to cause the Registration Statements to become effective
under the Exchange Act on or before the Distribution Date.

(c) Other Filings. Varian, SEB and IB shall cooperate in preparing,
-------------
filing with the Commission under the Securities Act and causing to become
effective any registration statements or amendments thereto that are appropriate
to reflect the establishment of or amendments to any employee benefit plan
contemplated by the Employee Benefits Allocation Agreement, the Proxy Statement
or otherwise as necessary to reflect the transactions contemplated by this
Agreement.

Section 2.12. State Securities Laws. Before the Distribution Date, each
---------------------
of Varian, SEB and IB shall take all necessary or appropriate actions under the
securities or blue sky Laws of states or other political subdivisions of the
United States in order to effect the Distributions.

Section 2.13. Listing Application. Before the Distribution Date, IB and
-------------------
SEB shall prepare and file with a national securities exchange or Nasdaq listing
applications and related documents and shall take all other necessary or
appropriate actions in order to cause a national securities exchange to list, or
Nasdaq to approve for quotation on its National Market, on or before the
Distribution Date the SEB Common Shares and the IB Common Shares.

Section 2.14. Transfers Not Effected Before the Distributions; Transfers
----------------------------------------------------------
Deemed Effective as of the Effective Time. If any transfers contemplated by
- -----------------------------------------
this Article II are not consummated at or before the Effective Time, the parties
shall (and shall cause their respective Affiliates and members of their
respective Groups to) cooperate to effect such transfers as promptly as
practicable after the Effective Time. Nothing herein shall be deemed to require
the transfer of any Assets or the assumption of any Liabilities which by their
terms or operation of Law cannot be transferred or assumed; provided, however,
-------- -------
that the parties shall (and shall cause their respective Affiliates and members
of their respective Groups to) cooperate to seek to obtain any necessary
Consents for the transfer of all Assets and Liabilities contemplated to be
transferred pursuant to this Article II. Where any transfer of Assets or
Liabilities has not been consummated at or before the Effective Time, from and
after the Effective Time the party retaining such Asset or Liability (or, as
applicable, such other member or members of such party's Group) shall hold such
Asset in trust for the use and benefit of the party entitled thereto (at the
expense of the party entitled thereto) or retain such Liability for the account
of the party by whom such Liability is to be assumed, as the case may be, and
take such other action as may be reasonably requested by the party to whom such
Asset is to be transferred, or by whom such Liability is to be assumed, as the
case may be, in order to place such party, to the extent reasonably possible, in
the same position as it would have been had such Asset or Liability been
transferred or assumed as contemplated by this Agreement. As, when and if any
such Asset or Liability becomes transferable or assumable, such transfer or
assumption shall be effected as promptly as practicable. As of the Effective
Time, each party (or, if applicable, such other member or members of such
party's Group) shall be deemed to have acquired (or, as applicable, retained)
complete and sole beneficial ownership over all Assets, together with all
rights, powers and privileges incident thereto, and shall be deemed to have
assumed in accordance with the terms of this Agreement all the Liabilities, and
all duties, obligations and responsibilities incident thereto, which such party
(or any member of such party's Group) is entitled to acquire or required to
assume under this Agreement.

Section 2.15. Ancillary Agreements. On or before the Distribution Date,
--------------------
each of Varian, SEB and IB shall enter into, and/or where applicable shall cause
such other members of their respective Groups to enter into, (a) the Ancillary
Agreements, (b) the Conveyancing and Assumption Instruments, and (c) any other
agreements in respect of the Distributions as are reasonably necessary or
appropriate in connection with the transactions contemplated by this Agreement
and the Ancillary Agreements.

Section 2.16. Operations in Ordinary Course. Except as otherwise
-----------------------------
expressly provided in this Agreement, between the Agreement Date and the
Effective Time, each of Varian, SEB and IB shall, and shall cause its
Subsidiaries to, conduct its business in a manner substantially consistent with
current and past operating practices and in the ordinary course, including with
respect to the payment and administration of accounts payable and the collection
and administration of accounts receivable, the purchase of capital assets and
equipment and the management of inventories.

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<PAGE>

ARTICLE III
THE DISTRIBUTIONS

Section 3.01. Record Date and Distribution Date. Subject to the
---------------------------------
satisfaction or, if applicable, waiver of the conditions set forth in Section
4.01, the Board of Directors of Varian shall establish the Distribution Record
Date and the Distribution Date and any appropriate procedures in connection with
the Distributions.

Section 3.02. The Distributions.
-----------------

(a) On or before the Distribution Date, Varian shall:

(i) deliver to the Agent the certificates representing the IB Common
Shares and the SEB Common Shares, in each case, endorsed by Varian in
blank, for the benefit of the Varian Holders; and

(ii) instruct the Agent to distribute, on or as soon as practicable
after the Distribution Date, to the Varian Holders,

(A) one share of IB Common Stock for each share of VAI Common
Stock; and

(B) one share of SEB Common Stock for each share of VAI Common
Stock.

(b) Duties and Responsibilities of SEB and IB. All shares of SEB Common
-----------------------------------------
Stock issued in the SEB Distribution shall be duly authorized, validly issued,
fully paid and nonassessable and free of any preemptive (or similar) rights. All
shares of IB Common Stock issued in the IB Distribution shall be duly
authorized, validly issued, fully paid and nonassessable and free of any
preemptive (or similar) rights. As soon as practicable after the Distribution
Date, certificates for shares of IB Common Stock and SEB Common Stock shall be
mailed by the Agent to the Varian Holders, unless the Agent uses a book entry
system of stock record keeping, in which event no certificates for shares of IB
Common Stock or SEB Common Stock will be used unless a stockholder so requests.
If certificates are used, each of SEB and IB shall provide, or cause to be
provided, to the Agent sufficient certificates representing SEB Common Stock and
IB Common Stock, respectively, in such denominations as the Agent may request in
order to effect the Distributions.

(c) Unclaimed Stock or Cash. Any shares of SEB Common Stock, shares of IB
-----------------------
Common Stock or any dividends or distributions, if any, with respect to SEB
Common Stock or IB Common Stock that remain unclaimed 180 days after the
Distribution Date shall be returned to HCS and the Persons entitled thereto
shall look only to HCS for such shares of SEB Common Stock, shares of IB Common
Stock, and any dividends or distributions, subject in each case to applicable
escheat or other abandoned property Laws.

ARTICLE IV
CONDITIONS TO THE DISTRIBUTIONS

Section 4.01. Conditions Precedent to the Distributions. The obligations
-----------------------------------------
of the parties to consummate the Distributions are subject to the satisfaction
or waiver as determined by Varian in its sole discretion (except as provided in
Section 4.02 below), of each of the following conditions:

(a) Declaration of Distributions and Establishment of Distribution Date.
-------------------------------------------------------------------
The Board of Directors of Varian shall have, in its sole discretion and subject
to and in accordance with the applicable rules of the NYSE and provisions of the
DGCL, declared the Distributions and established the Distribution Record Date,
the Distribution Date, the date on which shares of SEB Common Stock and IB
Common Stock, and any cash in lieu of fractional shares shall be mailed to the
Varian Holders and all appropriate procedures in connection with the
Distributions to the extent not provided in this Agreement.

(b) Tax Sharing Agreement. Varian, SEB and IB shall have executed and
---------------------
delivered the Tax Sharing Agreement and such agreement shall be in full force
and effect.

(c) Employee Benefits Allocation Agreement. Varian, SEB and IB shall
--------------------------------------
have executed and delivered the Employee Benefits Allocation Agreement and
such agreement shall be in full force and effect.

I-23
<PAGE>

(d) Transition Services Agreement. Varian, SEB and IB shall have
-----------------------------
executed and delivered the Transition Services Agreement and such agreement
shall be in full force and effect.

(e) Intellectual Property Agreement. Varian, SEB and IB shall have
-------------------------------
executed and delivered the Intellectual Property Agreement and such agreement
shall be in full force and effect.

(f) Effective Date of Registration Statements. The Registration
-----------------------------------------
Statements shall have been declared effective by order of the Commission and no
stop order shall have been entered, and no proceeding for that purpose shall
have been initiated or threatened by the Commission with respect thereto.

(g) Listing. The SEB Common Stock and the IB Common Stock shall have been
-------
approved for listing on a national securities exchange or quotation on the
Nasdaq National Market, on or before consummation of the Distributions.

(h) Tax Ruling. Varian shall have received rulings from the Internal
----------
Revenue Service in form and substance satisfactory to the Board of Directors of
Varian, which rulings shall be in full force and effect as of the Distribution
Date.

(i) Pre-Distribution Transactions. Each of the transactions and other
-----------------------------
matters contemplated by Article II (including each of the distributions,
transfers, conveyances, contributions, assignments or other transactions
included in, or otherwise necessary to consummate, the Corporate Reorganization
Transactions) shall have been consummated in all material respects.

(j) Covenants. The covenants contained in Article V of this Agreement
---------
that are required to be performed on or before the Distribution Date shall have
been fully performed.

(k) No Prohibitions. No temporary, preliminary or permanent injunction or
---------------
other order, decree or ruling issued by a Governmental Authority and no statute,
rule, regulation or executive order promulgated or enacted by any Governmental
Authority shall be in effect materially restricting, preventing or prohibiting
the consummation of the Distributions.

(l) Consents. Each of Varian, SEB and IB and the other members of their
--------
respective Groups shall have obtained all Consents the failure of which to
obtain would, in the determination of the Board of Directors of Varian, have a
material adverse effect on HCS, SEB or IB.

(m) Stockholder Approval. The Distribution Proposals shall have been
--------------------
approved by the requisite vote of the holders of VAI Common Stock in accordance
with the DGCL and the provisions of Varian's Restated Certificate of
Incorporation.

(n) Fairness Opinion. Warburg Dillon Read LLC shall have delivered its
----------------
written opinion to the Board of Directors of Varian dated as of the date the
Distributions are declared confirming that the Distributions are fair, from a
financial point of view, to the Varian Holders, and such opinion shall not have
been withdrawn or rescinded.

Section 4.02. Waivers. After the Varian stockholders approve the
-------
Distribution Proposals, the conditions set forth in Section 4.01 may only be
waived if the Board of Directors of Varian determines such waiver would not be
materially adverse to the Varian stockholders. Further, the Board of Directors
may only waive the condition set forth in Section 4.0(h) with respect to
receipt of Internal Revenue Service tax rulings if it has received an opinion of
counsel substantially to the effect that, for federal income tax purposes, no
gain or loss will be recognized by any holder of VAI Common Stock as a result of
the Distributions and no gain or loss will be recognized by the Company upon the
Distributions, which opinion shall not have been withdrawn or rescinded as of
the Effective Time.

ARTICLE V
COVENANTS

Section 5.0. Further Assurances; Consents. In addition to the actions
----------------------------
otherwise expressly provided in this Agreement, each party shall use its
commercially reasonable efforts to (a) execute and deliver, or cause to be

I-24
<PAGE>

executed and delivered, such instruments and documents and take, or cause to be
taken, such further or other actions as any other party may reasonably request
to effectuate the purposes of this Agreement and carry out the terms hereof, and
(b) take or cause to be taken all actions, and to do, or cause to be done, all
things reasonably necessary or appropriate under applicable Laws, agreements or
otherwise to consummate and make effective the transactions contemplated by this
Agreement, including (notwithstanding Section 5.05(c)) using its commercially
reasonable efforts to obtain any Consents, to enter into amendatory agreements
and to make any filings and applications necessary or appropriate in order to
consummate the transactions contemplated by this Agreement; provided, however,
-------- -------
that no party shall be obligated to pay any consideration therefor (except for
filing fees and other similar charges) to any third party from whom such
Consents or amendments are requested or to take any action or omit to take any
action if the taking or omission would be unreasonable burdensome to the party
or its Group or the Group's business.

Section 5.02. Intellectual Property Matters.
-----------------------------

(a) Intellectual Property Agreement Controls. Each party acknowledges
----------------------------------------
that, after the Distribution Date, it shall have no interest in nor any right to
use or display the name or any Intellectual Property of another party in any
way, except to the extent expressly provided in this Agreement or in any
Ancillary Agreement and except for any use which is otherwise permissible as
"fair use" under applicable Law. Each party further understands and agrees that
the rights, obligations and responsibilities of the parties with respect to
Intellectual Property matters shall be governed by the Intellectual Property
Agreement to the extent therein provided.

(b) No Representation of Affiliation. After the Distribution Date, no
--------------------------------
party shall represent or permit to be represented to any third party that it or
any member of its Group has a business affiliation with any other party or any
member of such other party's Group, except as expressly permitted by an
Ancillary Agreement.

Section 5.03. Employees; Employee Benefits.
----------------------------
(a) Treatment of Employees. As of the Effective Time, except as expressly
----------------------
provided in the Employee Benefits Allocation Agreement, (i) those Persons
employed in the Health Care Systems Business shall remain or become employees of
the applicable member of the Health Care Systems Group, (ii) those Persons
employed in the Instruments Business shall become employees of the applicable
member of the Instruments Group, and (iii) those Persons employed in the
Semiconductor Equipment Business shall become employees of the applicable member
of the Semiconductor Equipment Group.

