10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ýQUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2004

or

oTRANSITION REPORT 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 Incorporation or Organization)	(I.R.S. Employer 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)

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  ý  No  o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 133,558,551 shares of Common Stock, par value $1 per share, outstanding as of February 3, 2005.

www.varian.com

(NYSE: VAR)

VARIAN MEDICAL SYSTEMS, INC.

FORM 10-Q

TABLE OF CONTENTS

Part I.	Financial Information
Item 1.	Condensed Consolidated Financial Statements (Unaudited)
	Condensed Consolidated Statements of Earnings
	Condensed Consolidated Balance Sheets
	Condensed Consolidated Statements of Cash Flows
	Notes to the Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
Part II.	Other Information
Item 1.	Legal Proceedings
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits
Signatures
Index to Exhibits

2

PART I

FINANCIAL INFORMATION

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

	Three Months Ended
(In thousands, except per share amounts)	December 31, 2004			January 2, 2004 (1)
				(As Adjusted)
Revenues:
Product	$	248,171		$	227,808
Service contracts and other	50,785			39,157
Total revenues	298,956			266,965
Cost of revenues:
Product	145,586			134,746
Service contracts and other	28,186			25,510
Total cost of revenues	173,772			160,256
Gross margin	125,184			106,709
Operating expenses:
Research and development	18,368			17,604
Selling, general and administrative	46,190			44,472
Total operating expenses	64,558			62,076
Operating earnings	60,626			44,633
Interest income	1,958			1,648
Interest expense	(1,505		)	(1,215		)
Earnings from operations before taxes	61,079			45,066
Taxes on earnings	20,770			15,780
Net earnings	$	40,309		$	29,286
Net earnings per share:
Basic:	$	0.30		$	0.22
Diluted:	$	0.29		$	0.21
Shares used in the calculation of net earnings per share:
Weighted average shares outstanding - Basic	133,985			136,029
Weighted average shares outstanding - Diluted	139,938			142,121

(1) Certain amounts for the three months ended January 2, 2004 have been adjusted to reflect the Company’s change from the last-in, first-out (“LIFO”) method to the first-in, first-out (“FIFO”) method of accounting for inventories as described in Note 3. This change increased basic net earnings per share by $0.01 and had no impact on diluted net earnings per share for the three months ended January 2, 2004.

See accompanying notes to the consolidated financial statements.

3

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except par values)	December 31, 2004			October 1, 2004 (1)
				(As Adjusted)
Assets
Current assets:
Cash and cash equivalents	$	226,089		$	239,470
Short-term marketable securities	98,539			112,478
Accounts receivable, net	285,064			288,663
Inventories	163,539			144,389
Prepaid expenses and other	41,467			29,454
Deferred tax assets	81,130			81,130
Total current assets	895,828			895,584
Property, plant and equipment, net	91,255			85,377
Long-term marketable securities	39,663			40,970
Goodwill	112,653			112,653
Other assets	53,863			46,056
Total assets	$	1,193,262		$	1,180,640
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	57,966		$	59,639
Accrued expenses	262,087			255,519
Current maturities of long-term debt	5,349			5,250
Product warranty	40,685			40,654
Advance payments from customers	104,548			100,277
Total current liabilities	470,635			461,339
Long-term accrued expenses and other	42,355			41,889
Long-term debt	55,733			53,250
Total liabilities	568,723			556,478
Commitments and contingencies (Note 8)
Stockholders’ equity:
Preferred stock of $1 par value: 1,000 shares authorized; none issued and outstanding	—			—
Common stock of $1 par value: 189,000 shares authorized; 133,543 and 134,045 shares issued and outstanding at December 31, 2004 and at October 1, 2004, respectively	133,543			134,045
Capital in excess of par value	143,721			133,985
Deferred stock compensation	(707		)	(1,110		)
Retained earnings	347,982			357,242
Total stockholders’ equity	624,539			624,162
Total liabilities and stockholders’ equity	$	1,193,262		$	1,180,640

(1) Amounts as of October 1, 2004 have been derived from audited financial statements as of that date except that certain amounts have been adjusted to reflect the Company’s change from the LIFO method to the FIFO method of accounting for inventories as described in Note 3.

See accompanying notes to the consolidated financial statements.

4

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended
(In thousands)	December 31, 2004			January 2, 2004 (1)
				(As Adjusted)
Cash flows from operating activities:
Net earnings	$	40,309		$	29,286
Adjustments to reconcile net earnings to net cash provided by operating activities:
Tax benefits from employee stock option exercises	9,298			8,590
Depreciation	5,208			5,354
Provision for doubtful accounts receivable	560			297
Loss on disposal of property, plant and equipment	67			109
Amortization of intangibles	1,288			663
Amortization of premium/discount on marketable securities, net	176			410
Amortization of deferred stock compensation	403			263
Deferred taxes	(37		)	3,090
Net change in fair value of derivatives and underlying commitments	(2,710		)	(1,032		)
Income on equity investment in affiliate	(563		)	—
Changes in assets and liabilities:
Accounts receivable	15,944			32,897
Inventories	(19,952		)	(7,217		)
Prepaid expenses and other current assets	926			1,071
Accounts payable	(3,309		)	(1,815		)
Accrued expenses	(9,063		)	(23,805		)
Product warranty	(194		)	1,277
Advance payments from customers	2,885			9,325
Long-term accrued expenses and other liabilities	(332		)	(1,280		)
Net cash provided by operating activities	40,904			57,483
Cash flows from investing activities:
Proceeds from maturities of marketable securities	15,070			11,600
Purchase of businesses, net of cash acquired	—			(34,763		)
Purchases of property, plant and equipment	(8,581		)	(4,009		)
Proceeds from disposal of property, plant and equipment	26			10
Increase in cash surrender value of life insurance	(5,567		)	(4,276		)
Note receivable from affiliate	(750		)	—
Note receivable from other	(875		)	—
Other, net	(806		)	(662		)
Net cash used in investing activities	(1,483		)	(32,100		)
Cash flows from financing activities:
Repurchases of common stock	(60,797		)	(34,929		)
Proceeds from issuance of common stock to employees	11,164			12,875
Repayments of bank borrowings	(16		)	—
Net cash used in financing activities	(49,649		)	(22,054		)
Effects of exchange rate changes on cash and cash equivalents	(3,153		)	(3,186		)
Net increase (decrease) in cash and cash equivalents	(13,381		)	143
Cash and cash equivalents at beginning of period	239,470			210,448
Cash and cash equivalents at end of period	$	226,089		$	210,591

(1) Certain amounts for the three months ended January 2, 2004 have been adjusted to reflect the Company’s change from the LIFO method to the FIFO method of accounting for inventories as described in Note 3.

See accompanying notes to the consolidated financial statements.

5

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Varian Medical Systems, Inc. and subsidiaries (the “Company” or “VMS”) designs and manufactures advanced equipment and software solutions for treating cancer with radiation, as well as high quality, cost-effective X-ray tubes for original equipment manufacturers, replacement X-ray tubes and flat-panel digital subsystems for imaging in medical, scientific and industrial applications.

Fiscal Year

The Company’s fiscal year is the 52- or 53-week period ending on the Friday nearest September 30.  Fiscal year 2005 is the 52-week period ending September 30, 2005, and fiscal year 2004 was the 53-week period ended October 1, 2004. The fiscal quarter ended December 31, 2004 was a 13-week period and the fiscal quarter ended January 2, 2004 was a 14-week period.

Basis of Presentation

The condensed consolidated financial statements have been prepared by the Companypursuant to the rules and regulations of the Securities Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements and the accompanying notes are unaudited and should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended October 1, 2004. In the opinion of management, the condensed consolidated financial statements herein include adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the Company’s financial position as of December 31, 2004 and January 2, 2004, results of operations and cash flows for the three months ended December 31, 2004 and January 2, 2004. The results of operations for the three months ended December 31, 2004 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future periods.

Stock Split

On June 14, 2004, the Company’s Board of Directors declared a two-for-one stock split in the form of a 100% stock dividend. The distribution of the shares was made on July 30, 2004 to stockholders of record as of June 30, 2004. Unless otherwise stated, all references in the financial statements to the number of shares and per share amounts of the Company’s common stock have been retroactively restated to reflect the increased number of shares resulting from the two-for-one stock split.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

Stock-Based Compensation

The Company accounts for stock-based employee compensation arrangements under the intrinsic value method of accounting as defined by Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees and related interpretations, and complies with the disclosure provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure.  Under APB 25, compensation expense is based on the difference, if any, on the date of the grant, between the fair value of the Company’s stock and the exercise price.

6

The following table illustrates the effect on net earnings and earnings per share if the Company had accounted for the stock-based employee compensation under the fair value method of accounting:

	Three Months Ended
(In thousands, except per share amounts)	December 31, 2004			January 2, 2004
				(As Adjusted See Note 3)
Net earnings, as reported	$	40,309		$	29,286
Add: Stock-based employee compensation expense included in reported net earnings under APB No. 25, net of related tax effects	266			171
Deduct: Total stock-based employee compensation determined under fair value based method for all awards, net of related tax effects	(5,560		)	(4,496		)
Pro forma net earnings	$	35,015		$	24,961
Net earnings per share — Basic:
As reported	$	0.30		$	0.22
Pro forma	$	0.26		$	0.18
Net earnings per share — Diluted:
As reported	$	0.29		$	0.21
Pro forma	$	0.25		$	0.18

We estimate the fair value of our options using a Black-Scholes option valuation model, which was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the input of assumptions, including the expected stock price volatility. Our options have characteristics significantly different from those of traded options, and changes in the input assumptions can materially affect the fair value estimates. The fair value of options granted and the option component of the employee stock purchase plan shares were estimated at the date of grant using the Black-Scholes option valuation model with the following weighted average assumptions:

	Employee Stock Option Plans						Employee Stock Purchase Plan
	December 31, 2004			January 2, 2004			December 31, 2004			January 2, 2004
Expected life (in years)	4			4			0.5			0.5
Risk-free interest rate	3.5		%	3.0		%	2.6		%	1.2		%
Expected volatility	30.5		%	34.2		%	27.2		%	15.7		%
Expected dividend yield	—			—			—			—
Weighted average fair value at grant date	$	11.76		$	10.07		$	12.32		$	8.00

No shares were issued from the Employee Stock Purchase Plan during the three months ended December 31, 2004 and January 2, 2004.

Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4.  SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning in the Company’s fourth quarter of fiscal year 2005. The Company does not believe the adoption of SFAS No. 151 will have a material effect on its consolidated financial position, results of operations or cash flows.

7

FASB Staff Position (“FSP”) No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (“FSP 109-2”), provides guidance under SFAS No. 109, Accounting for Income Taxes, with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Creation Act”) on enterprises’ income tax expense and deferred tax liability.  The Jobs Creation Act was enacted on October 22, 2004.  FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Creation Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109.  The Company has not yet completed its evaluation on the impact of the repatriation provisions.  Accordingly, as provided for in FSP 109-2, the Company has not adjusted its tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Creation Act.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged.  SFAS No. 153 is effective for nonmonetary asset exchanges beginning in the Company’s fourth quarter of fiscal year 2005. The Company does not believe the adoption of SFAS No. 153 will have a material effect on its consolidated financial position, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which replaced SFAS No. 123and superseded APB 25.  SFAS No. 123R addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. Under SFAS No. 123R, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB 25 but will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of earnings.  SFAS No. 123R is effective beginning in the Company&# 146;s fourth quarter of fiscal year 2005 and allows, but does not require companies to restate the full fiscal year of 2005 to reflect the impact of expensing share-based payments under SFAS No. 123R. The Company has not yet determined which fair-value method and transition provision it will follow. The impact on the Company’s financial statements of applying Black-Scholes option valuation method of accounting for stock options is disclosed in the Stock-Based Compensation section above.

2. MARKETABLE SECURITIES

The carrying amounts of marketable securities are as follows:

(In millions)	December 31, 2004		October 1, 2004
Municipal bonds	$	138.2	$	148.4
Corporate debt securities	—		5.0
	138.2		153.4
Less: Short-term marketable securities	98.5		112.4
Long-term marketable securities	$	39.7	$	41.0

3. CHANGE IN METHOD OF ACCOUNTING FOR INVENTORIES

Prior to October 2, 2004, the Company accounted for U.S. inventories of Oncology Systems using the LIFO method.  All other inventories were carried at the lower of cost or market (realizable value) using the FIFO or average cost method.  Beginning October 2, 2004, the Company changed its accounting for Oncology Systems’ U.S. inventories from LIFO to FIFO because the Company has experienced relatively stable inventory costs (i.e., little to no inflation) over the last several years; therefore, the use of LIFO to match current costs with current revenues had no significant impact on the Company’s operating results that would have been reported using FIFO.  In addition, the Company believes changing to FIFO would enhance the comparability of its financial statements with those of its industry peers.  In accordance with APB No. 20, Accounting Change, the consolidated financial statements of prior years have been retroactively adjusted to apply the new inventory valuation method and accordingly, retained earnings as of October 1, 2004 has been increased by $10.4 million as a result of adjusting the inventories from their LIFO cost to current FIFO cost, net of the corresponding impact on deferred tax assets.  This accounting change also increased or (decreased) previously reported net earnings by $0.4 million, $(0.5) million and $1.1 million for fiscal years 2004, 2003 and 2002, respectively.

8

The effects of the accounting change on net earnings and basic net earnings per share as previously reported for the three months ended January 2, 2004 are as follows:

(In thousands, except per share amounts)
Net earnings:
As previously reported	$	29,168
Effect of change in accounting for inventories, net of taxes on earnings	118
As adjusted	$	29,286
Basic net earnings per share:
As previously reported	$	0.21
Effect of change in accounting for inventories, net of taxes on earnings	0.01
As adjusted	$	0.22

This accounting change did not have any effect on diluted earnings per share as previously reported for the three months ended January 2, 2004.

The components of inventories are as follows:

(In millions)	December 31, 2004		October 1, 2004		October 1, 2004
			(As Adjusted)		(As Previously Reported)
Raw materials and parts	$	104.2	$	90.6	$	79.8
Work-in-progress	9.1		8.2		7.4
Finished goods	50.2		45.6		40.5
Total Inventories	$	163.5	$	144.4	$	127.7

4. GOODWILL AND INTANGIBLE ASSETS

Pursuant to SFAS No. 142, Goodwill and Intangible Assets, the Company performs an annual impairment test for goodwill and intangible assts with indefinite lives. The impairment test for goodwill is a two-step process. Step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to each reporting unit. If the carrying amount is in excess of the fair value, step two requires the comparison of the implied fair value of the reporting unit with the carrying amount of the reporting unit’s goodwill. Any excess of the carrying value of the reporting unit’s goodwill over the implied fair value of the reporting unit’s goodwill will be recorded as an impairment loss.

The Company performed its annual SFAS No. 142 goodwill impairment assessment for its three reporting units in the fourth quarter of fiscal year 2004 and determined that there was no impairment. However, the Company could be required to record impairment charges in future periods if indicators of potential impairment exist.

The impairment test for purchased intangible assets with indefinite useful lives consists of a comparison of fair value to carrying value, with any excess of carrying value over fair value being recorded as an impairment loss. Intangible assets with finite useful lives are amortized over their useful lives, which range from one to twenty years.

9

The following table reflects the gross carrying amount and accumulated amortization of the Company’s intangible assets included in “Other assets” on the condensed consolidated balance sheets:

(In millions)	December 31, 2004			October 1, 2004
Intangible Assets:
Patents, licenses and other	$	13.5		$	13.5
Acquired existing technology	11.5			11.5
Customer contracts and supplier relationship	9.3			9.3
Accumulated amortization	(14.0		)	(12.7		)
Net carrying amount	$	20.3		$	21.6

Amortization expense for intangible assets required to be amortized under SFAS No. 142 was $1.3 million and $0.7 million for the three months ended December 31, 2004 and January 2, 2004, respectively.  The Company estimates amortization expense on a straight-line basis for the remaining nine months of fiscal year 2005, fiscal years 2006 through 2009 and thereafter, to be as follows (in millions): $3.8, $5.0, $3.8, $2.4, $1.8, and $3.5.

