VARIAN MEDICAL SYSTEMS INC, 10-K405, 2000-12-08

VARIAN MEDICAL SYSTEMS INC
10-K405, 2000-12-08
SPECIAL INDUSTRY MACHINERY, NEC

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

FORM 10-K

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2000

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

FOR THE TRANSITION PERIOD FROM __ TO __

COMMISSION FILE NUMBER: 1-7598

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

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

3100 HANSEN WAY,
PALO ALTO, CALIFORNIA 94304-1030
(Address of principal executive offices) (Zip Code)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $1 par value New York Stock Exchange
Preferred Stock Purchase Rights Pacific Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

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

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

At December 6, 2000, the aggregate market value of the Common Stock held
by non-affiliates of the registrant was approximately $1,874,920,000.

At December 6, 2000, the number of shares of Common Stock outstanding was
$32,326,211.

DOCUMENTS INCORPORATED BY REFERENCE

DEFINITIVE PROXY STATEMENT FOR THE COMPANY'S 2001 ANNUAL MEETING
OF STOCKHOLDERS--PART III OF THIS FORM 10-K

WWW.VARIAN.COM (NYSE: VAR)
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VARIAN MEDICAL SYSTEMS, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2000

PAGE
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PART I
<S> <C> <C>
Item 1. Business.................................................................................. 4
Item 2. Properties................................................................................ 14
Item 3. Legal Proceedings......................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders....................................... 16

PART II

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................. 18
Item 6. Selected Financial Data................................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 20
Item 7A Quantitative and Qualitative Disclosure About Market Risk................................. 36
Item 8. Financial Statements and Supplementary Data............................................... 38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 38

PART III

Item 10. Directors and Executive Officers of the Registrant........................................ 39
Item 11. Executive Compensation.................................................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 39
Item 13. Certain Relationships and Related Transactions............................................ 39

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 40
</TABLE>

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FORWARD-LOOKING STATEMENTS

Except for historical information, this annual report on Form 10-K
contains "forward-looking" statements within the meaning of the Private
Securities Litigation Reform Act of 1995 which provides a "safe harbor" about
future events, products and future financial performance that are based on the
beliefs of, estimates made by and information currently available to our
management. The outcome of the events described in these forward-looking
statements is subject to risks and uncertainties. Actual results and the timing
of certain events may differ significantly from those projected in these
forward-looking statements and reported results should not be considered an
indication of future performance due to the factors listed below, under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Certain Factors Affecting Our Business" and from time to time in
our other filings with the Securities and Exchange Commission. For this purpose,
statements concerning industry outlook, including market acceptance of or
transition to new products or technology such as IMRT, brachytherapy, software,
treatment techniques, and advanced x-ray products; growth drivers; Varian
Medical Systems, Inc.'s ("VMS," "we" or "our") orders, sales, backlog or
earnings growth; future financial results and any statements using the terms
"anticipate," "believe," "expect," "appear," "should," "will," "point to" or
similar statements are forward-looking statements that involve risks and
uncertainties that could cause our actual results to differ materially from
those projected or management's current expectations. Such risks and
uncertainties include, without limitation, market acceptance, demand for and
possible obsolescence of our products; our ability to successfully develop and
commercialize new products; the impact on our sales and margins of competitive
products and pricing; the effect of general economic conditions and foreign
currency exchange rates; our ability to increase operating margins on higher
sales while controlling costs; our ability to maintain manufacturing capacity to
meet demand, including the potential risk of earthquake damage to our existing
facilities; the effect of environmental claims and clean-up expenses on our
costs; our ability to protect our intellectual property and the related
competitive advantages of our products; our reliance on sole source or a limited
number of suppliers; the impact of managed care initiatives or other healthcare
reforms in the U.S. on our capital expenditures and/or limitations on third
party reimbursements and the resulting pressure on medical equipment pricing and
user demand for our products; our ability to meet U.S. FDA and other domestic or
foreign regulatory requirements or product clearances which might limit the
products we can sell or subject us to fines or other regulatory actions; our use
of distributors for a portion of our sales, the loss of which could reduce sales
and harm our financial results; continued consolidation in the x-ray tubes
market; the possibility that material product liability claims could harm our
future sales, or require us to pay uninsured claims; the availability and
adequacy of our insurance to cover future material liabilities, including any
material product liability or product recall of General Electric manufactured
products for which we provide customer service and have assumed such
liabilities; our ability to attract and retain key employees in a highly
competitive employment market; the affect which fluctuations in our operating
results may have on the price of our common stock; the possibility that certain
provisions of our Certificate of Incorporation and its stockholder rights plan
might discourage a takeover and therefore limit the price of our common stock;
our ability to meet time requirements for and implement conversion to the Euro
currency in our business dealings and operations in certain European countries;
the effect of price transparency on our business dealings in countries of the
European Community following implementation of Euro currency regulations; the
effect on our profit margins of product recycling and related regulatory
requirements in European and other countries; our potential responsibility for
additional tax obligations and other liabilities arising out of the spin-off of
segments of our former businesses; and the effect on our revenue recognition of
changes in accounting standards. By making forward-looking statements, we have
not assumed any obligation to, and you should not expect us to, update or revise
those statements because of new information, future events or otherwise.

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PART I

ITEM 1. BUSINESS

GENERAL

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

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

OVERVIEW

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

In serving the market for advanced medical systems (primarily for cancer
care), we continue to broaden our offerings to address the concerns driving this
sector, including the unrelenting demand to contain costs and enhance efficacy.
In addition to developing medical hardware, we also develop clinical software
products and devices designed to enhance their productivity and quality.

Our oncology systems line encompasses a fully integrated system of
products embracing not only linear accelerators but also sophisticated ancillary
products and services. Our linear accelerators and simulators are in service
around the world, treating cancer patients daily. Our x-ray tubes are sold to
most major diagnostic equipment manufacturers and cover a range of applications
including advanced mammography and CT scanning. We are also involved in several
high-growth product development opportunities, including advanced brachytherapy
systems for cancer treatment and one of the world's first real-time, digital
x-ray fluoroscopic imager. In addition, we are pursuing technologies and
products that promise to improve disease management by employing targeted energy
to enhance the effectiveness of leading-edge molecular medicine.

CANCER-CARE MARKET

Based on a recent study by the International Atomic Energy Agency -
Directory of Radiotherapy Centres - published in September 2000, approximately
57% of all cancer patients in the U. S. receive radiation therapy at some point
during the course of their disease. The study also suggested that radiation
therapy is appropriate for approximately 50% of all cancer patients worldwide,
either alone or in combination with surgery or chemotherapy. An important
advantage of radiation therapy is that the radiation acts with some selectivity
on cancer cells. When a cell absorbs radiation, the radiation affects the cell's
genetic structure and inhibits its replication, leading to its gradual death.
Cancerous cells replicate very fast and therefore the radiation they absorb can
disproportionately damage them.

Currently, the most common type of radiotherapy uses x-rays delivered by
external beams and is administered using linear accelerators ("LINACS"). LINACS
are conventionally used for multiple (or "fractionated") treatments of a tumor
in up to 30 radiation sessions. LINACS, as used more recently in the brain,
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.

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PRODUCTS

Our products can be broadly classified into three principal categories:
oncology systems, x-ray tubes and imaging subsystems, and other technologies
developed by our Ginzton Technology Center, primarily brachytherapy.

ONCOLOGY SYSTEMS

Our oncology systems business designs, manufactures, sells and services
hardware and software products for radiation treatment of cancer. Our products
include linear accelerators, simulators and computer systems for planning cancer
treatments and data management systems for radiation oncology centers. We offer
an integrated system of products embracing both linear accelerators and
sophisticated ancillary products and services to extend their capabilities and
efficiency. Our Clinac(TM) series of medical linear accelerators, marketed to
hospitals and clinics worldwide, generate therapeutic x-rays and radiation beams
for cancer treatment. We produce a variety of versions of these devices to suit
various facility requirements, including our new Silhouette Edition Clinac
designed to fit into older, smaller treatment rooms.

Linear accelerators are also used for industrial radiographic
applications. Our 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.

We also manufacture and market related radiotherapy products such as
imaging systems, information management systems, multi-leaf collimators,
simulators, treatment planning systems and radiosurgery products. We continually
work with physicians and technicians to develop the latest technology and
treatments.

The radiotherapy process consists of patient examination, planning of the
therapeutic approach, treatment delivery, verification that the treatments are
being delivered correctly, quality assurance of all the devices involved in the
treatment process, reporting of the results and obtaining reimbursement for the
radiotherapy services provided. We provide products that help perform each of
these tasks. We have also integrated our individual products into a complete
system that automates and enhances the entire process of treating a patient. In
addition, we store patient data and images into a single database that every
product can use, which enables each device to easily communicate with each
other.

Revenues from the oncology systems business represented 77%, 78% and 75%
of total revenues in fiscal 2000, 1999 and 1998, respectively. For a discussion
of segment financial information, see "Industry Segments" of the Notes to the
Consolidated Financial Statements.

X-RAY TUBES AND IMAGING SUBSYSTEMS

Our x-ray products business is a world leader in designing and
manufacturing subsystems for diagnostic radiology, including x-ray-generating
tubes and imaging subsystems, for the estimated worldwide $7 billion diagnostic
imaging market. X-ray tubes are a key component of x-ray imaging subsystems,
including both new system configurations and replacement tubes for the installed
base. We conduct an active research and development program to focus on new
technology and applications in both the medical and industrial x-ray tube
markets. Our extensive scientific and engineering expertise in glass and metal
center section tubes is considered state-of-the-art.

We manufacture tubes for four primary medical x-ray imaging applications:
CT scanners; radiographic/fluoroscopic; special procedures; and mammography.
Over time, we have substantially increased the heat storage capacity of CT
tubes. We developed these high heat unit tubes to respond 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
our current tubes last twice as long as tubes did five years ago, resulting in
significant savings for the customers. Our new high output CT tube, which is
capable of supporting the requirements of the newest generation of half second
CT scanners, is the only such anode grounded half second CT scanner tube in the
market at this time.

Our mammography tubes produce high quality images at low doses. Today,
almost a third of the mammography systems and nearly a quarter of the CT scanner
systems worldwide employ our tubes. We also offer a line of industrial x-ray
tubes which consist of analytical x-ray tubes used for x-ray fluorescence and
diffraction as well as tubes used for non-destructive imaging and gauging. We
also design, manufacture and market imaging products. Our amorphous silicon
imaging technologies can be broadly applied as an alternative to image
intensifiers

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or film. We expect that imaging equipment based on amorphous silicon
semiconductors may be more stable and reliable, have far fewer adjustments, and
suffer less degradation over time.

Revenues from the x-ray tubes and imaging subsystems business represented
20%, 21% and 24% of total revenues in fiscal 2000, 1999 and 1998, respectively.
For a discussion of segment financial information, see "Industry Segments" of
the Notes to the Consolidated Financial Statements.

GINZTON TECHNOLOGY CENTER

In addition to pursuing growth opportunities in existing markets, we are
pursuing the potential of combining advances in focused energy and imaging
technology with the latest breakthroughs in biotechnology through our research
facility, the Ginzton Technology Center ("GTC"). GTC manufactures and sells our
brachytherapy products, including our high dose rate brachytherapy system
(VariSource(TM)) and our brachytherapy treatment planning products
(BrachyVision(TM) and VariSeed(TM)).

During fiscal year 2000, we entered into an agreement with Cordis
Corporation, a subsidiary of Johnson and Johnson Company, to develop, supply and
service products and radioactive sources for coronary intravascular radiotherapy
treatment to prevent restenosis (or re-clogging of the arteries once blockages
were removed) after angioplasty. In November 2000, Cordis Corporation received
U.S. Food and Drug Administration ("FDA") clearance for this treatment system.

We are also evaluating using radiation to treat other diseases. Such
efforts are designed to bring forth a whole new range of products and
technologies that allow us to take full advantage of our reputation for
technology innovation leadership in the health care field.

MARKETING AND SALES

Sales to our ten largest customers in fiscal years 2000, 1999 and 1998
accounted for approximately 19%, 24% and 24% of sales, respectively. However, we
do not have a single customer that represents 10% or more of our total sales.

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

We sell our 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 $534 million, $459
million and $405 million for fiscal years 2000, 1999 and 1998, respectively. We
divide our markets for oncology systems, components and accessories by region
into North America, Europe, Asia and rest of the world, and these regions
constituted 62%, 23%, 8% and 7% of sales during fiscal year 2000 and 49%, 34%,
12% and 5% of sales during fiscal year 1999, respectively.

Historically, we have sold a high proportion of our x-ray products to a
limited number of customers and we expect that sales of these products to
relatively few customers will continue to account for a high percentage of sales
in the foreseeable future. We sell approximately 80% of our x-ray tube products
to original equipment manufacturers ("OEM's") and 20% to replacement tube
distributors. We supply tubes to such industry leaders as Toshiba, Hitachi,
Marconi, Shimadzu and General Electric Medical Systems, each of which accounted
for 5% or more of x-ray tube product sales in fiscal year 2000. Total sales for
our x-ray tubes and imaging subsystems business were $136 million, $123 million
and $131 million for fiscal years 2000, 1999 and 1998, respectively. We divide
our markets for x-ray tube products, components and accessories by region into
North America, Europe, Asia and rest of the world, and these regions constituted
32%, 15%, 51% and 2% during fiscal year 2000 and 30%, 23%, 44% and 3% of sales
during fiscal year 1999, respectively.

Although we have seen the strongest growth to date in North America, we
believe that in the foreseeable future there will be worldwide growth in the
markets for oncology systems and related services because of the underserved
market outside the U.S. With the transition from analog to digital systems, the
demand for products and

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services related to networking, archiving and electronic distribution of digital
images should grow in industrialized countries. We also believe there will be
continuous growth in the markets for information technology.

Our marketing strategy is to offer to customers a complete package of
products and services in the fields of radiotherapy, including equipment,
accessories and related services such as education and after-sales services. Our
marketing efforts include developing relationships with current and prospective
customers, participating in annual professional meetings for clinicians and
hospitals, advertising in trade journals, sending direct mail and marketing over
the telephone. Our growth strategy is to add products in existing markets,
expand in new high-potential markets, add product offerings through internal
research and development and alliances with other companies and grow our
international market.

CUSTOMER SUPPORT AND SERVICES

We maintain centers in Milpitas, California; Buc, France; and Tokyo,
Japan; as well as field service forces throughout the world for oncology systems
service support. Our network of service engineers and customer support
specialists provide installation, warranty, repair, training and support
services. We generate service revenue by providing service to customers on a
time and materials basis and through comprehensive service contracts and the
sale of parts. Our rates are competitive with those offered by our competitors.

We warrant most of our 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.
We warrant that software will perform in accordance with specifications at the
delivery date and up to three months thereafter if the customer gives notice of
any nonconformance. We offer a variety of post-warranty service agreements that
permit customers to contract for the level of equipment maintenance they
require. In addition, we offer specific software support agreements, reflecting
the growing use in our products of software that can be updated.

Systems under warranty or service contract receive periodic maintenance
by our service engineers, who also install new system capabilities or software
upgrades and respond to customer service requests. Customers who do not have a
service contract with us may also purchase these services.

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

We believe customer service and support are an integral part of our
competitive strategy. Service capability, availability and responsiveness play
an important role in marketing and selling medical equipment and systems,
particularly as the technological complexity of the products increases.
Nevertheless, many hospitals use their own biomedical engineering departments
and/or independent service organizations to service equipment after the warranty
period expires. Therefore, we cannot depend on conversion of all maintenance to
service contracts after the warranty period. However, after-warranty service
does provide an on-going source of revenue for us.

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

RESEARCH AND DEVELOPMENT

Developing products, systems and services based on advanced technological
concepts is essential to our ability to compete effectively. We maintain a
product research and development and engineering staff responsible for product
design and engineering. Research and development expenditures totaled $42
million, $40 million and $39 million in fiscal years 2000, 1999 and 1998,
respectively.

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GTC maintains technical competencies in x-ray technology, imaging physics
and applications, electronic design, materials science and biosciences to prove
feasibility of new product concepts and to improve current products. Present
research topics include new x-ray imaging concepts, image-based radiotherapy
treatment planning, targeting and verification tools, combined modality therapy,
manufacturing process improvements, improved x-ray tubes and gene technology.
GTC does accept certain sponsored research contracts from external agencies such
as the government or other private sources.

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

COMPETITION

The health care equipment markets are characterized by rapidly evolving
technology, intense competition and pricing pressure. We compete with companies
worldwide. Some of our competitors have greater financial, marketing and
management resources than we do. These competitors could develop technologies
and products that are more effective than those we currently use or produce or
that could render our products obsolete or noncompetitive. Our smaller
competitors could be acquired by companies with greater financial strength,
which could enable them to compete more aggressively. Certain of our
distributors could also be acquired by competitors, which could disrupt certain
distribution arrangements. We believe, however, that we compete favorably with
our competitors based on our continued commitment to global distribution and
customer service, value-added manufacturing, technological leadership and new
product innovation. We believe that the key to success in our markets is to
provide technologically superior products that deliver cost-effective, high
quality clinical outcomes and that meet or exceed customer quality and service
expectations. Our ability to compete successfully depends on our ability to
commercialize new products ahead of our competitors. In the sales of our
oncology systems products, we compete primarily with Siemens, Nucletron, Elekta
and Mitsubishi. We compete with independent service organizations in our service
and maintenance business and with a variety of companies in our 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 our x-ray tubes and imaging subsystems business, also manufacture x-ray tubes
for use in their own products. We must compete with these in-house x-ray tube
manufacturing operations that are naturally favored by their parent companies.
As a result, we must have a competitive advantage in one or more significant
areas which may include lower product cost, better product quality or superior
technology. We sell a significant volume of our x-ray tube products to companies
such as Toshiba 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, we compete
against other stand-alone x-ray tube manufacturers such as Comet, located in
Switzerland, and IAE, located in Italy. These companies compete with us for both
the OEM business of major diagnostic imaging equipment manufacturers and
independent servicers of x-ray tube.

MANUFACTURING AND SUPPLIES

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

Manufacturing processes at our various facilities include machining,
fabrication, subassembly, system assembly and final testing. We have invested in
various automated and semi-automated equipment for the fabrication and machining
of the parts and assemblies that we incorporate in our products. We may from
time to time further invest in such equipment when cost justified. Our quality
assurance program includes various quality control measures from inspection of
raw material, purchased parts and assemblies through on-line inspection. We

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also get subassemblies from third-party suppliers and integrate them into a
finished system. We outsource the manufacturing of major subassemblies and
perform system design, assembly and testing in-house. We believe outsourcing
enables us to reduce fixed costs and capital expenditures while also providing
us with the flexibility to increase production capacity. We purchase material
and components from various suppliers that are either standard products or built
to our specifications. Certain components used in our existing products, as well
as products under development, are frequently purchased from single sources.

BACKLOG

Our backlog amounted to $473 million at the end of fiscal 2000, of which
$358 million is expected to ship within fiscal year 2001. Backlog at the end of
fiscal 1999 amounted to $400 million, of which $274 million shipped in fiscal
year 2000. Backlog at the end of fiscal 1998 amounted to $352 million of which
$206 million shipped in fiscal year 1999. We include in backlog only orders for
products scheduled to be shipped within two years. Orders may be revised or
canceled, either according to their terms or as a result of negotiations;
consequently, it is impossible to predict with certainty the backlog that will
result in sales.

PRODUCT LIABILITY

Our business exposes us to potential product liability claims that are
inherent in the manufacture and sale of medical devices. Because our products
involve the delivery of radiation to the human body, the possibility for
significant injury and/or death exists with any of these products. As a result,
we may face substantial liability to patients for damages resulting from any
faulty, or alleged faulty, design, manufacture and servicing of our products.
Although we maintain limited product liability insurance coverage in an amount
that we deem sufficient for our business, there can be no assurance that this
coverage will ultimately prove to be adequate or that such coverage will
continue to remain available on acceptable terms, if at all.

On December 5, 1997, we purchased General Electric's Radiotherapy Service
Business (the "RS Business"). In connection with that transaction, we agreed to
assume liability for certain product defects and personal injury matters that
might arise from RS Business products, and obtained insurance for these matters.
The insurance provides that in each annual period we are responsible for the
first $5,000,000 of expenses or liabilities related to any such claims. As of
fiscal year end 2000, one claim has been asserted related to these RS Business
products for which we may have an indemnity obligation and we have received, and
will continue to monitor, information regarding other potential claims, none of
which, to our knowledge, have been asserted against us.

GOVERNMENT REGULATION

DOMESTIC REGULATION

As a manufacturer of medical devices, we are subject to extensive
regulation by federal, state, and local governmental authorities, such as the
United States Food and Drug Administration (the "FDA"). The FDA regulates the
design, development, testing, manufacturing, packaging, labeling, distribution
and marketing of medical devices under the U.S. Food, Drug and Cosmetic Act (the
"FDC Act") and regulations promulgated by the FDA. The State of California
(through its Department of Health Services), where we maintain one of our
manufacturing facilities, as well as other states, also regulate the manufacture
of medical devices.

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

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

9
<PAGE>

production, ensure that device components are compatible, select adequate
packing materials, and perform mandatory risk analyses.