(b) Employee Benefits Allocation Agreement Controls. Each party further
-----------------------------------------------
understands and agrees that the rights, obligations and responsibilities of the
parties with respect to employees and employee benefit matters shall be governed
by the Employee Benefits Allocation Agreement to the extent therein provided.

Section 5.04. Tax Matters. Each party intends that (a) the contributions
-----------
of Assets to IB and SEB each be treated as a reorganization within the meaning
of section 368(a)(1)(D) of the Code with respect to which no gain or loss is
recognized by any of the parties, and (b) the Distributions be treated as tax-
free distributions under section 355 of the Code and each such party shall use
its best efforts to cause the Distributions to so qualify. Each party further
understands and agrees that the rights, obligations and responsibilities of the
parties with respect to Tax matters will be governed by the Tax Sharing
Agreement to the extent therein provided.

Section 5.05. No Representations or Warranties.
--------------------------------

(a) General. Each party understands and agrees that, except as otherwise
-------
expressly provided in any Ancillary Agreement or paragraph (c) below, no party
is, in this Agreement or in any other agreement or document contemplated by this
Agreement (including the Conveyancing and Assumption Instruments) or otherwise,
making any representation or warranty whatsoever, including representing or
warranting in any way as to the Assets, businesses or Liabilities retained,
transferred or assumed as contemplated by this Agreement, as to the value or
freedom from Security Interests, or any other matter concerning any Assets or
Liabilities of such party, or as to the absence of any defenses or right of set-
off or freedom from counterclaim with respect to any claim or other Asset,
including any account receivable or any Liability of any party, or as to the
legal sufficiency of any assignment, document or instrument delivered under this
Agreement to convey title to any Asset or any other thing of value upon the
execution, delivery and filing thereof.

I-25
<PAGE>

(b) Disclaimer of Merchantability or Fitness of Assets. Each party
--------------------------------------------------
further understands and agrees that there are no warranties, express or implied,
as to the merchantability or fitness of any of the Assets either transferred to
or retained by the parties, and that, notwithstanding anything to the contrary
expressly provided in the applicable Conveyancing and Assumption Instrument, all
Assets either transferred or retained by the parties shall be "as is, where is"
and that, subject to Section 5.01, the party to which any such Assets are
transferred, or which retains any such Assets, shall bear the economic and legal
risks that any conveyances of such Assets shall prove to be insufficient to vest
in the transferee good and marketable title, free and clear of any Security
Interest.

(c) No Representations or Warranties Regarding Consents. Each party
---------------------------------------------------
understands and agrees that, except as otherwise expressly provided in the
applicable Conveyancing and Assumption Instruments, no party is representing or
warranting in any way that the obtaining of any Consents, the execution and
delivery of any amendatory agreements and the making of any filings or
applications contemplated by this Agreement will satisfy the provisions of any
or all applicable agreements or the requirements of any or all applicable Laws.
Each party further understands and agrees that the party to which any Assets are
transferred pursuant to this Agreement shall bear the economic and legal risk
that any necessary Consents are not obtained, that any necessary amendatory
agreements are not executed and delivered or that the provisions of any
applicable agreements or requirements of applicable Laws are not satisfied.

Section 5.06. Removal of Certain Guarantees; Releases from Liabilities.
--------------------------------------------------------

(a) Removal of Varian as Guarantor of Semiconductor Equipment Liabilities
----------------------------------------------------------------------
and Instruments Liabilities. Except as otherwise expressly provided in an
- ---------------------------
Ancillary Agreement, each party shall use its commercially reasonable efforts to
have, on or before the Distribution Date, or as soon as practicable thereafter,
(i) Varian and any other member of the Health Care Systems Group removed as a
guarantor of, or obligor under or for, any Semiconductor Equipment Liability or
Instruments Liability, (ii) SEB and any other member of the Semiconductor
Equipment Group removed as a guarantor of, or obligor under or for, any Health
Care Systems Liability or Instruments Liability, and (iii) IB and any other
member of the Instruments Group removed as a guarantor of, or obligor under or
for, any Health Care Systems Liability or Semiconductor Equipment Liability.

(b) Indemnification for Guaranties. If (i) a party is unable to obtain,
------------------------------
or to cause to be obtained, any removal described in paragraph (a) above, or
(ii) Liabilities arise from and after the Effective Time but before a guarantor
or obligor with reference to any such Liability is removed pursuant to Section
5.06(a), then such guarantor or obligor shall be indemnified for all Liabilities
incurred by it in its capacity as guarantor or obligor by (A) HCS with respect
to any Health Care Systems Liabilities, (B) SEB with respect to any
Semiconductor Equipment Liabilities, and (C) IB with respect to any Instruments
Liabilities. Without limiting the foregoing, each party shall, or shall cause a
member of its Group to, reimburse any such guarantor or obligor as soon as
practicable (but in no event later than 30 days) following receipt of notice of
a payment made pursuant to this Section 5.06(b) in respect of the party's
Liabilities.

(c) Additional Obligations. In the event that at any time before or
----------------------
after the Distribution Date, a party identifies any letters of credit, interest
rate or foreign exchange contracts or other contracts (excluding guarantees)
that relate primarily to one business but for which a member of another Group
has contingent, secondary, joint, several or other Liability of any nature
whatsoever, the party the business of which is primarily liable shall, at its
expense, take such actions and enter into such agreements and arrangements as
the other party may reasonably request to effect such party's (or the member of
each party's Group) release or substitution.

(d) Other Releases. Each party shall use commercially reasonable efforts
--------------
to obtain, or cause to be obtained, any Consent, substitution or amendment
required to novate or assign all obligations under agreements, leases, licenses
and other obligation or Liabilities of any nature whatsoever transferred under
this Agreement, or to obtain in writing the unconditional release of the
assignor so that in each such case, IB shall be solely responsible for the
Instruments Liabilities, HCS shall be solely responsible for the Health Care
Systems Liabilities and SEB shall be solely responsible for the Semiconductor
Equipment Liabilities; provided, however, that no party shall be obligated to
-------- -------
pay any consideration therefor (except for filing fees or other similar charges)
to any third party from whom such Consents, substitutions, amendments or
releases are requested. Whether or not any such Consent, substitution, amendment
or release is obtained, nothing in this Section 5.06(d) shall in any way limit
the obligations of the parties under Article VII.

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<PAGE>

Section 5.07. Intercompany Agreements. As of the Effective Time, each
-----------------------
party shall (and shall cause each other member of its Group to) terminate each
agreement between it and any member of any other Groups (other than this
Agreement, the Ancillary Agreements, the Conveyancing and Assumption Instruments
and any agreements that do not take effect until the Effective Time); provided,
--------
however, that such termination shall not affect any of the rights and/or
- -------
obligations of the parties to such agreements that accrued or were incurred
before the Effective Time (subject to the terms of Section 2.05(a)).

Section 5.08. Nondisclosure Agreements. Each of SEB and IB agrees to be
------------------------
bound by and subject to the terms and provisions of each of the Nondisclosure
Agreements for the same period of time and to the same extent as Varian (or the
applicable Subsidiary of Varian that is a party to such Nondisclosure
Agreement). Varian shall not, amend, supplement, terminate or waive any
provisions of the Nondisclosure Agreements (a) that relate to the Instruments
Business without the prior written consent of IB, or (b) that relate to the
Semiconductor Equipment Business without the prior written consent of SEB.

Section 5.09. Receipts after the Distribution Date. From and after the
------------------------------------
Distribution Date each party shall (or shall cause the applicable member of its
Group to) promptly transfer to the appropriate other party, or the appropriate
member of such other party's Group, any property it receives that is an Asset of
such other party or a

member of the other party's Group. Without limiting the foregoing, funds
received by a member of one Group upon payment of accounts receivable that
belong to a member of another Group shall be transferred to the other Group as
soon as practicable (but in no event later than 30 business days) after receipt
of such funds.

Section 5.10. Post-Distribution Audit.
-----------------------

(a) Preparation of Closing Balance Sheets. As soon as practicable after
-------------------------------------
the Effective Time, Varian shall cause PricewaterhouseCoopers LLP (or another
comparable independent accounting firm selected by Varian (the "Auditors")) to:

(i) conduct an audit of IB and the IB Subsidiaries in order to prepare
and deliver to each of HCS, IB and SEB a consolidated balance sheet for IB
and the IB Subsidiaries as of the Effective Time (the "IB Closing Balance
Sheet");

(ii) conduct an audit of HCS and the HCS Subsidiaries in order to
prepare and deliver to each of HCS, IB and SEB a consolidated balance sheet
for HCS and the HCS Subsidiaries as of the Effective Time (the "HCS Closing
Balance Sheet");

(iii) conduct an audit of SEB and the SEB Subsidiaries in order to
prepare and deliver to each of HCS, IB and SEB a consolidated balance sheet
for SEB and the SEB Subsidiaries, as of the Effective Time (the "SEB
Closing Balance Sheet");

and to deliver such Closing Balance Sheets within 90 days after the Distribution
Date.

(b) Audit Requirements. Each of the IB Closing Balance Sheet, the HCS
------------------
Closing Balance Sheet and the SEB Closing Balance Sheet shall be prepared on the
basis of an audit conducted by the Auditors in accordance with GAAP consistently
applied and without giving effect to any change in accounting principles
required on account of the consummation of the Distributions, except that, to
the extent that any definition contained herein contemplates inclusion or
exclusion of an item that would not be included or excluded under GAAP, the
Auditors shall compute such item in accordance with such definition. During the
course of the preparation of the IB Closing Balance Sheet, the HCS Closing
Balance Sheet and the SEB Closing Balance Sheet by the Auditors, and during any
period in which there is a dispute regarding either the IB Closing Balance
Sheet, the HCS Closing Balance Sheet and the SEB Closing Balance Sheet, each of
HCS, IB and SEB, as the case may be, shall cooperate with the Auditors and the
other parties and shall have access to all pertinent accounting and each other's
records. Each party also shall use its reasonable efforts to cause the work
papers of the Auditors in respect of its business to be made available to each
of the other parties.

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<PAGE>

ARTICLE VI
ACCESS TO INFORMATION; CONFIDENTIALITY

Section 6.01. Provision, Transfer and Delivery of Applicable Corporate
--------------------------------------------------------
Records. Except as expressly provided in any Ancillary Agreement,
- -------

(a) Provision, Transfer and Delivery of SEB Records. Each of HCS and IB
-----------------------------------------------
shall (and shall cause each other member of its Group to) as soon as practicable
after the Distribution Date transport (at SEB's expense) to SEB the Books and
Records in its possession that relate primarily to the Semiconductor Equipment
Assets, the Semiconductor Equipment Liabilities or the Semiconductor Equipment
Business or are necessary to operate the Semiconductor Equipment Business
(collectively, the "SEB Records"), except to the extent such items are already
in the possession of any member of the Semiconductor Equipment Group.

(b) Provision, Transfer and Delivery of IB Records. Each of HCS and SEB
----------------------------------------------
shall (and shall cause each other member of its Group to) as soon as practicable
after the Distribution Date transport (at IB's expense) to IB the Books and
Records in its possession that relate primarily to the Instruments Assets, the
Instruments Liabilities or the Instruments Business or are necessary to operate
the Instruments Business (collectively, the "IB Records"), except to the extent
such items are already in the possession of any member of the Instruments Group.

(c) Provision, Transfer and Delivery of HCS Records. Each of SEB and IB
-----------------------------------------------
shall (and shall cause each other member of its Group to) as soon as practicable
after the Distribution Date transport (at HCS's expense) to HCS the Books and
Records in its possession that relate primarily to the Health Care Systems
Assets, the Health Care Systems Liabilities or the Health Care Systems Business
or are necessary to operate the Health Care Systems Business (collectively, the
"HCS Records"), except to the extent such items are already in the possession of
any member of the Health Care Systems Group.

Section 6.02. Access to Books and Records. Unless otherwise contemplated
---------------------------
by Section 6.06, from and after the Distribution Date, each of HCS, SEB and IB
shall (and shall cause each other member of its Group to) afford to each other
party and its authorized Representatives reasonable access and duplicating
rights during normal business hours, subject to appropriate restrictions for
classified, privileged or confidential information, to the personnel,
properties, Books and Records and other data and information of such party and
each other member of such party's Group created before the Distributions insofar
as such access is reasonably required by the requesting party for the conduct of
the requesting party's business (but not for competitive purposes).

Section 6.03. Confidentiality.
---------------
(a) General Restriction on Disclosure. From and after the Distribution
---------------------------------
Date, none of HCS, SEB and IB shall (or permit any other member of its Group to)
use without the prior written consent of the applicable party and shall (and
shall cause each other member of its Group to) hold, and shall cause its
Representatives to (and those of any other member of its Group to) hold, in
strict confidence, all information concerning each other party and the other
members of each other party's Group in its possession, custody or control to the
extent such information either:

(i) relates to the period up to the Distribution Date;

(ii) relates to any Ancillary Agreement; or

(iii) is obtained in the course of performing services for the other
party pursuant to any Ancillary Agreement,

and shall not (and shall cause each other member of its Group not to) otherwise
release or disclose such information to any other Person, except its
Representatives (who shall be bound by this Section 6.03), without the prior
written consent of the applicable party or parties, unless compelled by judicial
or administrative process or, in the opinion of such party's counsel, required
by Law and such party has used commercially reasonable efforts to consult with
the applicable party or parties before such disclosure.