The following table reflects goodwill allocated to the Company’s reportable segments:

(In millions)	December 31, 2004		October 1, 2004
Oncology Systems	$	100.0	$	100.0
X-ray Products	0.5		0.5
Other	12.2		12.2
Total	$	112.7	$	112.7

5. RELATED PARTY TRANSACTIONS

In fiscal years 1999 and 2000, the Company invested a total of $5 million in a three member consortium for a 20% ownership interest in dpiX Holding LLC (“dpiX Holding”), which in turn invested $25 million for an 80.1% ownership interest of dpiX LLC (“dpiX”), a supplier of amorphous silicon based thin-film transistor arrays (“flat panels”) for the Company’s X-ray Products’ digital imaging subsystems and for its Oncology System’s PortalVision imaging systems. The Company had the right to appoint one Manager of the five person Board of Managers and the investment was accounted for under the equity method.  In accordance with the dpiX Holding agreement, net losses were to be allocated to the other two members, in succession, until their capital accounts equaled zero, before being allocated to the Company.  The dpiX Holding agreement also provided that net profits were to be allocated to the other two members, in succession, until their capital accounts equaled the net losses previously allocated, then to the three members in accordance with their ownership interests.

In September 2004, the Company acquired from another member in the consortium that member’s 20% ownership interest in dpiX Holding for $1 million.  As a result, the Company has the right to appoint two Managers of the five person Board of Managers and its ownership interest in dpiX Holding increased to 40% with the remaining 60% being held by the other member.  When the Company acquired this additional 20% ownership interest, the capital account of the selling member was zero because it was the first in the consortium to be allocated losses of dpiX Holding.  However, dpiX has been profitable since the Company acquired the additional 20% ownership interest of the member.  As a result, the Company was the first to be allocated net profits to recover previously allocated losses and recorded in the first quarter of fiscal year 2005 income on equity investment in dpiX of $0.6 million, which is included in “Selling, general and administrative” expenses in the condensed consolidated balance sheet.

In December 2004 the Company agreed to loan $2 million to dpiX in four separate payments, bearing interest at the rate of prime rate plus 1% per annum.  The principal balance is due and payable to the Company in twelve equal quarterly installments beginning October 2006; interest shall be paid in full according to the same quarterly schedule, but beginning in April 2005; and the entire principal balance, together with accrued and unpaid interest thereon and all other related amounts payable hereunder, being fully due and payable on July 10, 2009.  As of December 31, 2004, the note receivable from dpiX totaled $0.8 million which is included in “Other Assets” in the condensed consolidated balance sheet.

10

6. PRODUCT WARRANTY

The Company provides for estimated future costs of warranty obligations in accordance with FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others that requires an entity to disclose and recognize a liability for the fair value of the obligation it assumes upon issuance of a guarantee.  The Company warrants its products for a specific period of time, generally twelve months, against material defects.  The accrued warranty costs represent the best estimate at the time of sale of the total costs that the Company expects to incur to repair or replace product parts that fail while still under warranty.  The Company accrues for warranty costs in cost of revenues based on historical experience as to product failures as well as current information on repair costs. On a quarterly basis, the Company reviews the accrued warranty costs and updates the historical warranty cost trends.

The following table reflects the change in the Company’s product warranty accrual during the three months ended December 31, 2004 and January 2, 2004:

	Three Months Ended
(In millions)	December 31, 2004			January 2, 2004
Product warranty accrual, at beginning of period	$	40.7		$	36.1
Charged to cost of revenues	8.2			9.8
Actual product warranty expenditures or reclassifications	(8.2		)	(8.2		)
Product warranty accrual, at end of period	$	40.7		$	37.7

7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company has significant international transactions in foreign currencies and addresses certain financial exposures through a controlled program of risk management that includes the use of derivative financial instruments.  The Company sells products throughout the world, often in the currency of the customer’s country, and adheres to a policy of hedging firmly committed foreign currency sales orders. These firmly committed foreign currency sales orders are hedged with forward exchange contracts. The Company enters into foreign currency forward exchange contracts primarily to reduce the effects of fluctuating foreign currency exchange rates. The forward exchange contracts range from one to twelve months in original maturity. At December 31, 2004, the Company did not have any forward exchange contract with an original maturity greater than twelve months.  As international deliveries may extend beyond twelve months, the Company may hedge beyond twelve months in the future.  The Company does not hold derivative instruments for speculative or trading purposes.

The Company accounts for its hedges of foreign currency denominated sales orders (firm commitments) as fair value hedges under SFAS No. 149, Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities. For the three months ended December 31, 2004, there were no material gains or losses due to hedge ineffectiveness. At December 31, 2004, the Company had foreign exchange forward contracts to sell and purchase $253.0 million and $8.0 million, respectively, in various foreign currencies. At December 31, 2004, all open forward exchange contracts were deemed effective.

The Company also hedges balance sheet exposures monthly from its various foreign subsidiaries and business units. These monthly hedges of foreign-currency-denominated assets and liabilities do not qualify for hedge accounting treatment under SFAS No. 149.  Accordingly, changes in their fair values are recognized in “selling, general and administrative expenses” in the then-current period.  Changes in the values of these hedging instruments are offset by changes in the values of foreign currency denominated assets and liabilities.Variations from the forecasted foreign currency assets or liabilities, coupled with a significant currency movement, may result in a material gain or loss if the hedges are not effectively offsetting the change in value of the foreign currency asset or liability.  At December 31, 2004, the Company had foreign exchange forward contracts maturing in the second quarter of fiscal year 2005 to sell and purchase $119.0 million and $16.4 million, respectively, to hedge the risks associated with foreign currency denominated assets and liabilities.

11

8. COMMITMENTS AND CONTINGENCIES

Commitments

Following a decision by Mitsubishi Electric Co. (“MELCO”) to exit the radiotherapy equipment and service business and its desire to do so in a nondisruptive manner with an established radiotherapy equipment service provider, the Company entered into two separate transactions with MELCO contemporaneously whereby (i) the Company purchased MELCO’s radiotherapy equipment service business (the “Service Business”) to service MELCO’s existing customers and (ii) the Company formed a three-year joint venture (“JVA”) in Japan with MELCO that was effective as of February 3, 2004.

On February 2, 2004, the Company’s Japanese subsidiary (“VMS KK”) purchased the Service Business in Japan and certain other Asian and South American countries for 2.0 billion Japanese Yen, or US$19.1 million, plus a contingent “earn out” payable to MELCO at the end of the JVA period.  At the time of the acquisition of the Service Business, the Company and MELCO were unable to agree upon the value of the Service Business.  The Company therefore structured a payment, based on net profits or losses, to be made to or received from MELCO as an “earn out” adjustment to the purchase price to establish and verify the fair value of the Service Business.  This “earn out” payment is equivalent to 100% of the net profits or losses of the Service Business for a three-year period.  As a result of this purchase, VMS KK services and supports the MELCO radiotherapy equipment products in Japan, as well as sells, services and supports the Company’s products.  The Company accounted for the purchase of the Service Business as an acquisition and 100% of the profits and losses from VMS KK are reflected in the Company’s consolidated results.  The Company accounts for the “earn out” payment equivalent to 100% of the net profits or losses of the Service Business during the three-year period as an adjustment to the purchase price of the acquisition at the end of the JVA period in accordance with SFAS No. 141, Business Combinations and EITF No. 95-8, Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination.  For the eleven-month period ended December 31, 2004, net profits for the Service Business totaled approximately $0.7 million.  Assuming no future profits and losses, $0.7 million will be payable to MELCO at the end of the three-year JVA period.

In addition to purchasing the Service Business, the Company entered into a distributor arrangement to sell MELCO radiotherapy equipment products through VMS KK for two years to allow customers interested in purchasing MELCO radiotherapy equipment products to purchase such products for a limited period of time.  The Company does not expect that MELCO radiotherapy equipment products sales will be significant.  Pursuant to EITF No. 95-8, the Company accounted for any payment it may pay to MELCO computed on the basis of 50% of the net profits from the sale of MELCO radiotherapy equipment products during the JVA’s first two years as a VMS KK period expense.

The joint venture was accomplished through MELCO’s purchase on February 3, 2004, of a 35% ownership interest in VMS KK for 1.4 billion Japanese Yen, or US$13.5 million.  During the three-year JVA period, MELCO is not entitled to any profits or losses generated by VMS KK.  However, MELCO is entitled to elect one of the five members of VMS KK’s Board of Directors.  At the end of the three-year JVA period, MELCO is required to unconditionally sell and the Company is required to unconditionally repurchase MELCO’s 35% ownership interest in VMS KK at the original sale price (1.4 billion Japanese Yen) and there are no settlement alternatives to such a repurchase obligation.  The Company has accounted for MELCO’s 35% ownership interest as a mandatorily redeemable financial instrument, which is included in “Long-term accrued expenses and other” in the condensed consolidated balance sheets.

Contingencies

The U.S. Environmental Protection Agency or third parties has named the Company as a potentially responsible party under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (“CERCLA”), at eight sites where the Company, as Varian Associates, Inc., is alleged to have shipped manufacturing waste for recycling or disposal.  In addition, the Company is overseeing environmental cleanup projects and as applicable, reimbursing third parties for cleanup activities 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 agreement governing the distribution (the “spin-offs”) of Varian, Inc. (“VI”) and Varian Semiconductor Equipment Associates, Inc. (“VSEA”), by the Company in 1999, 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

12

spent $0.4 million and $0.8 million (net of amounts borne by VI and VSEA) during the three months ended December 31, 2004 and January 2, 2004, respectively, on environmental investigation, cleanup and third party claim costs.

For one 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 December 31, 2004, 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 $3.8 million to $7.3 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 December 31, 2004. 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 $3.8 million as of December 31, 2004. The amount accrued has not been discounted to present value due to the uncertainties that make it difficult to develop a best estimate of future costs.

As to other sites and facilities, the Company has gained sufficient knowledge based upon formal agreements with other parties defining the Company’s future liabilities or formal cleanup plans for these sites that have either been approved by or completed in accordance with the requirements of the state or federal environmental agency with jurisdiction over the site to better estimate the scope and costs of future cleanup activities. As of December 31, 2004, the Company estimated that the Company’s future exposure (net of VI’s and VSEA’s indemnification obligations) to complete the cleanup projects, including reimbursements to third party’s claims, for these sites and facilities ranged in the aggregate from $13.2 million to $44.9 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 December 31, 2004. 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. The best estimate within the range was $19.4 million at December 31, 2004. The Company accordingly accrued $12.8 million, which represents its best estimate of the future costs of $19.4 million discounted at 4%, net of inflation. This accrual is in addition to the $3.8 million described in the preceding paragraph.

The foregoing amounts 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/credits 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 consolidated 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 in any fiscal year.

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. The Company receives certain cash payments in the form of settlements and judgments from defendants, its insurers and other third parties from time to time. The Company has also reached an agreement with another insurance company under which the insurance company has agreed to pay a portion of the Company’s past and future environmental-related expenditures, and the Company therefore has a $3.3 million receivable included in “Prepaid expenses and other current assets” and “Other assets” at December 31, 2004. 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 and the insurance company has paid the claims that the Company has made.

The Company is also involved in 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

13

legal proceeding will result in a judgment or settlement that would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

9. RETIREMENT PLANS

The Company’s net pension and post-retirement benefit costs were composed of the following:

	Defined Benefit Plans						Post-Retirement Benefit Plans
(In thousands)	December 31, 2004			January 2, 2004			December 31, 2004			January 2, 2004
Service cost	$	758		$	757		$	—		$	—
Interest cost	777			649			92			115
Expected return on assets	(732		)	(564		)	—			—
Net amortization and deferral:
Transition amount	60			(3		)	123			123
Prior service cost	33			33			—			—
Recognized actuarial loss (gain)	179			206			(3		)	43
Net pension benefit cost	$	1,075		$	1,078		$	212		$	281

The Company made contributions to the defined benefit plans of $1.0 million during the three months ended December 31, 2004. The Company currently expects total contributions for fiscal year 2005 to be approximately $3.6 million.

The Company made contributions to the post-retirement benefit plans of $0.2 million during the three months ended December 31, 2004 and expects total contributions for fiscal year 2005 to be approximately $0.6 million.

10. STOCKHOLDERS’ EQUITY

Stock Repurchase Program

On November 19, 2004, the Company announced that its Board of Directors had authorized a repurchase by the Company of up to 6,000,000 shares of its common stock over the period through December 31, 2005 in addition to the 1,460,000 shares of common stock available for repurchase under the previously approved program as of October 1, 2004.  During the three months ended December 31, 2004, the Company paid $60.8 million to repurchase 1,460,000 shares of its common stock.  All shares that have been repurchased have been retired.  As of December 31, 2004, the Company could repurchase up to 6,000,000 shares of its common stock.

Comprehensive Earnings

Comprehensive earnings for the three months ended December 31, 2004 and January 2, 2004 equaled the reported net earnings.

14

11. EMPLOYEE STOCK OPTION PLANS

Option activity under the Omnibus Stock Plan and the 2000 Stock Option Plan (together, the “Employee Stock Option Plans”) is presented below:

			Outstanding Options
(In thousands, except per share amounts)	Shares Available for Grant		Number of Shares		Weighted Average Exercise Price
Balance at September 26, 2003 (12,224 options exercisable at a weighted average exercise price of $11.36)	8,814		16,494		$	14.13
Granted	(3,266	)	3,266		32.90
Cancelled or expired (1)	102		(108	)	25.35
Exercised	—		(3,408	)	11.41
Balance at October 1, 2004 (12,482 options exercisable at a weighted average exercise price of $8.53)	5,650		16,244		$	18.40
Granted	(2,425	)	2,425		39.80
Cancelled or expired	18		(18	)	23.92
Exercised	—		(958	)	11.65
Balance at December 31, 2004	3,243		17,693		$	21.69

(1) During the three months ended January 2, 2004, the Company excluded from shares available for grant 6 shares of cancelled or expired options that were granted before the spin-offs of VI and VSEA under the Company’s previous, now inactive, stock option plans.

The following tables summarize information concerning options outstanding and exercisable under the Employee Stock Option Plans at December 31, 2004:

		Options Outstanding				Options Exercisable
Range of Exercise Prices		Number of Shares Oustanding	Weighted Average Remaining Contractual Life (in years)	Weighted Average Exercise Price		Number of Shares Exercisable	Weighted Average Exercise Price
(Shares in thousands)
$	3.88 – $4.57	220	4.2	$	4.40	220	$	4.40
$	4.58 – $4.62	1,990	4.3	$	4.58	1,990	$	4.58
$	4.63 – $6.65	272	2.8	$	5.53	272	$	5.53
$	6.66 – $13.94	276	4.0	$	8.76	276	$	8.76
$	13.95 – $14.72	4,080	5.9	$	13.95	4,080	$	13.95
$	14.73 – $21.49	2,544	6.9	$	17.93	2,542	$	17.93
$	21.50 – $32.09	2,710	7.9	$	24.41	1,861	$	24.42
$	32.10 – $46.07	5,601	9.3	$	35.90	1,245	$	33.57
Total		17,693	7.1	$	21.69	12,486	$	16.32

15

12. EARNINGS PER SHARE

Basic net earnings per share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding for the period. Diluted net earnings per share is computed by dividing net earnings by the sum of the weighted average number of common shares outstanding and dilutive common shares under the treasury method. The following table sets forth the computation of basic and diluted earnings per share:

	Three Months Ended
(In thousands, except per share amounts)	December 31, 2004		January 2, 2004
			(As Adjusted See Note 3)
Numerator:
Net earnings	$	40,309	$	29,286
Denominator:
Basic weighted average shares outstanding	133,985		136,029
Dilutive stock option shares	5,609		5,790
Dilutive restricted performance shares and restricted common stock	344		302
Diluted weighted average shares outstanding	139,938		142,121
Net earnings per Share:
Basic	$	0.30	$	0.22
Diluted	$	0.29	$	0.21

The Company excludes options from the computation of diluted weighted average shares outstanding if the exercise price of the options is greater than the average market price of the shares because the inclusion of these options would be antidilutive to earnings per share.  Accordingly, stock options to purchase 248,124 and 3,200 shares at an average exercise price of $42.39 and $33.98 per share, respectively, were excluded from the computation of diluted weighted average shares outstanding during the three months ended December 31, 2004 and January 2, 2004, respectively.