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

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

The FDA requires that a new medical device or a new indication for use of
or other significant change in an existing medical device obtain either 510(k)
pre-market notification clearance or an approved Pre-Market Approval Application
("PMAA") before the manufacturers can obtain orders and distribute the product
in the United States. The 510(k) clearance process is applicable when the new
product being submitted is substantially equivalent to an existing commercially
available product. The process of obtaining 510(k) clearance may take at least
three months from the date of the application filing and generally requires
submitting supporting data, which can be extensive and can extend the process
for a considerable period of time. 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 from the date the pre-market approval is accepted for filing,
but sometimes longer for the FDA to review. Generally, we have not been required
to resort to the PMAA process for approval of our products.

The FDA reviews software deemed to be a medical device - such as our
treatment planning software - in connection with its pre-market notification
clearance 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 patient treatment and diagnosis. The 1989
draft policy exempts certain software from regulation on the basis of "competent
human intervention" occurring with the use of the software before any impact on
human health would occur. The FDA is considering a revised policy, which is
expected to eliminate this exemption and to base the level of regulation on the
level of risk imposed by the product. It is not clear what impact such
regulatory policies, if adopted, will have on the clinical information systems
or other medical software we offer.

We believe that we are in material compliance with all applicable
federal, state and most foreign regulations regarding the manufacture and sale
of our products. Such regulations and their enforcement are, however, constantly
undergoing change, and we cannot predict what effect, if any, changes may have
on our business. Failure to comply with FDA regulations could result in warning
letters, product clearance delays or other sanctions being imposed, including
restrictions on the marketing or the recall of our products, injunction or civil
penalties. Delays in the receipt of or failure to receive necessary regulatory
certifications or the loss of existing certifications could have a material
adverse effect on our business. We believe that our products substantially
comply with all applicable electrical safety and environmental standards, such
as those of Underwriters Laboratories and IEC 60601-1.

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

The design, manufacture, sale or service of our medical products involve
the risk of product liability claims and exposes our business to substantial
liability to patients for damages resulting from the faulty design, manufacture
or servicing of such products. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Certain Factors Affecting the
Company's Business--Because our products involve the delivery of radiation and
diagnostic imaging of the human body, product defects may result in material
product claims that could harm future sales and force us to pay material
uninsured claims."

10
<PAGE>

MEDICARE AND MEDICAID REIMBURSEMENT

The federal government regulates reimbursement for diagnostic
examinations and therapeutic procedures 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.

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

For certain hospital outpatient services, including radiation treatment,
reimbursement was historically based on the lesser of the hospital's costs or
charges, or a blended amount, 42% of which is based on the hospital's reasonable
costs and 58% of which is based on the fee schedule amount that Medicare
reimburses for such services when furnished in a physician's office. On April 7,
2000, the Health Care Financing Administration ("HCFA") published final
regulations to extend PPS to hospital outpatient services pursuant to the BBA,
as amended by the Balanced Budget Refinement Act of 1999. These regulations went
into effect in August 2000.

Under the outpatient PPS system, Medicare reimburses hospital outpatient
services according to rates calculated by Medicare for groups of covered
services known as "ambulatory payment classification" ("APC") groups.
Approximately ten APC groups involve radiation oncology services. The
reimbursement for each APC group is derived from a complicated calculation that
incorporates historical cost information, including capital acquisition costs.
Because the outpatient PPS system has only recently been implemented, it is
uncertain whether Medicare reimbursement for radiation treatments provided as
hospital outpatient services will be positively or negatively impacted.

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. Beginning January
1, 1992, Medicare phased 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" that includes physician
practice expenses such as equipment costs. Under the BBA, HCFA was required to
implement a revised methodology for calculating the practice expense component
of relative value from the current historical basis to a resource basis. These
new practice expense calculations will be phased in over a four-year period that
began on January 1, 2000.

HCFA's new methodology establishes 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 equipment, supplies, and
overhead. Because HCFA's proposed physician fee schedules utilizing two practice
expense values have only recently been implemented, it is uncertain whether
Medicare reimbursement for radiation oncology services provided by physician
practices will be positively or negatively impacted.

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 each state more control over
coverage and payment issues. In addition, HCFA has granted many states waivers
to allow for greater control of the Medicaid program at the state level. The
impact on our business of this greater state control on Medicaid payment for
diagnostic services is uncertain.

The sale of medical devices, the referral of patients for diagnostic
examinations utilizing such devices, and the submission of claims to third-party
payors (including Medicare and Medicaid) seeking reimbursement for such
services, are subject to various federal and state laws pertaining to health
care "fraud and abuse," including physician self-referral prohibitions,
anti-kickback laws, and false claims laws. Subject to certain enumerated

11
<PAGE>

exceptions, the federal physician self-referral law, also know as Stark II,
prohibits a physician from referring Medicare or Medicaid patients to an entity
in which the physician (or a family member) has ownership interest or
compensation relationship if the referral is for a "designated health service,"
which is defined explicitly to include radiology and radiation therapy services.
Although final regulations implementing Stark II have been postponed several
times and are currently scheduled for issuance before the end of 2000, the
proposed Stark II regulations issued in January 1998, as well as general federal
fraud and abuse laws and physician self-referral restrictions that exist in a
number of states and 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 our 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. The Office of the Inspector General prosecutes violation
of fraud and abuse laws and any violations may result in criminal and/or civil
sanctions including, in some instances, imprisonment and exclusion from
participation in federal health care programs such as Medicare and Medicaid.

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

FOREIGN REGULATION

Sales of medical devices outside the United States are subject to
regulatory requirements that vary from country to country. Specifically, certain
foreign regulatory bodies have adopted regulations governing product standards,
packaging requirements, labeling requirements, import restrictions, tariff
regulations, duties and tax requirements. For example, in July 1998, the
European Union implemented a Medical Device Directive that requires us to obtain
ISO 9001 certification and affix the required CE mark to our products. The CE
mark is an international symbol of adherence to certain quality assurance
standards and compliance with applicable European medical device directives
which, once affixed, enables a product to be sold in member countries of the
European Union. Several Asian countries are reviewing the possibility of
adopting similar regulatory schemes. In addition, several countries are
reviewing proposed regulations that would require manufacturers to dispose of
their products at the end of their useful lives. We cannot be certain that we
will not be required to incur significant costs in obtaining or maintaining
non-U.S. regulatory approvals. Delays in receipt of or failure to receive such
approvals, the loss of previously obtained approvals, or failure to comply with
existing or future regulatory requirements could have a material adverse effect
on our 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, we generally rely upon patents, copyrights, trademarks and trade secret
laws to establish and maintain our propriety rights in the developments,
improvements, and inventions that we have originated that are incorporated in
our products or that fall within our fields of interest. As of September 29,
2000, we owned 70 patents issued in the United States and 118 patents issued
throughout the rest of the world, and we have 146 patent applications on file
with various patent agencies worldwide. We intend to file additional patent
applications as appropriate.

We rely on a combination of copyright, trade secret and other laws, and
contractual restrictions on disclosure, copying and transferring title to
protect our intellectual property rights. We have trademarks, both registered
and unregistered, that are maintained and enforced to provide customer
recognition for our products in the marketplace We also have agreements with
third parties to license patented or proprietary technology, including
royalty-bearing licenses and technology cross-licenses. While we place
considerable importance on licensed technology, we do not believe that the loss
of any license would have a material adverse effect on our business.

Our competitors, like companies in many high technology businesses,
routinely review other companies' products for possible conflict with their own
patent rights. Although we have, from time to time, received notices of

12
<PAGE>

claims from others alleging patent infringement, we believe that there are no
pending patent infringement claims that we believe might have a material adverse
effect on our business.

ENVIRONMENTAL MATTERS

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

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

For a discussion of financial information about geographic areas, see
"Industry Segments" of the Notes to the Consolidated Financial Statements.

EMPLOYEES

At September 29, 2000, we had a total of 2,374 full-time and temporary
employees worldwide, 1,726 in the United States and 648 elsewhere. None of our
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. We currently
consider our relations with our employees to be good.

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

13
<PAGE>

ITEM 2. PROPERTIES

Our executive offices and oncology management and manufacturing
facilities are located in Palo Alto, California on 30 acres of land under
leaseholds which expire from 2012 through 2058. We own these facilities which
contain 248,902 square feet of aggregate floor space. The Ginzton Technology
Center is located in Mountain View, California under a lease that expires in
2004. Our manufacturing facilities are located throughout the world, including
Salt Lake City, Utah; Charleston, South Carolina; Crawley, England; Baden,
Switzerland; Buc, France; and Helsinki, Finland. Our 40 service and sales
facilities also are located in various parts of the world, with 26 located
outside of the United States, including Argentina, Australia, Austria, Brazil,
China, Denmark, Finland, France, Germany, Hong Kong, India, Italy, Japan,
Malaysia, The Netherlands, Spain, Switzerland, and Thailand.

The following is a summary of our properties at September 29, 2000:

LAND (ACRES) BUILDINGS (000'S SQ.FT.) NUMBER OF BUILDINGS
---------------------- ---------------------- ----------------------
OWNED LEASED OWNED LEASED OWNED LEASED
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
United States............................ 38 30 521 158 7 18
International............................ 2 -- 46 126 1 31
---------- ---------- ---------- ---------- ---------- ----------
40 30 567 284 8 49
</TABLE>

Our facilities, as utilized by our various segments, are shown in the
following table:

<TABLE>
<CAPTION>
BUILDINGS (000'S SQ. FT.)
----------------------------------------------------------
MANUFACTURING,
ADMINISTRATIVE AND
RESEARCH & DEVELOPMENT
-------------------------------
MARKETING AND
U.S. NON-U.S. TOTAL SERVICE TOTAL
--------- ---------- -------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Oncology systems..................................... 185 66 251 180 431
X-ray tubes and imaging subsystems................... 305 3 308 8 316
Ginzton Technology Center............................ 21 2 23 4 27
--------- ---------- -------- ------------- ---------
Total Operations................................ 511 71 582 192 774
Other operations (including manufacturing support)... 67 10 77 -- 77
--------- ---------- -------- ------------- ---------
Total........................................... 578 81 659 192 851
</TABLE>

We are utilizing substantially all of our currently available productive
space to develop, manufacture and market our products. We believe that our
facilities and equipment generally are well maintained, in good operating
condition and adequate for present operations.

ITEM 3. LEGAL PROCEEDINGS

The following summarizes the current status of our previously reported
legal proceedings.

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

After the spin-offs of VI and VSEA, we retained the liabilities related
to the medical systems business before the spin-offs, including the ISOs
Litigation. In addition, under the Amended and Restated Distribution Agreement,

14
<PAGE>

we agreed to manage and defend liabilities related to legal proceedings and
environmental matters arising from corporate or discontinued operations. Under
the Amended and Restated Distribution Agreement, each of VI and VSEA must
generally indemnify us for one-third of these liabilities (after adjusting for
any insurance proceeds we realize or tax benefits we receive), including certain
environmental-related liabilities described below and to fully assume and
indemnify us for liabilities arising from each of their operations before the
spin-offs. The availability of such indemnities will depend upon the future
financial strength of VI and VSEA. Given the long-term nature of some of the
liabilities, either company may not be in a position to fund indemnities in the
future. A court could also disregard the contractual allocation of indebtedness,
liabilities and obligations among the parties and require us to assume
responsibility for obligations allocated to another party, particularly if such
other party were to refuse or was unable to pay or perform any of its allocated
obligations. In addition, the Amended and Restated Distribution Agreement
generally provides that if a court prohibits any of the companies from
satisfying its indemnification obligations, then such indemnification
obligations will be shared equally between the two other companies.

From time to time, we are involved in certain other legal proceedings
arising in the ordinary course of our business. While we cannot be certain about
the ultimate outcome of any litigation, management does not believe any pending
legal proceeding will result in a judgment or settlement that will have a
material adverse effect on our financial position, results of operations or cash
flows.

There are a variety of environmental laws around the world regulating the
handling, storage, transport and disposal of hazardous materials that do or may
create increased costs for some of our operations. In addition, several
countries are proposing to or do require manufacturers to take back and dispose
of or recycle products at the end of the equipment's useful life. These laws
create increased costs for our operations.

From the time we began operating, we handled and disposed of hazardous
materials and wastes following procedures that were considered appropriate under
regulations, if any, existing at the time. We also hired companies to dispose of
wastes generated by our operations. Under various laws (such as the federal
"Superfund" law) and under our obligations concerning operations before the
spin-offs, we are overseeing environmental cleanup projects from our
pre-spun-off operations and as applicable reimbursing third parties (such as the
U.S. Environmental Protection Agency or other responsible parties) for cleanup
activities. Under the terms of the Amended and Restated Distribution Agreement,
we are obligated to pay one-third of certain environmental liabilities caused by
operations before the spin-offs, with VI and VSEA obligated for the balance. The
cleanup projects we are overseeing are being conducted under the direction of or
in consultation with relevant regulatory agencies. We estimated these cleanup
projects will take up to 30 years to complete. As described below, we have
accrued a total of $22.3 million to cover our liabilities for these cleanup
projects:

o We have developed a range of potential costs covering a
variety of cleanup activities, including three cleanup projects,
reimbursements to third parties, project management costs and
legal costs. There are, however, various uncertainties in these
estimates that make it difficult to develop a best estimate. Our
estimate of future costs to complete these cleanup activities
ranges from $4.6 million to $14.5 million. For these estimates,
we have not discounted the costs to present dollars because of
the uncertainties that make it difficult to develop a best
estimate and have accrued $4.6 million, which is the amount at
the low end of the range.

o For seven cleanup projects, we have sufficient knowledge to
develop better estimates of our future costs. While our estimate
of future costs to complete these cleanup projects, including
third party claims, ranges from $23.1 million to $52.3 million,
our best estimate within that range is $36.0 million. For these
projects we have accrued $17.7 million; which is our best
estimate of the $36.0 million discounted to present dollars at
4%, net of inflation.

When we develop these estimates above, we consider the financial strength
of other potentially responsible parties. These amounts are, however, only
estimates and may be revised in the future as we get more information on these
projects. We may also spend more or less than these estimates. Based on current
information, we believe that our reserves are adequate. At this time, management
believes that it is remote that any single environmental event would have a
materially adverse impact on our financial statements in any single fiscal year.
We spent $3.5 million (net of amounts borne by VI and VSEA) during fiscal year
2000 on environmental investigation, cleanup and third party claim costs. We
spent $1.7 million and $2.9 million in fiscal year 1999 and 1998, respectively,
net of amounts that would have been borne by VI and VSEA on similar activities.

15
<PAGE>

In 1992, we filed a lawsuit against 36 insurance companies for recovery
of our environmental investigation, cleanup and third party claim costs. We
reached cash settlements with various insurance companies in 1995, 1996, 1997
and 1998. In addition, we have an agreement with an insurance company to pay a
portion of our past and future expenditures. As a result of this agreement, we
have included a $4.5 million receivable in Other Assets as of September 29,
2000. We believe that this receivable is recoverable because it is based on a
binding, written settlement agreement with a financially viable insurance
company. Although we continue to aggressively pursue additional insurance
recoveries, we have not reduced our liability in anticipation of recovery from
third parties for claims that we made.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Inapplicable.

16
<PAGE>

EXECUTIVE OFFICERS

Set forth below are biographical summaries of our executive officers as
of December 8, 2000:

NAME AGE POSITION
---- --- --------
<S> <C> <C>
Richard M. Levy....................... 62 Dr. Levy became President and Chief Executive Officer of VMS on April 3, 1999.
President and Chief Executive Prior to April 2, 1999, he was the Executive Vice President of the Company
Officer responsible for the medical systems business. Dr. Levy also oversaw our Ginzton
Technology Center in Palo Alto. He joined the company in 1968, and became
Executive Vice President in 1990.

Timothy E. Guertin.................... 51 Mr. Guertin became Corporate Vice President of VMS on April 3, Corporate Vice
Corporate Vice President President 1999. Prior to April 2, 1999, he was Corporate Vice President and
President of Varian's oncology systems business, positions he held from 1992
and 1990, respectively. Mr. Guertin has held various other positions in the
medical systems business during his 25 years with the company.

John C. Ford.......................... 56 Dr. Ford became Corporate Vice President of VMS on April 3, 1999. Prior to
Corporate Vice President April 2, 1999, he was Senior Vice President, Business Development, for Varian's
medical systems business, a position he held from 1992. Dr. Ford has held various
other positions in the medical systems business during his 28 years with the
company.

Robert H. Kluge....................... 54 Mr. Kluge became Corporate Vice President of VMS on April 13, 1999. Prior to
Corporate Vice President April 2, 1999, he was Vice President and General Manager of Varian's x-ray
products business, positions he held from 1993. Before joining the company in
1993, he held various positions with Picker International (an x-ray systems
manufacturer).

Elisha W. Finney...................... 39 Ms. Finney became Corporate Vice President and Chief Financial Officer of VMS
Corporate Vice President, Chief on April 3, 1999. She has been Treasurer of the company since January 1998. From
Financial Officer and Treasurer 1988 to 1998, she was Varian's Risk Manager and from 1995 to 1998, Ms. Finney also
served as Assistant Treasurer. Ms. Finney held various other positions during her
12 years with the company.

Joseph B. Phair....................... 53 Mr. Phair became Corporate Vice President, Administration of VMS on August 20,
Corporate Vice President, 1999. Between April 2, 1999 and August 20, 1999, he was a consultant to the
Administration, General Counsel company. Mr. Phair has been General Counsel of the company since 1990 and
and Secretary Secretary since 1991. Mr. Phair was a Vice President of the company from 1990
until April 2, 1999, and has held various other positions in our legal department
during his 21 years with the company.

Crisanto C. Raimundo.................. 53 Mr. Raimundo became Corporate Controller of VMS on April 5, 2000. For six months
Corporate Controller prior to April 5, 2000, he was the company's Operations Controller. Since joining
the company in 1979, Mr. Raimundo has held various finance positions including
Controller for the oncology systems business, Director of Corporate Audit, and
Manager of Corporate Financial Analysis and Planning.

</TABLE>

17
<PAGE>

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Our common stock is traded on the New York Stock Exchange and Pacific
Exchange under the symbol VAR. The following table sets forth the high and low
closing sales prices for our common stock as reported in the consolidated
transaction reporting system for the New York Stock Exchange for the first half
of fiscal year 1999.

FISCAL YEAR 1999 HIGH LOW
----------- -----------
First Quarter................................ $ 41 1/16 $ 32 7/16
Second Quarter............................... 43 31 3/4

On April 2, 1999, the end of the first half of fiscal year 1999, we spun
off VI and VSEA to our stockholders. The high and low closing sales prices for
our common stock for the last half of fiscal year 1999 and in fiscal year 2000
were:

FISCAL YEAR 1999 HIGH LOW
----------- -----------
Third Quarter............................... $ 25 1/4 $ 16 5/8
Fourth Quarter.............................. 24 3/16 19 7/16

FISCAL YEAR 2000

First Quarter............................... 29 13/16 20 3/16
Second Quarter.............................. 47 1/4 28 9/16
Third Quarter............................... 48 38 1/2
Fourth Quarter.............................. 48 13/16 39 11/16

We declared cash dividends of $0.10 in the first quarter of fiscal year
1999. Since the spin-offs, we have not paid any dividends on our common stock
and do not currently anticipate paying dividends on the common stock for the
foreseeable future. Further, our existing financing arrangements contain
provisions that limit our ability to pay dividends.

As of December 6, 2000, there were approximately 4,474 holders of record
of our common stock.

18
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

We derived the following selected statements of earnings and balance
sheet data as of and for the fiscal years ended September 29, 2000, October 1,
1999, October 2, 1998, September 26, 1997 and September 27, 1996 from our
audited consolidated financial statements. The financial data set forth below
should be read in conjunction with our consolidated financial statements and
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein.