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<PAGE>

(b) Exceptions to Confidential Treatment. Notwithstanding paragraph (a),
------------------------------------
no party shall be prohibited from using or permitting the use of, or required to
hold in confidence and not release or disclose, any information to the extent
that (i) such information has been or is in the public domain through no fault
of such party, (ii) such information was used or held for use in such party's
business before the Distribution Date, (iii) such information is, after the
Distribution Date, lawfully acquired from other sources by such party, (iv) this
Agreement, any Ancillary Agreement or any other agreement entered into pursuant
to this Agreement permits the use or disclosure of such information by such
party, or (v) such information is necessary for such party to investigate,
evaluate, defend or prosecute any claim or Action involving any other party to
this Agreement.

Section 6.04. Witness Services. From and after the Distribution Date,
----------------
each of HCS, SEB and IB shall use its commercially reasonable efforts to make
available to each other party, upon reasonable written request, the officers,
directors, employees and agents of each member of its Group for consultation
and/or as witnesses to the extent that (a) such Persons may reasonably be useful
or required in connection with the prosecution or defense of any Action or the
investigation of any claim which involves the interests of the requesting party
or any member of its Group; and (b) there is no conflict in the Action or claim
between the requesting party or any member of its respective Group and the party
to which a request is made pursuant to this Section or any member of such
party's Group. The employing party agrees that such consultant or witness shall
be made available to the requesting party to the same extent that the employing
party would have made such consultant or witness available if the Distributions
had not occurred.

Section 6.05. Reimbursement; Other Matters. Except as otherwise
----------------------------
contemplated by this Agreement (including circumstances in which indemnification
is sought pursuant to Article VII) or by any Ancillary Agreement, a party
providing Books and Records or access to information or consulting or witness
services to any other party (or such party's Representatives) under this Article
VI shall be entitled to receive from such other party, upon the presentation of
invoices therefor reimbursement for all Costs (including the Costs of employees
providing consulting and witness services in connection with litigation and
Costs of employees providing information), as may be reasonably incurred in
providing such Books and Records or access to information, consulting or witness
services.

Section 6.06. Retention of Records. Except when a longer period is
--------------------
required by Law or is expressly provided for in this Agreement, any Ancillary
Agreement or the retention policy of Varian as of the date of this Agreement,
each party shall (and shall cause the members of its Group to) retain, for a
period of at least seven years after the Distribution Date, all material
information (including all material Books and Records) relating to such Group
and its operations before the Distribution Date. Notwithstanding the foregoing,
when retention of information is no longer required by Law or expressly provided
for in another Section of this Agreement or any Ancillary Agreement, any party
may offer in writing to deliver to the other parties all or a portion of such
information that relates to members of the offering party's Group and, if such
offer is accepted in writing within 90 days after receipt thereof, the offering
party shall promptly deliver such information (or copies thereof) to each
accepting party (at the expense of the accepting party). If such offer is not so
accepted, the offered information may be destroyed or otherwise disposed of by
the offering party at any time after expiration of such 90-day period.

Section 6.07. Privileged Matters.
------------------

(a) Privileged Information. Each party shall (and shall cause the
----------------------
members of its Group to) use its reasonable efforts to maintain, preserve,
protect and assert all privileges against disclosure (including the attorney-
client privilege, the attorney work product privilege and the self-evaluation
privilege) that apply to any Books and Records or other information of any
member of any other Group relating to any period before the Distribution Date
("Privilege" or "Privileges"). Each party shall use its reasonable efforts not
to waive (or permit any member of its Group to waive) any such Privilege that
could be asserted under applicable Law without the prior written consent of the
other party or parties having the right to assert or waive such Privilege
pursuant to this Section. HCS shall be entitled in perpetuity to require the
assertion, or to decide whether to consent to the waiver, of any and all
Privileges which relate primarily to the Health Care Systems Business or to
Health Care Systems Liabilities; SEB shall be entitled in perpetuity to require
the assertion, or to decide whether to consent to the waiver, of all Privileges
which relate primarily to the Semiconductor Equipment Business or to
Semiconductor Equipment Liabilities; and IB shall be entitled in perpetuity to
require the assertion, or to decide whether to consent to the waiver, of all
Privileges which relate primarily to the Instruments Business or to Instruments
Liabilities.

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<PAGE>

(b) Compelled Disclosure. To the extent that a party is compelled by
--------------------
judicial or administrative process to disclose any information under
circumstances in which any Privilege would be available ("Privileged
Information"), such party agrees to assert such Privilege in good faith before
making such disclosure. Each party shall consult with each applicable party upon
receipt by a party or any member of its Group of any subpoena, discovery or
other request that calls for production or disclosure of Privileged Information,
or if a party or any member of its Group obtains knowledge that any current or
former employee of such party or any member of its Group has received any
subpoena, discovery or other request which calls for the production or
disclosure of Privileged Information, including regarding whether any Privilege
is available. Each party shall cooperate with each applicable party and its
counsel participating in any hearing or other proceeding in respect of such
disclosure and assertion of Privilege. Nothing in this Section requires any
party to subject itself to sanctions in connection with any compelled
disclosure. Notwithstanding the foregoing, each party shall be permitted to
disclose Privileged Information in any proceeding in which such party is in an
adversarial position to any other party to this Agreement.

(c) No Waiver. The parties understand and agree that the transfer of
---------
any Books and Records or other information between any members of the Health
Care Systems Group, the Semiconductor Equipment Group or the Instruments Group
shall be made in reliance on the agreements of Varian, SEB and IB, as set forth
in Section 6.03 and this Section, to maintain the confidentiality of Privileged
Information and to assert and maintain all applicable Privileges. The Books and
Records being transferred pursuant to Section 6.01, the access to information
being granted pursuant to Section 6.02, the agreement to provide witnesses and
individuals pursuant to Section 6.04 and the transfer of Privileged Information
to any party pursuant to this Agreement shall not be deemed a waiver of any
Privilege that has been or may be asserted under this Section or otherwise.
Nothing in this Agreement shall operate to reduce, minimize or condition the
rights granted to each party in, or the obligations imposed upon each party by,
this Section.

ARTICLE VII
INDEMNIFICATION

Section 7.01. Survival of Agreements. All covenants and agreements of the
----------------------
parties contained in this Agreement and all covenants and agreements of the
parties contained in the Ancillary Agreements shall survive the Distribution
Date except as expressly provided herein and therein, and shall not be merged
into any deeds or other transfer or closing instruments or documents, including
the Conveyancing and Assumption Instruments.

Section 7.02. Taxes. This Article VII shall not be applicable to any
-----
Indemnifiable Losses related to (a) Taxes, which shall be governed by the Tax
Sharing Agreement, or (b) which are otherwise expressly provided for in the
Ancillary Agreements.

Section 7.03. Indemnification by HCS. Except as expressly provided in
----------------------
this Agreement or any Ancillary Agreement, and subject to Sections 7.02 and
7.06, (a) HCS shall, to the fullest extent permitted by Law, indemnify, defend
and hold harmless the SEB Indemnitees and the IB Indemnitees from and against
any and all Indemnifiable Losses of the SEB Indemnitees and the IB Indemnitees,
respectively, arising out of, relating to or resulting from either (i) the
Health Care Systems Liabilities or (ii) the breach by HCS or Varian of any
provision of this Agreement, or any Ancillary Agreement and (b) HCS shall bear
the cost of and indemnify, defend and hold harmless the SEB Indemnitees and the
IB Indemnitees from one-third of the Indemnifiable Losses, as incurred, arising
out of, relating to or resulting from the Shared Liabilities; provided, however,
------------------
that, except as otherwise provided in this Agreement or any Ancillary Agreement,
in the case of an Indemnifiable Loss in respect of a Shared Liability arising
out of, relating to or resulting from the management or conduct of the Health
Care Systems Business and the Instruments Business or the Health Care Systems
Business and the Semiconductor Equipment Business, HCS shall bear the cost of
and indemnify, defend and hold harmless IB and SEB, respectively, from one-half
of the Indemnifiable Losses, as incurred.

Section 7.04. Indemnification by SEB. Except as expressly provided in
----------------------
this Agreement or any Ancillary Agreement, and subject to Sections 7.02 and
7.06, (a) SEB shall, to the fullest extent permitted by Law, indemnify, defend
and hold harmless the HCS Indemnitees and the IB Indemnitees from and against
any and all Indemnifiable Losses of the HCS Indemnitees and the IB Indemnitees,
respectively, arising out of, relating to or resulting from either (i) the
Semiconductor Equipment Liabilities, or (ii) the breach by SEB of any provision
of this Agreement or any Ancillary Agreement, and (b) SEB shall bear the cost of
and indemnify, defend and hold harmless the HCS Indemnitees and the IB
Indemnitees from one-third of the Indemnifiable Losses, as incurred, arising out
of, relating to or resulting from the Shared Liabilities; provided, however,
------------------
that, except as otherwise provided in this

I-30
<PAGE>

Agreement or any Ancillary Agreement, in the case of an Indemnifiable Loss in
respect of a Shared Liability arising out of, relating to or resulting from the
management or conduct of the Semiconductor Equipment Business and the
Instruments Business or the Semiconductor Equipment Business and the Health Care
Systems Business, SEB shall bear the cost of and indemnify, defend and hold
harmless IB and HCS, respectively, from one-half of the Indemnifiable Losses as
incurred.

Section 7.05. Indemnification by IB. Except as expressly provided in this
---------------------
Agreement or any Ancillary Agreement, and subject to Sections 7.02 and 7.06, (a)
IB shall, to the fullest extent permitted by Law, indemnify, defend and hold
harmless the HCS Indemnitees and the SEB Indemnitees from and against any and
all Indemnifiable Losses of the HCS Indemnitees and the SEB Indemnitees,
respectively, arising out of, relating to or resulting from either (i) the
Instruments Liabilities or (ii) the breach by IB of any provision of this
Agreement or any Ancillary Agreement, and (b) IB shall bear the cost of and
indemnify, defend and hold harmless the HCS Indemnitees and the SEB Indemnitees
from one-third of the Indemnifiable Losses as incurred, arising out of, relating
to or resulting from the Shared Liabilities; provided, however, that, except as
------------------
otherwise provided in this Agreement or any Ancillary Agreement, in the case of
an Indemnifiable Loss in respect of a Shared Liability arising out of, relating
to or resulting from the management or conduct of the Instruments Business and
the Health Care Systems Business or the Instruments Business and the
Semiconductor Equipment Business, IB shall bear the cost of and indemnify,
defend and hold harmless HCS and SEB, respectively, from one-half of the
Indemnifiable Losses, as incurred.

Section 7.06. Limitations on Indemnification Obligations.
------------------------------------------

(a) Reductions for Insurance Proceeds and Other Recoveries. The amount
------------------------------------------------------
that any party (an "Indemnifying Party") is or may be required to pay to any
other Person (an "Indemnitee") pursuant to Section 7.03, 7.04 or 7.05, as
applicable, shall be reduced (retroactively or prospectively) by any Insurance
Proceeds or other amounts actually recovered from third parties by or on behalf
of such Indemnitee in respect of the related Indemnifiable Loss. The existence
of a claim by an Indemnitee for monies from an insurer or against a third party
in respect of any Indemnifiable Loss shall not, however, delay any payment
pursuant to the indemnification provisions contained herein and otherwise
determined to be due and owing by an Indemnifying Party. Rather the Indemnifying
Party shall make payment in full of the amount determined to be due and owing by
it against an assignment by the Indemnitee to the Indemnifying Party of the
entire claim of the Indemnitee for Insurance Proceeds or against such third
party. Notwithstanding any other provisions of this Agreement, it is the
intention of the parties that no insurer or any other third party shall be (i)
entitled to a benefit it would not be entitled to receive in the absence of the
foregoing indemnification provisions, or (ii) relieved of the responsibility to
pay any claims for which it is obligated. If an Indemnitee has received the
payment required by this Agreement from an Indemnifying Party in respect of any
Indemnifiable Loss and later receives Insurance Proceeds or other amounts in
respect of such Indemnifiable Loss, then such Indemnitee shall hold such
Insurance Proceeds or other amounts in trust for the benefit of the Indemnifying
Party (or Indemnifying Parties) and shall pay to the Indemnifying Party, as
promptly as practicable after receipt, a sum equal to the amount of such
Insurance Proceeds or other amounts received, up to the aggregate amount of any
payments received from the Indemnifying Party pursuant to this Agreement in
respect of such Indemnifiable Loss (or, if there is more than one Indemnifying
Party, the Indemnitee shall pay each Indemnifying Party, its proportionate share
(based on payments received from the Indemnifying Parties) of such Insurance
Proceeds).