13. INDUSTRY SEGMENTS

The Company’s operations are grouped into two reportable industry segments: Oncology Systems and X-ray Products. These industry segments were determined based on how management views and evaluates the Company’s operations. The Company’s Ginzton Technology Center (“GTC”), and BrachyTherapy operations are reflected in an “other” category. The Company evaluates its financial performance and allocates its resources primarily based on operating earnings.

	Revenues				Operating Earnings
	Three Months Ended				Three Months Ended
(In millions)	December 31, 2004		January 2, 2004		December 31, 2004			January 2, 2004
								(As Adjusted See Note 3)
Oncology Systems	$	242	$	221	$	56		$	46
X-ray Products	44		37		9			7
Other	13		9		3			—
Total industry segments	$	299	$	267	$	68		$	53
Corporate	—		—		(7		)	(8		)
Total company	$	299	$	267	$	61		$	45

16

14. SUBSEQUENT EVENT

On January 17, 2005, the Company announced that it has acquired Sigma Micro Informatique Conseil (“Sigma Micro”), a privately-held company that is the leading supplier of information management software for radiation oncology and medical oncology in cancer clinics and hospitals in France.  Sigma Micro’s products will complement the VARiS Vision™ software for information and image management within integrated treatment networks. The Company paid approximately $13 million in cash to acquire Sigma Micro, which is based in Toulouse, France.

17

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Varian Medical Systems, Inc.:

We have reviewed the accompanying condensed consolidated balance sheet of Varian Medical Systems, Inc. and its subsidiaries (the “Company”) as of December 31, 2004, and the related condensed consolidated statements of earnings and cash flows for the three-month periods ended December 31, 2004 and January 2, 2004.  These interim financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States).  A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters.  It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole.  Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of October 1, 2004, and the related consolidated statements of earnings, and of cash flows for the year then ended (not presented herein), and in our report dated November 12, 2004 we expressed an unqualified opinion on those consolidated financial statements.  In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of October 1, 2004, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PRICEWATERHOUSECOOPERS LLP

San Jose, California

January 21, 2005

18

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 which provides a “safe harbor” for statements about future events, products and future financial performance that are based on the beliefs of, estimates made by and information currently available to the management of Varian Medical Systems, Inc. (“we,” “our”, or “the Company”). The outcome of the events described in these forward-looking statements is subject to risks and uncertainties. Actual results and the outcome or timing of certain events may differ significantly from those projected in these forward-looking statements due to the factors listed under “— Factors Affecting Our Business”, and from time to time in our other filings with the Securities and Exchange Commission or SEC. For this purpose, statements concerning industry or market segment outlook; market acceptance of or transition to new products or technology such as intensity modulated radiation therapy, image guided radiation therapy, brachytherapy, software, treatment techniques, and advanced X-ray products; growth drivers; orders, revenues, backlog or earnings growth; future financial results and any statements using the terms “believe,” “expect,” “expectation,” “anticipate,” “can,” “should,” “will,” “would,” “could,” “estimate,” “appear,” “based on,” “may,” “pending,” “intended,” “potential,” “promise,” “predict” and “possible” or similar statements are forward-looking statements that involve risks and uncertainties that could cause our actual results and the outcome and timing of certain events to differ materially from those projected or management’s current expectations.  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.

Overview

We finished the first quarter of fiscal year 2005 with higher revenues, increased net orders, stronger margins, healthy earnings and another record quarter-end backlog.  During the first quarter of fiscal year 2005, our net earnings increased by 38%, net earnings per diluted share increased by 38%, overall revenues increased by 12% and overall net orders increased by 8% compared to the first quarter of fiscal year 2004.  At the end of the first quarter of fiscal year 2005, we reported backlog at $1 billion, an increase of 18% from the end of the year-ago quarter.

Oncology Systems.  Our largest business segment is Oncology Systems, which produces, sells and services hardware and software products for treating cancer with radiation, including linear accelerators, treatment simulation and verification products, information management and treatment planning software and other sophisticated accessory products and services.  Our products enable radiation oncology departments in hospitals and clinics to perform conventional radiotherapy treatments and offer the advanced treatment processes of intensity modulated radiation therapy, or IMRT, and image guided radiation therapy, or IGRT.

We have continued to see growth in the number of clinics that are treating patients with IMRT and IGRT. However, as the leading supplier of IMRT-enabling products and with over 50% of our customer sites worldwide having the products and accessories necessary to perform the most advanced forms of IMRT, we have seen and continue to expect that the rate of revenues growth for IMRT-related equipment will be lower than what we have experienced in the last three years, particularly in the North American market.  IGRT is a new technology driver in radiation therapy and we expect that IGRT will be one of the main contributors to revenues growth in our Oncology Systems business segment in the coming years.  While IGRT is still a nascent technology, we believe we are at the forefront of providing automated and clinically practical products for IGRT treatments.  It is our belief that IGRT should generally follow a similar growth pattern as what we experienced for IMRT.  As in the early days of IMRT, we are seeing a rising percentage of linear accelerators being ordered with IGRT-enabled accessories, though still far below the 90%-95% of linear accelerators that is being ordered with IMRT-enabled products.  At the end of the first quarter of fiscal year 2005, installations of our diagnostic-quality imaging systems for IGRT were either complete or in process at 30 treatment centers around the world.  While the level of orders for our IGRT-enabled products are still small compared to our IMRT-enabled products, we anticipate that, similar to what occurred with IMRT, North American market growth will again accelerate once IGRT is more-widely demonstrated among early adopters.

Fundamental market factors for growth in the radiation therapy market continue to be the rising cancer incidence, underserved medical needs outside of the United States, technology advances that are leading to improvements in patient care, patient demand for more advanced and effective treatments (such as IMRT, IGRT and stereotactic cancer treatments), media and marketing promotions as well as educational efforts by hospitals and radiotherapy centers motivated to have the most modern systems to improve clinical outcomes and attract top medical talent.

19

In the first quarter of fiscal year 2005, we saw a continued slowing in the Oncology Systems North American revenues and net orders growth, which was more than offset by continued strong growth in Oncology Systems international revenues and net orders.  Oncology Systems benefited from a growing international market which contributed 42% of total revenues and 50% of total net orders for the business segment during the quarter principally due to stronger cyclical demand after several years of very slow growth and, to a lesser extent, due to the relatively weak U.S. dollar that effectively made our pricing more competitive with our foreign competitors.  Net orders declined in North America as a result of an apparent contraction in the amount of business available for closure following a strong orders performance in the fourth quarter of fiscal year 2004.  This reflects typical quarterly volatility in a market where growth has slowed over the last two years following several years of heavy investment in advanced technology for IMRT.

Our stereotactic cancer treatment and IGRT-enabled products have also positioned us to expand beyond radiation oncology into the estimated $250 million radiosurgery market with a solution built around our Trilogy linear accelerator and on-board imager (“OBI”).  We recently announced the formation of Varian Surgical Sciences as the vehicle for carrying out our initiative to directly address this market.  We expect to offer a clinically effective and more cost-efficient alternative to dedicated radiosurgical devices as well as conventional surgery for the treatment of tumors, vascular malformations and certain functional conditions.

Our success in Oncology Systems depends upon our ability to retain leadership in technological innovation, the cost effectiveness of our products, the efficacy of our treatment technology and macroeconomic influences.  Factors affecting the adoption rate of new technologies such as IGRT could include our internal efficiency in design, documentation and testing, deployment and installation and the more-widely demonstrated efficacy of IGRT by early adopters.  They may also include customer training, reimbursement and our ability to educate customers about new technology cost and clinical advantages.  Macroeconomic factors could include hospital financial strength in the United States and governmental healthcare policies outside the United States.

X-Ray Products.  Our other significant business segment is X-ray Products, which manufactures and sells (i) X-ray tubes for use in a range of applications including computed tomography, or CT, scanning, radioscopic/fluoroscopic imaging, special procedures, industrial and mammography and (ii) flat panel imaging products (also commonly referred to as flat panel detectors) for digital X-ray image capture, which is an alternative to image intensifier tubes for fluoroscopy or X-ray film for radiography.  We continue to view the fundamental driver for this business to be the on-going success of key OEMs that incorporate our X-ray tube products and flat panel imaging devices into their medical diagnostic and industrial imaging systems. Our flat panel product is being incorporated into next generation imaging equipment, including equipment for IGRT such as OBI.

Other.  Through the Ginzton Technology Center, or GTC, we are developing new business areas, including next generation digital X-ray imaging technology and technology for cargo screening.  In addition, we are developing technologies and products that promise to improve disease management by employing targeted energy and molecular agents to enhance the effectiveness and broaden the application of radiation therapy. Our BrachyTherapy operations manufacture, sell and service advanced brachytherapy products, which include treatment planning software, afterloaders and applicators.  Our brachytherapy products are being used for partial breast irradiation.  Significant increase in revenues was due to strong product sales of our GammaMed HDR afterloaders in the first quarter of fiscal year 2005.  The operations of GTC and BrachyTherapy are reported as part of the “Other” category of our industry segments, see Note 13 “Industry Segments” of the Notes to the Condensed Consolidated Financial Statements.

This discussion and analysis of our financial condition and results of operations is based upon and should be read in conjunction with the condensed consolidated financial statements and the notes included elsewhere in this report, as well as the information contained under “—Factors Affecting Our Business” and the “Notes to the Consolidated Financial Statements”in our Annual Report on Form 10-K for the fiscal year ended October 1, 2004, and from time to time in our other filings with the SEC.

Critical Accounting Estimates

The preparation of our financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses.  These estimates and assumptions are based on historical experience and on various other factors that we believe are reasonable under the circumstances.  We periodically review our accounting policies and estimates and make adjustments when facts and circumstances dictate.  Our critical accounting policies that are

20

affected by critical accounting estimates include revenue recognition, valuation of allowance for doubtful accounts, valuation of inventory and warranty obligations, assessment of recoverability of goodwill and intangible assets, assessment of environmental remediation liabilities and valuation of taxes on earnings.  Such accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of our Condensed Consolidated Financial Statements, and actual results could differ materially from these estimates.  For a discussion of how these estimates and other factors may affect our business, also see “—Factors Affecting Our Business.”

Revenue Recognition

We frequently enter into sales arrangements with customers that contain multiple elements or deliverables such as hardware, software and services. Judgments as to the allocation of the proceeds received from an arrangement to the multiple elements of the arrangement, the determination of whether any undelivered elements are essential to the functionality of the delivered elements and the appropriate timing of revenue recognition are critical in respect to these arrangements to ensure compliance with GAAP.  In addition, the amount of product revenues recognized is affected by our judgments as to whether objective and reliable evidence of fair value exists for hardware products and vendor-specific objective evidence of the fair value for software products in arrangements with multiple elements. Changes to the elements in an arrangement and the ability to establish objective and reliable evidence of fair value or vendor-specific objective evidence of the fair value for those elements could affect the timing of revenue recognition.  Revenue recognition also depends on the timing of shipments and is subject to customer acceptance and the readiness of customers’ facilities.  If shipments are not made on scheduled timelines or the products are not accepted by the customer in a timely manner, our reported revenues may differ materially from expectations.

Allowance for Doubtful Accounts

Credit evaluations are undertaken for all major sale transactions before shipment is authorized. Normal payment terms require payment of a small portion upon signing of the purchase order contract, a significant amount upon transfer of risk of loss and the remaining amount upon completion of the installation.  On a quarterly basis, we evaluate aged items in the accounts receivable aging report and provide an allowance in an amount we deem adequate for doubtful accounts.  If our evaluation of our customers’ financial conditions does not reflect the future ability to collect outstanding receivables, additional provisions may be needed and our future operating results could be negatively impacted.  As of December 31, 2004, our allowance for doubtful accounts represented approximately 1.7% of total accounts receivable.

Inventories

Our inventories include high technology parts and components that may be specialized in nature or subject to rapid technological obsolescence. We have programs to minimize the required inventories on hand and we regularly review inventory quantities on hand and adjust for excess and obsolete inventory based primarily on historical usage rates and our estimates of product demand and production.  Actual demand may differ from our estimates, in which case we may have understated or overstated the provision required for obsolete and excess inventory, which would have an impact on our operating results.

Warranty Obligations

We warrant our products for a specific period of time, usually one year, against material defects.  We provide for the estimated future costs of warranty obligations in cost of revenues when the related revenues are recognized.  The accrued warranty costs represent our best estimate at the time of revenues recognized of the total costs that we will incur to repair or replace product parts, which fail while still under warranty.  The amount of accrued estimated warranty costs is primarily based on historical experience as to product failures as well as current information on repair costs.  Actual warranty costs could differ from the estimated amounts. On a quarterly basis, we review the accrued balances of our warranty obligations and update the historical warranty cost trends. If we were required to accrue additional warranty cost in the future, it would negatively affect our operating results.

Goodwill and Intangible Assets

Goodwill is initially recorded when the purchase price paid for a business acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. The majority of companies we have acquired have not had significant identified tangible assets and, as a result, a significant portion of the purchase price has been typically allocated to intangible assets and goodwill. Our future operating performance will be impacted by the future amortization of these acquired

21

intangible assets and potential impairment charges related to goodwill if indicators of potential impairment exist. As a result of business acquisitions, the allocation of the purchase price to goodwill and intangible assets could have a significant impact on our future operating results. The allocation of the purchase price of the acquired companies to goodwill and intangible assets requires us to make significant estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets and the appropriate discount rate for these cash flows. Should conditions be different from management’s current estimates, material write-downs of intangible assets and/or goodwill may be required, which would adversely affect our operating results.  We will continue to make assessments of impairment on an annual basis in the fourth quarter of our fiscal years or more frequently if indicators of potential impairment arise.  In fiscal year 2004, we performed such evaluation and found no impairment.  As of December 31, 2004, the carrying value of goodwill was $112.7 million.

Environmental Matters

We are subject to 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.  Environmental remediation liabilities are recorded when environmental assessments and/or remediation efforts are probable, and the costs of these assessments or remediation efforts can be reasonably estimated, in accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, and the American Institute of Certified Public Accountants, or AICPA, Statement of Position 96-1, Environmental Remediation Liabilities.  The accrued environmental costs represent our best estimate as to the total costs of remediation and the time period over which these costs will be incurred.  On a quarterly basis, we review these accrued balances.  If we were required to accrue additional environmental remediation costs in the future, it would negatively impact our operating results.

Taxes on Earnings

As a global taxpayer, significant judgments and estimates are required in evaluating our tax positions and determining our provision for taxes on earnings.  The calculation of our tax liabilities involves addressing uncertainties in the application of complex tax regulations.  We recognize liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and interest may be due.  These liabilities are adjusted in light of changing facts and circumstances, such as the closing of a tax audit.  The provision for taxes on earnings includes the effect of changes to these liabilities that are considered appropriate.