FISCAL YEARS
--------------------------------------------------------
2000 1999 1998 1997 1996
--------- ---------- --------- ---------- ----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
SUMMARY OF OPERATIONS:

<S> <C> <C> <C> <C> <C>
Sales....................................................... $ 689.7 $ 590.4 $ 541.5 $ 474.3 $ 467.5
--------- ---------- --------- ---------- ----------
Earnings from Continuing Operations before Taxes............ 84.9 18.2 36.0 29.2 25.0
Taxes on Earnings........................................ 31.8 10.0 9.9 9.2 7.4
--------- ---------- --------- ---------- ----------
Earnings from Continuing Operations......................... 53.0 8.2 26.1 20.0 17.6
Earnings (Loss) from Discontinued Operations, Net of Taxes.. -- (32.4) 47.7 95.6 104.5
--------- ---------- --------- ---------- ----------
Net Earnings (Loss)......................................... $ 53.0 $ (24.2) $ 73.8 $ 115.6 $ 122.1
========= ========== ========= ========== ==========
Net Earnings (Loss) Per Share-Basic
Continuing Operations.................................... $ 1.71 $ 0.27 $ 0.87 $ 0.66 $ 0.57
Discontinued Operations.................................. -- (1.07) 1.60 3.13 3.36
--------- ---------- --------- ---------- ----------
Net Earnings (Loss) Per Share-Basic......................... $ 1.71 $ (0.80) $ 2.47 $ 3.79 $ 3.93
========= ========== ========= ========== ==========
Net Earnings (Loss) Per Share-Diluted
Continuing Operations.................................... $ 1.64 $ 0.27 $ 0.86 $ 0.64 $ 0.55
Discontinued Operations.................................. -- (1.06) 1.57 3.03 3.26
--------- ---------- --------- ---------- ----------
Net Earnings (Loss) Per Share-Diluted....................... $ 1.64 $ (0.79) $ 2.43 $ 3.67 $ 3.81
========= ========== ========= ========== ==========
Dividends Declared Per Share................................ $ -- $ 0.10 $ 0.39 $ 0.35 $ 0.31
========= ========== ========= ========== ==========
</TABLE>

FINANCIAL POSITION AT YEAR END:
<S> <C> <C> <C> <C> <C>
Working capital......................................... $ 200.7 $ 112.4 $ 334.9 $ 349.2 $ 293.9
Total assets............................................ 602.6 539.2 1,218.3 1,104.3 1,018.9
Short-term borrowings................................... 0.6 35.6 46.8 18.7 4.4
Long-term borrowings.................................... 58.5 58.5 111.1 73.2 60.3
Stockholders' equity.................................... 270.4 185.0 557.5 524.6 467.9
</TABLE>

WE HAVE RESTATED THE SUMMARY OF OPERATIONS DATA PRESENTED ABOVE FOR
FISCAL YEARS 1996 THROUGH 1999 TO REFLECT AS DISCONTINUED OPERATIONS THE
ACTIVITIES ASSOCIATED WITH OUR FORMER SEMICONDUCTOR EQUIPMENT BUSINESS AND
INSTRUMENT BUSINESS WHICH WERE TRANSFERRED TO VSEA AND VI, RESPECTIVELY, AS PART
OF THE APRIL 2, 1999 SPIN-OFFS. THE BALANCE SHEET DATA AS OF OCTOBER 1, 1999
ALSO REFLECTS THE RESULTS OF THE APRIL 2, 1999 SPIN-OFFS. FISCAL YEAR 2000
RESULTS FROM CONTINUING OPERATIONS INCLUDE ACQUISITION-RELATED EXPENSES OF $2.0
MILLION ($1.2 MILLION AFTER-TAX OR $0.03 PER DILUTED SHARE.) FISCAL YEAR 1999
RESULTS FROM CONTINUING OPERATIONS INCLUDE NET REORGANIZATION RELATED CHARGES OF
$29.7 MILLION ($25.7 MILLION AFTER-TAX OR $0.84 PER DILUTED SHARE.) THIS
SELECTED FINANCIAL DATA SHOULD BE READ IN CONJUNCTION WITH THE RELATED
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO.

19
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW

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

The financial statements for fiscal years 1999 and 1998 included in this
report present VI and VSEA as discontinued operations under Accounting
Principles Board Opinion No. 30 "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." The line item "Earnings
(Loss) from Discontinued Operations-Net of Taxes" in the fiscal year 1999
financial statements reflects the net operating results of the spun-off
businesses, VI and VSEA. In determining the items belonging to the spun-off
businesses, we allocated certain corporate assets (including pension assets),
liabilities (including profit-sharing and pension benefits), and expenses
(including legal, accounting, employee benefits, insurance, information
technology services, treasury and other corporate overhead) to VI and VSEA.
While we believe that the methods we used to allocate the amounts to VI and VSEA
are reasonable, the balances we retained may not be indicative of the amounts
that we would have recorded had the spin-offs occurred before or after April 2,
1999. The following discussion and analysis pertains to our continuing
operations, unless otherwise noted.

On June 6, 2000, we announced an agreement to acquire privately held
IMPAC Medical Systems, Inc. On November 6, 2000, we abandoned the acquisition to
avoid a protracted legal proceeding after the U.S. Department of Justice
announced its intention to challenge the transaction on anti-trust grounds.
Fourth quarter fiscal year 2000 results included a charge of approximately $2
million for costs related to this acquisition.

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

RESULTS OF OPERATIONS

FISCAL YEAR

Our fiscal year is the 52- or 53-week period ending on the Friday nearest
September 30. Fiscal year 2000 is the 52-week period ended September 29, 2000.
Fiscal year 1999 is the 52-week period ended October 1, 1999. Fiscal year 1998
is the 53-week period ended October 2, 1998.

20
<PAGE>

FISCAL YEAR 2000 COMPARED TO FISCAL YEAR 1999

SALES: Our sales of $690 million in fiscal year 2000 were 17% higher than
our sales of $590 million in fiscal year 1999. International sales were
$301 million, or 43% of sales, in fiscal year 2000, compared to $318
million, or 54% of sales, in fiscal year 1999. For fiscal year 2001, we
expect total sales to grow about 14% or approximately $100 million over
fiscal year 2000 results with a shift toward international sales,
particularly in Europe.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
SALES (BY SEGMENT AND REGION) FISCAL YEAR 2000 FISCAL YEAR 1999
---------------- ----------------
------------------------------------------------------------------------------------------------------
ONCOLOGY SYSTEMS:
<S> <C> <C>
-- North America $332 million $229 million
-- Europe 124 million 155 million
-- Asia 42 million 54 million
-- Rest of the world 36 million 21 million
------------- --------------
Total oncology systems $534 million $459 million
------------------------------------------------------------------------------------------------------
X-RAY TUBES AND IMAGING
SUBSYSTEMS:
-- North America $ 43 million $ 38 million
-- Europe 20 million 28 million
--Asia 70 million 54 million
--Rest of the world 3 million 3 million
------------- -------------
Total x-ray tubes and $136 million $123 million
imaging subsystems
------------------------------------------------------------------------------------------------------
GTC $ 20 million $ 8 million
------------------------------------------------------------------------------------------------------
</TABLE>

Oncology systems sales: Oncology systems sales increased 16% to
$534 million (77% of sales) in fiscal
year 2000, compared to $459 million (78%
of sales) in fiscal year 1999. Our North
American sales growth of 45% reflects
the increased demand in the U.S. for
advanced digital radiotherapy equipment
that emerged in fiscal year 1999 and
continued through fiscal year 2000. The
decrease in European sales is primarily
due to the weakness of the European
market and currencies that made our
products relatively more expensive in
those countries. The decrease in Asian
sales primarily resulted from a one-time
multi-system sale in Japan in the second
quarter of fiscal year 1999. The rest of
the world showed continuing strength,
primarily Latin America and Mexico.

X-ray tubes and imaging
subsystems sales: X-ray tubes and imaging subsystems sales
increased 10% to $136 million (20% of
sales) in fiscal year 2000, compared to
$123 million (21% of sales) in fiscal
year 1999. The increase is primarily
attributable to strong demand for our CT
tube products, particularly demand for
our newer high-end CT scanner tubes from
a large Japanese customer. Fiscal year
2000 results also reflect the impact of
the ongoing consolidation of some of our
European customers who purchase our
x-ray tube products and the shifting of
purchases from Europe to North America
by two of our major European OEM
customers following their business
combinations with U.S. customers.

GTC sales: GTC sales were $20 million for fiscal
year 2000, compared to $8 million in
fiscal year 1999. The increase was split
among new sales attributable to our June
1999 acquisition of Multimedia Medical
Systems' business in treatment planning
software for low dose rate
brachytherapy, increased sales of our
existing high dose rate brachytherapy
product (particularly in North America),
and research contracts.

21
<PAGE>

GROSS PROFIT: We recorded gross profit of $257 million in fiscal year
2000 and $210 million in fiscal year 1999. As a percentage of sales,
gross profit was 37% in fiscal year 2000 compared to 36% in fiscal year
1999. Gross profit as a percentage of sales of oncology systems amounted
to 38% in fiscal year 2000 compared to 37% in fiscal year 1999. Oncology
systems margins improved primarily because of the higher sales to North
America which traditionally have better margins, although the margin
improvement was somewhat restrained by weaker currencies overseas,
particularly in Europe. Gross profit as a percentage of sales of x-ray
tubes and imaging subsystems decreased to 32% in fiscal year 2000 from
34% in fiscal year 1999. The gross margin decline in fiscal year 2000 was
primarily due to a sales-mix shift toward our newer high-end CT scanner
tubes that cost more to manufacture. We also incurred higher warranty and
scrap costs related to these tubes during fiscal year 2000. For fiscal
year 2001, we expect gross profit as a percentage of sales at the total
company level to remain flat with fiscal year 2000 results.

RESEARCH AND DEVELOPMENT: Research and development expenses were $42
million in fiscal year 2000 compared to $40 million in the same period of
fiscal year 1999, representing 6% and 7% of sales, respectively .

SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
expenses were $125 million (18% of sales) in fiscal year 2000, compared
to $116 million (20% of sales) in fiscal year 1999. The decrease in the
percentage of sales that selling, general and administrative expenses
represent reflects the faster growth of sales over expenses in fiscal
year 2000. The increase (in absolute dollars) in selling, general and
administrative expenses in fiscal year 2000 was primarily driven by
higher marketing and selling expenses that are in line with increased
market activity, particularly in North America, and higher expenditures
for employee profit-sharing and management incentives that are consistent
with improving financial performance. In addition, selling, general and
administrative expenses in fiscal year 1999 included corporate costs
incurred before the spin-offs that we could not allocate under generally
accepted accounting principles to discontinued operations.

REORGANIZATION COSTS: Fiscal year 2000 expenses included net
reorganization charges of $0.2 million primarily attributable to legal
fees incurred in excess of the related accrual established as part of the
April 2, 1999 spin-offs of our instruments and semiconductor equipment
businesses. Fiscal year 1999 expenses included net reorganization charges
of $29.7 million. Of the $29.7 million, $24.9 million related to the
April 2, 1999 spin-offs and $4.8 million related to the consolidation of
our x-ray manufacturing operations.

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

<TABLE>
<CAPTION>
ACCRUAL AT ACCRUAL AT
OCTOBER 1, CASH RECLASSIFICATION SEPTEMBER 29,
1999 PAYMENTS ADJUSTMENTS 2000
------------- ---------- ---------------- -------------
<S> <C> <C> <C> <C>
Retention bonuses, severance, and $ 4,507 $ (2,473) $ (451) $ 1,583
executive compensation..................
Legal, accounting, printing and investment
banking fees............................ 1,792 (2,253) 561 100
Gain on sale of real estate and corporate
assets..................................... -- -- -- --
Foreign taxes (excluding income taxes)..... 676 -- -- 676
Other...................................... 1,368 (1,485) 117 --
------------- ---------- ---------------- -------------
$ 8,343 $ (6,211) $ 227 $ 2,359
============= ========== ================ =============
</TABLE>

ACQUISITION-RELATED EXPENSES: We incurred transaction costs of
approximately $2.0 million in fiscal year 2000 associated with our
proposed (and later abandoned) acquisition of IMPAC Medical Systems, Inc.
The transaction costs were largely made up of legal, accounting and
investment adviser expenses.

INTEREST EXPENSE, NET: Our net interest expense was $2.8 million for
fiscal year 2000 compared to $6.1 million in fiscal year 1999. The
decrease in net interest expense resulted primarily from a

22
<PAGE>

$750,000 one-time interest payment received in connection with a federal
income tax refund in the fourth quarter of fiscal year 2000 and a
decrease in interest expense. We had lower levels of debt during fiscal
year 2000 compared to fiscal year 1999 when we contributed a substantial
amount of cash and debt to VI and VSEA as part of the spin-offs. We also
paid down $35 million of short-term debt in fiscal year 2000.

TAXES ON EARNINGS: Our effective tax rate was 37.5% in fiscal year 2000,
compared to 55% in fiscal year 1999. The fiscal year 1999 rate was
significantly higher principally due to certain reorganization costs
related to the spin-offs that were non-deductible.

NET EARNINGS: Our net earnings from continuing operations were $53
million in fiscal year 2000, compared to $8 million in fiscal year 1999.
The increase in net earnings is primarily attributable to increased sales
in fiscal year 2000 and the inclusion in fiscal year 1999 of substantial
reorganization-related net expenses incurred as part of the spin-offs.

FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998

SALES: Our sales of $590 million in fiscal year 1999 were 9% higher than
our sales of $541 million in fiscal year 1999. International sales were
$318 million, or 54% of sales, in fiscal year 1999, compared to $229
million, or 55% of sales, in fiscal year 1998.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
SALES (BY SEGMENT AND REGION) FISCAL YEAR 1999 FISCAL YEAR 1998
---------------- ----------------
------------------------------------------------------------------------------------------------------
ONCOLOGY SYSTEMS:
<S> <C> <C>
-- North America $229 million $202 million
-- Europe 155 million 149 million
-- Asia 54 million 31 million
-- Rest of the world 21 million 23 million
------------- --------------
Total oncology systems $459 million $405 million
------------------------------------------------------------------------------------------------------
X-RAY TUBES AND IMAGING
SUBSYSTEMS:
-- North America $ 38 million $ 38 million
-- Europe 28 million 33 million
--Asia 54 million 56 million
--Rest of the world 3 million 4 million
------------- -------------
Total x-ray tubes and $123 million $131 million
imaging subsystems
------------------------------------------------------------------------------------------------------
GTC $ 8 million $ 5 million
------------------------------------------------------------------------------------------------------
</TABLE>

Oncology systems sales: Oncology systems sales increased 13% to
$459 million (78% of sales) in fiscal
year 1999, compared to $405 million (75%
of sales) in fiscal year 1998.

X-ray tubes and imaging
subsystems sales: X-ray tubes and imaging subsystems sales
decreased 6% to $123 million (21% of
sales) in fiscal year 1999, compared to
$131 million (24% of sales) in fiscal
year 1999. The 6% decrease in x-ray
tubes and imaging subsystems sales
between fiscal year 1999 and fiscal year
1998 reflected continuing decrease in
x-ray tube sales volumes due to
consolidation of our original equipment
manufacturer customers that began in
fiscal year 1998 and continued into
fiscal year 1999.

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

GROSS PROFIT: We recorded gross profit of $210 million in fiscal year
1999 and $195 million in fiscal year 1998. As a percentage of sales,
gross profit was 36% of sales in both fiscal year 1999 and fiscal

23
<PAGE>

year 1998. Gross profit as a percentage of sales of oncology systems and
x-ray tubes and imaging subsystems were 37% and 34%, respectively, in
both fiscal year 1999 and fiscal year 1998.

RESEARCH AND DEVELOPMENT: Research and development expenses were $40
million in fiscal year 1999 compared to $39 million in fiscal year 1998,
amounting to 7% of sales in both years.

SELLING, GENERAL AND ADMINISTRATIVE: Selling, general and administrative
expenses were $116 million (20% of sales) in fiscal year 1999 compared to
$118 million (22% of sales) in fiscal year 1998. The decrease related
primarily to the inclusion of allocated general overhead costs for all of
fiscal year 1998 compared to only the first six months of fiscal year
1999. These expenses consisted primarily of corporate costs incurred
prior to our April 2, 1999 spin-offs that cannot be allocated to
discontinued operations under generally accepted accounting principles.
Selling expenses increased proportionally to the increase in sales from
fiscal year 1998 to fiscal year 1999.

REORGANIZATION COSTS: Fiscal year 1999 expenses included net
reorganization charges of $29.7 million, of which $24.9 million was
incurred as a result of our April 2, 1999 spin-offs and $4.8 million was
incurred as a result of the restructuring of our x-ray tubes and imaging
subsystems business by closing a manufacturing facility in Arlington
Heights, Illinois to consolidate manufacturing at our existing facilities
in Salt Lake City, Utah. The $29.7 million net charge included $34.3
million for retention bonuses for employee services provided prior to
October 1, 1999, employee severance and executive compensation; $21.0
million for legal, accounting, printing and investment banking fees; $1.7
million for foreign taxes (excluding income taxes) resulting from the
international reorganization of our subsidiaries in connection with the
spin-offs; and $6.8 million in other costs associated with the spin-offs
and restructuring; partially offset by a $34.1 million gain on the sale
of our aircraft and long-term leasehold interests in certain of the Palo
Alto facilities, together with the related buildings, and other corporate
assets.

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

REORGANIZATION CASH
COSTS AS OF (PAYMENTS) NON-CASH ACCRUAL AT
OCTOBER 1, 1999 RECEIPTS TRANSACTION OCTOBER 1, 1999
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Retention bonuses, severance, and $ 34,307 $ (29,800) $ -- $ 4,507
executive compensation.........
Legal, accounting, printing and
investment banking fees........ 20,982 (19,190) -- 1,792
Gain on sale of real estate and
corporate assets............... (34,098) 50,948 (16,850) --
Foreign taxes (excluding income
taxes)......................... 1,700 (18) (1,006) 676
Other............................. 6,777 (4,393) (1,016) 1,368
--------------- --------------- -------------- --------------
$ 29,668 $ (2,453) $ (18,872) $ 8,343
=============== =============== ============== ==============
</TABLE>

A majority of the remaining accrual as of October 1, 1999 was paid during
fiscal year 2000.

INTEREST EXPENSE, NET: Our net interest expense was $6.1 million in
fiscal year 1999 compared to $2.4 million in fiscal year 1998. In
connection with the spin-offs, we contributed $119 million of cash to
VSEA and VI, resulting in lower cash balances and lower interest income.
In addition, interest expense also increased due primarily to higher
levels of short-term borrowings in fiscal year 1999.

TAXES ON EARNINGS: Our effective tax rate was 55% in fiscal year 1999,
compared to 27% in fiscal year 1998. The fiscal year 1999 rate was
significantly higher than the fiscal year 1998 rate principally due to
certain reorganization costs related to the spin-offs that are
non-deductible. The fiscal year 1998 effective tax rate is lower than the
U.S federal statutory rate due to the impact of higher earnings in
certain foreign countries that have lower taxes.

NET EARNINGS: Our net earnings from continuing operations were $8 million
in fiscal year 1999, compared to $26 million in fiscal year 1998. The
decrease in net earnings is primarily attributable to
reorganization-related net expenses associated with the spin-offs.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is the measurement of our ability to meet potential cash
requirements, including ongoing commitments to repay borrowings, purchases of
business assets and funding of continuing operations. Our sources of cash
include sales, net interest income and borrowings under short-term notes payable
and long-term loans. Our liquidity is actively managed on a daily basis to
ensure the maintenance of sufficient funds to meet our needs.

Before the spin-offs, we historically incurred or managed debt at the
parent level. As part of the spin-offs, the parties agreed to the following
terms in the Distribution Agreement:

(1) Varian Associates, Inc. would contribute to VSEA $100 million in
cash and cash equivalents.

(2) Varian Associates, Inc. would provide VSEA with net worth (as
defined in the Distribution Agreement) of at least $150 million
and consolidated debt (as defined in the Distribution Agreement)
of no more than $5 million.

(3) VI would assume 50% of the remaining outstanding indebtedness
under Varian Associates, Inc.'s term loan.

(4) Varian Associates, Inc. would transfer cash and cash equivalents
to VI such that VI and Varian Associates, Inc., then renamed VMS,
would each have approximately 50% of the net debt of both VMS and
VI at the time of the Distribution.

(5) Subject to necessary adjustments, VMS would have a net worth of
between 40% and 50% of the aggregate net worth of VMS and VI.

As a result, we transferred $119 million in cash and cash equivalents to
VSEA and VI, and VSEA and VI assumed $69 million in debt during fiscal year
1999. However, the amounts allocated to VI and transferred to VSEA as a result
of the spin-offs were based on estimates. We may be required to make cash
payments to VI or VSEA, or may be entitled to receive cash payments from VI or
VSEA. We do not believe that any future payments would be material to our
consolidated financial statements.

At September 29, 2000, we had $58.5 million of long-term loans and $0.6
million of short-term notes payable. Interest rates on the outstanding long-term
loans on this date ranged from 6.70% to 7.15%. The weighted average interest
rate on these long-term loans was 6.82%. As of September 29, 2000, the weighted
average interest rate on the short-term notes payable was 5.56%. The long-term
loans currently contain covenants that limit future borrowings and cash
dividends payments. The covenants also require us to maintain certain levels of
working capital and operating results.

At September 29, 2000, we had $83.3 million in cash and cash equivalents
(approximately 44% of which was held abroad and would be subject to additional
taxation if it was repatriated to the U.S.) compared to $25.1 million at October
1, 1999.

Our primary cash inflows and outflows for fiscal year 2000, 1999 and 1998
were as follows:

o We generated cash from operating activities of $83.8 million in
fiscal year 2000, compared to using net cash of $33.6 million in
fiscal year 1999 and generating cash of $127.8 million in fiscal
year 1998. The primary reason for the positive operating cash flow
during fiscal year 2000 was our net earnings. We had $53.0 million
in net earnings in fiscal year 2000, compared to a $24.2 million
net loss (including discontinued operations) in fiscal year 1999.
The following items also contributed to our operating cash flows
in fiscal year 2000: $22.0 million in non-cash depreciation and
amortization charges, $12.2 million increase in accrued expenses
net of foreign currency adjustments, $5.9 million increase in
advance payments from customers, partially offset by additions to
inventory of $14.2 million to respond to the increased demand for
products. The largest difference between our fiscal year 1999 and
fiscal year 1998 operating cash flows results relates to the
decrease in net income, including discontinued operations, from a
$24.2 million net loss in fiscal year 1999, compared to $73.8
million in net earnings in fiscal year 1998. The net loss in
fiscal year 1999 was largely due to losses from our spun-off
businesses as recorded under generally accepted accounting
principles.