(b) Adjustments for Taxes. The amount of any Indemnifiable Loss shall be
---------------------
appropriately adjusted so that the amount of such Indemnifiable Loss is (i)
increased by the amount of all Income Taxes payable with respect to any payments
received from the Indemnifying Party or Indemnifying Parties, and (ii) reduced
by the amount of all Income Tax benefits from the incurrence or payment of any
such Indemnifiable Loss by the Indemnitee, as determined pursuant to the next
paragraph.

In computing the amount of Income Taxes payable or Income Tax benefit, (i)
in the absence of any change in treatment under the Code or applicable Tax Law,
payments with respect to contingent Liabilities attributable to periods before
the Distribution Date shall be treated for income tax purposes by the Indemnitee
and the Indemnifying Parties (and if Varian is neither the Indemnitee nor the
Indemnifying Party, by Varian) as distributions or capital contributions, as
appropriate, occurring immediately before the Distributions on the Distribution
Date, (ii) it shall be assumed that the highest marginal Tax rates in effect are
applicable to the Indemnitee, and (iii) such determination shall be made without
regard to whether any actual increase or decrease in Tax is realized by the
Indemnitee.

I-31
<PAGE>

If, notwithstanding the manner in which indemnity payments are reported,
there is an adjustment to the Tax Liability of a party as a result of its
receipt of an indemnity payment pursuant to this Agreement, such payment shall
be appropriately adjusted so that the amount of such payment, reduced by the
amount of all Income Taxes payable with respect to the receipt thereof, shall
equal the amount of the payment which the Indemnitee would otherwise be entitled
to receive pursuant to this Agreement.

(c) Foreign Currency Adjustments. In the event that any indemnification
----------------------------
payment required to be made hereunder shall be denominated in a currency other
than U.S. Dollars, the amount of such payment shall be translated into U.S.
Dollars using the foreign exchange rate for such currency determined as follows:

(i) with respect to any Indemnifiable Loss arising from the payment by
a financial institution under a guarantee, comfort letter, letter of
credit, foreign exchange contract or similar instrument, the foreign
exchange rate for such currency shall be determined as of the date on which
such financial institution shall have been reimbursed;

(ii) with respect to any Indemnifiable Loss covered by insurance, the
foreign exchange rate for such currency shall be the foreign exchange rate
employed by the insurer in settling such Indemnifiable Losses with the
Indemnifying Party; and

(iii) with respect to any Indemnifiable Loss not covered by either
clause (i) or (ii) above, the foreign exchange rate for such currency shall
be determined as of the date that notice of the claim with respect to such
Indemnifiable Loss is given to the Indemnitee.

Section 7.07. Procedures for Indemnification. Except as expressly
------------------------------
provided in any Ancillary Agreement:

(a) Notice of Third Party Claims (Other than Shared Liabilities). If a
------------------------------------------------------------
claim or demand is made against an Indemnitee by any Person who is not a party
to this Agreement or a Subsidiary thereof (a "Third Party Claim") for which an
Indemnifying Party may be liable under this Agreement other than with respect to
a Shared Liability, such Indemnitee shall notify the Indemnifying Party in
writing, and in reasonable detail, of the Third Party Claim promptly (and in any
event within 30 business days) after receipt by such Indemnitee of written
notice of the Third Party Claim; provided, however, that no delay by the
-------- -------
Indemnitee in giving such notice shall affect the Indemnitee's right to
indemnification hereunder except to the extent the Indemnifying Party is
actually prejudiced by such delay (except that the Indemnifying Party shall not
be liable for any expenses incurred during the period in which the Indemnitee
failed to give such notice). Thereafter, the Indemnitee shall deliver to the
Indemnifying Party, promptly (and in any event within ten business days) after
the Indemnitee's receipt thereof, copies of all notices and documents (including
court papers) received by the Indemnitee relating to the Third Party Claim.

(b) Legal Defense of Third Party Claims. If a Third Party Claim is made
-----------------------------------
against an Indemnitee, the Indemnifying Party shall be entitled to participate
in the defense thereof and, if it so chooses and acknowledges in writing its
obligation to indemnify the Indemnitee for the Third Party Claim, to assume the
defense thereof with counsel selected by the Indemnifying Party. Should the
Indemnifying Party assume the defense of a Third Party Claim, the Indemnifying
Party shall not be liable to the Indemnitee for legal or other expenses
subsequently incurred by the Indemnitee in connection with the defense of such
Third Party Claim. The Indemnifying Party shall be liable for the reasonable
fees and expenses of counsel employed by the Indemnitee for any period during
which the Indemnifying Party has failed to assume the defense of the Third Party
Claim (other than the period during which the Indemnitee failed to give notice
of the Third Party Claim). If the Indemnifying Party elects to assume the
defense of any Third Party Claim, all of the Indemnitees shall cooperate with
the Indemnifying Party in the defense or prosecution thereof.

(c) Third Party Claims (Shared Liabilities). If a Third Party Claim in
---------------------------------------
respect of a Shared Liability is made against an Indemnitee, such Indemnitee
shall notify the Indemnifying Parties in writing, and in reasonable detail, of
the Third Party Claim promptly (and in any event within 30 business days) after
receipt by such Indemnitee of written notice of the Third Party Claim; provided,
--------
however, that no delay by the Indemnitee in giving such notice shall affect the
- -------
Indemnitee's right to indemnification hereunder except to the extent an
Indemnifying Party is actually prejudiced by such delay (except that the
Indemnifying Party or Parties shall not be liable for any expenses incurred
during the period in which the Indemnitee failed to give such notice).
Thereafter, the Indemnitee shall deliver to the Indemnifying Party or Parties,
promptly (and in any event within ten business days) after the
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<PAGE>

Indemnitee's receipt thereof, copies of all notices and documents (including
court papers) received by the Indemnitee relating to the Third Party Claim.

The party designated on Schedule 1.01(a) or (b) to have management
responsibility for the related Shared Liability (the "Managing Party") shall
have management and administrative responsibility for the Third Party Claim
(unless no party is so designated, in which case the Managing Party shall be as
agreed among the affected parties). Such management and administrative
responsibility shall entail the defense of such Third Party Claim, negotiation
with claimants and potential claimants (subject to the limitations in the
following paragraph) and other reasonably related activities. Unless the
Managing Party is an Indemnifying Party that does not acknowledge in writing its
obligations to indemnify the Indemnitee for the Third Party Claim to the extent
contemplated by this Agreement, the Managing Party may assume the defense
thereof with counsel selected by such Managing Party. If the Managing Party
assumes the defense of the Third Party Claim, the legal or other expenses in
respect of such Third Party Claim incurred by or on behalf of any Person other
than such Managing Party shall not be Indemnifiable Losses for purposes of this
Agreement, except for the reasonable fees and expenses of counsel employed by
the Indemnitee for any period during which the Managing Party has failed to
assume the defense of the Third Party Claim (other than the period during which
the Indemnitee failed to give notice of the Third Party Claim). Each Indemnitee
and each Indemnifying Party shall cooperate with any Managing Party and each
other in the defense or prosecution of such Third Party Claim. All costs and
expenses (including attorneys' fees and all out-of-pocket expenses, together
with the Costs of the Managing Party (if the Managing Party assumes the defense
of the Third Party Claim)) incurred in connection with a Third Party Claim in
respect of a Shared Liability shall be included as a part of the Indemnifiable
Losses.

(d) Notwithstanding Sections 7.07(b) and 7.07(c):

(i) an Indemnifying Party (or the Managing Party, as applicable) shall
not be entitled to assume the defense of any Third Party Claim (and shall
be liable to the Indemnitee for the reasonable fees and expenses of counsel
incurred by the Indemnitee in defending such Third Party Claim to the
extent contemplated by this Agreement) if the Third Party Claim seeks an
order, injunction or other equitable relief or relief for other than money
damages against the Indemnitee which the Indemnitee reasonably determines,
after conferring with its counsel, cannot be separated from any related
claim for money damages and is materially prejudicial to the Indemnitee's
business; provided, however, that if such equitable relief or other relief
-------- -------
portion of the Third Party Claim can be so separated from that for money
damages, the Indemnifying Party (or the Managing Party, as applicable)
shall be entitled, but not required, to assume the defense of the portion
relating to money damages;

(ii) an Indemnifying Party (or the Managing Party, as applicable)
shall not be entitled to assume the defense of any Third Party Claim (and
shall be liable to the Indemnitee for the reasonable fees and expenses of
counsel incurred by the Indemnitee in defending such Third Party Claim to
the extent contemplated by this Agreement) if, in the Indemnitee's
reasonable judgment, a conflict of interest between such Indemnitee and any
Indemnifying Party exists, in respect of such Third Party Claim; and

(iii) if at any time after assuming the defense of a Third Party Claim
an Indemnifying Party (or the Managing Party, as applicable) shall fail to
assume or withdraws from the defense of such Third Party Claim, the
Indemnitee may resume the defense thereof and the Indemnifying Party (or
Indemnifying Parties as applicable) shall be liable for the reasonable fees
and expenses of counsel incurred by the Indemnitee in such defense.

(e) Settlement of Third Party Claims.
--------------------------------

(i) No Indemnitee (or the Managing Party, as applicable) shall admit
any liability with respect to, or settle, compromise or discharge, any
Third Party Claim or consent to the entry of any judgment without each
Indemnifying Party's prior written consent; provided, however, that the
-------- -------
Indemnitee shall have the right to settle, compromise or discharge such
Third Party Claim or consent to the entry of any judgment without the prior
written consent of the Indemnifying Party or Indemnifying Parties if (A)
the Indemnitee releases each Indemnifying Party from its indemnification
obligation hereunder with respect to such Third Party Claim and such
settlement, compromise or discharge would not otherwise materially
adversely affect the Indemnifying Party or Indemnifying Parties, or (B) the
Indemnifying Party (or the

I-33
<PAGE>

Managing Party, as applicable) has failed to assume the defense of the
Third Party Claim within 90 days after the receipt of notice thereof.

(ii) No Indemnifying Party (or Managing Party, as applicable) shall
settle, compromise or discharge any Third Party Claim or consent to any
judgment without each Indemnitee's prior written consent unless (A) an
unconditional term of such settlement, compromise or discharge thereof is
delivery by the claimant or the plaintiff to the Indemnitee of a written
release of all Liability in respect of such Third Party Claims, (B) the
Indemnifying Party pays the full amount of the Liability in connection with
such Third Party Claim, and (C) such settlement, compromise or discharge
would not otherwise materially adversely affect the Indemnitee.

(f) Other Claims. Any claim for an Indemnifiable Loss which does not
------------
result from a Third Party Claim shall be asserted by the Indemnitee by written
notice and in reasonable detail to the applicable Indemnifying Party. The
Indemnifying Party shall have 90 days from the date that it receives written
notice during which to notify the Indemnitee in writing of its good faith
objections, if any, to the Indemnitee's notice of claims for indemnification
describing in reasonable detail each of the Indemnifying Party's objections
thereto. If the Indemnifying Party does not deliver a written notice of
objection within such 90-day period, the Indemnifying Party shall be deemed not
have any objections to such notice or such claim. If the Indemnifying Party does
deliver such written notice of objection within such 90-day period, the
Indemnifying Party and the Indemnitee shall attempt in good faith to resolve any
such dispute within 90 days of receipt by the Indemnitee of such written notice
of objection. If the Indemnifying Party and the Indemnitee are unable to resolve
any such dispute within such 90-day period, such dispute shall be submitted to
the Separation Committee in accordance with the procedures set forth in Article
IX.

Section 7.08. Indemnification Payments. Indemnification required by this
------------------------
Article VII shall be made by quarterly payments of the amount thereof (other
than individual amounts of $100,000 or more, which shall be paid within ten
business days) during the course of the investigation or defense; provided,
--------
however, that if the applicable Indemnitee is a Subsidiary of a party that is
- -------
organized under a jurisdiction not in the United States, the payments shall, in
lieu thereof, be made to HCS, IB or SEB, as applicable.

Section 7.09. Certain Legal Proceedings.
-------------------------

(a) IB Third Party Claims. On the Distribution Date, IB shall assume
---------------------
(or shall cause one of its Subsidiaries to assume) (i) the prosecution of all
claims which are Instruments Assets and are pending on the Distribution Date,
and (ii) control of the defense against all Third Party Claims which are
Instruments Liabilities and are pending on the Distribution Date, including, in
each case, those set forth on Schedule 7.09(a).

(b) SEB Third Party Claims. On the Distribution Date, SEB shall assume
----------------------
(or shall cause one of its Subsidiaries to assume) (i) the prosecution of all
claims which are Semiconductor Equipment Assets and are pending on the
Distribution Date and (ii) control of the defense against all Third Party Claims
which are Semiconductor Equipment Liabilities and are pending on the
Distribution Date, including, in each case, those set forth on Schedule 7.09(b).

(c) HCS Third Party Claims. HCS (or its Subsidiaries) shall retain (i)
----------------------
the prosecution of all claims which are Health Care Systems Assets and are
pending on the Distribution Date, and (ii) control of the defense against all
Third Party Claims which are Health Care Systems Liabilities and are pending on
the Distribution Date, including, in each case, those set forth on Schedule
7.09(c).