In addition, the carrying value of our net deferred tax assets assumes that we will be able to generate sufficient future taxable earnings to fully utilize these deferred tax assets.  Should we conclude it is more likely than not that we will be unable to recover our net deferred tax assets, our tax provision would increase in the period in which we make such a determination.

We are subject to taxes on earnings in both the U.S. and numerous foreign jurisdictions.  Earnings derived from our international region are generally taxed at rates lower than U.S. rates.  The ability to maintain our current effective rate is contingent upon existing tax laws in both the U.S. and in the respective countries in which our international subsidiaries are located.  In addition, a decrease in the percentage of our total earnings from our international region, or a change in the mix of international regions among particular tax jurisdictions, could increase our effective tax rate.  Also, our current effective tax rate does not assume U.S. taxes on undistributed profits of certain foreign subsidiaries.  These earnings could become subject to incremental foreign withholding or U.S. federal and state taxes should they either be deemed or actually remitted to the U.S.

Results of Operations

Fiscal Year

Our fiscal year is the 52- or 53-week period ending on the Friday nearest September 30. Fiscal year 2005 is the 52-week period ending September 30, 2005, and fiscal year 2004 was the 53-week period ended October 1, 2004. The fiscal quarter ended December 31, 2004 was a 13-week period and the fiscal quarter ended January 2, 2004 was a 14-week period.

On June 14, 2004, our Board of Directors declared a two-for-one stock split in the form of a 100% stock dividend. The distribution of the shares was made on July 30, 2004 to stockholders of record as of June 30, 2004. Unless otherwise stated, all references in the financial statements to the number of shares and per share amounts of our common stock have been retroactively restated to reflect the increased number of shares resulting from the two-for-one stock split.

22

Discussion of Financial Data for theFirst Quarter of Fiscal Year 2005 Compared to First Quarter of Fiscal Year 2004

Total Revenues

	Three Months Ended
Revenues by sales classification (Dollars in millions)	December 31, 2004			January 2, 2004			Percent Change
Product	$	248.2		$	227.8		9	%
Service Contracts and Other	50.8			39.2			30	%
Total Revenues	$	299.0		$	267.0		12	%
Product as a percentage of total revenues	83		%	85		%
Service Contracts and Other as a percentage of total revenues	17		%	15		%
Revenues by region
North America	$	161.5		$	153.6		5	%
Europe	76.4			69.5			10	%
Asia	49.6			37.4			33	%
Rest of world	11.5			6.5			77	%
Total International (1)	137.5			113.4			21	%
Total	$	299.0		$	267.0		12	%
North America as a percentage of total revenues	54		%	58		%
International as a percentage of total revenues	46		%	42		%

(1) We consider international revenues to be revenues outside of North America.

Total revenues for the first quarter of fiscal year 2005 increased over total revenues for the first quarter of fiscal year 2004 due primarily to the continuing growth in our Oncology Systems business segment.  All of our business segments, as well as all of our geographic regions, contributed to our total revenues increase and total product revenues growth in the first quarter of fiscal year 2005.  The total product revenues growth was complemented by strong growth in Oncology Systems service contracts and other revenues, which was the primary contributor to the total service contracts and other revenues growth.

Oncology Systems Revenues

	Three Months Ended
Revenues by sales classification (Dollars in millions)	December 31, 2004			January 2, 2004			Percent Change
Product	$	194.2		$	185.3		5	%
Service Contracts and Other	47.2			35.5			33	%
Total Oncology Systems revenues	$	241.4		$	220.8		9	%
Product as a percentage of total Oncology Systems revenues	80		%	84		%
Service Contracts and Other as a percentage of Oncology Systems revenues	20		%	16		%
As a percentage of total revenues	81		%	83		%

The increase in service contracts and other revenues was the major contributor to the overall Oncology Systems revenues increase.  Service contracts and other revenues increased due to a combination of factors, including increased support services and renewals associated with increased product sales that have resulted in a larger installed base of our products, the increase in sophistication and complexity of our products (particularly software products which generate maintenance contracts), the acquisition of the radiotherapy equipment service business of Mitsubishi Electric Co. in Japan in the second quarter of fiscal year 2004 which contributed to the increase in service contracts and other revenues and a higher percentage growth in such revenues and the relatively weak U.S. dollar that effectively made our pricing more competitive with our foreign competitors.  The growth rate in service contracts and other revenues for the first quarter of fiscal year 2005 was consistent with the growth rate in fiscal year 2004.

23

Oncology Systems product revenues for the first quarter of fiscal year 2005 grew 5% over the unusually strong product revenues for the first quarter of fiscal year 2004, which had been 35% greater than those in the first quarter of fiscal year 2003.  Continued demand for our linear accelerators and our IMRT-enabling products formed the core of this growth.  Oncology Systems product revenues for the quarter were, however, adversely affected due to timing of product shipments and acceptances.

	Three Months Ended
Revenues by region (Dollars in millions)	December 31, 2004			January 2, 2004			Percent Change
North America	$	139.0		$	134.0		4	%
Europe	66.8			62.9			6	%
Asia	27.3			19.2			42	%
Rest of world	8.3			4.7			75	%
Total International	102.4			86.8			18	%
Total	$	241.4		$	220.8		9	%
North America as a percentage of Oncology Systems revenues	58		%	61		%
International as a percentage of Oncology Systems revenues	42		%	39		%

For the first quarter of fiscal year 2005, revenues in North America increased 4% over the unusually strong first quarter of fiscal year 2004, which had been 23% greater than the same quarter of fiscal year 2003.  The North American market has experienced a decrease in revenues growth rates as the rate of revenues growth from our IMRT-enabling products in North America has slowed, and revenues from our IGRT-enabling products are still small compared to our IMRT-enabling products.  The decrease in revenues growth in North America has been more than offset by revenues growth from our international markets.  This is consistent with the orders growth patterns discussed in the Net Orders section within this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”).

X-ray Products Revenues

	Three Months Ended
Revenues by region (Dollars in millions)	December 31, 2004			January 2, 2004			Percent Change
North America	$	15.4		$	13.7		12	%
Europe	5.7			4.8			20	%
Asia	21.9			17.8			23	%
Rest of world	1.4			1.0			41	%
Total International	29.0			23.6			23	%
Total	$	44.4		$	37.3		19	%
As a percentage of total revenues	15		%	14		%

All of our geographic regions contributed to the increase in X-ray Products revenues for the first quarter of fiscal year 2005 over the first quarter of fiscal year 2004.  X-ray Products revenues increased primarily due to the continued increase in demand from our major OEM customers in Asia and North America for our flat panel imaging products and for our high power, anode grounded CT scanning tube.

24

Other Revenues

	Three Months Ended
Revenues by sales classification (Dollars in millions)	December 31, 2004			January 2, 2004			Percent Change
Product	$	9.6		$	5.3		80	%
Service Contracts and Other	3.6			3.6			—
Total Revenues	$	13.2		$	8.9		48	%
As a percentage of total revenues	4		%	3		%

For our combined Other segment, which is comprised of GTC and our BrachyTherapy operations, the increase in revenues for the first quarter of fiscal year 2005 over the same period in fiscal year 2004 was due primarily to increased product sales within BrachyTherapy in all geographic regions.

Gross Margin

	Three Months Ended
Gross margin in absolute dollars (Dollars in millions)	December 31, 2004			January 2, 2004			Percent Change
	(As Adjusted) (1)
Oncology Systems	$	102.6		$	89.4		15	%
X-ray Products	15.4			13.5			14	%
Other	7.2			3.8			90	%
Gross margin	$	125.2		$	106.7		17	%
Gross margin by segment
Oncology Systems	42.5		%	40.5		%
X-ray Products	34.6		%	36.2		%
Total Company	41.9		%	40.0		%

(1) See Note 3 to the condensed consolidated financial statements.

Oncology Systems gross margin increased 2 percentage points for the first quarter of fiscal year 2005 from the same period of fiscal year 2004 due primarily to a mix shift towards higher margin products, a higher level of revenues related to acceptance of products and higher volume, partially offset by a shift to lower margin international revenues.  In addition, product costs decreased slightly in the core products due to cost reduction initiatives.  This margin improvement in Oncology Systems may not necessarily continue in the future, especially as revenues continue to shift towards our international markets that typically have lower margins than those for North America.

X-ray Products gross margin for the first quarter of fiscal year 2005 decreased 1.6 percentage points over the same period of fiscal year 2004 as significant gains in the flat panel product line were more than offset by higher warranty costs and manufacturing costs in our X-ray tube products.

Research and Development and Selling, General and Administrative

	Three Months Ended
(Dollars in millions)	December 31, 2004			January 2, 2004			Percent Change
Research and development	$	18.4		$	17.6		4	%
As a percentage of total revenues	6		%	7		%
Selling, general and administrative	$	46.2		$	44.5		4	%
As a percentage of total revenues	15		%	17		%

25

The increase in $0.8 million in research and development expenses for the first quarter of fiscal year 2005 compared to the same period in fiscal year 2004 was attributable to a net increase of $1.1 million in Oncology Systems and a net increase of $0.3 million in Other segment offset by a net decrease of $0.6 million in X-ray Products.  The increase in Oncology Systems was attributable primarily to: a) increased expenses of $0.6 million related to new projects from our recent acquisitions; and b) increased employee headcount, materials costs and consulting expenses totaling $0.6 million.  The decrease in X-ray Products was due primarily to the completion of a research project, which contributed $0.7 million to research and development expenses in the first quarter of fiscal year 2004.

The increase in $1.7 million in selling, general and administrative expenses for the first quarter of fiscal year 2005 compared to the same period in fiscal year 2004 was attributable primarily to: a) increased operating expenses of $1.0 million related to acquisitions and b) increased expenses of $0.8 million resulted from the relatively weak U.S. dollar which translated into higher operating expenses for our foreign operations.

Interest Income, Net

	Three Months Ended
(Dollars in thousands)	December 31, 2004		January 2, 2004		Percent Change
Interest income, net	$	453	$	433	5	%

Taxes on Earnings

	Three Months Ended
	December 31, 2004		January 2, 2004		Change
Effective tax rate	34	%	35	%	(1	)%

The decrease in effective tax rate for the first quarter of fiscal year 2005 was primarily due to an anticipated shift of earnings towards countries where we have lower statutory rates.  Our future effective tax rate could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets or liabilities, or changes in tax laws or interpretations thereof.

Net Earnings Per Diluted Share

	Three Months Ended
	December 31, 2004		January 2, 2004		Percent Change
Net earnings per diluted share	$	0.29	$	0.21	38	%

The increase for both the first quarter of fiscal year 2005 can be attributed to the increase in total revenues and improvement in gross margins and operating expenses as a percentage of revenues.

26

Net Orders

	Three Months Ended
Total Net Orders (by segment and region) (Dollars in millions)	December 31, 2004		January 2, 2004		Percent Change
Oncology Systems:
North America	$	134.8	$	145.2	(7	)%
Europe	98.1		78.9		24	%
Asia	23.9		22.0		9	%
Rest of world	14.6		9.0		62	%
Total International	136.6		109.9		24	%
Total Oncology Systems	$	271.4	$	255.1	6	%
X-ray Products:
North America	$	17.9	$	13.4	33	%
Europe	7.3		6.0		22	%
Asia	22.8		23.7		(3	)%
Rest of world	1.8		1.0		79	%
Total International	31.9		30.7		4	%
Total X-ray Products	$	49.8	$	44.1	13	%
Other:	$	13.1	$	9.1	43	%
Total Net Orders	$	334.3	$	308.3	8	%

The increase in net orders for the first quarter of fiscal year 2005 was primarily due to the increase in Oncology Systems international net orders offset by a decline in North American net orders.  Oncology Systems benefited from a growing international market that contributed 50% of our total net orders for the business segment in the first quarter of fiscal year 2005 principally due to stronger cyclical demand after several years of very slow growth and, to a lesser extent, due to the relatively weak U.S. dollar that effectively made our pricing more competitive with our foreign competitors.  Net orders declined in North America as a result of an apparent contraction in the amount of business available for closure following a strong orders performance in the fourth quarter of fiscal year 2004.  This reflects typical quarterly volatility in a market where growth has slowed over the last two years following several years of heavy investment in advanced technology for IMRT.

For the trailing twelve months ended December 31, 2004, Oncology Systems net orders increased by 17%, including a 7% increase for North America and a 32% increase for international markets.  By comparison, the trailing twelve-month Oncology Systems net order growth rate in the first quarter of fiscal year 2004 was 17%, including a 15% increase for North America and a 22% increase for international markets.  Over the long-term, we continue to believe that Oncology Systems business segment can sustain global long-term growth of 10% to 15% a year due to fundamental market factors for growth in the radiation therapy market that we believe have remained unchanged.  These factors include the rising cancer incidence, underserved medical needs outside of the United States, technology advances that are leading to improvements in patient care, patient demand for more advanced and effective treatments (such as IMRT, IGRT and stereotactic cancer treatments), media and marketing promotions as well as educational efforts by hospitals and radiotherapy centers motivated to have the most modern systems to improve clinical outcomes and attract top medical talent.  In any given period, orders growth in either North America or international markets could be outside of this range.  Although orders usually result in future sales within twelve months, the actual timing of sales and revenue recognition varies significantly based on the delivery requirements of individual orders and are shorter for some types of orders, such as upgrades (i.e. the addition of new features or accessories to existing equipment).  Thus, orders in any quarter are not necessarily directly correlated to the level of sales in any particular future quarter.

X-ray Products net orders increased for the first quarter of fiscal year 2005 compared to the first quarter of fiscal year 2004 due to a significant order for our flat panel image systems received during the first quarter of fiscal year 2005 and continuing strong demand for our high power, anode grounded CT scanning tubes.  Despite the strong increase in net orders, we continue to believe that our long-term expectations for X-ray Products growth will be in the 0% to 5% range as the X-ray

27

tube market continues to mature and become more commoditized, with growth primarily being driven by the on-going success of key OEMs that incorporate our X-ray tube products and flat panel imaging devices into their medical diagnostic and industrial imaging systems.

Net orders in the Other segment, which comprised of GTC and our BrachyTherapy operations, increased 43% in the first quarter of fiscal year 2005 compared to the same quarter in fiscal year 2004 due primarily to net orders generated in brachytherapy.

Backlog

At December 31, 2004, we had a backlog of $1.0 billion, an increase of 18% compared to January 2, 2004.  Our Oncology Systems backlog at December 31, 2004 increased by 17%, including a 10% increase for North America and a 28% increase for international markets from January 2, 2004.

Outlook

Total Revenues:  For fiscal year 2005 based on our record backlog, we continue to expect that total company revenues should increase by about 13% to 14% over the total for fiscal year 2004.  For the second quarter of fiscal year 2005, we expect that total company revenues should increase in the low double digits.

Net Earnings Per Diluted Share:We expect that net earnings per diluted share for fiscal year 2005 should increase by about 22% over the fiscal year 2004 total.  For the second quarter of fiscal year 2005, we expect that earnings per diluted share should increase by nearly 18% over their respective totals for the comparable quarter in fiscal year 2004.

Net Orders, Backlog and Outlook contain forward-looking statements and projections that are subject to the factors, risks and uncertainties set forth or referred to under “Forward Looking Statements,” “—Factors Affecting Our Business” and elsewhere in this Quarterly Report on Form 10-Q.  Actual results and the outcome or timing of certain events may differ significantly.

Liquidity and Capital Resources

Liquidity is the measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, acquire businesses and fund continuing operations. Our sources of cash include earnings, net interest income, borrowings under long-term loans, stock option exercises and employee stock purchases. Our cash usage is actively managed on a daily basis to ensure the maintenance of sufficient funds to meet our needs.