25
<PAGE>

o Investing activities used $21.6 million of net cash in fiscal year
2000, compared to providing $12.9 million of net cash in fiscal
year 1999 and using $143.1 million in fiscal year 1998. Almost all
of the net cash used in fiscal year 2000 was for purchases of
property, plant and equipment. The $12.9 million of net cash
provided in fiscal year 1999 included proceeds of $54.3 million
from the sale of our long-term leasehold interests in certain Palo
Alto facilities, related buildings and certain other corporate
assets, which was partially offset by $39.4 million used to
purchase property, plant and equipment and the Multimedia Medical
Systems' business in June 1999. In contrast, investing activities
in fiscal year 1998 used $143.1 million of cash, with $47.0
million used to purchase property, plant and equipment and $105.5
million used to acquire businesses, including the purchase of the
RS Business.

o Financing activities used net cash of $11.2 million in fiscal year
2000 and $104.7 million in fiscal year 1999, compared to providing
net cash of $19.3 million in fiscal year 1998. We used $35.0
million to pay down short-term debt during fiscal year 2000. This
was partially offset by $23.7 million of proceeds from stock
option exercises and employee stock purchases. The $104.7 million
net cash outlay in fiscal year 1999 was primarily attributable to
the aggregate of $119.3 million we contributed to VI and VSEA in
connection with the spin-offs, which was somewhat offset by $15.7
million proceeds from stock option exercises and employee stock
purchase plan purchases. Financing activities in fiscal year 1998
provided net cash of $19.3 million. We had additional long-term
borrowings of $38.0 million and net short-term borrowings of $27.6
million, partially offset by $34.5 million used to repurchase
shares of our stock (net of $19.7 million of proceeds received
from employees to purchase common stock) and $14.3 million used to
pay dividends in fiscal year 1998.

Total debt as a percentage of total capital decreased from 33.7% at
fiscal year end 1999 to 17.9% at September 29, 2000 largely due to repayments on
our short-term notes payable during fiscal year 2000. The ratio of current
assets to current liabilities improved from 1.42 to 1 at fiscal year end 1999 to
1.80 to 1 at September 29, 2000. At September 29, 2000, we had $70.3 million
available in unused uncommitted lines of credit. During the first quarter of
fiscal year 2000, we added an additional $50 million committed revolving credit
facility of which the entire balance was unused and available at September 29,
2000.

We expect that our future capital expenditures will continue to
approximate 2.5% of sales in each fiscal year. We spent $2.6 million in capital
expenditures related to facilities changes required after the spin-offs during
fiscal year 2000 and anticipate spending an additional $0.1 million in fiscal
year 2001.

In May 1999, we agreed to invest $5 million in a consortium to
participate in the acquisition of a minority interest in dpiX LLC ("dpiX"),
which supplies us with amorphous silicon thin-film transistor arrays for our
imaging products and for our oncology system's Portal Vision imagers. We funded
$2.5 million in July 1999 and the remaining $2.5 million in July 2000. The
investment was recorded under the equity method of accounting. Under the
agreement governing the consortium, each equity partner absorbs the consortium's
share of the gains and losses of dpiX based on a designated sequential order. We
are required to absorb our portion of the consortium's cumulative share of
dpiX's losses when it exceeds $20 million. At this time, management believes it
is reasonably possible that we will recognize a loss of up to $5 million on this
investment in fiscal year 2001. The $5 million represents the maximum share of
the consortium's losses that we are obligated to take based on the initial level
of contributions into the consortium.

26
<PAGE>

July 1999. No decision, however, has been entered. The parties have agreed to
consolidate our claims from the Northern District of California to the action in
the U.S. District Court in Texas.

After the spin-offs, we retained the liabilities related to the medical
systems business before the spin-offs, including the ISOs Litigation. In
addition, under the Amended and Restated Distribution Agreement, we agreed to
manage and defend liabilities related to legal proceedings and environmental
matters arising from corporate or discontinued operations. Under the Amended and
Restated Distribution Agreement, each of VI and VSEA must generally indemnify us
for one-third of these liabilities (after adjusting for any insurance proceeds
we realize or tax benefits we receive), including certain environmental-related
liabilities described below and to fully assume and indemnify us for liabilities
arising from each of their operations before the spin-offs. The availability of
such indemnities will depend upon the future financial strength of VI and VSEA.
Given the long-term nature of some of the liabilities, either company may not be
in a position to fund indemnities in the future. A court could also disregard
the contractual allocation of indebtedness, liabilities and obligations among
the parties and require us to assume responsibility for obligations allocated to
another party, particularly if such other party were to refuse or was unable to
pay or perform any of its allocated obligations. In addition, the Amended and
Restated Distribution Agreement generally provides that if a court prohibits any
of the companies from satisfying its indemnification obligations, then such
indemnification obligations will be shared equally between the two other
companies.

Our liquidity is affected by many factors, some of which are based on the
normal ongoing operations of our business and some of which arise from
uncertainties and conditions in the U.S. and global economies. Although our cash
requirements will fluctuate (positively and negatively) as a result of the
shifting influences of these factors, we believe that existing cash, cash
generated from operations and our borrowing capability will be sufficient to
satisfy anticipated commitments for capital expenditures and other cash
requirements for fiscal year 2001.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments and requires recognition of all
derivatives as assets or liabilities in the balance sheet and measurement of
those instruments at fair value. The accounting for changes in the fair values
of those derivatives would be dependent upon the use of the derivative and
whether it qualifies for hedge accounting. The statement, as amended by SFAS
137, is effective for fiscal years beginning after June 15, 2000. We are
required to adopt the standard in the first quarter of fiscal year 2001. As
discussed in our Notes to the Consolidated Financial Statements, the initial
adoption of this statement, as amended, will result in a cumulative after-tax
increase in net income of approximately $228,000, reflecting the time value on
forward contracts that we have elected to exclude from effectiveness testing
under SFAS 133. The adoption will also impact assets and liabilities recorded on
the balance sheet. On a prospective basis after the initial adoption, we do not
expect the impact to our consolidated financial statements to be material.

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements filed with the SEC. The staff
accounting bulletin outlines the basic criteria that we must meet to recognize
revenue and provides guidance for disclosures related to revenue recognition
policies. The staff accounting bulletin was amended in June 2000 to delay the
implementation date to the fourth quarter of our fiscal year 2001. In October
2000, the SEC released written guidance to assist with implementing this staff
accounting bulletin. We are in the process of determining the impact that
adoption will have on our consolidated financial statements.

EURO CONVERSION

27
<PAGE>

paid for by using either the Euro or the participating country's local currency.
Thereafter, the local currencies will be cancelled and the Euro will be used for
all transactions by and between the eleven participating members of the European
Union. We have implemented systems to begin conducting business with our
customers in both the Euro and the respective national currency. Systems and
processes that are initially impacted by this dual currency requirement are
customer billing and receivables, payroll and cash management activities,
including cash collections and disbursements. To accomplish compliance, we are
making the necessary systems and process changes and are working with our
financial institutions on various cash management issues. We have modified our
systems to accommodate recording transactions in the Euro and are commencing
recording transactions in the Euro in the eight countries of the European
community in which we currently do business.

We currently believe that the costs associated with implementing and
completing the Euro conversion, as well as business and market implications, if
any, associated with the Euro conversion, will not be material to our results of
operations or financial condition in any year or in the aggregate. The
competitive impact of increased cross-border price transparency, however, is
uncertain both with respect to products sold by us as well as products and
services which we purchase.

Our ongoing efforts with respect to the Euro conversion, and those of
our significant customers and suppliers, including financial institutions may,
at some time in the future, reveal as yet unidentified or not fully understood
issues that may not be addressable in a timely fashion, or that may cause
unexpected competitive or market effects. These issues, if not resolved
favorably, could have a material adverse effect on our results of operations or
financial condition in the future.

ENVIRONMENTAL MATTERS

There are a variety of environmental laws around the world regulating the
handling, storage, transport and disposal of hazardous materials that do or may
create increased costs for some of our operations. In addition, several
countries are proposing to require manufacturers to take back, recycle and
dispose of products at the end of the equipment's useful life. These laws create
increased costs for our operations.

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At September 29, 2000, our reserve for environmental liabilities, based
upon future environmental related costs estimated as of that date, was
calculated as follows:

TOTAL
RECURRING NON-RECURRING ANTICIPATED
COSTS COSTS FUTURE COSTS
--------------- --------------- ---------------
(DOLLARS IN MILLIONS)
FISCAL YEAR:
-------------
<S> <C> <C> <C>
2001.................................................. $ 1.2 $ 1.8 $ 3.0
2002.................................................. 1.1 2.4 3.5
2003.................................................. 1.1 0.5 1.6
2004.................................................. 1.1 -- 1.1
2005.................................................. 1.1 -- 1.1
Thereafter............................................ 28.6 1.7 30.3
--------------- --------------- ---------------
Total costs........................................... $ 34.2 $ 6.4 40.6
=============== ===============
Less imputed interest................................. (18.3)
---------------
Reserve amount........................................ $ 22.3
===============
</TABLE>

When we develop these estimates, we consider the financial strength of
other potentially responsible parties. These amounts are, however, only
estimates and may be revised in the future as we get more information on these
projects. We may also spend more or less than these estimates. Based on current
information, we believe that our reserves are adequate. At this time, management
believes that it is remote that any single environmental event would have a
materially adverse impact on our financial statements in any single fiscal year.
We spent $3.5 million (net of amounts borne by VI and VSEA) during fiscal year
2000 on environmental investigation, cleanup and third party claim costs. We
spent $1.7 million and $2.9 million in fiscal year 1999 and 1998, respectively,
net of amounts that would have been borne by VI and VSEA on similar activities.

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

CERTAIN FACTORS AFFECTING OUR BUSINESS

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

IF THE SPIN-OFF OF VI AND VSEA DID NOT QUALIFY AS A TAX-FREE SPIN-OFF, WE COULD
INCUR A SIGNIFICANT TAX LIABILITY

We received a Tax Ruling from the Internal Revenue Service (the "IRS") in
connection with the spin-offs to the effect, among other things, that neither
VMS nor the holders of Varian common stock would recognize a gain or loss as a
result of the spin-offs. Such rulings, while generally binding upon the IRS, are
subject to certain factual representations and assumptions. If such factual
representations and assumptions were incorrect in any material respect, such
ruling would be jeopardized. We are not aware of any facts or circumstances that
would cause such representations and assumptions to be untrue. VMS, VI and VSEA
have agreed to certain restrictions on their future actions to further assure
that the spin-offs will qualify as tax-free.

If one or both of the April 2, 1999 spin-offs failed to qualify as a
tax-free spin-off under Section 355 of the Internal Revenue Code of 1986, as
amended (the "Code"), then we will recognize a gain equal to the difference

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<PAGE>

between the fair market value of the stock of the non-qualifying company (or
companies) and our adjusted tax basis in such stock. If we were to recognize
gain on one or both of the spin-offs, such gain and the resulting tax liability
likely would be very substantial.

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 with 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 done with 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 our
company to the IRS related to the Tax Ruling is the representation that each of
the spin-offs was not part of such a plan or series of related transactions. If
VMS, VI or VSEA were to undergo a 50% Ownership Shift, particularly if such 50%
Ownership Shift occurred within two years after the date of the spin-offs, there
can be no assurance that the IRS will not assert that such ownership shift
occurred as part of a plan or series of related transactions and therefore that
the spin-offs are taxable under Section 355(e).

If the spin-offs are taxable solely under Section 355(e), we would
recognize a gain equal to the difference between the fair market value of the
VSEA and VI common stock and VMS's adjusted tax basis in such stock. However,
holders of Varian common stock would not recognize a gain or loss resulting from
the spin-offs. If we were to recognize gain on the spin-offs, such gain and the
resulting tax liability likely would be very substantial.

The Tax Sharing Agreement between VMS, VSEA and VI allocates
responsibility for the possible corporate tax burden resulting from the
spin-offs. Each of the three companies is responsible for any corporate taxes
resulting from the spin-offs attributable to action taken or permitted by that
entity or its affiliates after the spin-offs. If the spin-offs are found to be
taxable but none of VMS, VI and VSEA has done anything to cause the spin-offs to
be taxable, each company generally will be liable for one-third of those taxes.

OUR STOCKHOLDER RIGHTS PLAN AND CERTAIN PROVISIONS OF OUR CERTIFICATE OF
INCORPORATION MAY DISCOURAGE A TAKE-OVER AND THEREFORE LIMIT THE PRICE OF OUR
COMMON STOCK

We have a stockholder rights plan which, under certain circumstances,
would significantly dilute the equity interest in our company of a person (or
persons) who is seeking to acquire control of our company without the prior
approval of our Board of Directors. Certain provisions of our Certificate of
Incorporation may also make more difficult an acquisition of control of our
company without the approval of our Board of Directors.

IF THE HEALTH CARE MARKET DOES NOT ACCEPT OUR NEW PRODUCTS, OR IF OUR PRODUCTS
BECOME OBSOLETE, OUR REVENUES WILL NOT GROW

We cannot be sure that any products we develop 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 about 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. When our competitors introduce their products into the market also
affects market acceptance and market share of our products. Accordingly, the
relative speed with which we 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
participation.

In addition, rapid change and technological innovation characterize the
marketplace for medical products. Our products may therefore become obsolete,
whether from long development or government approval cycles or our competitors
having developed improved products or processes. In addition, the marketplace
could conclude that the task our product was designed to do is no longer an
element of a generally accepted diagnostic or treatment regimen. Any development
adversely affecting the market for our equipment would result in us having to
reduce production volumes or to discontinue manufacturing, which could harm our
business, results of operations and financial condition.

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<PAGE>

IF WE ARE UNABLE TO DEVELOP ENHANCEMENTS AND NEW GENERATIONS OF PRODUCTS, WE MAY
BE UNABLE TO ATTRACT OR RETAIN CUSTOMERS

Rapid and significant technological change, evolving industry standards
and new product introductions characterize the market for our products. Many of
our 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 on our part.

New product developments and new business opportunities in the health
care industry are inherently risky and unpredictable. These risks 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 competitors'
reaction. In addition, the high cost of technological innovation is matched by
the rapid and significant change in the technologies governing the products that
compete in our market, by the 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. We cannot be sure we
will be able to successfully develop, manufacture and phase in new products.
Without successful new product introductions, our revenues will likely suffer.
Additionally, even if customers accept new products or sales volume increases on
new or existing products, the costs associated with making such products
available to customers may reduce or prevent us from increasing our operating
margins.

OUR FAILURE OR DELAY IN OBTAINING REGULATORY APPROVALS OR OUR FAILURE TO COMPLY
WITH APPLICABLE REGULATIONS MAY LIMIT THE PRODUCTS WE CAN SELL OR SUBJECT US TO
FINES

As a manufacturer of medical devices, our products and manufacturing
activities are subject to extensive and rigorous government regulation,
including the provisions of the FDC Act. Our commercial distribution activities
in certain foreign countries are also subject to government regulation.
Obtaining FDA market clearances or certifications can be time consuming,
expensive and uncertain. We may not obtain the necessary clearances or
certifications or obtain them without undue delay. Furthermore, even if we are
granted regulatory clearances, the clearances may include significant
limitations on the indicated uses of the product. 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 U.S. Federal Trade Commission also regulate the
content of advertising and marketing materials relating to medical devices. The
advertising and marketing materials for our products may not always comply with
these regulations.

We are 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. If we do not comply with
applicable regulatory requirements, it can result in, among other things, fines,
suspensions of approvals, seizures or recalls of products, operating
restrictions and criminal prosecutions. In addition, changes in existing
regulations or adoption of new regulations could affect the timing of, or
prevent us from obtaining, future regulatory approvals. Government regulation
also may delay for a considerable period of time or prevent the marketing and
full commercialization of future products or services that we may develop,
and/or impose costly requirements on our business. 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 our business.

HEALTH CARE REFORMS AND CHANGES TO THIRD PARTY REIMBURSEMENTS FOR RADIATION
ONCOLOGY SERVICES MAY AFFECT DEMAND FOR OUR PRODUCTS

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. These policies include rationing of government-funded reimbursement
for health care services and imposing price controls on medical products and
services providers. We 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 our products and
services and the way we conduct business. We are unable to predict whether such
proposals will be enacted, whether other health care legislation or regulation
affecting our business may be proposed or enacted in the future, or what effect
any such legislation or regulation would have on our business, financial
condition and results of operations.

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<PAGE>

In addition, sales of certain of our products indirectly depend on
whether adequate reimbursement is available to our customers 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. The availability of such reimbursement affects
our customers' decisions to purchase capital equipment. Third-party payors are
increasingly challenging the pricing of medical procedures or limiting or
prohibiting reimbursement for certain services or devices or through other
means, and we cannot be sure that they will reimburse our customers at levels
sufficient to enable us to achieve or maintain sales and price levels for our
products. Without adequate support from third-party payors, the market for our
products may be limited. There is no uniform policy on reimbursement among
third-party payors, nor are there any assurances that procedures using our
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 our products under any foreign reimbursement system.

Specifically, recent changes in Medicare reimbursement for hospital
outpatient services and physician fee schedules were implemented under the
Balanced Budget Act of 1997 (as amended by the Balanced Budget Refinement Act of
1999), which could have a positive or negative impact on reimbursement for
radiation oncology services and may affect the demand for our products.
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 affect demand for
our products. We are unable to predict whether such proposals will be enacted,
whether other health care legislation or regulation affecting our business may
be proposed or enacted in the future, or what effect any such legislation or
regulation would have on our business, financial condition and results of
operations.

BECAUSE OUR PRODUCTS INVOLVE THE DELIVERY OF RADIATION AND DIAGNOSTIC IMAGING OF
THE HUMAN BODY, PRODUCT DEFECTS MAY RESULT IN MATERIAL PRODUCT LIABILITY CLAIMS
THAT COULD HARM FUTURE SALES AND FORCE US TO PAY MATERIAL UNINSURED CLAIMS

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

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

We have historically maintained limited product liability insurance
coverage in an amount we deem sufficient for each of our businesses. These
product liability insurance policies are expensive and have deductible amounts
and self-insured retentions. In the future, it may not be on acceptable terms or
in sufficient amounts, if at all. We cannot give assurance that the insurance
coverage we obtained is adequate. A successful claim brought against us in
excess of our insurance coverage or any material claim for which insurance
coverage is denied or limited and for which indemnification is not available
could harm our business, results of operations and financial condition.

On December 5, 1997, we purchased General Electric's Radiotherapy Service
Business (the "RS Business"). In connection with that transaction, we agreed to
assume liability for certain product defects and personal injury matters that
might arise from RS Business products, and obtained limited insurance for these
matters. The insurance provides that in each annual period we are responsible
for the first $5,000,000 of expenses or liabilities related to any such claims.
As of fiscal year end 2000, one claim has been asserted related to these RS
Business products for which we may have an indemnity obligation and we have
received, and will continue to monitor, information regarding other potential
claims, none of which, to our knowledge, have been asserted against us.

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<PAGE>

WE UTILIZE DISTRIBUTORS FOR A PORTION OF OUR SALES, THE LOSS OF WHICH COULD HARM
OUR RESULTS, AS COULD CONTINUED CONSOLIDATION IN THE MARKET FOR X-RAY TUBES

We have significant strategic relationships with a number of key
distributors principally in foreign countries. If these strategic relationships
are terminated and not replaced, it could adversely harm us. We have noticed a
trend toward consolidation in the OEM markets of our x-ray tubes business over
the past few years. The ongoing consolidation of customers who purchase our
x-ray tube products, including the consolidation of such customers into
companies that already manufacture x-ray tubes, may lead to more variability in
our operating results and could harm our business, operating results, and
financial condition.

FLUCTUATIONS IN OUR OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO BE VOLATILE,
WHICH COULD CAUSE LOSSES TO OUR STOCKHOLDERS

We have and expect in the future to experience fluctuations in our
operating results. The timing and amount of revenues are subject to a number of
factors that make it difficult to estimate revenues and operational results
prior to the end of any quarter. Many of our products require significant
capital expenditures, and the timing of sales of these products could affect our
quarterly earnings. A delay in a shipment in any quarter due, for example, to
unanticipated construction delays, cancellations by customers or unexpected
manufacturing difficulties, may cause sales in that quarter to fall
significantly below our expectations and may therefore adversely affect our
operating results for that quarter. Because some of our sales are quite large in
dollar amounts, an unexpected change in a customer's financial solvency or
ability to obtain financing for capital expenditures may also harm sales.
Furthermore, our quarterly operating results may also vary significantly
depending on a number of other factors, including changes in our pricing or our
competitors' pricing, 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 us and by our
competitors, and general economic conditions. Because certain of our operating
expenses are based on anticipated capacity levels and a high percentage of such
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. Any of these factors may harm our results. In addition,
our orders and backlog cannot necessarily be relied upon as accurate predictors
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 if or when the orders will
mature into revenue. Our operating results in one or more future quarters may
fall below the expectations of securities analysts and investors. In that event,
the trading price of our common stock would almost certainly decline.

OUR MARKET IS HIGHLY COMPETITIVE AND WE MAY LOSE MARKET SHARE TO COMPANIES WITH
GREATER RESOURCES OR WHO ARE ABLE TO DEVELOP MORE EFFECTIVE TECHNOLOGIES OR
COULD BE FORCED TO REDUCE OUR PRICES

The markets we serve 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
the products we offer. Our products and services compete with those of a
substantial number of foreign and domestic companies, some with greater
resources, financial or otherwise, than we have, and the rapid technological
changes occurring in our markets are expected to lead to the entry of new
competitors. Our ability to anticipate technological changes and introduce
enhanced products on a timely basis will be a significant factor in our ability
to expand and remain competitive. Existing competitors' actions and new entrants
may have an adverse impact on our sales and profitability. These competitors
could develop technologies and products that are more effective than those we
currently use or market or that could render our products obsolete or
noncompetitive.