(d) Shared Assets/Shared Liabilities. The Managing Party shall assume or
--------------------------------
retain the (i) prosecution of all claims that are Shared Assets and are pending
on the Distribution Date and (ii) control of the defense against all Third Party
Claims which are Shared Liabilities and are pending on the Distribution Date,
including, in each case, those set forth on Schedule 7.09(d).

Section 7.10. Survival of Indemnities. The obligations of HCS, SEB and IB
-----------------------
under this Article VII shall survive the sale or other transfer by any of them
of any Assets or businesses or the assignment by any of them of any Liabilities
with respect to any Indemnifiable Loss of any Indemnitee related to such Assets,
businesses or Liabilities.

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<PAGE>

Section 7.11. Contribution. To the extent that indemnification provided
------------
for under Section 7.03, 7.04 or 7.05 is unavailable to hold harmless an
Indemnitee in respect of any Indemnifiable Loss, then the Indemnifying Party
under such Section, in lieu of indemnifying such Indemnitee, shall contribute to
the amount paid or payable by such Indemnitee as a result of such Indemnifiable
Loss in such proportion as is appropriate to reflect the relative fault (to be
determined through the procedures provided for in Article IX) of the
Indemnifying Party on the one hand and of the Indemnitee on the other hand in
connection with the action, inaction, statements or omissions that resulted in
such Indemnifiable Loss as well as any other relevant equitable considerations.

Section 7.12. Exclusive Mechanism; Waiver of Jury Trial. Each of IB, SEB
-----------------------------------------
and HCS, on behalf of itself and each member of its Group, agrees that the
procedures set forth in this Article VII, together with Article IX, shall be the
sole and exclusive mechanism for the resolution of any dispute, controversy or
claim relating to any of the matters set forth in Sections 7.03, 7.04 and 7.05.
Each of IB, SEB and HCS, on behalf of itself and each member of its Group,
irrevocably waives any right to any trial by jury with respect to any dispute,
controversy or claim arising out of, relating to or resulting from this
Agreement or any Ancillary Agreement.

Section 7.13. Failure to Satisfy Indemnification Obligation. In the
---------------------------------------------
event that (a) it is finally determined that an Indemnifying Party is liable to
an Indemnitee hereunder in respect of an Indemnifiable Loss, and (b) a court of
competent jurisdiction prohibits such Indemnifying Party from satisfying all or
a part of its obligations to the Indemnitee hereunder(for indemnification or
contribution) in respect of such Indemnifiable Loss, then the amount of the
Indemnifiable Loss that is not satisfied shall be treated as a Shared Liability
of the parties to this Agreement other than the Indemnifying Party, with each
such other party bearing one-half of such amount.

Section 7.14. Treatment of Shared Assets.
--------------------------

(a) Prosecution of Claims. The Managing Party in respect of a Shared
---------------------
Asset, or such other party as the parties hereto shall agree (or if they cannot
agree, HCS) shall have sole and exclusive authority to commence, prosecute,
settle, manage, control, conduct, waive, forego, release, discharge, forgive and
otherwise determine all matters whatsoever with respect to any Shared Asset.

(b) Disposition of Benefit. Any benefit that may be received from a
----------------------
Shared Asset shall be shared, one-third each, among HCS, IB and SEB, except to
the extent that the benefit relates to a Shared Asset received in respect of a
Shared Liability, the indemnification obligations for which are borne by only
two of the parties pursuant to Sections 7.03, 7.04 or 7.05, in which event such
benefit shall be shared, one-half each, by the parties bearing the
indemnification obligation.

(c) Shared Asset Payments. The amount of any benefit from a Shared Asset
---------------------
shall be payable by the party receiving the benefit (net of the Costs incurred
in collecting such benefit, if the party is not otherwise indemnified with
respect to such Costs under other provisions of this Article VII) to the other
parties quarterly (other than individual amounts of $100,000 or more, which
shall be paid within ten business days) as such benefits are received.

(d) Adjustment for Taxes. The amount of benefits determined pursuant to
--------------------
this Section 7.14 shall be appropriately adjusted to take into account Income
Taxes in a manner consistent with Section 7.06(b).

ARTICLE VIII
INSURANCE

Section 8.01. Policies and Rights Included within Assets.
------------------------------------------

(a) New and Existing Insurance. As of the Effective Time, each of the
--------------------------
Groups shall be responsible for arranging separate Policies with respect to
Actions and Liabilities arising after the Effective Time with respect to such
Group and its business. As of the Effective Time, all prepaid and unused
premiums, and all refunds received thereafter with respect to each Company
Policy that inured to the benefit of more than one Group before the Effective
Time, except as provided in Section 8.04, shall be distributed or retained one-
third each to HCS, IB and SEB (or one-half each to the affected parties if only
two parties were insured under the applicable Company Policy). To the extent any
party receives any such refund, the party receiving the refund shall promptly
transfer to the other parties the portion of such refund to which each such
other party is entitled.

I-35
<PAGE>

(b) IB's Insurance. Without limiting the generality of the definition of
--------------
the Instruments Assets set forth in Section 1.01 or the effect of Section 2.02,
the Instruments Assets shall include any and all rights of an insured party or
an additional named insured party under the Company Policies and all predecessor
Policies thereto for Actions or Liabilities arising before the Effective Time,
including rights of indemnity and the right to be defended by or at the expense
of the insurer, with respect to all Actions or Liabilities incurred or claimed
to have been incurred before the Distribution Date by any party in connection
with the Instruments Assets or the conduct of the Instruments Business or, to
the extent any claim is made against IB or any IB Subsidiary, the conduct of the
Health Care Systems Business or the Semiconductor Equipment Business (a "IB
Claim"); provided, however, that nothing in this paragraph (b) shall be deemed
-------- -------
to constitute (or to reflect) an assignment of such Company Policies, or any of
them, to IB. Except for Insurance Proceeds paid to or on behalf of any member of
the Health Care Systems Group or the Semiconductor Equipment Group at the
direction of IB in satisfaction of a claim that would otherwise be subject to
indemnification by IB under Article VII, IB shall be entitled to receive from
Varian any Insurance Proceeds with respect to any IB Claims under the Company
Policies, including reimbursement for Instruments Liabilities.

(c) SEB's Insurance. Without limiting the generality of the definition
---------------
of the Semiconductor Equipment Assets set forth in Section 1.01 or the effect of
Section 2.02, the Semiconductor Equipment Assets shall include any and all
rights of an insured party or an additional named insured party under the
Company Policies and all predecessor Policies thereto for Actions or Liabilities
arising before the Effective Time, including rights of indemnity and the right
to be defended by or at the expense of the insurer, with respect to all Actions
or Liabilities incurred or claimed to have been incurred before the Distribution
Date by any party in connection with the Semiconductor Equipment Assets or the
conduct of the Semiconductor Equipment Business or, to the extent any claim is
made against SEB or any SEB Subsidiary, the conduct of the Instruments Business
or the Health Care Systems Business, (an "SEB Claim"); provided, however, that
-------- -------
nothing in this paragraph (c) shall be deemed to constitute (or to reflect) an
assignment of such Company Policies, or any of them, to SEB. Except for
Insurance Proceeds paid to or on behalf of any member of the Instruments Group
or the Health Care Systems Group at the direction of SEB in satisfaction of a
claim that would otherwise be subject to indemnification by SEB under Article
VII, SEB shall be entitled to receive from Varian any Insurance Proceeds with
respect to any SEB Claims under the Company Policies, including reimbursement
for Semiconductor Equipment Liabilities.

(d) HCS's Insurance. Without limiting the generality of the definition
---------------
of the Health Care Systems Assets set forth in Section 1.01, the Health Care
Systems Assets shall include any and all rights of an insured party or an
additional named insured party under the Company Policies and all predecessor
Policies thereto including rights of indemnity and the right to be defended by
or at the expense of the insurer, other than the rights that are included in the
Instruments Assets or the Semiconductor Equipment Assets.

Section 8.02. Claims.
------

(a) Assignment of Rights to the Instruments Group.
---------------------------------------------

(i) The parties agree that as of the Effective Time, Varian shall be
deemed (A) to have assigned to the Instruments Group, all the other Groups'
rights, if any, as an insured party or an additional named insured party
including rights of indemnity and the right to be defended by or at the
expense of the insurer, under all of the Company Policies with respect to
such IB Claims as are pending on the Distribution Date, and (B) to the
extent necessary to provide the Instruments Group all the benefit of such
insurance with respect to IB Claims, to designate IB, without need of
further documentation, as the agent and attorney-in-fact to assert and to
collect any Insurance Proceeds under such Company Policies; provided,
--------
however, that nothing in this Section 8.02(a) shall be deemed to constitute
-------
or reflect the assignment of any of the Company Policies to the Instruments
Group. If, after the Distribution Date, the Instruments Group shall be
entitled to payment or reimbursement with respect to an IB Claim or any
Person shall assert an IB Claim, then HCS shall at the time such IB Claim
arises or is asserted be deemed (A) to assign, without need of further
documentation, to the Instruments Group all of the Health Care Systems
Group's rights, if any, as an insured party or an additional named insured
party, including right of indemnity and the right to be defended by or at
the expense of the insurer, under the applicable Company Policy with
respect to such IB Claim and (B) to the extent necessary to provide the
Instruments Group with the benefit of such insurance with respect to IB
Claims, to designate IB, without need of further documentation, as the
agent and attorney-in-fact to assert and to collect any Insurance Proceeds
under such Company Policies; provided, however, that nothing in this
-------- -------
Section 8.02(a) shall be deemed to constitute or

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<PAGE>

reflect the assignment of any of the Company Policies to the Instruments
Group. In the event an insurer refuses to honor such agency or to pay such
Insurance Proceeds to the Instruments Group, HCS shall use all reasonable
efforts to collect such Insurance Proceeds and forward them to IB.

(ii) In the event of payment of an IB Claim by the Instruments Group
after the Distribution Date, IB, or the applicable member of the
Instruments Group shall be subrogated to and stand in the place of HCS or
the applicable member of any other Group as to any rights, events or
circumstances in respect of which IB or the applicable member of the
Instruments Group may have any right or claim under this Agreement or
otherwise against any such insurer relating to such IB Claim. The parties
shall cooperate with the Instruments Group in a reasonable manner in
prosecuting any subrogated right or claim.

(b) Assignment of Rights to the Semiconductor Equipment Group.
---------------------------------------------------------

(i) The parties agree that as of the Effective Time, Varian shall be
deemed (A) to have assigned to the Semiconductor Equipment Group, all the
other Groups' rights, if any, as an insured party or an additional named
insured party including rights of indemnity and the right to be defended by
or at the expense of the insurer, under all of the Company Policies with
respect to such SEB Claims as are pending on the Distribution Date, and (B)
to the extent necessary to provide the Semiconductor Equipment Group all
the benefit of such insurance with respect to SEB Claims, to designate SEB,
without need of further documentation, as the agent and attorney-in-fact to
assert and to collect any Insurance Proceeds under such Company Policies;
provided, however, that nothing in this Section 8.02(b) shall be deemed to
-------- -------
constitute or reflect the assignment of any of the Company Policies to the
Semiconductor Equipment Group. If, after the Distribution Date, the
Semiconductor Equipment Group shall be entitled to payment or reimbursement
with respect to a SEB Claim or any Person shall assert a SEB Claim, then
HCS shall at the time such SEB Claim arises or is asserted be deemed (A) to
assign, without need of further documentation, to the Semiconductor
Equipment Group all of the Health Care Systems Group's rights, if any, as
an insured party or an additional named insured party, including right of
indemnity and the right to be defended by or at the expense of the insurer,
under the applicable Company Policy with respect to such SEB Claim and (B)
to the extent necessary to provide the Semiconductor Equipment Group with
the benefit of such insurance with respect to SEB Claims, to designate SEB,
without need of further documentation, as the agent and attorney-in-fact to
assert and to collect any Insurance Proceeds under such Company Policies;
provided, however, that nothing in this Section 8.02(b) shall be deemed to
-------- -------
constitute or reflect the assignment of any of the Company Policies to the
Semiconductor Equipment Group. In the event an insurer refuses to honor
such agency or to pay such Insurance Proceeds to the Semiconductor
Equipment Group, HCS shall use all reasonable efforts to collect such
Insurance Proceeds and forward them to SEB.

(ii) In the event of payment of a SEB Claim by the Semiconductor
Equipment Group after the Distribution Date, SEB, or the applicable member
of the Semiconductor Equipment Group shall be subrogated to and stand in
the place of HCS or the applicable member of any other Group as to any
rights, events or circumstances in respect of which SEB or the applicable
member of the Semiconductor Equipment Group may have any right or claim
under this Agreement or otherwise against any such insurer relating to such
SEB Claim. The parties shall cooperate with the Semiconductor Equipment
Group in a reasonable manner in prosecuting any subrogated right or claim.

Section 8.03. Administration; Other Matters. Consistent with the
-----------------------------
provisions of Article VII, after the Distribution Date,

(a) HCS's Responsibilities. HCS shall be responsible for (i) Insurance
----------------------
Administration of the Company Policies, and (ii) Claims Administration with
respect to any Health Care Systems Liabilities, any Health Care Systems Assets
or any claims as to which the Health Care Systems Group has retained rights of
reimbursement or subrogation under this Agreement or any Ancillary Agreement. It
is understood that the retention of the Company Policies by HCS is in no way
intended to limit, inhibit or preclude any right to insurance coverage for any
Insured Claim or any other rights under the Company Policies.