Liquidity

The following table summarizes our cash and cash equivalents and marketable securities:

(In millions)	December 31, 2004		October 1, 2004		Increase/ (Decrease)
Cash, cash equivalents and marketable securities:
Cash and cash equivalents	$	226	$	239	$	(13	)
Marketable securities	138		154		(16		)
Total	$	364	$	393	$	(29	)

The net decrease in cash and cash equivalents and marketable securities during the first quarter of fiscal year 2005 was primarily attributable to the use of cash and cash proceeds from maturities of marketable securities for the repurchase of common stock of $61 million and capital expenditures of $9 million, significantly offset by cash of $41 million generated from operating activities and cash provided by the issuance of common stock of $11 million related to employee stock option exercises.

At December 31, 2004, we had $364 million in cash, cash equivalents and marketable securities (approximately 40% of which was held abroad and could be subject to additional taxation if repatriated to the U.S.) compared to $393 million (approximately 29% of which was held abroad) at October 1, 2004.

28

Cash Flows

	Three Months Ended
(In millions)	December 31, 2004			January 2, 2004
Net cash flow provided by (used in):
Operating activities	$	40.9		$	57.5
Investing activities	(1.5		)	(32.1		)
Financing activities	(49.6		)	(22.1		)
Effects of exchange rate changes on cash and cash equivalents	(3.2		)	(3.2		)
Net increase (decrease) in cash and cash equivalents	$	(13.4	)	$	0.1

Our primary cash inflows and outflows for the first quarter of fiscal years 2005 and 2004 were as follows:

•We generated net cash from operating activities of $40.9 million during the first quarter of fiscal year 2005, compared to $57.5 million for the same period of fiscal year 2004.  The $16.6 million decrease in net cash from operating activities during the first quarter of fiscal year 2005 compared to the same period of fiscal year 2004 was a result of an increase in net earnings of $11.0 million and an adjustment for a net decrease in non-cash items of $4.1 million, significantly offset by a net change of approximately $23.5 million in operating assets and liabilities (working capital items).  The net change in working capital items consisted primarily of an increase in accounts receivable of $17.0 million as a result of a shift to international deliveries which had longer payment terms and higher accounts receivable stemming from revenues which occurred late in the quarter but which were not yet due and an increase in inventories of $12.7 million due to anticipated customer demands.

We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, timing of product shipments, accounts receivable collections, inventory management, and the timing of tax and other payments. For additional discussion, see “—Factors Affecting our Business” within this MD&A.

•Investing activities used $1.5 million of net cash for the first quarter of fiscal year 2005 compared to $32.1 million for the first quarter of fiscal year 2004.  We did not purchase any businesses during the first quarter of fiscal year 2005 but used $34.8 million for the purchase of businesses during the first quarter of fiscal year 2004.  Our net proceeds from maturities of marketable securities were $15.1 million during the first quarter of fiscal year 2005 compared to $11.6 million during the same period of fiscal year 2004.  Net cash used for the purchase of property, plant and equipment was $8.6 million during the first quarter of fiscal year 2005 compared to $4.0 million during the same period of fiscal year 2004.

•Financing activities used net cash of $49.6 million for the first quarter of fiscal year 2005, compared to net cash of $22.1 million used for the first quarter of fiscal year 2004. During the first quarter of fiscal year 2005, we used $60.8 million for the repurchase of common stock, which was offset by $11.2 million in proceeds received from employee stock option exercises.  During the first quarter of fiscal year 2004, we used $34.9 million for the repurchase of common stock, which was offset by $12.9 million in proceeds received from employee stock option exercises.

We expect our capital expenditures, which typically represent purchases of facilities, manufacturing equipment, office equipment and furniture and fixtures, to be around 3% of revenues in fiscal year 2005.

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 as a result of the shifting influences of these factors, we believe that existing cash and cash equivalents, cash to be generated from operations and our borrowing capability will be sufficient to satisfy anticipated commitments for capital expenditures and other cash requirements through the next twelve months.  We currently anticipate that we will continue to utilize our strong liquidity and cash flows from operations to repurchase our common stock, make strategic acquisitions, invest in the growth of our products and invest in systems and processes.

29

Performance Metrics

Trade accounts receivable days of sales outstanding, or DSO, were 85 at December 31, 2004, compared to 76 at January 2, 2004.  Our accounts receivable and DSO are impacted primarily by timing of product shipments, collections performance and payment terms.  In the first quarter of fiscal year 2005, DSO was up 9 days from the first quarter of fiscal year 2004, which had a 13-day improvement over the same quarter of fiscal year 2003.  The increase in DSO for the first quarter of fiscal year 2005 over the same quarter of fiscal year 2004 was primarily the result of a higher proportion of revenue occurring in the second half of the quarter, with a shift to international deliveries also contributing the increase.

From time to time, we provide to our qualified customers extended payment terms as a competitive factor in winning customers and displacing our competitors.  Such extended payment terms can also negatively affect our DSO and may increase the risk of collectibility of our accounts receivable as our customers’ financial condition could change adversely during the extended payment period.

Accrued Expenses

At December 31, 2004, accrued expenses increased approximately $6 million from October 1, 2004 due primarily to an increase of $10 million for our purchase of foreign currency hedges related to firm commitments under SFAS No. 149 and an increase in deferred revenues of $6 million, partially offset by net decreases in accrued compensation of $12 million.

Stock Repurchase Program

On November 19, 2004, our Board of Directors authorized a repurchase of up to 6,000,000 shares of our common stock through the December 31, 2005 in addition to the 1,460,000 shares of common stock available for repurchase under the previously approved program as of October 1, 2004.  During the first quarter ended December 31, 2004, we paid $60.8 million to repurchase 1,460,000 shares of our common stock.  All shares that have been repurchased have been retired.  As of December 31, 2004, we could still purchase up to 6,000,000 shares of our common stock.

Contractual Obligations

There has been no significant change to our contractual obligations since it was reported in our Annual Report on Form 10-K for the fiscal year ended October 1, 2004 except that in the first quarter of fiscal year 2005 we purchased a facility in Las Vegas that we had previously leased and assumed from the seller a loan that will mature in installments through November 2011.  The remaining balance of the loan amounted to approximately $2.6 million at December 31, 2004.

Total debt as a percentage of total capital increased to 10.7% at December 31, 2004 compared to 10.2% (as adjusted) at October 1, 2004 due to the addition to debt of the loan assumed in connection with the Las Vegas facility purchased in the first quarter of fiscal year 2005. The ratio of current assets to current liabilities decreased to 1.90 to 1 at December 31, 2004 from 1.94 to 1 (as adjusted) at October 1, 2004.

Environmental Matters

We are subject to 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.  Although we follow procedures that we consider appropriate under existing regulations, these procedures can be costly and we cannot completely eliminate the risk of contamination or injury from these materials, and, in the event of such an incident, we could be held liable for any damages that result.  In addition, we could be assessed fines or penalties for failure to comply with environmental laws and regulations.  These costs, and any future violations or liability under environmental laws or regulations, could have a material adverse effect on our business.

In addition, we may be required to incur significant additional costs to comply with future changes in existing environmental laws and regulations or new laws and regulations.  For example, several countries are proposing to require manufacturers to take back, recycle and dispose of products at the end of the equipment’s useful life. The European Union or EU has adopted directives that when implemented will require medical equipment manufacturers to bear some or all of the cost of product disposal at the end of the products’ useful life, thus creating increased costs for our operations.  The EU has also adopted a directive that may require the adoption of restrictions on the use of some hazardous substances in certain of our products sold in the EU.  This directive could create increased costs for our operations.

30

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 by the Company of VI and VSEA in 1999, we are overseeing environmental cleanup projects from our pre-spin-offs 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 agreement governing the spin-offs, VI and VSEA are each obligated to indemnify us for one-third of these environmental cleanup costs (after adjusting for any insurance proceeds realized or tax benefits recognized by us). The cleanup projects we are overseeing are being conducted under the direction of or in consultation with relevant regulatory agencies. We estimate these cleanup projects will take up to approximately 30 years to complete. As described below, we have accrued a total of $16.6 million at December 31, 2004 to cover our liabilities for these cleanup projects:

•Our estimate of future costs to complete certain cleanup activities ranges from $3.8 million to $7.3 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 $3.8 million, which is the amount at the low end of the range.

•For ten cleanup projects, we have sufficient knowledge to develop better estimates of our future costs.  Formal agreements with other parties defining the Company’s future liabilities or formal cleanup plans for these sites have been approved by or completed in accordance with requirements of the state or federal environmental agency with jurisdiction over the site.  While our estimate of future costs to complete these cleanup projects, including third party claims, ranges from $13.2 million to $44.9 million, our best estimate within that range is $19.4 million. For these projects we have accrued $12.8 million; which is our best estimate of the $19.4 million discounted to present dollars at 4%, net of inflation.

When we developed the estimates above, we considered 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 consolidated financial statements in any single fiscal year. We spent $0.4 million and $0.8 million, net of amounts borne by VI and VSEA, during the first quarter ended December 31, 2004 and January 2, 2004, respectively.

We receive cash payments in the form of settlements and judgments from various insurance companies, defendants and other third parties from time to time. 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 a $3.3 million receivable included in “Prepaid expenses and other current assets” and “Other assets” as of December 31, 2004. We believe that this receivable is collectible because it is based on a binding, written settlement agreement with a financially viable insurance company and the insurance company has paid the claims that we have made.

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, that are or might be considered hazardous, and we have generated and disposed of wastes, that are or might be considered hazardous. Therefore, it is possible that additional environmental issues may arise in the future that we cannot now predict.

Off-Balance Sheet Arrangements

In conjunction with the sale of our products in the ordinary course of business, we provide standard indemnification of business partners and customers for losses suffered or incurred for patent, copyright or any other intellectual property infringement claims by any third parties with respect to our products.  The term of these indemnification arrangements is generally perpetual. The maximum potential amount of future payments we could be required to make under these agreements is unlimited.  As of December 31, 2004, we have not incurred any costs since the spin-offs to defend lawsuits or settle claims related to these indemnification arrangements.

We have entered into indemnification agreements with our directors and officers that may require us to indemnify our directors and officers against liabilities that may arise by reason of their status or service as directors or officers, and to advance their expenses incurred as a result of any legal proceeding against them as to which they could be indemnified.  Generally, the maximum obligation under such indemnifications is not explicitly stated and, as a result, the overall amount of these obligations cannot be reasonably estimated.  We believe that if we were to incur a loss in any of these matters, the loss would not have a material effect on our consolidated financial position, results of operations or cash flows.

31

Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4.  SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning in our fourth quarter of fiscal year 2005. We do not believe the adoption of SFAS No. 151 will have a material effect on our consolidated financial position, results of operations or cash flows.

FASB Staff Position (“FSP”) No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (“FSP 109-2”), provides guidance under SFAS No. 109, Accounting for Income Taxes, with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the “Jobs Creation Act”) on enterprises’ income tax expense and deferred tax liability.  The Jobs Creation Act was enacted on October 22, 2004.  FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Creation Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109.  We have not yet completed our evaluation on the impact of the repatriation provisions.  Accordingly, as provided for in FSP 109-2, we have not adjusted our tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Creation Act.

In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.  SFAS 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged.  SFAS No. 153 is effective for nonmonetary asset exchanges beginning in our fourth quarter of fiscal year 2005. We do not believe the adoption of SFAS No. 153 will have a material effect on our consolidated financial position, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which replaced SFAS No. 123, Accounting for Stock-Based Compensation and superseded Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees.  SFAS No. 123R addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. Under SFAS No. 123R, companies will no longer be able to account for share-based compensatio n transactions using the intrinsic method in accordance with APB 25 but will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of earnings.  SFAS No. 123R is effective beginning in our fourth quarter of fiscal year 2005 and allows, but does not require, us to restate the full fiscal year of 2005 to reflect the impact of expensing share-based payments under SFAS No. 123R. We have not yet determined which fair-value method and transitional provision it will follow. The impact on our financial statements of applying Black-Scholes option valuation method of accounting for stock options is disclosed in the Stock-Based Compensation section of Note 1 to the Condensed Consolidated Financial Statements.

Factors Affecting Our Business

The following risk factors and other information included in this Form 10-Q should be carefully considered.  The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. If any of the following risks actually occur, our business, operating results, and financial condition could be materially adversely affected.

IF WE ARE UNABLE TO ANTICIPATE OR KEEP PACE WITH CHANGES IN THE MARKETPLACE AND THE DIRECTION OF TECHNOLOGICAL INNOVATION AND CUSTOMER DEMANDS, OUR PRODUCTS MAY BECOME LESS USEFUL OR OBSOLETE AND OUR OPERATING RESULTS WILL SUFFER

The marketplace for our Oncology Systems products is characterized by rapid change and technological innovation. Because our products often have long development and government approval cycles, we must anticipate changes in the marketplace and the direction of technological innovation and customer demands. For example, most of our recent product introductions in our Oncology Systems business segment have related to IMRT, or the relatively new technology of IGRT, and enhancements of existing products through greater systems integration and simplification.

IMRT is a form of three-dimensional conformal radiation therapy that links beam shaping and portal imaging accessories, treatment planning and information management software to the actual treatment delivery device, the linear accelerator.

32

While we believe that IMRT is becoming a well-accepted standard of treatment in the radiation oncology market, if future studies fail to confirm the effectiveness of IMRT or our products or show negative side effects, or if other more effective technologies are introduced, our revenues could fail to increase or could decrease.  Our success will depend upon the continued growth in awareness, acceptance and success of IMRT in general and acceptance of our products utilizing this technology in particular.  However, as more institutions purchase IMRT-equipped linear accelerators or upgrade their existing accelerators with IMRT technology, the market for IMRT-related products may become saturated and we will face competition from newer technologies.  In fact, orders and revenues for our Oncology Systems business in North America have grown very rapidly over the last five years due largely to the adoption of IMRT as an accepted standard of treatment for radiation oncology.  While we expect that our Oncology Systems North American orders and revenues will continue growing, this high rate of growth is not sustainable and we have seen and continue to expect that the rate of growth for IMRT-related equipment will be lower than what we have experienced, particularly in the North American market.  Our future success, therefore, will depend on our ability to accurately anticipate and capitalize on new customer demands through technological innovations and changes, including new technologies for treatment such as IGRT.

IGRT is a very new cancer treatment methodology that allows for dynamic, real-time X-ray imaging and precise treatment of small, moving and changing tumors with greater dose intensity and accuracy while preserving healthy surrounding tissue.  We are currently investing in product development to design new classes of imaging products for IGRT treatment as well as enhancements to existing products to enable IGRT treatment capabilities. We believe IGRT is the next generation in radiotherapy treatment of cancers, combining IMRT treatment with sophisticated real-time imaging and visualization systems, and that it will be a driver of growth in our Oncology Systems business over the next several years.  IGRT, while recognized as a new technology driver in radiation therapy, is nevertheless a nascent technology that is not yet widely accepted or adopted.  Our future success depends upon the wide spread awareness, acceptance and adoption by the radiation oncology market of IGRT and our IGRT products as an evolutionary technology and methodology for radiotherapy treatment of cancers.  If our assumptions regarding the future importance of IGRT are incorrect, if IGRT fails to be effective as a treatment methodology or if IGRT fails to become widely accepted, our revenues could fail to increase or could decrease.

As radiation oncology treatment becomes more complex, our customers are increasingly concerned about the integration and simplicity of use of our various products for treating patients.  For example, our linear accelerators, treatment simulators, treatment verification products and treatment planning and information management software products are highly sophisticated and require a high level of training and education in order to competently and safely use such products.  The complexity and training requirements are further increased since our products are designed so that they are capable of operating together within integrated treatment systems.  We have directed substantial product development efforts into more tightly integrating our products so that they are capable of operating more seamlessly within a system and into simplifying the usability of our products through enhancement such as more intuitive user interfaces and greater software intelligence.  We anticipate that these efforts to enable greater integration and enhance simplicity-of-use will increase the acceptance and adoption of IMRT and IGRT and will foster greater demand for our products from new customers and upgrades from existing customers.  If we are unsuccessful in these efforts to enable greater integration and enhance simplicity-of-use efforts or if our assumptions about the importance of these features to customers are inaccurate, our revenues could fail to increase or could decrease.