OUR HIGH PERCENTAGE OF INTERNATIONAL SALES MAKES THOSE SALES SUBJECT TO
VARIABILITY THAT WE NO NOT FACE DOMESTICALLY

We conduct business globally. International sales accounted for
approximately 43%, 54% and 55% of sales in fiscal years 2000, 1999 and 1998,
respectively. As a result, we must provide significant service and support on a
worldwide basis. We have manufacturing and research operations in England,
Switzerland, Finland and France as well as sales and service offices located
throughout Europe, Asia, Latin America and Australia. We have invested
substantial financial and management resources to develop an international
infrastructure to meet the needs of our customers. We intend to continue to
expand our presence in international markets, although we cannot be sure we

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will able to compete successfully in the international market or 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 our 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 us in foreign markets where payment
for our 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.

OUR RESULTS MAY BE HARMED BY SHIFTS IN EXHANGE RATES

We sell our products internationally and are subject to market risk due
to fluctuations in foreign currency exchange rates. We manage this risk through
established policies and procedures that include the use of derivative financial
instruments. We have historically 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. Our
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 September 29, 2000, we had forward exchange contracts to sell
foreign currencies totaling $129.3 million and to buy foreign currencies
totaling $30.5 million.

SFAS 133 requires derivatives to be measured at fair value and to be
recorded as assets or liabilities on the balance sheet. The accounting for gains
or losses resulting from changes in the fair values of those derivatives would
be dependent upon the use of the derivative and whether it qualifies for hedge
accounting. The statement, as amended by SFAS 137, is effective for us beginning
the first quarter of fiscal year 2001. Upon adoption of SFAS 133, as amended, we
will continue to sell product throughout the world in foreign currencies and
will continue our policy of hedging foreign currency exposures that result from
international sales backlog with forward exchange contracts. Although we engage
in hedging transactions that may offset the effect of fluctuations in foreign
currency exchange rates, financial exposure may nonetheless result, primarily
from the timing of transactions, from the effectiveness of the hedges (measured
by how closely the changes in fair value of the hedging instrument offset the
changes in fair value of the hedged item), from forecast volatility and from the
movement of exchange rates. In addition, any significant changes in the exchange
rates and/or the political, regulatory or economic environment where we conduct
international operations may have a material impact on our revenues and profits.

IF WE ARE NOT ABLE TO PROTECT OUR INTELLECTUAL PROPERTY, OUR COMPETITIVE
ADVANTAGES WILL BE REDUCED

We place considerable importance on obtaining and maintaining 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.

We file applications as appropriate for patents covering new products and
manufacturing processes. We cannot be sure, however, that patents now owned or
patents that will issue from any pending or future patent applications owned by,
or licensed to, VMS, or that the claims allowed under any issued patents, will
be sufficiently broad to protect our technology position against competitors. In
addition, issued patents owned by, or licensed to, VMS may be challenged,
invalidated or circumvented, or the rights granted under the patent may not
provide us with competitive advantages. We could incur substantial costs and
diversion of management resources if we have to defend our business in suits
brought against us or in suits in which we may assert our patent rights against
others. An unfavorable outcome to any such litigation could harm us. 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.

We may also not be aware of pending or issued patents held by parties not
affiliated with us that relate to our products or technologies. If a claim
relating to proprietary technology or information is asserted against us, we 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 we would prevail in any such contest. If the outcome of
any such contest is unfavorable to us, it could materially adversely affect our
business and results of operations. From time to time, we have received notices
from, and have issued notices to, third parties alleging infringement of patent
or other intellectual property

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rights relating to their products. Such claims are often, but not always,
settled by mutual agreement satisfactorily without litigation.

We rely on a combination of copyright, trade secret and other laws, and
contractual restrictions on disclosure, copying and transferring title,
including confidentiality agreements with vendors, strategic partners,
co-developers, employees, consultants and other third parties, to protect our
proprietary rights. There can be no assurance that such protections will prove
adequate and that contractual agreements will not be breached, that we will have
adequate remedies for any such breaches, or that our trade secrets will not
otherwise become known to or independently developed by others. We have
trademarks, both registered and unregistered, that are maintained and enforced
to provide customer recognition for our products in the marketplace. There can
be no assurance that our trademarks will not be used by unauthorized third
parties. We 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 NATURE OF OUR BUSINESS EXPOSES US TO ENVIRONMENTAL CLAIMS OR CLEANUP
EXPENSES, WHICH COULD CAUSE US TO PAY SIGNIFICANT AMOUNTS

For a discussion of environmental matters, see "--Environmental Matters."

SINCE WE DEPEND UPON A LIMITED GROUP OF SUPPLIERS, OUR LOSS OF A SUPPLIER COULD
REDUCE OUR ABILITY TO MANUFACTURE PRODUCTS OR INCREASE OUR COSTS

We obtain certain of the components and subassemblies included in our
products from a limited group of suppliers, or in some cases a single-source
supplier, including the source wires for high-dose afterloaders, klystrons for
linear accelerators, solid state imaging panels and specialized integrated
circuits for imaging subassemblies. If we lose of any of these suppliers
(including any single-source supplier), we would be required to obtain one or
more replacement suppliers as well as potentially requiring a significant level
of product development to incorporate new parts into our products. We believe
that we may be able to obtain alternative sources for such components when
necessary, although the need to change suppliers or to alternate between
suppliers might cause material delays in delivery or significantly increase
costs. Although we have obtained limited insurance to protect against business
interruption loss, 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 we seek to reduce our 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 our business and
results of operations and could result in damage to customer relationships.

WE MAY NOT BE ABLE TO MAINTAIN AND EXPAND OUR BUSINESS IF WE ARE NOT ABLE TO
RETAIN, HIRE AND INTEGRATE SUFFICIENT QUALIFIED PERSONNEL

Our future success depends to a significant extent on the continued
service of certain of our key executive, technical, sales, marketing and
engineering personnel. It also depends on our ability to attract, expand,
integrate train and retain our management team, qualified engineering personnel
and technical personnel. The loss of services of key employees could adversely
affect our business, operating results or financial condition. Competition for
such personnel is intense, particularly in the labor markets around our
facilities in Palo Alto, California and Salt Lake City, Utah. If we fail to
hire, train or retain qualified personnel, we will not be able to maintain and
expand our business.

THE LOCATION OF SOME OF OUR FACILITIES SUBJECTS US TO THE RISK OF EARTHQUAKES

We conduct a portion of our activities including manufacturing,
administration and data processing at facilities located in seismically active
areas that have experienced major earthquakes in the past. We carry limited
earthquake insurance on our facilities. However, such coverage may not be
adequate or continue to be available at commercially reasonable rates and terms.
In the event of a major earthquake or other disaster affecting our facilities,
our operations and our operating results could be adversely affected.

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CONVERSION TO THE EURO AFFECTS VARIOUS ASPECTS OF OUR BUSINESS

On January 1, 1999, eleven of the fifteen member countries of the
European Union adopted the Euro as their common legal currency. Following the
introduction of the Euro, the local currencies are scheduled to remain legal
tender in the participating countries until January 1 2002. During this
transition period, goods and services may be paid for by using either the Euro
or the participating country's local currency. Thereafter, the local currencies
will be cancelled and the Euro will be used for all transactions by and between
the eleven participating members of the European Union. Our ability to convert
our software applications to support Euro requirements, implement sales
documentation, quotations, price lists and catalogs, contracts, accounting and
tax records and related historical documents in the Euro over the required time
periods, and associated costs of accomplishing these actions, could have a
material adverse affect on our business and results of operations and could
damage customer relationships. Additionally, competitive impact of cross-border
price transparency resulting from product pricing in a common currency in
multiple European countries could adversely affect margins on sales to customers
in those countries.

CHANGES TO ACCOUNTING STANDARDS AND RULES COULD EITHER DELAY OUR RECOGNITION OF
REVENUES OR REDUCE THE AMOUNT OF REVENUES THAT WE MAY RECOGNIZE AT A SPECIFIC
TIME, DEFERRING OR REDUCING OUR PROFITABILITY

Recent actions and comments from the SEC have focused on the integrity of
financial reporting. In addition, the FASB and other regulatory accounting
agencies have recently introduced several new or proposed accounting standards,
some of which represent a significant change from current industry practices.
For example, in December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." SAB 101 provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements of
all public registrants. In response to numerous requests for interpretive
guidance of SAB 101, the effective date of the standard has been delayed twice.
We currently expect SAB 101 to become effective in the fourth quarter of fiscal
2001. In October 2000, the SEC released written guidance to assist with
implementing this staff accounting bulletin. We are in the process of
determining the impact of its adoption. The adoption of SAB 101 may have a
material effect on our reported revenues and results of operations for any
particular quarter.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to two primary types of market risks: foreign currency
exchange rate risk and interest rate risk.

FOREIGN CURRENCY EXCHANGE

As a global concern, we are exposed to adverse movements in foreign
currency exchange rates. These exposures may change over time as business
practices evolve and could have a material adverse impact on our financial
results. Historically, our primary exposures related to non-U.S. dollar
denominated sales and purchases throughout Europe, Asia and Australia. On
January 1, 1999, eleven of the fifteen member countries of the European Monetary
Union adopted the Euro as their common legal currency. Following the
introduction of the Euro, the local currencies of the participating countries
are scheduled to remain legal tender until June 30, 2002. During this transition
period, goods and services may be paid for in either Euro or the participating
country's local currencies. Thereafter, only the Euro will be the legal tender
in the participating countries. We continue to evaluate, among other issues, the
impact of the Euro conversion on our foreign currency exposure. Based on the
evaluation to date, we do not expect the Euro conversion to create any change in
currency exposure due to our existing hedging practices.

36
<PAGE>

We hedge the currency exposures associated with certain assets and
liabilities denominated in non-functional currencies and with anticipated
foreign currency cash flows. We do not enter into forward exchange contracts for
trading purposes. We intend our hedging activity to offset the impact of
currency fluctuations on certain anticipated foreign currency cash flows and
certain non-functional currency assets and liabilities. Our success, however,
depends upon estimating balance sheets denominated in various currencies. If
forecasts are overstated or understated during periods when currency is
volatile, we could experience unanticipated currency gains or losses. Our
forward exchange contracts generally range from one to three months in original
maturity. We do not have any forward exchange contract with an original maturity
greater than one year. Forward exchange contracts outstanding, their unrealized
gains or losses and their fair values as of the fiscal year-end 2000 are
summarized as follows:

FISCAL YEAR-END 2000
-------------------------------------------------------------------
NOTIONAL NOTIONAL
VALUE VALUE UNREALIZED FAIR
SOLD PURCHASED GAIN/(LOSS) VALUE
-------------- --------------- ----------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Australian dollar......................... $ 7.1 $ 1.3 $ 0.1 $ 0.3
Brazilian real............................ -- 0.7 -- --
British pound............................. 18.0 3.9 0.8 0.7
Canadian dollar........................... 19.5 2.7 -- 0.1
Danish krona.............................. 0.7 2.2 -- --
Euro dollar............................... 62.2 8.6 1.0 1.5
Japanese yen.............................. 14.4 1.7 -- 0.2
Swedish krona............................. 3.2 -- -- --
Swiss franc............................... 2.5 9.4 -- --
Thailand baht............................. 1.7 -- 0.1 --
-------------- --------------- ----------------- ------------
Totals............................... $ 129.3 $ 30.5 $ 2.0 $ 2.8
============== =============== ================= ============
</TABLE>

The fair value of forward exchange contracts generally reflects the
estimated amounts that we 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 the open contracts. The notional
amounts of forward exchange contracts are not a measure of our exposure.

INTEREST RATE RISK

Our exposure to market risk for changes in interest rates relates
primarily to our investment portfolio and notes payable. We do not use
derivative financial instruments in our investment portfolio, and the investment
portfolio only includes highly liquid instruments with an original maturity of
three months or less. We primarily enter into debt obligations to support
general corporate purposes, including working capital requirements, capital
expenditures and acquisitions.

The fair value of our investment portfolio or related income would not be
significantly impacted by interest rates since the investment maturities are
short. Our long-term debt of $58.5 million at September 29, 2000 carries a
weighted average fixed interest rate of 6.82% per annum with principal payments
due in various installments over a ten-year period, beginning in 2005. Our notes
payable to bank of $0.6 million carry a weighted average fixed interest rate of
5.56% per annum with principal payable semiannually through January 2003.

37
<PAGE>

The table below presents principal amounts and related weighted average
interest rates by year for our cash and cash equivalents and debt obligations.

FISCAL YEAR ENDING
--------------------------------------------------------------------------
2001 2002 2003 2004 2005 THEREAFTER TOTAL
-------- -------- --------- -------- --------- ----------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Assets..............................
Cash and cash equivalents........ $ 83.3 -- -- -- -- -- $ 83.3
Average interest rate............ 5.56 % 5.56 %

Liabilities.........................
Notes payable.................... $ 0.6 -- -- -- -- -- $ 0.6
Average interest rate............ 5.56 % -- -- -- -- -- 5.56 %

Long-term debt................... -- -- -- -- $ 5.3 $ 53.2 $ 58.5
Average interest rate............ -- -- -- -- 6.82 % 6.82 % 6.82 %
</TABLE>

The estimated fair value of our cash and cash equivalents (the majority
of which was held abroad at September 29, 2000 and would be subject to
additional taxation if it was repatriated in the U.S.) approximates the
principal amounts reflected above based on the short maturities of these
financial instruments.

The fair value of our long-term debt is estimated based on the current
rates available to us for debt of similar terms and remaining maturities. Under
this method, the fair value of our long-term debt is estimated to be $56.5
million. We determined the estimated fair value amount by using available market
information and commonly accepted valuation methodologies. However, it requires
considerable judgment in interpreting market data to develop estimates of fair
value. Accordingly, the fair value estimate presented is not necessarily
indicative of the amount that we or holders of the instrument could realize in a
current market exchange. The use of different assumptions and/or estimation
methodologies may have a material effect on the estimated fair value.

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this item is submitted as a separate section of this
report. See Item 14.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

38
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item with respect to the Company's
executive officers is set forth in Item 1 of this report. The balance of the
information required by this item is incorporated by reference from the
Company's Definitive Proxy Statement for the 2001 Annual Meeting of Stockholders
under the captions "Election of Directors" and "Stock Ownership--Section 16(a)
Beneficial Ownership Reporting Compliance."

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from
the Company's Definitive Proxy Statement for the 2001 Annual Meeting of
Stockholders under the caption "Compensation of Directors and the Named
Executive Officers."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference from
the Company's Definitive Proxy Statement for the 2001 Annual Meeting of
Stockholders under the caption "Stock Ownership--Beneficial Ownership of Certain
Stockholders and Executive Officers."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from
the Company's Definitive Proxy Statement for the 2001 Annual Meeting of
Stockholders under the captions "Compensation of Directors and the Named
Executive Officers--Certain Transactions" and "Change in Control Agreements."

39
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

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

o Report of Independent Accountants

o Consolidated Statements of Earnings

o Consolidated Balance Sheets

o Consolidated Statements of Stockholders' Equity

o Consolidated Statements of Cash Flows

o Notes to the Consolidated Financial Statements

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

The following financial statement schedule of the Registrant and its
subsidiaries for fiscal years 2000, 1999 and 1998 is filed as a part of this
report and should be read in conjunction with the Consolidated Financial
Statements of the Registrant and its subsidiaries.

SCHEDULE
--------
II Valuation and Qualifying Accounts

All other schedules are omitted because of the absence of conditions
under which they are required or because the required information is given in
the financial statements or the notes thereto.

(3) Exhibits:

See attached Exhibit Index.

(b) The Company filed no reports on Form 8-K during the fourth quarter of
fiscal 2000.

40
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

Dated: December 8, 2000

VARIAN MEDICAL SYSTEMS, INC.

By: /s/ Elisha W. Finney
------------------------------------
Elisha W. Finney
Vice President, Finance and
Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.

SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Richard M. Levy President and Chief Executive December 8, 2000
--------------------------------- Officer (Principal Executive
RICHARD M. LEVY Officer)

/s/ Elisha W. Finney Vice President, Finance and December 8, 2000
--------------------------------- Chief Financial Officer
ELISHA W. FINNEY (Principal Financial Officer)

/s/ Crisanto C. Raimundo Controller (Principal December 8, 2000
--------------------------------- Accounting Officer)
CRISANTO C. RAIMUNDO

JOHN SEELY BROWN* Director
SAMUEL HELLMAN* Director
TERRY R. LAUTENBACH* Director
DAVID W. MARTIN, JR.* Director
BURTON RICHTER* Director
RICHARD W. VIESER* Director

*By /s/ Elisha W. Finney December 8, 2000
--------------------
ELISHA W. FINNEY
Attorney-in-Fact
</TABLE>

41
<PAGE>

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES

FORM 10-K

INDEX OF FINANCIAL STATEMENTS AND SCHEDULES

The following financial statements of the registrant and its subsidiaries
are required to be included in Item 8:

PAGE
----
Report of Independent Accountants.......................................... F-2
Consolidated Statements of Earnings........................................ F-3
Consolidated Balance Sheets................................................ F-4
Consolidated Statements of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to the Consolidated Financial Statements............................. F-7

The following financial statement schedule of the Registrant and its
subsidiaries for fiscal years 2000, 1999 and 1998 is filed as a part of this
report as required to be included in Item 14(a) and should be read in
conjunction with the Consolidated Financial Statements of the Registrant and its
subsidiaries:

SCHEDULE PAGE
-------- ----
II Valuation and Qualifying Accounts................................ F-25

All other schedules are omitted because of the absence of conditions
under which they are required or because the required information is given in
the financial statements or the notes thereto.

F-1
<PAGE>

VARIAN MEDICAL SYSTEMS, INC.
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
of Varian Medical Systems, Inc.:

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 40 present fairly, in all material
respects, the financial position of Varian Medical Systems, Inc. and its
subsidiaries at September 29, 2000 and October 1, 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
September 29, 2000 in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedule listed in the index appearing under Item 14(a)(2) on page 40
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP
------------------------------
PricewaterhouseCoopers LLP

San Jose, California
November 9, 2000

F-2
<PAGE>

VARIAN MEDICAL SYSTEMS AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF EARNINGS

FISCAL YEARS
-------------------------------------
2000 1999 1998
----------- ----------- -----------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Sales.................................................................... $ 689,700 $ 590,440 $ 541,461
----------- ----------- -----------
Operating Costs and Expenses
Cost of sales....................................................... 432,603 380,435 346,298
Research and development............................................ 42,083 39,895 39,255
Selling, general and administrative................................. 125,107 116,131 117,528
Reorganization...................................................... 227 29,668 --
Acquisition-related expenses........................................ 1,977 -- --
----------- ----------- -----------
Total Operating Costs and Expenses.................................. 601,997 566,129 503,081
----------- ----------- -----------
Operating Earnings....................................................... 87,703 24,311 38,380
Interest expense.................................................... (5,161) (9,980) (8,835)
Interest income..................................................... 2,333 3,908 6,418
----------- ----------- -----------
Earnings from Continuing Operations Before Taxes......................... 84,875 18,239 35,963
Taxes on earnings................................................... 31,826 10,021 9,819
----------- ----------- -----------
Earnings from Continuing Operations...................................... 53,049 8,218 26,144
Earnings (Loss) from Discontinued Operations--Net of Taxes................ -- (32,456) 47,696
----------- ----------- -----------
Net Earnings (Loss)...................................................... $ 53,049 $ (24,238) $ 73,840
=========== =========== ===========
Average Shares Outstanding--Basic......................................... 31,104 30,219 29,910
=========== =========== ===========
Average Shares Outstanding--Diluted....................................... 32,432 30,527 30,419
=========== =========== ===========
Net Earnings (Loss) Per Share--Basic
Continuing Operations............................................... $ 1.71 $ 0.27 $ 0.87
Discontinued Operations............................................. -- (1.07) 1.60
----------- ----------- -----------
Net Earnings (Loss) Per Share--Basic........................... $ 1.71 $ (0.80) $ 2.47
=========== =========== ===========
Net Earnings (Loss) Per Share--Diluted
Continuing Operations............................................... $ 1.64 $ 0.27 $ 0.86
Discontinued Operations............................................. -- (1.06) 1.57
----------- ----------- -----------
Net Earnings (Loss) Per Share--Diluted......................... $ 1.64 $ (0.79) $ 2.43
=========== =========== ===========
</TABLE>