(b) IB's Responsibilities. IB shall be responsible for Claims
---------------------
Administration with respect to any Instruments Liabilities, Instruments Assets
or any claims as to which the Instruments Group has rights of reimbursement or
subrogation under this Agreement or any Ancillary Agreement.

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<PAGE>

(c) SEB's Responsibilities. SEB shall be responsible for Claims
----------------------
Administration with respect to any Semiconductor Equipment Liabilities,
Semiconductor Equipment Assets or any claims as to which the Semiconductor
Equipment Group has rights of reimbursement or subrogation under this Agreement
or any Ancillary Agreement.

(d) The Managing Party's Responsibilities. The Managing Party shall be
-------------------------------------
responsible for Claims Administration with respect to Insured Claims for Shared
Liabilities.

(e) Notice. In the event that HCS, SEB or IB makes an Insured Claim
------
under a Company Policy, such party shall deliver notice to the other parties of
such Insured Claim and shall keep the other parties periodically updated as to
the status of such Insured Claim.

Section 8.04. Retrospectively Calculated Insurance Premiums. Each party
---------------------------------------------
shall pay or receive its share of retrospectively calculated additional or
return premiums or assessments, policy dividends or audited exposures after the
Distribution Date for coverage under the Company Policies with respect to their
respective Liabilities which are Insured Claims under the Company Policies. Such
shares shall be determined consistent with losses incurred or audited exposure
with respect to the Assets or businesses of the parties for that specific line
of insurance coverage, as determined in an independent underwriting analysis.
Each party shall have the right, but not the obligation, to pay any additional
premiums under the Company Policies with respect to the other parties'
Liabilities which are Insured Claims under the Company Policies to the extent
that one or more other parties does not pay such premium, in which event the
non-paying party or parties shall promptly reimburse the payor for any premiums
paid by the payor with respect to such non-paying party's Liabilities.

Section 8.05. Allocation of Insurance Proceeds; Cooperation.
---------------------------------------------

(a) Allocation of Insurance Proceeds. Except as otherwise provided in
--------------------------------
Section 8.01, Insurance Proceeds received with respect to claims, costs and
expenses under the Company Policies shall be paid to HCS with respect to Health
Care Systems Liabilities that are Insured Claims, to IB with respect to
Instruments Liabilities that are Insured Claims and to SEB with respect to
Semiconductor Equipment Liabilities that are Insured Claims. Payment of the
allocable portions of indemnity costs of Insurance Proceeds resulting from the
Company Policies shall be made to the appropriate party upon receipt from the
insurer. Insurance Proceeds received with respect to Shared Liabilities shall be
paid to the party or other Person bearing the Liability that represents the
Insured Claim.

(b) Maximization of Coverage. Each party agrees to use commercially
------------------------
reasonable efforts to maximize available coverage under the Company Policies for
all Insured Claims whether or not such party is the expected beneficiary of
Insurance Proceeds under such Company Policies in respect of such Insured
Claims. As part of such efforts to maximize insurance coverage, each party
agrees to take all commercially reasonable actions to recover such amounts as
are or might be due from all other responsible parties in respect of an Insured
Claim, including Insured Claims as to which coverage limits under the Company
Policies would be or would have been exceeded as a result of such Insured Claim
and whether or not such party is expected to benefit directly from such effort
and to engage in reasonable settlement negotiations and consider reasonable
offers of settlement or compromise with respect to any Liabilities that
represent Insured Claims. Each party further agrees to name each other party to
this Agreement as an additional insured (up to a maximum of $10,000,000) under
each liability Policy maintained by such Party during the three-year period
commencing on the Distribution Date for claims under Article VII of this
Agreement.

(c) Multiple Claims. Where Health Care Systems Liabilities and/or
---------------
Instruments Liabilities and/or Semiconductor Equipment Liabilities, as
applicable, are covered under the same Company Policies for periods before the
Distribution Date, or covering claims made after the Distribution Date with
respect to an event or an occurrence before the Distribution Date, then the
Health Care Systems Group, the Instruments Group and the Semiconductor Equipment
Group, as applicable, may claim coverage for Insured Claims under such Company
Policies to the extent of liability or other coverage of such Company Policies.
Each party may receive Insurance Proceeds in respect of its Insured Claims as
and when payable under the terms of the applicable Company Policies without
regard to whether the Insured Claim covers Health Care Systems Liabilities,
Instruments Liabilities or Semiconductor Equipment Liabilities; provided,
--------
however, that before receiving payment under a Company Policy, the party making
- -------
the claim shall be required to have retained a portion of the Liability
underlying such Insured Claim equal to the amount of the self insurance
retention or deductible. In the event that the aggregate limits on any

I-38
<PAGE>

Company Policy is exceeded by the aggregate of paid Insured Claims, no Group
shall be entitled to reimbursement from another Group.

Section 8.06. Reimbursement of Expenses. Each of IB or SEB shall
-------------------------
reimburse the applicable insurer (or any applicable third-party administrator)
to the extent required under any Company Policy (or service agreement) for any
services performed after the Distribution Date with respect to any and all IB
Claims or SEB Claims, respectively, which are paid, settled, adjusted, defended
and/or otherwise handled by such insurer or third-party administrator under the
terms and conditions of such Company Policy (or any service agreement with any
such third-party administrator).

Section 8.07. Insurer Insolvency or Coverage Controversy. None of IB,
------------------------------------------
HCS and SEB shall be liable to one another for claims not reimbursed by insurers
for any reason, including co-insurance provisions, deductibles, adequacy of
limits, self-insurance retentions, bankruptcy or insolvency of any insurer, any
coverage disputes, any failure to timely claim or any defect in such claim or
its processing or exhaustion of Company Policy aggregates.

Section 8.08. Agreement for Waiver of Conflict and Shared Defense. In the
---------------------------------------------------
event that Insured Claims of more than one of the parties exist relating to the
same occurrence, the applicable parties shall jointly defend and waive any
conflict of interest necessary to the conduct of the joint defense. Nothing in
this Section 8.08 shall be construed to limit or otherwise alter in any way the
obligations of the parties to this Agreement, including those created by this
Agreement, by operation of Law or otherwise.

Section 8.09. Direct Responsibility for Claims; Additional Insurance; No
----------------------------------------------------------
Modifications.
- -------------

(a) Notification to Insurers. Varian agrees to use commercially
------------------------
reasonable efforts to notify all known liability insurers under the Company
Policies of the Distributions and to seek an endorsement by such insurers that
the coverage provided by such Company Policies will apply to the Health Care
Systems Group, the Instruments Group and the Semiconductor Equipment Group, as
organized and existing on the Distribution Date, with the same force and effect
and subject to the same terms, conditions and exclusions as if the separation of
Varian and the Distributions had not occurred (it being understood that Varian
shall be under no obligation to pay any amounts or otherwise incur any
Liabilities in connection therewith). In the event such endorsement is refused,
Varian agrees to use commercially reasonable efforts to place the Instruments
Group and the Semiconductor Equipment Group in the same position as each would
have been had such endorsement been agreed upon by such insurers (it being
understood that Varian shall be under no obligation to pay any amounts or
otherwise incur any Liabilities in connection therewith). Each of HCS, IB and
SEB shall have the right to use commercially reasonable efforts to negotiate
agreements with any and all insurers or third party administrators for the
assumption of direct responsibility for any and all Liabilities related to it
under any Company Policies, and Varian shall provide commercially reasonable
assistance in this effort.

(b) Post-Distribution Date Actions. After the Distribution Date, none
------------------------------
of HCS, IB or SEB or any member of their respective Groups shall, without the
prior written consent of the other parties, provide any insurer with a release,
or amend, modify or waive any rights under any Policy or agreement, if such
release, amendment, modification or waiver would adversely affect any rights or
potential rights to coverage of any member of the other Groups thereunder;
provided, however, that, except as expressly provided in this Agreement, the
- -------- -------
foregoing shall not (i) preclude any member of any Group from presenting any
claim or, subject to Section 8.05, from exhausting any Policy limit, (ii)
require any member of any Group to pay any premium or other amount or to incur
any Liability, or (iii) require any member of any Group to renew, extend or
continue any Policy in force. Each of HCS, IB and SEB shall share such
information as is reasonably necessary in order to permit the others to manage
and conduct its insurance matters in an orderly fashion.

(c) Additional Insurance. Nothing in this Agreement shall be deemed to
--------------------
restrict any member of the Instruments Group or the Semiconductor Equipment
Group from acquiring, at its own expense, any other insurance policy in respect
of any Liabilities or covering any period to the extent such insurance policy
does not contravene or abrogate any rights of any member of the other Groups
under any of the Company Policies or increase (or potentially increase) premiums
thereunder, whether prospectively or retroactively.

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<PAGE>

ARTICLE IX
DISPUTE RESOLUTION

Section 9.01. Separation Committee.
--------------------

(a) Composition and Responsibility of Committee. As of the Effective
-------------------------------------------
Time, HCS, IB and SEB shall form a committee (the "Separation Committee")
comprised of one representative designated from time-to-time by the chief
executive officer of each of the parties. Except as otherwise expressly provided
in this Agreement, until the tenth anniversary of the Effective Time, the
Separation Committee shall be responsible for resolving any and all
controversies, disputes or claims arising out of, relating to, in connection
with or resulting from this Agreement or any Ancillary Agreement (or any
amendment hereto or thereto or any transaction contemplated hereby or thereby),
including as to its existence, interpretation, performance, non-performance,
validity, breach or termination, including any claim based on contract, tort,
statute or constitution and any claim raising questions of law, whether arising
before or after termination of this Agreement or any of the Ancillary
Agreements, including any dispute as to (i) whether any Action or other
Liability is an Instruments Liability, a Health Care Systems Liability, a
Semiconductor Equipment Liability or a Shared Liability, (ii) whether any Asset
is a Instruments Asset, a Health Care Systems Asset, a Semiconductor Equipment
Asset or a Shared Asset, (iii) the interpretation of any provision of this
Agreement or any Ancillary Agreement, and (iv) such other matters as are
contemplated by this Agreement or any Ancillary Agreement to be resolved by the
Separation Committee (collectively, "Agreement Disputes").

(b) Resolution Procedures. In the event of an Agreement Dispute, each
---------------------
of the parties shall have the right to refer such Agreement Dispute in writing
to the Separation Committee (or, if the Agreement Dispute involves only two of
the parties, to the representatives of the affected parties that are members
thereof) for resolution. The Separation Committee (or such members) shall seek
to render a unanimous written decision with respect to any Agreement Dispute
within 60 days after receipt of the referral. The decision of the Separation
Committee (or such members) with respect to any Agreement Dispute shall be
binding on the affected parties, the members of their respective Groups and
their respective successors and assigns. In the event that the Separation
Committee (or such members) is unable to reach a unanimous written decision as
to any Agreement Dispute within 60 days after receipt of the referral, any of
the affected parties shall have the right to submit such Agreement Dispute to
arbitration in accordance with the procedures described in Section 9.02. The
parties shall each bear their own expenses and costs in connection with the
procedures described in this Section 9.01.

Section 9.02. Binding Arbitration.
-------------------

(a) Submission of Agreement Disputes. Until 60 days after the tenth
--------------------------------
anniversary of the Effective Time, the resolution of any and all such Agreement
Disputes not resolved in accordance with Section 9.01 shall be exclusively
governed, settled and resolved in accordance with the mandatory binding
arbitration provided for in this Section 9.02.

(b) Commencement of Arbitration. Any affected party may commence
---------------------------
arbitration proceedings by delivering a written notice to the other party or
parties, describing in reasonable detail the Agreement Dispute to the other(s),
and expressly requesting arbitration (an "Arbitration Demand Notice") and by
filing with the American Arbitration Association ("AAA") a claim. Any such
arbitration shall be final, conclusive and binding on the parties, the members
of their respective Groups and their respective successors and assigns.

(c) Selection of Panel. The arbitration shall be conducted in Palo Alto,
------------------
California by three arbitrators acting by majority vote (the "Panel"). The
parties involved in the arbitration shall jointly select the three arbitrators
from a list provided by AAA. If the parties are unable to agree as to the Panel
within 30 days after delivery of the Arbitration Demand Notice, the arbitrators
shall be appointed by the AAA pursuant to the commercial arbitration rules of
the American Arbitration Association, as amended from time to time (the "AAA
Rules"). If an arbitrator so selected or appointed becomes unable to serve, his
or her successor shall be similarly selected or appointed. Notwithstanding the
foregoing, if the affected parties agree, the Panel may consist of one
arbitrator jointly selected by the affected parties. The Panel shall be the sole
judge of the existence and extent of its jurisdiction.

(d) Arbitration Procedures. The arbitration shall be conducted under the
----------------------
AAA Rules.