Our X-ray Products business segment sells products primarily to large diagnostic imaging systems companies that also manufacture X-ray tubes for their own systems.  We, therefore, compete with these in-house X-ray tube manufacturing operations for business from their affiliated systems businesses.  To succeed, we must provide X-ray tube products that meet our customer demands for lower cost, better product quality and/or superior technology and performance.  If we are unable to continue to innovate our X-ray tube technology and anticipate our customers’ demands in the areas of cost, quality, technology and performance, then our revenues could fail to increase or could decrease as our customers purchase from their internal manufacturing operations or from other independent X-ray tube manufacturers.

We may be unable to accurately anticipate changes in our markets and the direction of technological innovation and demands of our customers, our competitors may develop improved products or processes, or the marketplace may conclude that the task our products were designed to do is no longer an element of a generally accepted diagnostic or treatment regimen.  If this occurs, the market for our products may be adversely affected and they may become less useful or obsolete. Any development adversely affecting the market for our products would force us to reduce production volumes or to discontinue manufacturing one or more of our products or product lines and would reduce our revenues and earnings.

33

IF WE ARE UNABLE TO DEVELOP NEW GENERATIONS OF PRODUCTS AND ENHANCEMENTS TO EXISTING PRODUCTS, WE MAY BE UNABLE TO ATTRACT OR RETAIN CUSTOMERS OR GAIN ACCEPTANCE OF OUR PRODUCTS BY CUSTOMERS

Our success depends upon the successful development, introduction and commercialization of new generations of products, treatment systems and enhancements to and/or simplification of existing products.  Our Oncology Systems and brachytherapy products are technologically complex and must keep pace with rapid and significant technological change, comply with rapidly evolving industry standards and compete effectively with new product introductions of our competitors.  Our X-ray Products business segment must also continually innovate to develop products with lower cost, better product quality and superior technology and performance in order to effectively compete with the affiliated X-ray tube manufacturing operations of many of our customers.  Accordingly, many of our products require significant planning, design, development and testing at the technological, product and manufacturing process levels. These activities require significant capital commitments and investments on our part, which we may be unable to recover. In addition, some of our research and development projects, particularly in GTC, are funded by government contracts. Changes in government priorities and our ability to attract such funding may affect our overall research effort and ultimately, our ability to develop successful new products and product enhancements.

Our ability to successfully develop and introduce new products, treatment systems and product enhancements and simplifications, and the costs associated with these efforts, are affected by our ability to:

•properly identify customer needs;

•prove feasibility of new products;

•limit the time required from proof of feasibility to routine production;

•limit the timing and cost of regulatory approvals;

•accurately predict and control costs associated with inventory overruns caused by phase-in of new products and phase-out of old products;

•price our products competitively;

•manufacture and deliver our products in sufficient volumes on time, and accurately predict and control costs associated with manufacturing, installation, warranty and maintenance of the products;

•manage customer acceptance and payment for products;

•limit customer demands for retrofits of both new and old products; and

•anticipate and compete successfully with competitors’ efforts.

Additionally, our ability to gain healthcare market acceptance and demand for our new Oncology Systems products and treatment procedures may be also affected by the budgeting cycles of hospitals and clinics for capital equipment purchases which frequently fix budgets one or more years in advance.  We cannot be sure that we will be able to successfully develop, manufacture and phase in new products, treatment systems or product enhancements.  Without the successful introduction of new products and product enhancements, we may be unable to attract and retain customers and our revenues and operating results will suffer. In addition, even if customers accept new products or product enhancements, the revenues from such products may not be sufficient to offset the significant costs associated with making such products available to customers or we may have longer sales and ordering timeframes due to customer budgeting cycles.

A HIGH PERCENTAGE OF OUR SALES ARE INTERNATIONAL, AND ECONOMIC, POLITICAL AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS COULD ADVERSELY AFFECT OUR SALES OR MAKE THEM LESS PREDICTABLE

We conduct business globally. Our international revenues accounted for approximately 46% and 42% of revenues during the first quarter ended December 31, 2004 and January 2, 2004, respectively. As a result, we must provide significant service and support on a worldwide basis, and we have sales and service offices located throughout Europe, Asia, Latin America and Australia. In addition, we have manufacturing and research operations in England, Germany, Switzerland and Finland.  We have invested substantial financial and management resources to develop an international infrastructure to meet the needs of

34

our customers. We intend to continue to expand our presence in international markets, although we cannot be sure we will be able to compete successfully in the international market or meet the service and support needs of such customers. Accordingly, our future results could be harmed by a variety of factors, including:

•the difficulties in enforcing agreements and collecting receivables through many foreign country’s legal systems;

•the longer payment cycles associated with many foreign customers;

•the possibility that foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade;

•fluctuations in foreign currency exchange rates, which may affect product demand or the profitability in U.S. dollars of products and services provided by us in foreign markets where payment for our products and services or of our expenses is made in the local currency;

•our ability to obtain U.S. export licenses and other required export or import licenses or approvals;

•changes in the political, regulatory, safety or economic conditions in a country or region; and

•the possibility that it may be more difficult to protect our intellectual property in foreign countries.

Also, historically our international sales have had lower average selling prices and gross margins.  So, as the geographic distribution of our orders and sales shifts increasingly towards our international regions, our overall rate of orders growth (measured in U.S. dollars) could slow down and overall revenues and gross margins may be negatively affected.

OUR RESULTS MAY BE ADVERSELY AFFECTED BY CHANGES IN FOREIGN CURRENCY EXHANGE RATES

Since we sell our products internationally and have international operations, we are also 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 foreign currency forward exchange contracts to mitigate the effects of operational (sales orders) and balance sheet exposures to fluctuations in foreign currency exchange rates. Our forward exchange contracts generally range from one to twelve months in original maturity.

Although we engage in hedging strategies that may offset the effect of fluctuations in foreign currency exchange rates, the protection these strategies provide will be affected by the timing of transactions, 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), forecast volatility and the extent of movement of exchange rates. If our hedging strategies are not effective in offsetting the effect of fluctuations in foreign currency exchange rates, our operating results may be harmed.

In addition, long-term movements in currency rates could affect the competitiveness of our products.  Even though sales of our products internationally occurs predominantly in local currencies, our cost structure is largely U.S. dollar based, and some of our competitors may have cost structures based in other currencies, so our overall margins and pricing competitiveness may be adversely affected.  In fact, we have benefited from the relatively weak U.S. dollar that has made our pricing more competitive with our foreign competitors.  This has been a contributor to our international orders and revenues growth.  To the extent that the U.S. dollar strengthens against other countries’ currencies, this will cease to be a positive factor for our international growth and may result in slower growth in our international orders and revenues, which then could negatively affect our overall financial performance and results.  The relative weakness of the U.S. dollar against other currencies has been a subject of policy discussions within the U.S. government and among other countries’ governments.  Changes in monetary or other policies will likely affect such foreign currency exchange rates.

WE FACE SIGNIFICANT COSTS IN ORDER TO COMPLY WITH LAWS AND REGULATIONS APPLICABLE TO THE MANUFACTURE AND DISTRIBUTION OF OUR PRODUCTS, AND IF WE FAIL OR ARE DELAYED IN OBTAINING REGULATORY APPROVALS OR FAIL TO COMPLY WITH APPLICABLE REGULATIONS, WE MAY BE UNABLE TO DISTRIBUTE OUR PRODUCTS OR MAY BE SUBJECT TO CIVIL OR CRIMINAL PENALTIES

Many of our products and the products of OEMs that incorporate our products are subject to extensive and rigorous government regulation of the manufacture and distribution of our products, both in the United States and in foreign countries.  Compliance with these laws and regulations is expensive and time-consuming, and changes to or failure to comply with these laws and regulations, or adoption of new laws and regulations, could adversely affect our business.

35

In the United States, as a manufacturer and seller of medical devices and devices utilizing radioactive by-product material, we and some of our suppliers and distributors are subject to extensive regulation by federal governmental authorities, such as the U.S. Food and Drug Administration, or FDA, and state and local regulatory agencies, such as the State of California, to ensure such devices are safe and effective.  Such regulations, which include the U.S. Food, Drug and Cosmetic Act, or the FDC Act, and regulations promulgated by the FDA, govern the design, development, testing, manufacturing, packaging, labeling, distribution, import/export, possession, marketing, transportation, disposal, clinical investigations involving humans, sale and marketing of medical devices, post-market surveillance, repairs, replacements, recalls and other matters relating to medical devices, radiation producing devices and devices utilizing radioactive by-product material. State regulations are extensive and vary from state to state. Our Oncology Systems equipment and software, but not industrial products, and our brachytherapy products constitute medical devices subject to these regulations.  Our X-ray tube products and our flat panel imaging products are also considered medical devices. Future products in any of our business segments may constitute medical devices and be subject to regulation as such.  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.

The FDA generally requires that medical devices receive FDA 510(k) pre-market notification clearance or an approved pre-market approval application, or PMA, before we, as a manufacturer of such devices, can take orders or distribute those products in the United States.  In addition, modifications or enhancements to these products that could significantly affect safety or effectiveness, or constitute a major change in intended use, require further FDA clearance or approval. Obtaining FDA market clearances or approvals can be time consuming, expensive and uncertain. We may fail to obtain the necessary clearances or approvals or may be unduly delayed in doing so. Furthermore, even if we are granted regulatory clearances, the clearances may include significant limitations on the indicated uses of the product, which may limit the market for those products. 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.  If we were unable to achieve required FDA approval or clearance for a product, or were limited or unduly delayed in doing so, our business would suffer.  In addition, our products have either been Class 1 medical devices (our X-ray tube and flat panel imaging products), which require no pre-market approvals or clearances, or Class 2 medical devices (our Oncology Systems and brachytherapy products, with the exception of industrial products), which requires only the 510(k) pre-market notification clearance. The 510(k) clearance process is less time-consuming, expensive and uncertain than the PMA approval process. If we were required to use the PMA approval process for future products or product modifications, it could delay or prevent release of the proposed products or modifications, and could cause our business to suffer.

In addition to FDA-required market clearances and approvals, our manufacturing operations are required to comply with the FDA’s Quality System Regulation, or QSR, which addresses the quality program requirements such as a company’s management responsibility for the company’s quality systems, and good manufacturing practices, product design, controls, methods, facilities and quality assurance controls used in manufacturing, assembly, packing, storing and installing medical devices.  Compliance with the QSR is necessary to receive FDA clearance or approval to market new products and is necessary for us to be able to continue to market cleared or approved product offerings.  The FDA makes announced and unannounced inspections to determine compliance with the QSR and may issue 483 reports listing instances where we have failed to comply with applicable regulations and/or procedures or Warning Letters which, if not adequately responded to, could lead to enforcement actions against us, including fines, the total shutdown of our production facilities and criminal prosecution.

The FDA and the Federal Trade Commission, or FTC, also regulate the promotion and advertising of our products that are medical devices to ensure that the claims that are made are not “off-label” from the intended use stated in the 510(k) clearance for the products and also there is scientific data to substantiate such claim. The FDA and FTC determinations on these matters can be subjective, and we cannot assure you that the FDA or FTC would agree that all or our promotional claims are permissible.  If the FDA or FTC determined that any of our promotional claims were not permissible, we may be required to revise our promotional claims or may be subject to enforcement actions.

As a manufacturer of medical devices utilizing radioactive byproduct material, we are subject to numerous federal, state and local laws and regulations relating to their manufacture, distribution, transportation, import/export, possession, use and disposal.  Our medical devices utilizing radioactive byproduct material are subject to the Nuclear Regulatory Commission, or NRC, clearance and approval requirements, and the manufacture and sale of these products are subject to state regulation that is extensive and varies from state to state.  Our manufacture and distribution of medical devices utilizing byproduct material also requires us to obtain a number of licenses and certifications for these devices and materials.  Service of these products must also be in accordance with a specific radioactive materials license.  We are also subject to a variety of additional

36

environmental laws regulating our manufacturing operations and the handling, storage, transport and disposal of hazardous materials, and imposing liability for the cleanup of contamination from these materials.

As a participant in the healthcare industry, we are also subject to extensive laws and regulations in addition to FDA regulation on a broad array of additional subjects at the federal, state and local levels.  These include laws and regulations protecting the privacy and integrity of patient medical information, including the Health Insurance Portability and Accountability Act of 1996, or HIPAA, “fraud and abuse” laws and regulations such as physician self-referral prohibitions, anti-kickback laws, and false claims laws. We also must comply with numerous federal, state and local laws of more general applicability relating to such matters as safe working conditions, manufacturing practices and fire hazard control.

If we or any of our suppliers or distributors fail to comply with FDA and other applicable regulatory requirements, it can result in a wide variety of actions, such as:

•investigations, 483 reports of non-compliance or Warning Letters;

•fines, injunctions, and civil penalties;

•partial suspensions or total shutdown of production, or the imposition of operating restrictions;

•losses of clearances or approvals already granted, or the refusal of future requests for clearance or approval;

•seizures or recalls of our products;

•the inability to sell our products in the applicable jurisdiction; and

•criminal prosecutions.

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. In addition, changes in existing regulations or adoption of new regulations could affect the timing of, or prevent us from obtaining, future regulatory approvals, or could otherwise adversely affect our business.

Our operations and sales of our products outside the United States are subject to regulatory requirements that vary from country to country, and may differ significantly from those in the United States.  In general, our products are regulated outside the United States as medical devices by foreign governmental agencies similar to the FDA and the FTC. We are also subject to laws and regulations outside the United States applicable to manufacturers of medical devices, radiation producing devices and products utilizing radioactive materials, and laws and regulations of general applicability relating to matters such as environmental protection, safe working conditions, manufacturing practices and other matters, in each case that are often comparable, if not more stringent, than regulation in the United States.  Our sales of products in foreign countries are also subject to regulation of matters such as product standards, packaging requirements, labeling requirements, environmental and product recycling requirements, import restrictions, tariff regulations, duties and tax requirements. We rely in some countries on our foreign distributors to assist us in complying with foreign regulatory requirements. We may be required to incur significant time and expense in obtaining and maintaining non-United States regulatory approvals and in complying with non-United States. laws and regulations.  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 restrict or prevent us from doing business in the applicable country or subject us to a variety of enforcement actions, which would adversely affect our business.

It is also important that our products comply with electrical safety and environmental standards, such as those of Underwriters Laboratories, the Canadian Standards Association, and the International Electrotechnical Commission. If one or more of our products fail to comply with these standards, we may be unable to obtain or maintain registrations to sell our products, demand for our products may diminish, or we may be subject to other enforcement actions.

The laws and regulations applicable to us and our business and their enforcement are constantly undergoing change, and we cannot predict what effect, if any, changes may have on our business.  In addition, new laws and regulations may be adopted which adversely affect our business. There has been a trend in recent years, both in the United States and foreign countries, 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.  There is a continuing trend for

37

governments around the world, including the United States and Canada, to start charging fees for the review of pre-market notification clearances.