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

F-3
<PAGE>

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS

FISCAL YEAR-END
---------------------------
SEPTEMBER 29, OCTOBER 1,
2000 1999
------------- ------------
(DOLLARS IN THOUSANDS,
EXCEPT PAR VALUES)
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents........................................................ $ 83,321 $ 25,126
Accounts receivable, net......................................................... 226,442 233,785
Inventories...................................................................... 92,482 78,324
Other current assets............................................................. 48,343 45,011
------------- ------------
Total Current Assets...................................................... 450,588 382,246
------------- ------------
Property, Plant and Equipment......................................................... 206,614 200,386
Accumulated depreciation and amortization........................................ (126,515) (120,138)
------------- ------------
Net Property, Plant and Equipment......................................... 80,099 80,248
------------- ------------
Other Assets.......................................................................... 71,863 76,689
------------- ------------
Total Assets.............................................................. $ 602,550 $ 539,183
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable.................................................................... $ 616 $ 35,587
Accounts payable--trade........................................................... 41,351 40,141
Accrued expenses................................................................. 128,391 121,165
Product warranty................................................................. 19,975 18,152
Advance payments from customers.................................................. 59,563 54,757
------------- ------------
Total Current Liabilities................................................. 249,896 269,802
Long-Term Accrued Expenses............................................................ 23,795 25,890
Long-Term Debt........................................................................ 58,500 58,500
------------- ------------
Total Liabilities......................................................... 332,191 354,192
------------- ------------
Commitments and Contingencies
Stockholders' Equity..................................................................
Preferred stock..................................................................
Authorized 1,000,000 shares, par value $1, issued and outstanding none....... -- --
Common stock.....................................................................
Authorized 99,000,000 shares, par value $1, issued and outstanding
31,769,000 shares at September 29, 2000 and 30,563,000 shares at
October 1, 1999.............................................................. 31,769 30,563
Capital in excess of par value................................................... 50,869 20,185
Retained earnings................................................................ 187,721 134,243
------------- ------------
Total Stockholders' Equity................................................ 270,359 184,991
------------- ------------
Total Liabilities and Stockholders' Equity................................ $ 602,550 $ 539,183
============= ============
</TABLE>

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

F-4
<PAGE>

VARIAN MEDICAL SYSTEMS AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
CAPITAL IN
COMMON STOCK EXCESS OF TREASURY
--------------------- PAR RETAINED STOCK AT
SHARES AMOUNT VALUE EARNINGS COST TOTAL
--------- ---------- ---------- ----------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
BALANCES, FISCAL YEAR-END, 1997........... 30,108 $ 30,108 $ -- $ 494,469 $ -- $ 524,577
Net earnings for the year................. -- -- -- 73,840 -- 73,840
Issuance of stock under omnibus stock,
stock option, and employee stock
purchase plans (including tax benefit
of $5,321)............................. 646 646 24,407 -- -- 25,053
Purchase of common stock.................. -- -- -- -- (54,276) (54,276)
Retirement of treasury stock.............. (1,011) (1,011) (24,407) (28,858) 54,276 --
Dividends declared ($0.39 per share)...... -- -- -- (11,649) -- (11,649)
--------- ---------- ---------- ----------- ---------- -----------
BALANCES, FISCAL YEAR-END, 1998........... 29,743 29,743 -- 527,802 -- 557,545
Net loss for the year..................... -- -- -- (24,238) -- (24,238)
Issuance of stock under omnibus stock,
stock option, and employee stock
purchase plans (including tax benefit
of $5,338)............................. 820 820 20,185 -- -- 21,005
Dividends declared ($0.10 per share)...... -- -- -- (2,991) -- (2,991)
Spin Distribution......................... -- -- -- (366,330) -- (366,330)
--------- ---------- ---------- ----------- ---------- -----------
BALANCES, FISCAL YEAR-END, 1999........... 30,563 30,563 20,185 134,243 -- 184,991
Net earnings for the year................. -- -- -- 53,049 -- 53,049
Issuance of stock under omnibus stock,
stock option, and employee stock
purchase plans (including tax benefit
of $7,970)............................. 1,206 1,206 30,494 -- -- 31,700
Non-cash stock-based compensation......... -- -- 190 -- -- 190
Spin Distribution......................... -- -- -- 429 -- 429
--------- ---------- ---------- ----------- ---------- -----------
BALANCES, FISCAL YEAR-END, 2000........... 31,769 $ 31,769 $ 50,869 $ 187,721 $ -- $ 270,359
========= ========== ========== =========== ========== ===========
</TABLE>

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

F-5
<PAGE>

VARIAN MEDICAL SYSTEMS AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

FISCAL YEARS
------------------------------------
2000 1999 1998
----------- ----------- -----------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net Cash Provided/(Used) by Operating Activities......................... $ 83,839 $ (33,557) $ 127,753
----------- ----------- -----------
INVESTING ACTIVITIES
Proceeds from sale of property, plant and equipment...................... 1,786 54,260 2,321
Purchase of property, plant and equipment................................ (19,234) (39,402) (46,954)
Purchase of businesses, net of cash acquired............................. -- (5,849) (105,470)
Other, net............................................................... (4,124) 3,851 7,035
----------- ----------- -----------
Net Cash (Used)/Provided by Investing Activities............ (21,572) 12,860 (143,068)
----------- ----------- -----------
FINANCING ACTIVITIES
Net (repayments)/borrowings on short-term obligations.................... (34,971) 11,253 27,624
Proceeds from long-term borrowings....................................... -- -- 38,000
Principal payments on long-term debt..................................... -- (12,138) (96)
Proceeds from common stock issued to employees........................... 23,730 15,667 19,732
Purchase of common stock................................................. -- -- (54,276)
Dividends paid........................................................... -- (2,991) (14,348)
Cash distributed in spin-off of businesses............................... -- (119,273) --
Other, net............................................................... -- 2,792 2,692
----------- ----------- -----------
Net Cash (Used)/Provided by Financing Activities............ (11,241) (104,690) 19,328
----------- ----------- -----------
Effects of Exchange Rate Changes on Cash................................. 7,169 846 3,356
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents.............. 58,195 (124,541) 7,369
Cash and Cash Equivalents at Beginning of Fiscal Year............. 25,126 149,667 142,298
----------- ----------- -----------
Cash and Cash Equivalents at End of Fiscal Year................... $ 83,321 $ 25,126 $ 149,667
=========== =========== ===========
DETAIL OF NET CASH PROVIDED/(USED) BY OPERATING ACTIVITIES
Net Earnings/(Loss)...................................................... $ 53,049 $ (24,238) $ 73,840
Adjustments to reconcile net earnings/(loss) to net cash provided/(used)
by operating activities:
Depreciation....................................................... 17,794 30,879 42,663
Allowances for doubtful accounts................................... 1,142 2,704 3,020
Loss/(gain) from sale of assets.................................... 73 (30,565) 62
Amortization of intangibles........................................ 4,162 6,519 4,993
Deferred taxes..................................................... (1,062) (20,850) (5,166)
Non-cash stock-based compensation.................................. 190 -- --
Changes in assets and liabilities:
Accounts receivable........................................... (8,802) (32,600) 30,770
Inventories................................................... (14,158) 3,295 (18,098)
Other current assets.......................................... 1,811 (14,098) (2,458)
Accounts payable--trade........................................ 3,121 6,558 (16,728)
Accrued expenses.............................................. 12,192 23,097 (3,671)
Product warranty.............................................. 2,000 (2,961) 2,061
Advance payments from customers............................... 5,938 13,319 186
Long-term accrued expenses.................................... (2,095) (3,056) 9,019
Tax benefits from employee stock option plan.................. 7,970 5,338 5,321
Other............................................................. 514 3,102 1,939
----------- ----------- -----------
Net Cash Provided/(Used) by Operating Activities.................. $ 83,839 $ (33,557) $ 127,753
=========== =========== ===========
</TABLE>

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

F-6
<PAGE>

VARIAN MEDICAL SYSTEMS, INC., AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FISCAL YEAR

The Company's fiscal years reported are the 52- or 53- week periods
ending on the Friday nearest September 30. Fiscal years 2000 and 1999 comprised
the 52-week periods ended on September 29, 2000 and October 1, 1999,
respectively. Fiscal year 1998 comprised the 53-week period ended on October 2,
1998.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include those of the Company and
its subsidiaries. Significant intercompany balances, transactions, and stock
holdings have been eliminated in consolidation. Investments in affiliated
companies over whose operations the Company has significant influence but not
control are accounted for under the equity method.

DISTRIBUTION

On April 2, 1999, Varian Associates, Inc. reorganized into three separate
publicly traded companies by spinning off, through a tax-free distribution, two
of its businesses to stockholders (the "Distribution"). The Distribution
resulted in the following three companies: 1) the Company (renamed from Varian
Associates, Inc. to Varian Medical Systems, Inc. following the Distribution); 2)
Varian, Inc. ("VI"); and 3) Varian Semiconductor Equipment Associates, Inc.
("VSEA"). The Distribution resulted in a non-cash dividend to stockholders.

The Distribution was accomplished under the terms of an Amended and
Restated Distribution Agreement dated as of January 14, 1999 by and among the
Company, VI and VSEA (the "Distribution Agreement"). For purposes of governing
certain of the ongoing relationships between and among the Company, VI and VSEA
after the Distribution, the Company, VI and VSEA also entered into various
agreements (the "Distribution-Related Agreements") that set forth the principles
to be applied in allocating certain related costs and specified portions of
contingent liabilities to be shared, which, by their nature, could not be
reasonably estimated at the time.

Under the Distribution Agreement, (1) the Company was required, among
other things, to contribute to VSEA cash and cash equivalents such that VSEA
would have $100 million in cash and cash equivalents and consolidated debt (as
defined in the Distribution Agreement) of no more than $5 million and (2) VI was
required to assume 50% of the outstanding indebtedness under the Company's term
loans and have transferred to it such portion of the indebtedness under the
Company's notes payable and such amounts of cash and cash equivalents so that as
of the time of the Distribution, the Company and VI would each have net debt
(defined in the Distribution Agreement as the amount outstanding under the term
loans and the notes payable, less cash and cash equivalents) equal to
approximately 50% of the net debt of the Company and VI, subject to such
adjustment as was necessary to provide the Company with a net worth of between
40% and 50% of the aggregate net worth of the Company and VI. As a result, the
Company transferred $119 million in cash and cash equivalents to VSEA and VI,
and VSEA and VI assumed $69 million in debt during fiscal year 1999. However,
the amounts allocated to VI and transferred to VSEA in connection with the
Distribution were based on estimates. Certain future adjustments or payments may
be required under the provisions of the Distribution Agreement or the
Distribution-Related Agreements. The Company may be required to make cash
payments to VI or VSEA, or may be entitled to receive cash payments from VI or
VSEA. The Company does not believe that any future payments would be material to
the Company's consolidated financial statements.

In fiscal year 1999, the Company reported results of operations pursuant
to Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions."
Accordingly, the Company reclassified its fiscal year 1999 and fiscal year 1998
consolidated financial statements to reflect the dispositions of VI and VSEA.
The net operating results of VI and VSEA have been reported, net of applicable
income taxes, as "Earnings (Loss) from Discontinued Operations."

F-7
<PAGE>

VARIAN MEDICAL SYSTEMS, INC., AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In the fiscal year 1999 results of operations, the Company recorded a
loss on disposition pertaining to VI and VSEA of $5.5 million (net of income
taxes of $3.0 million). The loss on disposition related to employee relocation,
severance, retention, and other payroll costs directly associated with the
disposition of VI and VSEA.

Summarized information for discontinued operations, excluding the above
loss on disposition, is as follows (dollars in millions):

FISCAL YEARS
----------------------------------
2000 1999 1998
---------- ---------- ----------
Sales........................... $ -- $ 375.7 $ 880.7
========== ========== ==========
Earnings (Loss) before Taxes.... $ -- $ (39.5) $ 76.8
========== ========== ==========
Net Earnings (Loss)............. $ -- $ (27.0) $ 47.7
========== ========== ==========

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.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of the Company's financial instruments including
cash and cash equivalents, accounts receivable and accounts payable approximate
fair value due to their short maturities.

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 selling,
general and administrative expenses for 2000, 1999 and 1998 was $1.8 million,
$4.4 million and $2.2 million, respectively.

REVENUE RECOGNITION

Sales and related cost of sales for hardware are generally recognized
upon shipment of products which in some cases precedes customer acceptance, as
the performance of installation obligations is essentially perfunctory and there
is a demonstrated history of customer acceptance following shipment. Sales and
related cost of sales for software products are generally recognized at the time
of customer acceptance, which normally is within 30 days after installation. 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 sales when sales are
recognized. Service revenue is recognized ratably over the period of the related
contract.

CASH AND CASH EQUIVALENTS

The Company considers currency on hand, demand deposits, and all highly
liquid investments with an original maturity of three months or less to be cash
and cash equivalents. Cash and cash equivalents are deposited in demand and
money market accounts in various financial institutions in the United States and
internationally. Deposits held with financial institutions may exceed the amount
of insurance provided on such deposits. The Company has not experienced any
losses on its deposits of cash, cash equivalents or marketable securities.

ACCOUNTS RECEIVABLE

Accounts receivable are stated net of allowances for doubtful accounts of
$1.9 million at the end of fiscal year 2000 and $1.1 million at the end of
fiscal year 1999.

F-8
<PAGE>

VARIAN MEDICAL SYSTEMS, INC., AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Financial instruments that potentially expose the Company to
concentrations of credit risk consist principally of trade accounts receivable.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of customers comprising the Company's customer
base and their dispersion across many geographies. The Company performs ongoing
credit evaluations of its customers and generally does not require collateral
from its customers.

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 (except X-ray
Products). 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
$14.9 million in fiscal 2000, $14.2 million in fiscal 1999 and $44.7 million in
fiscal 1998. The main components of inventories are as follows:

2000 1999
-------- ---------
(DOLLARS IN MILLIONS)
Raw materials and parts............... $ 67.4 $ 61.9
Work-in-process....................... 10.7 7.8
Finished goods........................ 14.4 8.6
-------- ---------
Total Inventories.................. $ 92.5 $ 78.3
======== =========

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, ranging from three
to forty years, using the straight-line method for financial reporting purposes
and accelerated methods for tax purposes. Leasehold improvements are amortized
using the straight-line method over their estimated useful lives, or the
remaining term of the lease, whichever is less. Assets subject to lease are
amortized using the straight-line method over the term of the lease. 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.

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

2000 1999
---------- ----------
(DOLLARS IN MILLIONS)
Land and land improvements.................. $ 5.5 $ 5.4
Buildings................................... 59.7 58.7
Machinery and equipment..................... 132.3 124.4
Construction in progress.................... 6.5 11.9
Assets subject to lease..................... 2.6 --
---------- ----------
Total Property, Plant and Equipment...... $ 206.6 $ 200.4
========== ==========

GOODWILL AND OTHER LONG-LIVED 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. Included in other assets at September 29, 2000 and October 1, 1999 is
goodwill of $53.1 million and $56.1 million, respectively (net of accumulated
amortization of $10.1 million and $7.1 million, respectively).

F-9
<PAGE>

VARIAN MEDICAL SYSTEMS, INC., AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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.

ENVIRONMENTAL LIABILITIES

Liabilities are recorded when environmental assessments and/or remedial
efforts are probable, and the costs can be reasonably estimated. Generally, the
timing of these accruals coincides with completion of a feasibility study or the
Company's commitment to a formal plan of action. The Company records the
environmental liabilities in accordance with AICPA's SOP 96-1, "Environmental
Remediation Liabilities."

TAXES ON EARNINGS

The Company's provision for income taxes comprises its estimated tax
liability currently payable and the change in its deferred income taxes.
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.

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. Included in sales for fiscal 2000, 1999 and
1998, were customer funded research and development projects of $1.9 million,
$1.2 million and $1.6 million, respectively.

COMPUTATION OF EARNINGS PER SHARE

Earnings per share (EPS) is computed under two methods, basic and
diluted. Basic net earnings (loss) per share is computed by dividing earnings
(loss) available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings (loss) per share is computed
by dividing earnings (loss) available to common stockholders by the sum of the
weighted average number of common shares outstanding and potential common shares
(when dilutive). A reconciliation of the numerator and denominator used in the
earnings per share calculations is presented as follows (in thousands, except
per share amounts):

<TABLE>
<CAPTION>
FISCAL YEARS
---------------------------------------
2000 1999 1998
----------- ------------- ------------
<S> <C> <C> <C>
NUMERATOR--BASIC AND DILUTED:
Earnings from Continuing Operations...................... $ 53,049 $ 8,218 $ 26,144
Earnings (Loss) from Discontinued Operations............. -- (32,456) 47,696
----------- ------------- ------------
Net Earnings (Loss)............................... $ 53,049 $ (24,238) $ 73,840
=========== ============= ============
DENOMINATOR--BASIC:
Average shares outstanding............................... 31,104 30,219 29,910
=========== ============= ============
NET EARNINGS (LOSS) PER SHARE--BASIC:
Continuing Operations.................................... $ 1.71 $ 0.27 $ 0.87
Discontinued Operations.................................. -- (1.07) 1.60
----------- ------------- ------------
Net Earnings (Loss) Per Share--Basic.............. $ 1.71 $ (0.80) $ 2.47
=========== ============= ============
DENOMINATOR--DILUTED:
Average shares outstanding............................... 31,104 30,219 29,910
Dilutive stock options................................... 1,328 308 509
----------- ------------- ------------
32,432 30,527 30,419
=========== ============= ============
NET EARNINGS (LOSS) PER SHARE--DILUTED:
Continuing Operations.................................... $ 1.64 $ 0.27 $ 0.86
Discontinued Operations.................................. -- (1.06) 1.57
----------- ------------- ------------
Net Earnings (Loss) Per Share--Diluted............ $ 1.64 $ (0.79) $ 2.43
=========== ============= ============
</TABLE>

F-10
<PAGE>

VARIAN MEDICAL SYSTEMS, INC., AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Options to purchase 41,643 shares, 2,446,756 shares and 1,741,459 shares
at average exercise prices of $41.53, $23.69 and $48.59, respectively, were
outstanding on a weighted average basis during fiscal 2000, 1999 and 1998,
respectively, but were not included in the computation of diluted EPS in their
respective years because the options' exercise price was greater than the
average market price of the shares.

RECLASSIFICATIONS

Certain financial statement items have been reclassified to conform to
the current year's format. These reclassifications had no impact on previously
reported net earnings.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting and Standards Board ("FASB")
issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 requires
derivatives to be measured at fair value and to be recorded as assets or
liabilities on the balance sheet. The accounting for gains or losses resulting
from changes in the fair values of those derivatives would be dependent upon the
use of the derivative and whether it qualifies for hedge accounting. The
statement, as amended by SFAS 137, is effective for fiscal years beginning after
June 15, 2000. The Company will adopt the standard in the first quarter of
fiscal year 2001. The Company will continue to sell products throughout the
world in foreign currencies and will continue its policy of hedging foreign
currency exposures that result from international firmly committed sales orders
with forward contracts. In addition, the Company hedges the balance sheet
exposures from its various foreign subsidiaries having U.S. dollar functional
currencies. Upon initial adoption of this statement, as amended, on September
30, 2000, the Company will record the fair value of foreign currency forward
contracts previously held off-balance-sheet as $2.5 million of current assets
with a credit to earnings and record the change in fair value of the related
firm commitments as $2.1 million of current liabilities with a charge to
earnings. This will result in a cumulative after-tax increase to net income of
approximately $228,000, reflecting the time value on forward contracts that the
Company has elected to exclude from effectiveness testing under SFAS 133. Gains
and losses resulting from changes in the fair values of hedge instruments
meeting the definition of derivatives will be reflected in "Cost of Sales." The
Company does not expect the prospective application of this statement to have a
material impact on the Company's financial position or results of operations.

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. SAB 101 was amended in June 2000 to
delay the implementation date to the fourth quarter of fiscal year 2001, however
earlier adoption is permitted. In October 2000, the SEC released written
guidance to assist with implementing this staff accounting bulletin. The Company
is in the process of determining the impact that adoption will have on our
consolidated financial statements.

OTHER ASSETS

In May 1999, the Company agreed to invest $5 million in a consortium to
participate in the acquisition of a minority interest in dpiX LLC ("dpiX"),
which supplies the Company with amorphous silicon thin-film transistor arrays
for its imaging products and for its oncology system's Portal Vision imagers.
The Company funded $2.5 million in July 1999 and the remaining $2.5 million in
July 2000. These amounts are included in "Other Assets" on the Company's
consolidated balance sheets. The investment is accounted for under the equity
method. Under the agreement governing the consortium, each equity partner
absorbs the consortium's share of the gains and losses of dpiX based on a
designated sequential order. The Company is required to absorb its portion of
the consortium's cumulative share of dpiX's losses when it exceeds $20 million.
At this time, management believes it is reasonably possible that it will
recognize a loss of up to $5 million on this investment in fiscal year 2001. The
$5 million represents the maximum share of the consortium's losses that the
Company is obligated to take based on the initial level of contributions into
the consortium.

F-11
<PAGE>

VARIAN MEDICAL SYSTEMS, INC., AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

ACCRUED EXPENSES
2000 1999
--------- --------
(DOLLARS IN MILLIONS)
Taxes, including taxes on earnings...................... $ 27.0 $ 17.6
Payroll and employee benefits........................... 34.9 29.0
Estimated loss contingencies............................ 14.8 14.6
Deferred income......................................... 10.9 10.2
Reorganization costs.................................... 2.4 8.3
Other................................................... 38.4 41.5
--------- --------
Total Accrued Expenses........................... $ 128.4 $ 121.2
========= ========

NOTES PAYABLE

Short-term notes payable amounted to $0.6 million and $35.6 million at
the end of fiscal years 2000 and 1999, respectively. The weighted average
interest rates on short-term borrowings were 5.6% and 6.1% at the end of fiscal
years 2000 and 1999, respectively. Total debt is subject to limitations included
in long-term debt agreements. The Company had $70.3 million available in unused,
uncommitted lines of credit at September 29, 2000.