(e) Conduct of Hearing. All hearings shall be conducted on an expedited
------------------
schedule and all proceedings shall be confidential. Any affected party may at
its expense make a stenographic record thereof, which

I-40
<PAGE>

shall then be shared with the other affected parties which so request a copy
(which parties shall then share equally in the expense) and which shall be given
to the Panel as the official record of the proceedings. Hearings with respect to
an Agreement Dispute shall begin not later than 120 days after selection or
appointment of the Panel and shall not be more than 30 days in length. The Panel
shall be required to issue a final award within 30 days of the conclusion of the
hearings. The award shall be in writing and shall specify the factual and legal
basis for the award. The Panel shall apportion all costs and expenses of
arbitration, including the Panel's fees and expenses, fees and expenses of
experts and reasonable attorneys' fees, among the affected parties as the Panel
deems fair and reasonable. The parties agree that money damages may be
inadequate and that any party shall be entitled to seek, and that the Panel
shall be empowered to enter, equitable and injunctive relief, including
preliminary and temporary injunctive relief, in addition to any other
appropriate relief or remedy. The parties consent to the jurisdiction of the
Panel to award such relief and to the binding nature of any such relief award by
the Panel. Any arbitration award shall be binding and enforceable against the
affected parties and each member of their respective Groups and judgment may be
entered thereon in any court of competent jurisdiction.

(f) Limitation on Damages. In no event may the Panel award exemplary,
---------------------
special or punitive damages or lost profits, except to the extent that
exemplary, special or punitive damages or lost profits are actually paid by a
party or a member of a party's Group to a third party.

Section 9.03. Disputes Regarding Closing Balance Sheets; Payments.
---------------------------------------------------
Notwithstanding Sections 9.01 and 9.02, the following shall govern disputes with
respect to the IB Closing Balance Sheet, the HCS Closing Balance Sheet and SEB
Closing Balance Sheet.

(a) Disputes Regarding Closing Balance Sheets. Unless (i) in the case
-----------------------------------------
of the IB Closing Balance Sheet, IB delivers written notice to HCS and SEB on or
before the 60th day after its receipt of the IB Closing Balance Sheet that it
disputes the value of any item set forth on the IB Closing Balance Sheet (a "IB
Dispute"), or (ii) in the case of the SEB Closing Balance Sheet, SEB delivers
written notice to HCS and IB on or before the 60th day after its receipt of the
SEB Closing Balance Sheet that it disputes the value of any item set forth on
the SEB Closing Balance Sheet (a "SEB Dispute"), or (iii) in the case of the HCS
Closing Balance Sheet, HCS delivers a written notice to IB and SEB on or before
the 60th day after its receipt of the HCS Balance Sheet that it disputes the
value of any item set forth on the HCS Closing Balance Sheet (a "HCS Dispute"),
then the parties shall be deemed to have accepted and agreed to the IB Closing
Balance Sheet, the HCS Closing Balance Sheet or the SEB Closing Balance Sheet,
as applicable, in the form in which it was delivered to it by the Auditors. If
such a notice of a dispute is given by a party (the "Disputing Party") within
such 60-day period, then the parties shall, within 30 days after the giving of
any such notice, attempt to resolve the IB Dispute, HCS Dispute or SEB Dispute,
as the case may be, and agree in writing upon the final content of the affected
Closing Balance Sheet. Notwithstanding the foregoing, the values assigned to
each Asset and Liability on the IB Closing Balance Sheet, the HCS Closing
Balance Sheet and the SEB Closing Balance Sheet will be conclusively presumed to
be correct, and no party shall have the right to dispute the value of any item
if the values assigned to such Assets and Liabilities are the same as the values
recorded on Varian's balance sheet immediately prior to the Effective Time.

(b) If the parties are unable to resolve any IB Dispute, HCS Dispute or
SEB Dispute, as the case may be, within such 30-day period, then a mutually
acceptable independent accounting firm (the "Independent Auditors") shall be
employed as arbitrator hereunder to settle such IB Dispute, HCS Dispute and/or
SEB Dispute, as the case may be, as soon as practicable. In resolving such IB
Dispute, HCS Dispute or SEB Dispute, the Independent Auditors shall (i) be
granted access to all documents and facilities necessary to perform its function
as arbitrator; (ii) permit each party and its representatives to make written
and oral presentations to the Independent Auditors; (iii) resolve such IB
Dispute, HCS Dispute and/or SEB Dispute by following relevant internal
accounting methods and policies consistently applied, to the extent such methods
and policies are not inconsistent with GAAP or any term of this Agreement; (iv)
make a final decision regarding such IB Dispute, HCS Dispute and/or SEB Dispute
within such period of time mutually agreed upon by the relevant parties and
specified at the time of appointment of the Independent Auditors; and (v) issue
a written statement explaining the basis for its final decision. The
determination of the Independent Auditors with respect to any IB Dispute, HCS
Dispute and/or SEB Dispute, as the case may be, shall be final and binding on
the applicable parties. Each affected party shall pay its proportionate share of
the fees and expenses of the Independent Auditors for such services. HCS and the
Disputing Party (or Disputing Parties) each agree to execute, if requested by
the Independent Auditors, a reasonable engagement letter. The term "IB Adjusted
Closing Balance Sheet" as used herein shall mean the definitive IB Closing
Balance Sheet agreed to by the parties or, as the case may be, the definitive IB
Closing Balance Sheet resulting from the determinations made by the Independent
Auditors in accordance with this Section 9.03 (in addition to the matters

I-41
<PAGE>

theretofore agreed to by IB and HCS). The term "HCS Adjusted Closing Balance
Sheet" as used herein shall mean the definitive HCS Balance Sheet agreed to by
the parties or, as the case may be, the definitive HCS Closing Balance Sheet
resulting from the determinations made by the Independent Auditors in accordance
with this Section 9.03 (in addition to the matters theretofore agreed to by HCS
and the Disputing Party or Disputing Parties). The term "SEB Adjusted Closing
Balance Sheet" as used herein shall mean the definitive SEB Closing Balance
Sheet agreed to by the parties or, as the case may be, the definitive SEB
Balance Sheet resulting from the determinations made by the Independent Auditors
in accordance with this Section 9.03 (in addition to the matters theretofore
agreed to by SEB and HCS).

(c) Post-Distribution Adjustments, Cash Payments and Other Actions.
--------------------------------------------------------------

(i) If the SEB Adjusted Closing Balance Sheet indicates that the
targets for the minimum Cash and Cash Equivalents provided in Section
2.05(b)(i)(A) or minimum consolidated Net Worth provided in Section
2.05(b)(i)(B) or the maximum Consolidated Debt of SEB provided in Section
2.05(b)(ii) were not met as of the Effective Time, then each of HCS and IB
shall pay to SEB, in cash, an amount equal to 50% of the amount that would
have been sufficient to cause SEB to meet such targets, or to reimburse SEB
for any Consolidated Debt in excess of $5,000,000, as of the Effective
Time, within ten days after the date the SEB Adjusted Closing Balance Sheet
is determined and provided to the parties. If the SEB Adjusted Closing
Balance Sheet indicates that the target for the minimum Cash and Cash
Equivalents provided in Section 2.05(b)(i)(A) has been exceeded but the
target for minimum consolidated Net Worth provided in Section 2.05(b)(i)(B)
has been satisfied, then SEB shall pay to each of HCS and IB, in cash, an
amount equal to 50% of the amount by which (A) the Cash and Cash
Equivalents of SEB set forth on the SEB Adjusted Closing Balance Sheet
exceed (B) the sum of (y) $100,000,000 and (z) the amount, if any, that
would be required to reimburse SEB for any Consolidated Debt in excess of
$5,000,000, within ten days after the date the SEB Adjusted Closing Balance
Sheet is determined and provided to the parties. If the consolidated Net
Worth set forth on the SEB Adjusting Closing Balance Sheet exceeds
$225,000,000, then SEB shall pay to each of HCS and IB, in cash, an amount
equal to 50% of the amount by which the such consolidated Net Worth exceeds
$225,000,000, within ten days after the date the SEB Adjusted Closing
Balance Sheet is determined and provided to the parties.

(ii) If the HCS Adjusted Closing Balance Sheet indicates that the
consolidated Net Worth of HCS set forth on the HCS Adjusted Closing Balance
Sheet is less than 40% of the combined consolidated Net Worths of HCS and
IB set forth on the HCS Adjusted Closing Balance Sheet and the IB Adjusted
Closing Balance Sheet, then IB shall pay to HCS an amount in cash that
would have been sufficient to cause the consolidated Net Worth of HCS to
have equaled 40% of the combined consolidated Net Worths of HCS and IB set
forth on the HCS Adjusted Closing Balance Sheet and the IB Adjusted Closing
Balance Sheet as of the Effective Time, within ten days after the later of
the HCS Adjusted Closing Balance Sheet and the IB Adjusted Closing Balance
Sheet is determined and provided to the parties. If the HCS Adjusted
Closing Balance Sheet indicates that the consolidated Net Worth of HCS set
forth on the HCS Adjusted Closing Balance Sheet is more than 50% of the
combined consolidated Net Worths of HCS and IB set forth on the HCS
Adjusted Closing Balance Sheet and the IB Adjusted Closing Balance Sheet,
then HCS shall pay to IB an amount in cash that would have been sufficient
to cause the consolidated Net Worth of HCS to have equaled 50% of the
combined consolidated Net Worths of HCS and IB set forth on the HCS
Adjusted Closing Balance Sheet and the IB Adjusted Closing Balance Sheet as
of the Effective Time, within ten days after the later of the HCS Adjusted
Closing Balance Sheet and the IB Adjusted Closing Balance Sheet is
determined and provided to the parties. For purposes of this Section
9.03(c)(ii), the consolidated Net Worth of HCS shall be determined without
giving effect to any Transaction Expenditures or Dispositions (including
associated tax benefit and tax cost) that have been accrued, paid or
received by HCS as of the Effective Time or any of the transactions
effected pursuant to Section 2.05(d), but shall include any adjustments
required by Section 9.03(c)(i).

Section 9.04. Post Distribution Adjustment in Respect of Transaction
------------------------------------------------------
Expenditures and Disposition Proceeds. On the date that is 180 days after the
- -------------------------------------
Distribution Date (or, if such date is not a business day, the immediately
following business day), HCS and IB shall recompute the After-tax Differential
(including HCS's and IB's good faith estimates of the components thereof that
are not yet determinable as of such 180th day). If the positive or negative
difference between the After-tax Differential determined as of such date and the
After-tax Differential determined pursuant to the provisions of Section 2.05(d)
is more than $1,000,000, then IB shall pay HCS, or HCS shall pay IB (as
applicable to put the parties in the positions they would have been if the
After-tax
I-42
<PAGE>

Differential computed pursuant to the provisions of Section 2.05(d) was equal to
the recomputed After-tax Differential) 50% of the amount of such difference.

Section 9.05. Specific Performance. Each party acknowledges that there
--------------------
is no adequate remedy at Law for the failure by such parties to comply with the
provisions of this Agreement and that such failure would cause immediate harm
that would not be adequately compensable in damages. Accordingly, each party
agrees that the agreement contained in Section 9.02 with respect to arbitration
of Agreement Disputes and in Section 9.03 with respect to resolution of Disputes
by the Independent Auditors may be specifically enforced without the requirement
of posting a bond or other security.

ARTICLE X
MISCELLANEOUS

Section 10.01. Complete Agreement; Construction. This Agreement and the
--------------------------------
Ancillary Agreements shall constitute the entire agreement among the parties
with respect to the subject matter hereof and shall supersede all prior
agreements, negotiations, commitments and writings with respect to such subject
matter. In the event of any inconsistency between this Agreement and any
Schedule or Exhibit, the Schedule or Exhibit, as the case may be, shall prevail.
Notwithstanding any other provisions in this Agreement to the contrary, in the
event and to the extent that there is a conflict between the provisions of this
Agreement and the provisions of any Ancillary Agreement, the Ancillary Agreement
shall prevail, except for inconsistencies with respect to Sections 5.05 and 6.07
and Article IX, which shall prevail over any inconsistent provisions of any
Ancillary Agreement other than the Tax Sharing Agreement.

Section 10.02. Ancillary Agreements. This Agreement is not intended to
--------------------
address, and should not be interpreted to address, the matters expressly covered
by the Ancillary Agreements.

Section 10.03. Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which shall be deemed to be an original but all of
which together shall constitute but one and the same Agreement.

Section 10.04. Responsibility for Expenses.
---------------------------

(a) Transaction Expenditures. Except as otherwise expressly provided in
------------------------
this Agreement, any Ancillary Agreement or any instrument or agreement
contemplated thereby, and subject to the provisions of this Agreement with
respect to After-tax Transaction Expenditures, all Transaction Expenditures
shall be charged to and paid by Varian.

(b) Expenses Incurred or Accrued after the Distribution Date. Except as
--------------------------------------------------------
otherwise set forth in this Agreement or any Ancillary Agreement, each party
shall bear its own costs and expenses incurred in connection with the
transactions contemplated by this Agreement.