THE MARKETS IN WHICH WE COMPETE ARE HIGHLY COMPETITIVE, AND WE MAY LOSE MARKET SHARE TO COMPANIES WITH GREATER RESOURCES OR WHICH ARE ABLE TO DEVELOP MORE EFFECTIVE TECHNOLOGIES, OR WE COULD BE FORCED TO REDUCE OUR PRICES

The markets for radiation therapy equipment and software are characterized by rapidly evolving technology, intense competition and pricing pressure. Our Oncology Systems products and services compete with those of a substantial number of foreign and domestic companies.  Some of these companies have greater financial, marketing and other resources than we have.  Also, we expect that the rapid technological changes occurring in our markets will lead to the entry of new competitors into our markets, as well as our encountering new competitors as we apply our technologies in new markets such as stereotactic radiosurgery for neurosurgical treatments. Our ability to compete successfully depends in part on our ability to provide technologically superior, clinically proven products that deliver more precise, cost-effective, high quality clinical outcomes, together in a complete package of products and services, and to do so ahead of our competitors.  Our ability to compete in the radiation therapy market may be adversely affected when purchase decisions are based solely upon price since our products are generally sold on a total value to the customer basis.  This may occur if hospitals and clinics give purchasing decision authority to group purchasing organizations that focus solely on pricing as the primary determinant in making purchase decisions.  In our sales of linear accelerator products for radiotherapy and radiosurgery, we compete primarily with Siemens Medical Solutions, Elekta AB, Tomotherapy Incorporated and Accuray Incorporated.  We compete with a variety of companies, such as IMPAC Medical Systems, Inc., Philips Medical Systems, Computerized Medical Systems, Inc., North American Scientific, Inc., Nucletron B.V. and Elekta AB, in our software systems, treatment simulation and verification products and accessories product lines.  In respect of our BrachyTherapy operations, our primary competitor is Nucletron B.V.  For the service and maintenance business for our products, we compete with independent service organizations and our customers’ internal service organizations.

The market for X-ray tube products is extremely competitive. All of the major diagnostic imaging systems companies, which are the primary customers of our X-ray Products business, also manufacture X-ray tubes for use in their own products. We must compete with these in-house X-ray tube manufacturing operations that are naturally favored by their affiliated companies. As a result, we must have a competitive advantage in one or more significant areas, which may include lower product cost, better product quality or superior technology and performance. We sell a significant volume of our X-ray tube products to companies such as Toshiba Corporation, Hitachi Medical Corporation, Shimadzu Corporation, Philips Medical Systems and GE, all of which have in-house X-ray tube production capability. In addition, we compete against other stand-alone X-ray tube manufacturers such as Comet AG and IAE Industria Applicazioni Elettroniche Spa.

In each of our business segments, existing competitors’ actions and new entrants may adversely affect our ability to compete. 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. In addition, the timing of competitors’ introduction of products into the market could affect the market acceptance and market share of our products.  If we are unable to develop competitive products, gain regulatory approval and supply commercial quantities of such products to the market as quickly and effectively as our competitors, market acceptance of our products may be limited and our sales reduced. In addition, some of our smaller competitors could be acquired by larger companies that have greater financial strength, which could enable them to compete more aggressively. Some of our suppliers or distributors could also be acquired by competitors, which could disrupt these supply or distribution arrangements and result in less predictable and reduced revenues in our businesses.  Therefore, such competitive factors or our failure to achieve the above dependencies could have a negative affect on our pricing, sales, market share and gross margins and our ability to maintain or increase our operating margins.

INTEROPERABILITY OF OUR PRODUCTS WITH ONE ANOTHER AND THEIR COMPATIBILITY WITH THIRD PARTY PRODUCTS IS BECOMING INCREASINGLY IMPORTANT, AND IF WE ARE UNABLE TO MAKE OUR PRODUCTS INTEROPERATE WITH ONE ANOTHER OR COMPATIBLE WITH WIDELY USED THIRD PARTY PRODUCTS, SALES OF OUR PRODUCTS COULD DECREASE

As radiation oncology treatment becomes more and more complex, our customers are increasingly concerned about the interoperability and compatibility of the various products they use in providing treatment to patients.  For example, our linear accelerators, treatment simulators, treatment verification products and treatment planning and information management software products are designed to interoperate with one another, and to be compatible with other widely used third party radiation oncology products. Obtaining and maintaining this interoperability and compatibility is costly and time consuming, and when third parties modify the design or functionality of their products, it can require us to modify our products to ensure

38

compatibility. In addition, our ability to obtain compatibility with third party products can depend on the third parties providing us with adequate information regarding their products. These third parties are in many cases our competitors and accordingly the timing of their product changes, and of sharing relevant information with us, may be made to place us at a competitive disadvantage. We could further be required to obtain additional regulatory clearances for any modification of our products. It is also possible that, despite our best efforts, we might be unable to make our products interoperable or compatible with widely used third party products or might only be able to do so at a prohibitive expense, making our products more costly or less attractive to our customers.

WE MAY INCUR SUBSTANTIAL COSTS IN PROTECTING OUR INTELLECTUAL PROPERTY, AND IF WE ARE NOT ABLE TO DO SO, OUR COMPETITIVE POSITION WOULD BE HARMED

We file applications as appropriate for patents covering new products and manufacturing processes. We cannot be sure, however, that our patents, patents that will be issued from any of our pending or future patent applications or patents for technologies licensed to us, or that the claims allowed under any issued patents, will be sufficiently broad to protect our technology position against competitors. Issued patents owned by, or licensed to, us 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 assert our patent rights against others. An unfavorable outcome to any such litigation could harm us. In addition, we may not be able to detect infringement or may lose competitive position in the market before we do so.

We also 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. We cannot assure you that such protections will prove adequate, 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. We cannot assure you that our trademarks will not be used by unauthorized third parties. We also have agreements with third parties that license to us certain patented or proprietary technologies. If we were to lose the rights to license these technologies, or our costs to license these technologies were to materially increase, our business would suffer.

THIRD PARTIES MAY CLAIM WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY, AND WE COULD SUFFER SIGNIFICANT LITIGATION OR LICENSING EXPENSES OR BE PREVENTED FROM SELLING OUR PRODUCTS

The industries in which we compete are characterized by a substantial amount of litigation over patent and other intellectual property rights. Our competitors, like companies in many high technology businesses, continually review other companies’ products for possible conflicts with their own intellectual property rights.  Determining whether a product infringes a third party’s intellectual property rights involves complex legal and factual issues, and the outcome of this type of litigation is often uncertain. Third parties may claim that we are infringing their intellectual property rights, and we may be found to infringe those intellectual property rights.  While we do not believe that any of our products infringe the valid intellectual property rights of third parties, we may not be aware of intellectual property rights of others that relate to our products, services or technologies. From time to time, we have received notices from third parties alleging infringement of patent or other intellectual property rights relating to their products. Any contest regarding patents or other intellectual property could be costly and time-consuming, and could divert our management and key personnel from our business operations.  We cannot assure you that we would prevail in any such contest.  We also do not maintain insurance for such intellectual property infringement.  Therefore, if we are unsuccessful in defending any such infringement claim, we may be subject to significant damages or injunctions against development and sale of our products, or may be required to enter into costly royalty or license agreements.  We cannot assure you that any licenses required would be made available on acceptable terms or at all.

SINCE WE DEPEND UPON A LIMITED GROUP OF SUPPLIERS, AND IN SOME CASES SOLE SOURCE SUPPLIERS, FOR SOME PRODUCT COMPONENTS, THE LOSS OF A SUPPLIER COULD REDUCE OUR ABILITY TO MANUFACTURE PRODUCTS, CAUSE MATERIAL DELAYS IN OUR ABILITY TO DELIVER PRODUCTS, OR SIGNIFICANTLY INCREASE OUR COSTS

We obtain some of the components and subassemblies included in our products from a limited group of suppliers, or in some cases a single-source supplier; for example, the source wires for high-dose afterloaders, klystrons for linear accelerators, imaging panels, non-coated array sensors and coating for array sensors for the flat panels, specialized integrated circuits for imaging subassemblies, and some targets, housings and glass bulbs for X-ray tubes. If we lose any of these suppliers, we

39

would be required to obtain and qualify one or more replacement suppliers, which may then also require us to redesign or modify our products to incorporate such new parts and/or further require us to obtain clearance, qualification or certification of such product by the FDA or other applicable regulatory approvals in other countries. Such an event will likely cause material delays in delivery and significantly increase costs for the affected product.  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.  Disruptions or loss of any of our limited- or sole-source components or subassemblies, including the ones referenced above, could adversely affect our business and financial results and could result in damage to customer relationships.

WE SELL OUR X-RAY TUBES TO A LIMITED NUMBER OF OEM CUSTOMERS, MANY OF WHOM ARE ALSO OUR COMPETITORS, AND THE LOSS OR REDUCTION IN PURCHASING VOLUME BY ONE OR MORE OF THESE CUSTOMERS OR THE CONTINUED CONSOLIDATION AMONG OEMs IN THE X-RAY TUBE PRODUCTS MARKET COULD REDUCE OUR SALES OF X-RAY TUBE PRODUCTS

We sell our X-ray tube products to a limited number of OEM customers, many of whom are also our competitors, for incorporation into diagnostic imaging systems.  The loss of, or reduction in purchasing volume by one or more of these customers would have a material adverse effect on our X-ray Products business.  We also have noticed a trend toward consolidation of diagnostic imaging systems manufacturers over the past few years. The ongoing consolidation of customers, who purchase our X-ray tube products, including the consolidation of these customers into companies that already manufacture X-ray tubes, could result in less predictable and reduced sales of our X-ray tubes products.  In addition, our OEM customers’ products, which use our tubes, could lose market share to competitive products or technologies and, thereby, result in a reduction in our orders and revenues.

IF WE ARE UNABLE TO PROVIDE THE SIGNIFICANT EDUCATION AND TRAINING REQUIRED FOR THE HEALTHCARE MARKET TO ACCEPT OUR PRODUCTS, OUR BUSINESS WILL SUFFER

In order to achieve market acceptance for our Oncology Systems products, we are often required to educate physicians about the use of a new treatment procedure such as IMRT and IGRT, overcome physician objections to some of the effects of the product or its related treatment regimen, convince healthcare payors that the benefits of the product and its related treatment process outweigh its costs and help train qualified physicists in the skilled use of our products. For example, the complexity and dynamic nature of IMRT and IGRT requires significant education of hospitals and physicians regarding the benefits of IMRT and IGRT and the required departures from their customary practices. We have expended and will continue to expend significant resources on marketing and educational efforts to create awareness of IMRT generally and to encourage acceptance and adoption of our IMRT-related products. We expect that IGRT will also require similar substantial education and training efforts to gain awareness, knowledge of benefits versus costs and widespread acceptance and use of IGRT and our products.  The timing of our competitors’ introduction of products and the market acceptance of their products may also make this educational process more difficult.  We cannot be sure that any products we develop will gain any significant market acceptance and market share among physicians, patients and healthcare payors, even if required regulatory approvals are obtained.

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

Our future success depends to a significant extent on the continued service of members of our key executive, technical, sales, marketing and engineering staff. 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. Competition for such personnel can be intense.  We compete for key personnel with other medical equipment and software manufacturers and technology companies, as well as universities and research institutions.  Because the competition for qualified personnel is intense, costs related to compensation could increase significantly if supply decreases or demand increases. If we are unable to hire, train or retain qualified personnel, we will not be able to maintain and expand our business.

IF WE ARE NOT ABLE TO MATCH OUR MANUFACTURING CAPACITY WITH DEMAND FOR OUR PRODUCTS, OUR FINANCIAL RESULTS MAY SUFFER

As a manufacturer of medical devices with a long production cycle, we need to anticipate demand for our products in order to ensure adequate manufacturing capacity.  We cannot assure you that we will be successfully able to do so.  If our manufacturing capacity does not keep pace with product demand, we will not be able to fulfill orders in a timely manner

40

which in turn may have a negative effect on our financial results and overall business.  Conversely, if demand for our products decreases, the fixed costs associated with excess manufacturing capacity may adversely affect our financial results.

WE MAY ATTEMPT TO ACQUIRE NEW BUSINESSES, PRODUCTS OR TECHNOLOGIES, AND IF WE ARE UNABLE TO SUCCESSFULLY COMPLETE THESE ACQUISITIONS OR TO INTEGRATE ACQUIRED BUSINESSES, PRODUCTS, TECHNOLOGY OR EMPLOYEES, WE MAY FAIL TO REALIZE EXPECTED BENEFITS OR HARM OUR EXISTING BUSINESS

Our success will depend, in part, on our ability to expand our product offerings and grow our businesses in response to changing technologies, customer demands and competitive pressures.  In some circumstances, we may determine to do so through the acquisition of complementary businesses, products or technologies rather than through internal development. In fiscal year 2004, we acquired Zmed, Inc, a provider of radiation oncology software and accessories for ultrasound-based, image-guided radiotherapy, stereotactic radiation treatments and image management to our suite of products, OpTx Corporation, a medical oncology information systems software provider, and the service business of Mitsubishi Electric Corp.’s radiation therapy business. In the second quarter of fiscal year 2005, we also acquired Sigma Micro Informatique Conseil, a French radiation and medical oncology information system software provider.  The identification of suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete identified acquisitions.  Furthermore, even if we successfully complete an acquisition, we may not be able to successfully integrate newly acquired organizations, products or technologies into our operations, and the process of integration could be expensive, time consuming and may strain our resources. In addition, we may be unable to retain employees of acquired companies, or retain the acquired company’s customers, suppliers, distributors or other partners who are our competitors or who have close relationships with our competitors.  Consequently, we may not achieve anticipated benefits and could harm our existing business. In addition, future acquisitions could result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or expenses, or other charges such as in-process research and development, any of which could harm our business and affect our financial results.

WE UTILIZE DISTRIBUTORS FOR A PORTION OF OUR SALES, THE LOSS OF WHICH COULD HARM OUR REVENUES IN THE TERRITORY SERVICED BY THESE DISTRIBUTORS

We have strategic relationships with a number of key distributors for sales and service of our products, principally in foreign countries. If these strategic relationships are terminated and not replaced, our revenues and/or ability to service our products in the territories serviced by these distributors could be adversely affected.

BECAUSE OUR PRODUCTS INVOLVE THE DELIVERY OF RADIATION AND DIAGNOSTIC IMAGING OF THE HUMAN BODY AND ARE SUBJECT TO EXTENSIVE REGULATION, PRODUCT DEFECTS MAY RESULT IN MATERIAL PRODUCT LIABILITY OR PROFESSIONAL ERRORS AND OMISSIONS CLAIMS, INVESTIGATION BY REGULATORY AUTHORITIES OR PRODUCT RECALLS THAT COULD HARM FUTURE REVENUES AND REQUIRE US TO PAY MATERIAL UNINSURED CLAIMS

Our business exposes us to potential product liability claims that are inherent in the manufacture, sale, installation, servicing and support of medical devices and software. Because our products involve the delivery of radiation to the human body, collection and storage of patient treatment data for physicians’ use, and diagnostic imaging of the human body, the possibility for significant injury and/or death exists. The tolerance for error in the design, manufacture, installation, servicing, support or use of our products may be small or nonexistent. As such, we may face substantial liability to patients for damages resulting from the faulty design, manufacture, installation, servicing and support of our products.  We may also be subject to claims for property damages or economic loss related to or resulting from any errors or defects in our products, or the installation, servicing and support of our product, or any professional services rendered in conjunction with our products.  In any accident case, we could be subject to legal costs whether or not our products or services were a factor.

In addition, if a product we designed or manufactured is defective, whether due to design or manufacturing defects, improper use of the product or other reasons, we may be required to notify regulatory authorities and/or to recall the product, possibly at our expense. A required notification to a regulatory authority or recall could result in an investigation by regulatory authorities of our products, which could in turn result in required recalls, restrictions on the sale of the products or other civil or criminal penalties.  The adverse publicity resulting from any of these actions could cause customers to review and potentially terminate their relationships with us. These investigations or recalls, especially if accompanied by unfavorable publicity or termination of customer contracts, could result in our incurring substantial costs, losing revenues and damaging our reputation, each of which would harm our business.