LONG-TERM ACCRUED EXPENSES

Long-term accrued expenses are comprised primarily of accruals for
environmental costs not expected to be expended within the next year. The
current portion is recorded within accrued expenses.

LONG-TERM DEBT

<TABLE>
<CAPTION>
2000 1999
--------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Unsecured term loan, 6.70% due in installments of $6.25 payable in fiscal years
2008, 2010, 2012, and 2014...............................................................
$ 25.0 $ 25.0
Unsecured term loan, 6.76% due in semiannual installments of $5.25 payable in
fiscal years 2005, 2007, 2009, and 2011..................................................
21.0 21.0
Unsecured term loan, 7.15% due in installments of $2.5 payable in fiscal years
2006-2010................................................................................
12.5 12.5
--------- --------
Long-term debt.............................................................................. $ 58.5 $ 58.5
========= ========
</TABLE>

The unsecured term loans contain covenants that limit future borrowings
and require the Company to maintain certain levels of working capital and
operating results. For fiscal year 2000, the Company was in compliance with all
restrictive covenants of the loan agreements. The financing agreements restrict
the payment of dividends.

Interest paid (in millions) on short and long-term debt was $4.7, $7.6
and $8.2 in fiscal years 2000, 1999 and 1998, respectively.

The fair value of the Company's long-term debt is estimated based on the
current rates available to the Company for debt of similar terms and remaining
maturities. Under this method, the Company's fair value of long-term debt is
estimated to be $56.5 million. The Company determined the estimated fair value
amount by using available market information and commonly accepted valuation
methodologies. However, considerable judgment is required in interpreting market
data to develop estimates of fair value. Accordingly, the estimate presented
herein is not necessarily indicative of the amount that the Company or holders
of the instrument could realize in a current market exchange. The use of
different assumptions and/or estimation methodologies may have a material effect
on the estimated fair value.

FORWARD EXCHANGE CONTRACTS

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. For example, the
value of the foreign currency against the U.S. dollar may increase or decrease
between the time when

F-12
<PAGE>
VARIAN MEDICAL SYSTEMS, INC., AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

the Company enters into a contract and when the contract is completed. When the
Company's foreign exchange contracts hedge that operational exposure by locking
in a rate of exchange, 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 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 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. Because the impact of movements in currency
exchange rates on foreign exchange contracts generally offsets the related
impact on the underlying items being hedged, these instruments do not subject
the Company to risk that would otherwise result from changes in currency
exchange rates. 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, and no forward exchange contract has an original maturity
greater than one year. Forward exchange contracts outstanding, their unrealized
gains or losses and their fair values as of fiscal year-end 2000 are summarized
as follows:

FISCAL YEAR-END 2000
------------------------------------------
NOTIONAL NATIONAL
VALUE VALUE UNREALIZED FAIR
SOLD PURCHASED GAIN/LOSS VALUE
--------- ----------- ----------- -------
(DOLLARS IN MILLIONS)
Australian dollar........... $ 7.1 $ 1.3 $ 0.1 $ 0.3
Brazilian real.............. -- 0.7 -- --
British pound............... 18.0 3.9 0.8 0.7
Canadian dollar............. 19.5 2.7 -- 0.1
Danish krona................ 0.7 2.2 -- --
Euro dollar................. 62.2 8.6 1.0 1.5
Japanese yen................ 14.4 1.7 -- 0.2
Swedish krona............... 3.2 -- -- --
Swiss franc................. 2.5 9.4 -- --
Thailand baht............... 1.7 -- 0.1 --
--------- ----------- ----------- -------
Totals............... $ 129.3 $ 30.5 $ 2.0 $ 2.8
========= =========== =========== =======

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.

OMNIBUS STOCK AND EMPLOYEE STOCK PURCHASE PLANS

Prior to fiscal 1991, the Company had in place the 1982 Non-Qualified
Stock Option Plan (the "1982 Plan"). During fiscal 1991, the Company adopted the
Omnibus Stock Plan (the "Plan"), which was amended and restated as of the
Distribution, under which shares of common stock can be issued to officers,
directors, key employees and consultants. The maximum number of shares of common
stock available for awards under the Plan is 5,000,000 exclusive of substitute
options issued in connection with the Distribution. The exercise price for
incentive and nonqualified stock options granted under the Plan may not be less
than 100% of the fair market value of the common stock at the date of the grant.
For employees holding more than 10% of the voting rights of all classes of
stock, the exercise price of incentive stock options may not be less than 110%
of the fair market value of the

F-13
<PAGE>

VARIAN MEDICAL SYSTEMS, INC., AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

common stock at the date of grant. Options granted will be exercisable at such
times and be subject to such restrictions and conditions as determined by the
Organization and Compensation Committee of the Company's Board of Directors, but
no option shall be exercisable later than five years from the date of grant for
incentive stock options for which the grantee owns greater than 10% of the
voting power of all classes of stock and no longer than ten years from the date
of grant for all other options. Options granted are generally exercisable in
cumulative installments of one-third each year, commencing one year following
date of grant, and expire if not exercised within seven or ten years from date
of grant. Restricted stock grants may be awarded at prices ranging from 0% to
50% of the fair market value of the stock on the date of grant and may be
subject to restrictions on transferability and continued employment as
determined by the Organization and Compensation Committee.

Option activity under the 1982 Plan and the Plan is presented below (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- --------------------
<S> <C> <C>
Options outstanding, September 26, 1997...................... 3,742 $36.43
Granted................................................... 1,041 56.68
Terminated or expired..................................... (116) 49.21
Exercised................................................. (416) 23.21
---------
Options outstanding, October 2, 1998......................... 4,251 42.33
Granted................................................... 61 37.28
Terminated or expired..................................... (70) 47.47
Exercised................................................. (531) 15.78
---------
Options outstanding, April 1, 1999........................... 3,711 43.40
Attributable to discontinued operations................... (2,133) 46.44
---------
Options Outstanding, April 1, 1999, prior to conversion...... 1,578 45.36
---------
Options converted at April 2, 1999........................... 3,445 20.78
Granted................................................... 2,676 18.32
Terminated or expired..................................... (32) 22.71
Exercised................................................. (140) 23.01
---------
Options Outstanding October 1, 1999.......................... 5,949 19.92
Granted................................................... 114 35.19
Terminated or expired..................................... (314) 16.26
Exercised................................................. (1,069) 19.00
---------
Options Outstanding September 29, 2000....................... 4,680 $20.51
=========
</TABLE>

At fiscal year-end 2000, 1999 and 1998, options for 2,979,000, 2,939,000
and 2,406,000 shares of common stock were exercisable and 2,511,000, 2,356,000
and 580,000 shares were available for future grants under the plans,
respectively.

In April 1999, in conjunction with the Distribution, those individuals
who became employees of VI or VSEA were granted substitute awards in the stock
of their new employer, and any stock options held by them in respect of the
Company are reflected as surrendered attributable to discontinued operations in
the above table. Options held by certain individuals whose employment was
terminated in connection with the Distribution were granted substitute options
in VMS, VI and VSEA equal in each case to one third of the unexercised options
held as of the Distribution. The number of shares subject to options and the
option exercise price were adjusted immediately following the Distribution to
preserve, as closely as possible, the economic value of the options that existed
prior to the Distribution. For the remaining holders of unexercised options, the
number of shares subject to options and the option exercise price was adjusted
immediately following the Distribution to preserve, as closely as possible, the
economic value of the options that existed prior to the Distribution.

During fiscal years 2000, 1999 and 1998, 0, 22,000 and 52,000 shares,
respectively, were awarded under restricted stock grants at no cost to the
employees. The restricted stock grants vest generally over a three-year

F-14
<PAGE>
VARIAN MEDICAL SYSTEMS, INC., AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

period, however, restricted stock was vested for all employees immediately prior
to the Distribution. As no such restricted stock grants have been made from the
date of the Distribution, no compensation expense was recognized in fiscal year
2000. Compensation expense from restricted stock was $2.7 million and $3.0
million in fiscal years 1999 and 1998, respectively.

The following tables summarize information concerning outstanding and
exercisable options under the 1982 Plan and the Plan at the end of fiscal 2000
(in thousands, except number of years and per share amounts):

OPTIONS OUTSTANDING
------------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) PRICE
---------------------- ----------- --------------- -------------
$ 6.94-$18.16.................... 639 2.9 $ 15.70
18.31........................... 2,051 8.5 18.31
18.50-22.13..................... 740 5.7 22.03
22.16-25.68..................... 560 5.6 22.40
26.64-30.15..................... 614 6.8 26.69
32.00-46.59..................... 76 9.4 41.58
-----------
Total.......................... 4,680 6.8 $ 20.51
===========

OPTIONS EXERCISABLE
-----------------------------
WEIGHTED
NUMBER AVERAGE
RANGE OF EXERCISE PRICES EXERCISABLE EXERCISE PRICE
---------------------- ----------- ----------------
$ 6.94-$18.16........................... 632 $ 15.68
18.31.................................. 648 18.31
18.50-22.13............................ 661 22.06
22.16-25.68............................ 558 22.39
26.64-30.15............................ 450 26.70
32.00-46.59............................ 30 41.06
-----------
Total................................. 2,979 $ 20.85
===========

The Employee Stock Purchase Plan (the ESPP) covers substantially all
employees in the United States and Canada. Beginning in fiscal year 2000, the
participants' purchase price is the lower of 85% of the closing market price on
the first trading day of the each six-month period in the fiscal year or the
first trading day of the next six-month period. Prior to fiscal year 2000, the
participants' purchase price was the lower of 85% of the closing market price on
the first trading day of the fiscal quarter or the first trading day of the next
fiscal quarter. The discount is treated as equivalent to the cost of issuing
stock for financial reporting purposes. During fiscal 2000, 1999 and 1998,
136,000 shares, 130,000 shares and 176,000 shares were issued under the ESPP for
$3.4 million, $3.7 million and $7.2 million, respectively. At fiscal year-end
2000, the Company had a balance of 1,321,000 shares reserved for the ESPP. The
ESPP was suspended effective January 4, 1999 and reinstated October 4, 1999.

F-15
<PAGE>

VARIAN MEDICAL SYSTEMS, INC., AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company has adopted the pro forma disclosure provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." Accordingly, the Company applies
APB Opinion 25 and related interpretations in accounting for its stock
compensation plans. If the Company had elected to recognize compensation cost
based on the fair value of the options granted at grant date as prescribed by
SFAS No. 123, net earnings and net earnings per share would have been reduced to
the pro forma amounts shown below for fiscal years 2000, 1999 and 1998:

<TABLE>
<CAPTION>
FISCAL YEARS
-------------------------------
2000 1999 1998
--------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Earnings from Continuing Operations--as reported................................. $ 53,049 $ 8,218 $ 26,144
========= ========= =========
Earnings from Continuing Operations--pro forma................................... $ 48,227 $ 6,264 $ 24,666
========= ========= =========
Earnings from Continuing Operations per share--basic, as reported................ $ 1.71 $ 0.27 $ 0.87
========= ========= =========
Earnings from Continuing Operations per share--basic, pro forma.................. $ 1.55 $ 0.21 $ 0.82
========= ========= =========
Earnings from Continuing Operations per share--diluted, as reported.............. $ 1.64 $ 0.27 $ 0.86
========= ========= =========
Earnings from Continuing Operations per share--diluted, pro forma................ $ 1.49 $ 0.21 $ 0.81
========= ========= =========
</TABLE>

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:

EMPLOYEE STOCK
EMPLOYEE STOCK OPTION PURCHASE PLAN
----------------------- ----------------------
2000 1999 1998 2000 1999 1998
------ ------- ------ ------ ------ ------
Expected dividend yield....... -- -- 0.8% -- -- 0.8%
Risk-free interest rate....... 6.5% 5.3% 5.6% 6.0% 4.4% 5.0%
Expected volatility........... 41.0% 29.0% 24.0% 41.0% 29.0% 24.0%
Expected life (in years):
Employees.................. 4 4 4 .50 .25 .25
Executive Officers......... 7 7 7 .50 .25 .25

The weighted average estimated fair values of employee stock options
granted during fiscal 2000, 1999 and 1998 were $17.86, $5.38 and $18.06 per
share, respectively. The weighted average estimated fair values of the ESPP
awards issued during fiscal 2000, 1999 and 1998 were $20.39, $9.90 and $7.76 per
share, respectively.

RETIREMENT PLANS

The Company has defined contribution retirement plans covering
substantially all of its United States and Canadian employees. The Company's
major obligation is to contribute an amount based on a percentage of each
participant's base pay. For fiscal year 1998, the Company contributed 5% of its
consolidated earnings from continuing operations before taxes, as adjusted for
discretionary items, as retirement plan profit sharing. For fiscal year 1999, no
retirement plan profit sharing contribution was made due to the Company's net
loss resulting from the Distribution. Effective at the beginning of fiscal year
2000, the Company terminated its retirement plan profit sharing contribution.
Participants are entitled, upon termination or retirement, to their portion of
the retirement fund assets, which are held by a third-party custodian. In
addition, a number of the Company's foreign subsidiaries have defined benefit
retirement plans for regular full-time employees. Total pension expense for all
plans amounted to $5.7 million, $5.5 million and $8.2 million, for fiscal 2000,
1999 and 1998, respectively.

F-16
<PAGE>

VARIAN MEDICAL SYSTEMS, INC., AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

TAXES ON EARNINGS

Taxes on earnings from continuing operations are as follows:

2000 1999 1998
------ ------- ------
(DOLLARS IN MILLIONS)
Current
U.S. federal.................................. $16.0 $ 7.1 $ 2.9
Non-U.S....................................... 13.4 15.3 7.9
State and local............................... 3.5 (0.8) 1.7
------ ------- ------
Total current............................... 32.9 21.6 12.5
------ ------- ------
Deferred
U.S. federal.................................. (0.4) (11.0) (3.1)
Non-U.S....................................... (0.7) (0.6) 0.4
------ ------- ------
Total deferred.............................. (1.1) (11.6) (2.7)
------ ------- ------
Taxes on Earnings................................ $31.8 $ 10.0 $ 9.8
====== ======= ======

Significant items making up deferred tax assets and liabilities are as
follows:

2000 1999
------- -------
(DOLLARS IN
MILLIONS)
Assets:
Product warranty.......................................... $ 6.7 $ 5.5
Deferred compensation.................................. 4.0 2.3
Special provisions..................................... 18.7 21.0
Inventory adjustments.................................. 6.4 6.5
Deferred income........................................ 1.6 1.7
Accelerated depreciation............................... -- 1.7
Credit carryforwards................................... 0.9 5.8
State deferred taxes................................... 2.1 --
Capitalized research and development................... 8.4 --
Other.................................................. 2.1 3.6
------- -------
50.9 48.1
------- -------
Liabilities:
Accelerated depreciation............................... 1.7 --
Net undistributed profits of foreign subsidiaries...... 5.4 5.4
Other.................................................. 2.2 2.2
------- -------
9.3 7.6
------- -------
Net Deferred Tax Asset.................................... $ 41.6 $ 40.5
======= =======

The classification of the net deferred tax asset on the consolidated
balance sheet is as follows:

<TABLE>
<CAPTION>
2000 1999
------- -------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Net current deferred tax asset (included in other current assets).............................. $ 39.3 $ 34.3
Net long-term deferred tax asset (included in other assets).................................... 2.3 6.2
------- -------
Net Deferred Tax Asset......................................................................... $ 41.6 $ 40.5
======= =======
</TABLE>

At September 29, 2000, the Company had federal tax carryforwards of
approximately $0.9 million, which expire in 2004, if not utilized.

F-17
<PAGE>

VARIAN MEDICAL SYSTEMS, INC., AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The effective tax rate on continuing operations differs from the U.S.
federal statutory tax rate as a result of the following:

2000 1999 1998
-------- ------ -------
Federal statutory income tax rate................... 35.0% 35.0% 35.0%
State and local taxes, net of federal tax benefit... 2.7 (3.0) 2.9
Foreign taxes, net.................................. 1.5 1.9 (5.5)
Foreign sales corporation........................... (1.2) (7.0) (3.1)
Research and development credit..................... (0.5) (0.9) (0.5)
Non-deductible transaction costs.................... -- 32.0 --
Other............................................... -- (3.1) (1.5)
-------- ------ -------
Effective Tax Rate............................... 37.5% 54.9% 27.3%
======== ====== =======

Income taxes paid are as follows:

2000 1999 1998
-------- ------- -------
(DOLLARS IN MILLIONS)
Federal income taxes paid, net...................... $ 1.7 $(12.7) $ 8.0
State income taxes paid, net........................ 1.5 (0.2) 7.0
Foreign income taxes paid, net...................... 9.6 23.1 12.8
-------- ------- -------
Total Paid....................................... $ 12.8 $ 10.2 $ 27.8
======== ======= =======

LEASE COMMITMENTS

At fiscal year-end 2000, the Company was committed to minimum rentals
under noncancelable operating leases for fiscal years 2001 through 2005 and
thereafter, as follows, in millions: $5.2, $6.0, $5.6, $5.1, $4.4 and $2.6.
Rental expense for fiscal years 2000, 1999 and 1998, in millions, was $8.6,
$11.0 and $10.1, respectively.

CONTINGENCIES

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 Varian Associates, Inc. is alleged to have
shipped manufacturing waste for recycling or disposal. The Company is overseeing
environmental cleanup projects and as applicable, reimbursing third parties for
cleanup activities. The cleanup projects that the Company is overseeing are
conducted under the direction of, or in consultation with, federal, state and/or
local agencies at certain current VMS or former Varian Associates, Inc.
facilities (including facilities disposed of in connection with the Company's
sale of its Electron Devices business during 1995, and the sale of its Thin Film
Systems business during 1997). Under the terms of the Distribution Agreement, VI
and VSEA are each obligated to indemnify the Company for one-third of these
environmental cleanup costs (after adjusting for any insurance proceeds realized
or tax benefits recognized by the Company). The Company spent $3.5 million (net
of amounts borne by VI and VSEA) during fiscal year 2000 on environmental
investigation, cleanup and third party claim costs. The Company spent $1.7
million and $2.9 million in fiscal year 1999 and 1998, respectively, net of
amounts that would have been borne by VI and VSEA on similar activities.

For certain of these sites and facilities, various uncertainties make it
difficult to assess the likelihood and scope of further cleanup activities or to
estimate the future costs of such activities (including cleanup costs,
reimbursements to third parties, project management costs and legal costs) if
undertaken. As of September 29, 2000, the Company nonetheless estimated that the
Company's future exposure (net of VI's and VSEA's indemnification obligations)
to complete the cleanup projects for these sites ranged in the aggregate from
$4.6 million to $14.5 million. The time frame over which the Company expects to
complete the cleanup projects varies with each site, ranging up to approximately
30 years as of September 29, 2000. Management believes that no amount in the
foregoing range of estimated future costs is more probable of being incurred
than any other amount in such range and therefore accrued $4.6 million as of
September 29, 2000. The amount accrued has not been discounted to present value.

F-18
<PAGE>
VARIAN MEDICAL SYSTEMS, INC., AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As to other sites and facilities, the Company has gained sufficient
knowledge to be able to better estimate the scope and costs of future cleanup
activities. As of September 29, 2000, the Company estimated that the Company's
future exposure (net of VI and VSEA's indemnification obligations) to complete
the cleanup projects including paying third party claims for these sites and
facilities ranged in the aggregate from $23.1 million to $52.3 million. The time
frame over which these cleanup projects are expected to be complete varies with
each site and facility, ranging up to approximately 30 years as of September 29,
2000. 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 $36.0 million at September 29, 2000. The Company
accordingly accrued $17.7 million, which represents its best estimate of the
future costs discounted at 4%, net of inflation. This accrual is in addition to
the $4.6 million described in the preceding paragraph.

At September 29, 2000, the Company's reserve for environmental
liabilities, based upon future environmental-related costs estimated as of that
date, was calculated as follows:

TOTAL
RECURRING NON-RECURRING ANTICIPATED
COSTS COSTS FUTURE COSTS
--------------- --------------- ---------------
(DOLLARS IN MILLIONS)
FISCAL YEAR:
-------------
2001..................... $ 1.2 $ 1.8 $ 3.0
2002..................... 1.1 2.4 3.5
2003..................... 1.1 0.5 1.6
2004..................... 1.1 -- 1.1
2005..................... 1.1 -- 1.1
Thereafter............... 28.6 1.7 30.3
--------------- --------------- ---------------
Total costs........... $ 34.2 $ 6.4 40.6
=============== ===============
Less imputed interest.... (18.3)
---------------
Reserve amount........... $ 22.3
===============

The amounts set forth in the foregoing table are only estimates of
anticipated future environmental-related costs to cover the known cleanup
projects, 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 cleanup activities, the large number of sites and
facilities involved and the amount of third party claims. The Company believes
that most of these cost ranges will narrow as cleanup activities progress. The
Company believes that its reserves are adequate, but as the scope of its
obligations becomes more clearly defined, these reserves (and the associated
indemnification obligations of VI and VSEA) may be modified and related charges
against earnings may be made.

Although any ultimate liability arising from environmental-related
matters described herein could result in significant expenditures that, if
aggregated and assumed to occur within a single fiscal year, would be material
to 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 (and assuming VI and VSEA satisfy their indemnification obligations),
management believes that the costs of these environmental-related matters are
not reasonably likely to have a material adverse effect on the consolidated
financial statements of the Company.