Section 10.05. Notices. All notices, consents, requests, waivers, claims
-------
or other communications (each a "Notice") required or permitted under this
Agreement shall be in writing and shall be sufficiently given or made (a) if
hand delivered or sent by telecopy (with delivery confirmed by voice or
otherwise), (b) if sent by nationally recognized overnight courier, or (c) if
sent by registered or certified mail, postage prepaid, return receipt requested,
and in each case addressed as follows:

If to Varian before the Distributions, at:
3050 Hansen Way
Palo Alto, California 94304
Attn: Chief Financial Officer
Telecopy: (650) 424-5754

with a copy to:

I-43
<PAGE>

3050 Hansen Way
Palo Alto, California 94304
Attn: General Counsel
Telecopy: (650) 858-2018

If to HCS before the Distributions, at:
3100 Hansen Way
Palo Alto, California 94304
Attn: Elisha W. Finney
Telecopy: (650) 424-5358

with a copy to:

3050 Hansen Way
Palo Alto, California 94304
Attn: Joseph B. Phair
Telecopy: (650) 858-2018

If to SEB before the Distributions, at:
35 Dory Road
Gloucester, Massachusetts 01930
Attn: Ernest L. Godshalk III
Telecopy: (978) 283-0445

If to IB before the Distributions, at:
3050 Hansen Way
Palo Alto, California 94304
Attn: Wayne P. Somrak
Telecopy: (650) 424-5754

with a copy to:

3100 Hansen Way
Palo Alto, California 94304
Attn: A.W. Homan
Telecopy: (650) 424-5998

If to HCS after the Distributions, at:
3100 Hansen Way
Palo Alto, California 94304
Attn: Chief Financial Officer

With a copy to:

3100 Hansen Way
Palo Alto, California 94304
Attn: General Counsel

If to SEB after the Distributions, at:
35 Dory Road
Gloucester, Massachusetts 01930
Attention: Chief Financial Officer

With a copy to:

I-44
<PAGE>

35 Dory Road
Gloucester, Massachusetts 01930
Attn: General Counsel

If to IB after the Distributions, at:
3120 Hansen Way
Palo Alto, California 94304
Attn: Chief Financial Officer

with a copy to:

3120 Hansen Way
Palo Alto, California 94304
Attn: General Counsel

or such other address as shall be furnished by any of the parties in a Notice.
Any Notice shall be deemed to have been duly given or made when the Notice is
received.

Section 10.06. Waivers. The failure of any party to require strict
-------
performance by any other party of any provision in or rights or remedies with
respect to this Agreement shall not waive or diminish that party's right to
demand strict performance thereafter of that or any other provision hereof or
right or remedy.

Section 10.07. Amendments. This Agreement may be amended or supplemented,
----------
or its provisions waived only by an agreement in writing signed by each of the
parties; provided, however, that (i) after the Varian stockholders approve the
-------- -------
Distributions no such amendment, supplement or waiver may be effected unless it
would not be materially adverse to the Varian stockholders, and (ii) Article VII
may not be amended after the Distributions in respect of third party
beneficiaries thereof without the consent of such Persons.

Section 10.08. Assignment.
----------

(a) No party to this Agreement shall (i) consolidate with or merge into
any Person or permit any Person to consolidate with or merge into such party
(other than a merger or consolidation in which the party is the surviving or
continuing corporation), or (ii) sell, assign, transfer, lease or otherwise
dispose of, in one transaction or a series of related transactions, all or
substantially all of its Assets, unless the resulting, surviving or transferee
Person expressly assumes, by instrument in form and substance reasonably
satisfactory to the other parties, all of the obligations of the party under
this Agreement.

(b) Except as expressly provided in paragraph (a) above or Section 7.10,
neither this Agreement nor any of the rights, interests or obligations hereunder
shall be assignable, directly or indirectly, by any party without the prior
written consent of the other parties, and any attempt to so assign without such
consent shall be void.

Section 10.09. Successors and Assigns. Subject to Section 10.08, this
----------------------
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the successors and permitted assigns of the parties.

Section 10.10. Termination. This Agreement may be terminated and the
-----------
Distributions may be abandoned at any time before the Distributions by Varian in
its sole discretion without the approval of SEB or IB or the Varian
stockholders. In the event of such termination, no party shall have any
Liability of any kind to any other party. After the Distributions, this
Agreement may not be terminated except by an agreement in writing signed by each
of the parties; provided, however, that Article VII may not be terminated after
-------- -------
the Distributions in respect of the third party beneficiaries thereof without
the consent of such Persons.

Section 10.11. Third Party Beneficiaries. Except as expressly
-------------------------
contemplated by Article VII (relating to Indemnitees), this Agreement is solely
for the benefit of the parties and the members of their respective Groups and
Affiliates and their respective successors and permitted assigns, and should not
be deemed to confer upon third parties any remedy, claim, liability, right of
reimbursement, cause of action or other right in excess of those existing
without reference to this Agreement.

I-45
<PAGE>

Section 10.12. Exhibits and Schedules. The Exhibits and Schedules
----------------------
attached to this Agreement shall be construed with and as an integral part of
this Agreement to the same extent as if the same had been set forth verbatim
herein.

Section 10.13. Governing Law. This Agreement, the Ancillary Agreements
-------------
and any other agreements entered into in connection with the transactions
contemplated hereby (except for the Conveyancing and Assumption Instruments,
which shall be governed by local Law) shall be governed by, and construed and
enforced in accordance with, the Laws of the State of Delaware without regard to
the principles of conflicts of Laws thereunder. Notwithstanding the foregoing,
the Federal Arbitration Act, 9 U.S.C. (S)(S)1-15, shall govern the arbitrability
of Agreement Disputes.

Section 10.14. Severability. If any provision of this Agreement or the
------------
application thereof to any Person or circumstance is determined to be invalid,
void or unenforceable in any respect, the remaining provisions hereof, or the
application of such provision to Persons or circumstances other than those as to
which it has been held invalid, void or unenforceable, shall remain in full
force and effect and in no way be affected, impaired or invalidated thereby, so
long as the economic or legal substance of the transactions contemplated hereby
is not affected in any manner adverse to any party.

Section 10.15. Subsidiaries. Each party shall cause to be performed, and
------------
hereby guarantee the performance of, all actions, agreements and obligations set
forth herein to be performed by any Subsidiary of such party which is
contemplated to be a Subsidiary of such party on and after the Distribution
Date.

Section 10.16. Titles and Headings. Titles and headings to sections
-------------------
herein are inserted for the convenience of reference only and are not intended
to be part of or to affect the meaning or interpretation of this Agreement or of
any Ancillary Agreement.

Section 10.17. Consent to Jurisdiction. Without limiting any of the
-----------------------
provisions of Article IX, each party hereby submits to the exclusive
jurisdiction of the Chancery Court of the State of Delaware and the Federal
courts of the United States of America located in Delaware in respect of the
transactions contemplated by this Agreement, and hereby waives, and agrees not
to assert, as a defense in any action, suit or proceeding for the transactions
contemplated by this Agreement, that it is not subject thereto or that such
action, suit or proceeding may not be brought or is not maintainable in such
courts or that the Agreement may not be enforced in or by such courts or that
its property is exempt or immune from execution, that the suit, action or
proceeding is brought in an inconvenient forum, or that the venue of the suit,
action or proceeding is improper.

I-46
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.

VARIAN ASSOCIATES, INC.

By /s/ Richard M. Levy
-------------------
Name: Richard M. Levy
Title: Executive Vice President

VARIAN SEMICONDUCTOR EQUIPMENT ASSOCIATES, INC.

By /s/ Richard A. Aurelio
----------------------
Name: Richard A. Aurelio
Title: President and Chief Executive Officer

VARIAN, INC.

By /s/ Allen J. Lauer
------------------
Name: Allen J. Lauer
Title: President and Chief Executive Officer

I-47
<PAGE>

[LOGO OF RECYCLED PAPER] Printed on recycled paper

<PAGE>

P
R VARIAN ASSOCIATES, INC.
O
X PROXY FOR COMBINED ANNUAL AND SPECIAL MEETING OF
Y STOCKHOLDERS--FEBRUARY 18, 1999

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned stockholder of Varian Associates, Inc. hereby
constitutes and appoints J.TRACY O'ROURKE and JOSEPH B. PHAIR, and each of them,
proxies and attorneys-in-fact of the undersigned, with full power of
substitution, to vote all the shares of Common Stock of Varian Associates, Inc.
standing in the name of the undersigned, at the Combined Annual and Special
Meeting of Stockholders of Varian Associates, Inc. to be held at the SRI
International Auditorium, 333 Ravenswood Avenue, Menlo Park, California, on
February 18, 1999, at 1:30 p.m., local time, and at any adjournment(s) or
postponement(s) thereof.

Unless a contrary direction is indicated, this Proxy will be voted FOR
Proposals 1, 2, 3, 4, 5, 6, 7, 8, 9 and 10, FOR all nominees listed in Proposal
11 and in accordance with the judgement of the proxies as to the best interests
of the Company upon such other business as may properly come before the meeting
or any adjournment or postponement thereof. If specific instructions are
indicated, this Proxy will be voted in accordance therewith. With respect to
Proposal 11, the proxies shall have full discretion and authority to vote
cumulatively and to allocate votes among any or all of the nominees of the Board
of Directors in such order as they may determine.

Proposal 11 -- Election of Directors -- Nominees: Angus A. MacNaughton,
John G. McDonald, Wayne R. Moon, Burton Richter and Elizabeth E. Tallett.

- --------------------------------------------------------------------------------
SEE REVERSE
SIDE
- --------------------------------------------------------------------------------
(If you have written in the above space, please mark the corresponding box on
the reverse side of this card)

PLEASE FILL IN, DATE, SIGN AND MAIL THIS PROXY IN THE
ENCLOSED POSTAGE-PAID RETURN ENVELOPE

CONTINUED AND TO BE SIGNED ON REVERSE SIDE

- --------------------------------------------------------------------------------
FOLD AND DETACH HERE

[MAP APPEARS HERE] DIRECTIONS TO SRI INTERNATIONAL
CONFERENCE CENTER AUDITORIUM

From San Francisco: southbound via 101--
take Willow Road exit and continue right
on Willow to Middlefield Rd., right on
Middlefield to first stoplight, left
into SRI parking lot.

From San Jose: northbound via 101--take
Willow Road-Menlo Park exit, continue on
Willow to Middlefield Rd., right on
Middlefield to first stoplight, left
into SRI parking lot.

From San Francisco: southbound via 280--
take Woodside Road exit, left on
Woodside to El Camino Real, right on El
Camino southbound to Ravenswood Ave.,
left on Ravenswood (past SRI main
entrance) to Middlefield Rd., right on
Middlefield to first stoplight, right
into SRI parking lot.

From San Jose: northbound via 280--take
Page Mill exit, right on Page Mill to El
Camino Real, left on El Camino to
Ravenswood Ave., right on Ravenswood
(past SRI main entrance) to Middlefield
Rd., right on Middlefield to first
stoplight, right into SRI parking lot.
<PAGE>
[X] PLEASE MARK YOUR
VOTE WITH AN X.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS 1, 2, 3, 4, 5, 6, 7,
8, 9, 10 AND 11. THE EFFECTIVENESS OF PROPOSALS 1 THROUGH 10 IS CONDITIONED
UPON THE APPROVAL OF ALL SUCH PROPOSALS.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>

FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
1. To Approve the [_] [_] [_] 2. To Approve the Amendment [_] [_] [_] 3. To Approve the [_] [_] [_]
Internal to the Certificate of Amendment to
Transfers, Incorporation of the the Certificate
Special Company to Change the of Incorporation
Dividends and Name of the Company of the Company
Distribution to Change Certain
Agreement 3. To Approve the Amendment [_] [_] [_] Corporate
to the Certificate of Governance
Incorporation of the Provisions
Company to Specify that
the Number of Directors 5. To Approve the [_] [_] [_]
Shall be Fixed by Adoption by IB
Resolution of the Board of the IB
of Directors Omnibus Stock
- ------------------------------------------------------------------------------------- Plan

6. To Approve the [_] [_] [_]
Adoption by IB
of the IB
Management
Incentive Plan

7. To Approve the [_] [_] [_]
Adoption by SEB
of the SEB
Omnibus Stock
Plan

8. To Approve the [_] [_] [_]
Adoption by SEB
of the SEB
Management
Incentive Plan

9. To Approve the [_] [_] [_]
Amendment and
Restatement
by the Company
of the Company
Omnibus Stock
Plan

10. To Approve the [_] [_] [_]
Amendment and
Restatement
by the Company
of the Company
Management
Incentive Plan

FOR WITHHELD
11. Election of [_] [_]
Directors
(see reverse)

For, except vote withheld from the
following nominee(s):
SIGNATURE(S)________________________________________________ DATE_______________
NOTE: Please sign exactly as name appears on your stock certificate. If the stock ------------------------------------
is registered in the names of two or more persons, each should sign.
Executors, administrators, trustees, guardians, attorneys and corporate
officers should insert their titles.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
DETACH AND RETURN PROXY CARD

VARIAN ASSOCIATES, INC.
COMBINED ANNUAL AND SPECIAL MEETING OF STOCKHOLDERS

FEBRUARY 18, 1999
1:30 p.m.

SRI INTERNATIONAL AUDITORIUM
333 RAVENSWOOD AVENUE
MENLO PARK, CALIFORNIA

(MAP ON REVERSE SIDE)