The Company evaluates its liability for environmental-related
investigation and cleanup costs in light of the liability and financial
wherewithal of potentially responsible parties and insurance companies with
respect to which the Company believes that it has rights to contribution,
indemnity and/or reimbursement (in addition to the obligations of VI and VSEA).
Claims for recovery of environmental investigation and cleanup costs already
incurred, and to be incurred in the future, have been asserted against various
insurance companies and other third parties. In 1992, the Company filed a
lawsuit against 36 insurance companies with respect to most of the
above-referenced sites and facilities. The Company received certain cash
settlements during fiscal years 1995, 1996, 1997 and 1998 from defendants in
that lawsuit. The Company has also reached an agreement with another insurance

F-19
<PAGE>
VARIAN MEDICAL SYSTEMS, INC., AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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 $4.5 million receivable in Other Assets at September 29, 2000.
The Company believes that this receivable is recoverable because it is based on
a binding, written settlement agreement with a solvent and financially viable
insurance company. Although the Company intends to aggressively pursue
additional insurance and other recoveries, the Company has not reduced any
liability in anticipation of recovery with respect to claims made against third
parties.

The Company is a party to three related federal actions involving claims
by independent service organizations ("ISOs") that the Company's policies and
business practices relating to replacement parts violate the antitrust laws (the
"ISOs Litigation"). The ISOs purchase replacement parts from 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 the
U. S. District Court for the Northern District of California 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, allege a variety of other anti-competitive
business practices and filed a motion for class certification, which was heard
by the U. S. District Court in Texas in July 1999. No decision, however, has
been entered. The parties have agreed to consolidate its claims from the
Northern District of California to the action in the District Court in Texas.

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

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

REORGANIZATION CHARGES

Fiscal year 2000 expenses included net reorganization charges of $0.2
million primarily attributable to legal fees incurred in excess of the accrual
established as part of the Distribution that occurred on April 2, 1999.

Fiscal year 1999 expenses included net reorganization charges of $29.7
million, of which $24.9 million was incurred as a result of the Distribution and
$4.8 million was incurred as a result of the Company's restructuring of its
X-ray Products segment by the closing of a manufacturing facility in Arlington
Heights, Illinois to consolidate manufacturing at the Company's existing
facility in Salt Lake City, Utah. The $29.7 million net charge includes $34.3
million for retention bonuses for employee services provided prior to October 1,
1999, employee severance

F-20
<PAGE>
VARIAN MEDICAL SYSTEMS, INC., AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

and executive compensation; $21.0 million for legal, accounting, printing and
investment banking fees; $1.7 million for foreign taxes (excluding income taxes)
resulting from the international reorganization of the Company's subsidiaries in
connection with the Distribution; and $6.8 million in other costs associated
with the Distribution and restructuring; partially offset by a $34.1 million
gain on the sale of the Company's aircraft and long-term leasehold interests in
certain of its Palo Alto facilities, together with the related buildings and
other corporate assets.

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

<TABLE>
<CAPTION>
ACCRUAL AT ACCRUAL AT
OCTOBER 1, CASH RECLASSIFICATIONS SEPTEMBER 29,
1999 PAYMENTS /ADJUSTMENTS 2000
--------------- ------------ ----------------- --------------
<S> <C> <C> <C> <C>
Retention bonuses, severance, and executive $ 4,507 $ (2,473) $ (451) $ 1,583
compensation...................................
Legal, accounting, printing and investment
banking fees................................... 1,792 (2,253) 561 100
Foreign taxes (excluding income taxes)............ 676 -- -- 676
Other............................................. 1,368 (1,485) 117 --
--------------- ------------ --------------- --------------
$ 8,343 $ (6,211) $ 227 $ 2,359
=============== ============ =============== ==============
</TABLE>

ACQUISITION-RELATED EXPENSES

On June 6, 2000, the Company announced an agreement to acquire privately
held IMPAC Medical Systems, Inc. ("IMPAC"). The Company incurred transaction
costs of approximately $2.0 million. The transaction costs were largely made up
of legal, accounting and investment adviser expenses. On November 6, 2000, the
Company announced the abandonment of its proposed acquisition of IMPAC to avoid
a protracted legal proceeding after the U.S. Department of Justice declared its
intention to challenge the transaction on antitrust grounds. As a result of the
abandonment of the proposed acquisition in November 2000, the Company recognized
the $2.0 million of transaction costs in its fiscal year 2000 results of
operations.

PURCHASE BUSINESS COMBINATIONS

During fiscal years 1999 and 1998, the Company acquired the assets and
liabilities of two businesses. The consolidated financial statements include the
operating results of each acquired business from the date of acquisition. Pro
forma results of operations have not been presented, because the effects of
these acquisitions were not material on either an individual or an aggregated
basis. The Company did not participate in any purchase business combinations in
fiscal year 2000.

Amounts allocated to goodwill are amortized on a straight-line basis over
periods ranging from 7 to 40 years.

Summary of purchase transactions (dollars in millions):
<TABLE>
<CAPTION>
ENTITY NAME CONSIDERATION CLOSING DATE
------------- ------------- -----------------
<S> <C> <C>
Therapy Planning Division of Multimedia Medical Systems, Inc.-Brachytherapy.... $ 7.5 July 1999
GE Medical Systems--Radiotherapy Service and Parts............................. $ 45.0 December 1997
</TABLE>

INDUSTRY SEGMENTS

The Company's operations are grouped into two reportable segments:
Oncology Systems and X-ray Products. These segments were determined based on how
management views and evaluates the Company's operations. The Company's Ginzton
Technology Center (GTC) including its brachytherapy business, is reflected in an
"other" category. Other factors included in segment determination were similar
economic characteristics, distribution channels, manufacturing environment,
technology and customers. The Company evaluates performance and

F-21
<PAGE>

VARIAN MEDICAL SYSTEMS, INC., AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

allocates resources based on earnings from continuing operations before interest
and taxes. The accounting policies of the reportable segments are the same as
those disclosed in the summary of significant accounting policies.

Oncology Systems designs, manufactures, sells and services hardware and
software products for radiation treatment of cancer, including linear
accelerators, simulators and computer systems for planning cancer treatments and
data management systems for radiation oncology centers. Oncology Systems also
manufactures and markets related radiotherapy products such as imaging systems,
information management systems, multi-leaf collimators, simulators and
radiosurgery products. X-ray Products is involved in the design and manufacture
of subsystems for diagnostic radiology, including x-ray-generating tubes and
imaging subsystems. X-ray Products manufactures tubes for medical x-ray imaging
applications including CT scanner, radiographic/fluoroscopic, special
procedures; and mammography and industrial x-ray tubes consisting of analytical
x-ray tubes used for x-ray fluorescence and diffraction as well as tubes used
for non-destructive imaging and gauging. GTC, the Company's research and
development facility for breakthrough technologies, also manufactures and sells
the Company's brachytherapy products and services. In addition, GTC conducts
externally funded contract research related to developing new medical
technologies.

Corporate includes shared costs of legal, tax, accounting, human
resources, real estate, insurance, information technology, treasury and other
management costs. A portion of the indirect and common costs has been allocated
through the use of estimates. Accordingly, the following information is provided
for purposes of achieving an understanding of operations, but may not be
indicative of the financial results of the reported segments were they
independent organizations. In addition, comparisons of the Company's operations
to similar operations of other companies may not be meaningful.

The Company operates various manufacturing and marketing operations
outside the United States. Sales to customers located in Japan were $81 million
in fiscal 2000, $75 million in fiscal 1999 and $68 million in fiscal 1998. Sales
between geographic areas are accounted for at cost plus prevailing markups
arrived at through negotiations between profit centers. Related profits are
eliminated in consolidation. No single customer represents 10% or more of the
Company's total sales. Sales under prime contracts from the U.S. Government were
approximately $4.3 million in fiscal 2000, $4.4 million in fiscal 1999 and $6.1
million in fiscal 1998.

For fiscal 2000, 1999 and 1998, no single country outside the United
States accounted for more than 10% of total assets.

<TABLE>
<CAPTION>
EARNINGS FROM
CONTINUING
OPERATIONS
SALES BEFORE TAXES
------------------------------ ------------------------------
2000 1999 1998 2000 1999 1998
--------- ---------- --------- ---------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Oncology Systems................ $ 534 $ 459 $ 405 $ 93 $ 70 $ 60
X-ray Products.................. 136 123 131 18 11 20
Other........................... 20 8 5 (5) (8) (9)
--------- ---------- --------- ---------- --------- ---------
Total Industry Segments...... 690 590 541 106 73 71
Corporate....................... -- -- -- (18) (49) (33)
Interest, net................... -- -- -- (3) (6) (2)
--------- ---------- --------- ---------- --------- ---------
Total Company................ $ 690 $ 590 $ 541 $ 85 $ 18 $ 36
========= ========== ========= ========== ========= =========
</TABLE>

F-22
<PAGE>

VARIAN MEDICAL SYSTEMS, INC., AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

INFORMATION ABOUT PROFIT/(LOSS) AND ASSETS

<TABLE>
<CAPTION>
CAPITAL DEPRECIATION
TOTAL ASSETS EXPENDITURES* AMORTIZATION*
----------------------- ------------------- --------------------
2000 1999 1998 2000 1999 1998 2000 1999 1998
------- ------ -------- ----- ------ ------ ------ ------ -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Oncology Systems.............................. $ 340 $ 333 $ 302 $ 8 $ 10 $ 7 $ 9 $ 9 $ 8
X-ray Products................................ 90 84 79 6 8 6 7 9 7
Other......................................... 20 18 6 1 3 1 2 1 1
------- ------ -------- ----- ----- ----- ----- ----- -----
Total Industry Segments.................... 450 435 387 15 21 14 18 19 16
Corporate..................................... 153 104 831 4 7 6 4 5 6
------- ------ -------- ----- ----- ----- ----- ----- -----
Total Company.............................. $ 603 $ 539 $ 1,218 $ 19 $ 28 $ 20 $ 22 $ 24 $ 22
======= ====== ======== ===== ===== ===== ===== ===== =====
</TABLE>
--------------
* Amounts may not agree to the consolidated financial statements due to
amounts associated with discontinued operations.

GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
LONG-LIVED
SALES ASSET
-------------------------------- ------------------------------
2000 1999 1998 2000 1999 1998
--------- ---------- --------- --------- -------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
United States................................. $ 379 $ 267 $ 234 $ 111 $ 124 $ 228
International................................. 311 323 307 41 33 91
--------- ---------- --------- --------- -------- ---------
Total Company.............................. $ 690 $ 590 $ 541 $ 152 $ 157 $ 379
========= ========== ========= ========= ======== =========
</TABLE>

Sales are based on final destination of products sold.

QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
--------------------------------------------- ---------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- -------- -------- ------ -------- -------- --------- -------- -------
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales.............. $ 141.3 $ 169.7 $ 170.7 $ 208.0 $689.7 $ 105.0 $ 149.3 $ 144.5 $ 191.6 $590.4
-------- -------- -------- -------- ------ -------- -------- --------- -------- -------
Gross Profit....... $ 50.4 $ 61.0 $ 62.1 $ 83.6 $257.1 $ 32.8 $ 49.4 $ 51.3 $ 76.5 $210.0
-------- -------- -------- -------- ------ -------- -------- --------- -------- -------
Net Earnings (Loss)
Continuing
Operations.... $ 5.2 $ 10.4 $ 14.0 $ 23.4 $ 53.0 $ (2.0) $ (10.2) $ 6.6 $ 13.8 $ 8.2
Discontinued
Operations.... -- -- -- -- -- (0.4) (30.8) -- (1.2) (32.4)
-------- -------- -------- -------- ------ -------- -------- --------- -------- -------
Net Earnings (Loss) $ 5.2 $ 10.4 $ 14.0 $ 23.4 $ 53.0 $ (2.4) $ (41.0) $ 6.6 $ 12.6 $(24.2)
======== ======== ======== ======== ====== ======== ======== ========= ======== =======
Net Earnings
(Loss) Per
Share-Basic.....
Continuing
Operations.... $ 0.17 $ 0.33 $ 0.45 $ 0.74 $ 1.71 $ (0.07) $ (0.34) $ 0.22 $ 0.46 $ 0.27
Discontinued
Operations.... -- -- -- -- -- (0.01) (1.02) -- (0.05) (1.07)
-------- -------- -------- -------- ------ -------- -------- --------- -------- -------
Basic.............. $ 0.17 $ 0.33 $ 0.45 $ 0.74 $ 1.71 $ (0.08) $ (1.36) $ 0.22 $ 0.41 $(0.80)
======== ======== ======== ======== ====== ======== ======== ========= ======== =======
Net Earnings
(Loss) Per
Share-Diluted...
Continuing
Operations.... $ 0.17 $ 0.32 $ 0.43 $ 0.71 $ 1.64 $ (0.07) $ (0.34) $ 0.21 $ 0.45 $ 0.27
Discontinued
Operations.... -- -- -- -- -- (0.01) (1.02) -- (0.04) (1.06)
-------- -------- -------- -------- ------ -------- -------- --------- -------- -------
Diluted............ $ 0.17 $ 0.32 $ 0.43 $ 0.71 $ 1.64 $ (0.08) $ (1.36) $ 0.21 $ 0.41 $(0.79)
======== ======== ======== ======== ====== ======== ======== ========= ======== =======
</TABLE>

The four quarters for net earnings (loss) per share may not add to the
total year because of differences in the weighted average number of shares
outstanding during the quarters and the year.

Net earnings from continuing operations for the fourth quarter of fiscal
year 2000 include net after tax acquisition-related expenses of $1.2 million and
related diluted loss per share of $0.03.

F-23
<PAGE>

VARIAN MEDICAL SYSTEMS, INC., AND SUBSIDIARY COMPANIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Net earnings (loss) from continuing operations for the first through the
fourth quarters of fiscal year 1999 include net after tax reorganization related
charges (income) of $3.0 million, $23.1 million, $0.3 million, and ($0.7)
million, respectively, and related diluted (earnings) loss per share of $0.10,
$0.77, $0.01, and ($0.02), respectively.

MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS (UNAUDITED)

The Company's common stock is traded on the New York Stock Exchange and
Pacific Exchange under the symbol VAR. The following table sets forth the high
and low closing sales prices for the Company's common stock as reported in the
consolidated transaction reporting system for the New York Stock Exchange for
the first half of fiscal year 1999.

FISCAL YEAR 1999 HIGH LOW
----------- ------------
First Quarter.................... $ 41 1/16 $ 32 7/16
Second Quarter................... 43 31 3/4

On April 2, 1999, the end of the first half of fiscal year 1999, the
Company distributed to its stockholders all of the outstanding shares of common
stock of each of VI and VSEA. The high and low closing sales prices for the
Company's common stock for the last half of fiscal year 1999 and in fiscal year
2000 were:

FISCAL YEAR 1999 HIGH LOW
----------- -----------
Third Quarter....................... $ 25 1/4 $ 16 5/8
Fourth Quarter...................... 24 3/16 19 7/16

FISCAL YEAR 2000

First Quarter....................... 29 13/16 20 3/16
Second Quarter...................... 47 1/4 28 9/16
Third Quarter....................... 48 38 1/2
Fourth Quarter...................... 48 13/16 39 11/16

The Company declared cash dividends of $0.10 in the first quarter of
fiscal year 1999. Since the Distribution, the Company has not paid any dividends
on the common stock and does not currently anticipate paying dividends on the
common stock for the foreseeable future. Further, the existing term loans of the
Company's financing agreements contain provisions that limit the ability of the
Company to pay dividends.

F-24

<PAGE>

SCHEDULE II

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS (1)
FOR THE FISCAL YEARS ENDED 2000, 1999 AND 1998
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT CHARGED DEDUCTIONS BALANCE
BEGINNING COSTS AND ----------------------------- AT END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIPTION AMOUNT PERIOD
-------------------------------------------- ----------- ------------ ---------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL NOTES & ACCOUNTS
RECEIVABLE:
Write-offs &
Fiscal year ended 2000..................... $ 1,138 $ 1,142 Adjustments $ 420 $ 1,860
=========== ============ ============ ==========
Write-offs &
Fiscal year ended 1999..................... $ 2,644 $ 2,704 Adjustments $ 4,210(2)$ 1,138
=========== ============ ============ ==========
Write-offs &
Fiscal year ended 1998..................... $ 2,715 $ 3,020 Adjustments $ 3,091 $ 2,644
=========== ============ ============ ==========

ESTIMATED LIABILITY FOR PRODUCT WARRANTY:
Actual
Warranty
Fiscal year ended 2000..................... $ 18,152 $ 27,670 Expenditures $ 25,847 $ 19,975
=========== ============ ============ ==========
Actual
Warranty
Fiscal year ended 1999..................... $ 44,153 $ 56,389 Expenditures $ 82,390(3)$ 18,152
=========== ============ ============ ==========
Actual
Warranty
Fiscal year ended 1998..................... $ 37,620 $ 59,433 Expenditures $ 52,900 $ 44,153
=========== ============ ============ ==========
--------------
(1) As to column omitted the answer is "none."
(2) Includes a $2,420 deduction due to the spin-offs of the Company's instruments and semiconductor businesses
on April 2, 1999.
(3) Includes a $22,437 deduction due to the spin-offs of the Company's instruments and semiconductor
businesses on April 2, 1999.
</TABLE>

F-25
<PAGE>

EXHIBIT INDEX

Set forth below is a list of exhibits that are being filed or
incorporated by reference into this Form 10-K:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C> <C>
2 Amended and Restated Distribution Agreement, dated as of January 14, 1999, by and among Varian
Associates, Inc. (which has been renamed Varian Medical Systems, Inc.), Varian, Inc. and Varian
Semiconductor Equipment Associates, Inc. (incorporated by reference to Exhibit 2 to the
registrant's Form 8-K Current Report dated as of April 2, 1999, File No. 1-7598).
3.1 Registrant's Restated Certificate of Incorporation.
3.2 Registrant's By-Laws, as amended (incorporated by reference to Exhibit 3-B to the registrant's
Form 10-Q Quarterly Report for the quarter ended April 2, 1999. File No. 1-7598).
4.1 Specimen Common Stock Certificate.*
10.1+ Registrant's Omnibus Stock Plan.
10.2+ Registrant's Management Incentive Plan.*
10.3+ Registrant's form of Indemnity Agreement with Directors and Executive Officers.*
10.4+ Registrant's form of Change in Control Agreement with certain Executive Officers other than the
Chief Executive Officer and the Chief Financial Officer.*
10.5+ Registrant's Change in Control Agreement with the Chief Executive Officer.*
10.6+ Registrant's Change in Control Agreement with the Chief Financial Officer *
10.7+ Registrant's Change in Control Agreement with General Counsel.**
10.8 Amended and Restated Note Purchase and Private Shelf Agreement, dated as of April 1, 1999,
between Registrant and Prudential Insurance Company of America (certain exhibits and schedules
omitted).*
10.9 Employee Benefits Allocation Agreement, dated April 2, 1999, by and among Varian Associates, Inc.
(which has been renamed Varian Medical Systems, Inc.), Varian, Inc. and Varian Semiconductor
Equipment Associates, Inc. (incorporated by reference to Exhibit No. 99.1 to the registrant's
Form 8-K Current Report dated as of April 2, 10.9 1999, File No. 1-7598).
10.10 Intellectual Property Agreement, dated April 2, 1999, by and among Varian Associates, Inc. (which
has been renamed Varian Medical Systems, Inc.), Varian, Inc. and Varian Semiconductor Equipment
Associates, Inc. (incorporated by reference to Exhibit No. 99.2 to the registrant's Form 8-K
Current Report dated as of April 2, 1999, File No. 1-7598).
10.11 Tax Sharing Agreement, dated April 2, 1999, by and among Varian Associates, Inc. (which has been
renamed Varian Medical Systems, Inc.), Varian, Inc. and Varian Semiconductor Equipment
Associates, Inc. (incorporated by reference to Exhibit No. 99.3 to the registrant's Form 8-K
Current Report dated as of April 2, 1999, File No. 1-7598).
10.12 Transition Services Agreement, dated April 2, 1999, by and among Varian Associates, Inc. (which
has been renamed Varian Medical Systems, Inc.), Varian, Inc. and Varian Semiconductor Equipment
Associates, Inc. (incorporated by reference to Exhibit No. 99.4 to the registrant's Form 8-K
Current Report dated as of April 2, 1999, File No. 1-7598).
10.13+ Amended and Restated Severance Agreement between the registrant and Joseph B. Phair dated as of
August 20, 1999.**
10.14+ Registrant's Supplemental Retirement Plan.**
10.15+ Description of Certain Compensatory Arrangements between registrant and directors.**
10.16+ Description of Certain Compensatory Arrangements between registrant and executive officers.**
10.17+ Registrant's Deferred Compensation Plan.
21 List of Subsidiaries.
23 Consent of Independent Accountants.
24 Power of Attorney by directors of the Company authorizing certain persons to sign this Annual Report
Report on Form 10-K on their behalf.
27 Financial Data Schedule for the fiscal year ended September 29, 2000.
--------------
* Incorporated by reference from the exhibit of the same number to the registrant's Form 10-Q Quarterly Report for the
quarter ended April 2, 1999, File No. 1-7598.
** Incorporated by reference from the exhibit of the same number to the registrant's Form 10-K Annual Report for the fiscal
year ended October 1, 1999, File No. 1-7598.
+ Management contract or compensatory arrangement.
</TABLE>