41

We have historically maintained limited product liability insurance coverage in amounts we deem sufficient for our business and currently self-insure professional liability/errors and omission liability. The product liability insurance policies that we maintain are expensive and have high deductible amounts and self-insured retentions. In the future, these policies may not be available on acceptable terms or in sufficient amounts, if at all.  In addition, the insurance coverage we have obtained may not be adequate. A successful material claim brought against us relating to a self-insured liability or a liability that is in excess of our insurance coverage, or for which insurance coverage is denied or limited would require us to pay damage amounts that could be substantial and have a material adverse effect on our financial position.

HEALTHCARE REFORMS, CHANGES IN HEALTHCARE POLICIES AND CHANGES TO THIRD PARTY REIMBURSEMENTS FOR RADIATION ONCOLOGY SERVICES MAY AFFECT DEMAND FOR OUR PRODUCTS

The United States government has in the past, and may in the future, consider (and state and local, as well as a number of foreign governments, are considering or have adopted) healthcare policies intended to curb rising healthcare costs. These policies have included, and may in the future include, rationing of government-funded reimbursement for healthcare services and imposing price controls on medical products and services providers. Future significant changes in the healthcare systems in the United States or elsewhere could have a negative impact on the demand for our products and services, and the way we conduct business.  We are unable to predict what healthcare reform legislation or regulation, if any, will be enacted in the United States or elsewhere, whether other healthcare 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.

In addition, sales of some of our products indirectly depend on whether adequate reimbursement is available to our customers for the treatment provided by those products from third-party healthcare payors, such as government healthcare insurance programs, including the Medicare and Medicaid programs, private insurance plans, health maintenance organizations and preferred provider organizations. Once Medicare has made a decision to provide reimbursement for a given treatment, these reimbursement rates are generally reviewed and adjusted by Medicare annually.  Private third-party payors often adopt Medicare reimbursement policies and payment amounts.  As a result, decisions by the Centers for Medicare and Medicaid Services or CMS to reimburse for a treatment, or changes to Medicare’s reimbursement policies or reductions in payment amounts with respect to a treatment would likely extend to third-party payor reimbursement policies and amounts for that treatment as well.  The availability of such reimbursement for treatments using our products and the relevant reimbursement rates can affect our customers’ decisions to purchase our products or the products into which our X-ray tube and flat panel imaging products are integrated. For example, currently Medicare reimbursement rates for IMRT treatments are substantially higher than the reimbursement rates for standard radiotherapy treatments, and recent growth in our business has been driven in part by growth in sales of IMRT and IMRT-related products. Any material adverse change in Medicare’s reimbursement policies regarding IMRT treatments or other procedures using our products, or material reduction in reimbursement rates for such procedures, could reduce demand for our products and have a material adverse effect on our revenues.  In addition, the executive branch of the federal government and the Congress from time to time consider various Medicare and other healthcare reform proposals that could significantly affect both private and public reimbursement for healthcare services. If a proposal that significantly reduced reimbursement rates for our products or procedures using our products were enacted into law, it could adversely affect the demand for these products and our business would suffer.

As a general matter, third-party payors are increasingly challenging the pricing of medical procedures or limiting or prohibiting reimbursement for specific services or devices, 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 can we be sure that procedures using our products will qualify for reimbursement from third-party payors.  Foreign countries also have their own healthcare reimbursement systems, and we cannot be sure that third-party reimbursement will be made available with respect to our products under any foreign reimbursement system.

FLUCTUATIONS IN OUR OPERATING RESULTS, INCLUDING QUARTERLY NET ORDERS AND REVENUES, MAY CAUSE OUR STOCK PRICE TO BE VOLATILE, WHICH COULD CAUSE LOSSES TO OUR STOCKHOLDERS

We have experienced and expect in the future to experience fluctuations in our operating results. Many of our products require significant capital expenditures by our customers. Accordingly, individual product orders and revenues can be quite large in dollar amounts, and the timing of when individual orders or revenues are made could have an effect our quarterly earnings. Timing of order placement from customers and their willingness to commit to purchase products are inherently difficult to predict or forecast.  Once orders are received, factors that may affect whether these orders become revenues are the timing include:

42

•delay in shipment due, for example, to unanticipated construction delays at customer locations where our products are to be installed, cancellations by customers, natural disasters, port strikes or manufacturing difficulties;

•delay in the installation and/or acceptance of a product; or

•a change in a customer’s financial condition or ability to obtain financing.

Furthermore, our quarterly operating results may also be affected by a number of other factors, including:

•changes in our or our competitors’ pricing or discount levels;

•changes or anticipated changes in third-party reimbursement amounts or policies applicable to treatments using our products;

•seasonality of revenues;

•changes in foreign currency exchange rates;

•changes in the relative portion of our revenues represented by our various products;

•timing of the announcement, introduction and delivery of new products or product enhancements by us and by our competitors;

•disruptions in the supply or changes in the costs of raw materials, labor, product components or transportation services;

•changes in the general economic conditions in the regions in which we do business;

•the possibility that unexpected levels of cancellations of orders or backlog may affect certain assumptions upon which we base our forecasts and predictions of future performance; and

•the impact of changing levels of sales to sole purchasers of certain of our X-ray products.

Because many 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 revenue recognition can cause significant variations in operating results from quarter to quarter.  If results fall below the expectation of securities analysts and investors, the trading price of our common stock would almost certainly decline.

We report on a quarterly and annual basis our net orders and backlog results.  It is important to understand that, unlike revenues, net orders and backlog are not governed by the rules of generally accepted accounting principles in the United States, or GAAP and are not within the scope of our audit review; therefore, investors should not interpret our net orders or backlog results in such a manner.  Also, our net 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, appropriate regulatory authorizations and other factors.  Unexpected levels of cancellation of individual orders will reduce the quarterly net orders results and also affect the level of future revenues.  Accordingly, we cannot be sure if or when orders will mature into revenues. Our operating results for net orders and backlog in one or more future periods may fall below the expectations of securities analysts and investors. In that event, the trading price of our common stock would almost certainly decline.

We prepare our financial statements to conform with GAAP. These principles are subject to interpretation by the FASB, AICPA, the SEC and various other bodies. A change in interpretations of, or our application of, these principles can have a significant effect on our reported results and may even affect our reporting of transactions completed before a change is announced.

THE NATURE OF OUR BUSINESS EXPOSES US TO ENVIRONMENTAL CLAIMS OR CLEANUP EXPENSES, WHICH COULD CAUSE US TO PAY SIGNIFICANT AMOUNTS

We are subject to a variety of environmental laws around the world regulating the handling, storage, transport and disposal of hazardous materials and imposing liability for the cleanup of contamination from these materials that do or may create increased costs for some of our operations.  For example, several countries, including those in the EU, are implementing regulations that would require manufacturers to take back, recycle and dispose of products, or bear the cost of such disposal,

43

at the end of the equipment’s useful life and to restrict the use of some hazardous substances in certain products sold in those countries.  These types of regulations impose additional costs for us to do business in such countries as compared to the costs we have today.  In addition, we may be required to incur significant additional costs to comply with future changes in environmental laws and regulations or new laws or regulations.  Although we follow procedures that we consider appropriate under existing regulations, these procedures can be costly and we cannot completely eliminate the risk of contamination or injury from these hazardous materials, and, in the event of such an incident, we could be held liable for any damages that result.  Traditionally, we either have not maintained insurance for or have retained insurance policies with high deductibles or self-insured portions.  In addition, we could be assessed fines or penalties for failure to comply with environmental laws and regulations.  These costs, and any future violations or liability under environmental laws or regulations, could have a material adverse effect on our business.

THE EFFECT OF TERRORISM OR AN OUTBREAK OF EPIDEMIC DISEASES MAY NEGATIVELY AFFECT SALES AND HINDER OUR OPERATIONS

Concerns about terrorism or an outbreak of epidemic diseases such as Severe Acute Respiratory Syndrome, or SARs, especially in our major markets of North America or Europe, could have a negative effect on travel and our business operations, and result in adverse consequences on our revenues and financial performance.  For example, during the third quarter of fiscal year 2003, our sales and business operations in Asia were negatively affected by the outbreak of SARs in Asia.

AS A STRATEGY TO UTILIZE OUR AVAILABLE CASH TO BETTER ASSIST OUR SALES EFFORTS, WE HAVE BEGUN OFFERING EXTENDED PAYMENT TERMS, WHICH MAY POTENTIALLY RESULT IN HIGHER DSO AND GREATER PAYMENT DEFAULTS

In light of the relatively low interest rates on short-term investments and in order to better utilize our strong cash position in a manner to better assist sales of our products, we have begun offering longer or extended payment terms for qualified customers in more circumstances.  While we qualify customers to whom we offer such longer or extended payment terms, there can be no assurance that the financial positions of such customers will not change adversely over the longer time period given for payment.  In such an event, we may experience an increase in payment defaults in our accounts receivable, which will, if not adequately reserved for, adversely affect our revenues and net earnings.  Also, such longer or extended payment terms will likely result in an increase in our DSO.

OUR OPERATIONS ARE VULNERABLE TO INTERRUPTION OR LOSS DUE TO NATURAL DISASTERS, POWER LOSS, STRIKES AND OTHER EVENTS BEYOND OUR CONTROL, WHICH WOULD ADVERSELY AFFECT OUR BUSINESS

We conduct a significant portion of our activities including manufacturing, administration and data processing at facilities located in the State of California and other seismically active areas that have experienced major earthquakes in the past, as well as other natural disasters. We carry limited earthquake insurance for inventory only.  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, it could significantly disrupt our operations, delay or prevent product manufacture and shipment for the time required to repair, rebuild or replace our manufacturing facilities, which could be lengthy, and result in large expenses to repair or replace the facilities.  In addition, our facilities, particularly in the State of California, may be subject to a shortage of available electrical power and other energy supplies.  Such shortages may increase our costs for power and energy supplies or could result in blackouts, which could disrupt the operations of our affected facilities and harm our business.  In addition, our products are typically shipped from a limited number of ports, and any natural disaster, strike or other event blocking shipment from such ports could delay or prevent shipments and harm our business.

OUR STOCKHOLDER RIGHTS PLAN AND 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 that, under specific circumstances, would significantly dilute the equity interest in our company of a person (or persons) seeking to acquire control of our company without the prior approval of our Board of Directors. Our Certificate of Incorporation also includes provisions that may make an acquisition of control of our company without the approval of our Board of Directors more difficult.  Such stockholder rights plan and provisions in our Certificate of Incorporation may discourage take-over attempts and limit the price of our common stock.

44

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

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

Currency Exchange Rate Risk

As a global entity, we are exposed to movements in currency exchange rates. These exposures may change over time as business practices evolve and adverse movements could have a material adverse impact on our financial results.  Our primary exposures related to non-United States dollar denominated sales and expenses throughout Europe, Asia and Australia.

We have significant international transactions in foreign currencies and address related financial exposures through a controlled program of risk management that includes the use of derivative financial instruments. We sell products throughout the world, often in the currency of the customer’s country, and adhere to a policy of hedging firmly committed sales orders. These firmly committed foreign currency sales orders, excluding the amounts relating to the products made outside of the United States, are hedged with forward exchange contracts. We primarily enter into foreign currency forward exchange contracts to reduce the effects of fluctuating currency exchange rates. We do not enter into forward exchange contracts for speculative or trading purposes. The forward exchange contracts range from one to twelve months in original maturity. As of December 31, 2004, we did not have any forward exchange contract with an original maturity greater than twelve months, but we may hedge beyond twelve months in the future.

We also hedge the balance sheet exposures from our various foreign subsidiaries and business units having U.S. dollar functional currencies.  We enter into these monthly foreign exchange forward contracts to minimize the short-term impact of currency fluctuations on assets and liabilities denominated in currencies other than the U.S. dollar functional currency.

The notional value of sold forward exchange contracts for both hedges of foreign currency denominated sales orders and balance sheet exposures from our subsidiaries outstanding as of December 31, 2004 totaled $372.0 million. The notional value of purchased forward exchange contracts for both hedges of foreign currency denominated sales orders and balance sheet exposures from our subsidiaries outstanding as of December 31, 2004 totaled $24.4 million.  The notional amounts of forward exchange contracts are not a measure of our exposure.  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.  A move in currency exchange rates would change the fair value of the contracts, and the fair value of the underlying exposures hedged by the contracts would change in a similar offsetting manner.  Accordingly, we believe that our hedging strategy should yield no material net impact to our results of operations or cash flows.

Interest Rate Risk

Our market risk exposure to changes in interest rates depends primarily on our investment portfolio. Currently, our investment portfolio consists of highly liquid instruments in short-term marketable securities, as well as a portion in long-term marketable securities.  In the unlikely event that interest rates were to decrease substantially, we might reinvest a substantial portion of our investment portfolio at lower interest rates. We would consider additional debt obligations to support general corporate purposes, including working capital requirements, capital expenditures and acquisitions. To date, we have not used derivative financial instruments to hedge the interest rate in our investment portfolio or long-term debt, but may consider the use of derivative instruments in the future.

The principal amount of cash, cash equivalents and marketable securities at December 31, 2004 totaled $ 364 million with a weighted average interest rate of 1.6% and an estimated average tax equivalent yield of 2.1%.  All of our marketable securities at December 31, 2004 were in municipal bonds. Our investment portfolio of municipal bonds and corporate debt securities is classified as held-to-maturity, and any gains or losses relating to changes in interest rates would occur in the unlikely event of liquidation of all or part of the investment portfolio. Our debt of $61 million at December 31, 2004 carried a weighted average fixed interest rate of 6.9% with principal payments due in various installments over the next ten years.

The estimated fair value of our cash and cash equivalents and marketable securities (40% of which was held abroad at December 31, 2004 and could be subject to additional taxation if it was repatriated in the United States) approximated the principal amounts of these financial instruments.

Although payments under some 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.

45

Item 4.Controls and Procedures

(a)Disclosure controls and procedures. Based on our management’s evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b)Changes in internal controls over financial reporting. There were no changes that occurred during the first fiscal quarter of fiscal year 2005 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

46

PART II

OTHER INFORMATION

Item 1.  Legal Proceedings

We are subject to various legal proceedings and claims that are discussed in the Note 8 to the Condensed Consolidated Financial Statements under the caption “Contingencies” and such discussion is incorporated by reference into this item. We are also subject to certain other legal proceedings and claims that have arisen in the ordinary course of business.  While we can provide no assurances as to the ultimate outcome of any litigation, management does not believe any pending legal proceeding will result in a judgment or settlement that would have a material adverse effect on our financial condition, results of operations or cash flows.

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

The following table provides information with respect to the shares of common stock repurchased by us during the first quarter of fiscal year 2005.

Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
October 2, 2004 - October 29, 2004	—	—		—	1,460,000	(1)
October 30, 2004 - November 26, 2004	662,500	$	40.15	662,500	6,797,500	(2)
November 27, 2004 - December 31, 2004	797,500	$	42.88	797,500	6,000,000
Total	1,460,000	$	41.64	1,460,000

(1) On November 12, 2003, we announced that our Board of Directors had authorized a repurchase of up to three million shares (on a pre-July 30, 2004 stock split basis) of our common stock over the period through August 31, 2005.  After repurchases made by us during fiscal year 2004, 1,460,000 shares of common stock remained available for repurchase under this program as of October 1, 2004.  After repurchases made by us during the first quarter of fiscal year 2005, no shares of common stock remained available for repurchase under this program.

(2) On November 19, 2004, we announced that our Board of Directors had authorized a repurchase of up to 6,000,000 shares of our common stock over the period through December 31, 2005.  We will fund the stock repurchases, which will be made from time to time at prices deemed appropriate by management, from our available working capital.  Shares will be retired and cancelled upon repurchase.  As of December 31, 2004, we could repurchase up to 6,000,000 shares of our common stock under this program.

Item 3.  Defaults Upon Senior Securities

None.

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

None.

Item 5.  Other Information

None.

47

Item 6.  Exhibits

(a)Exhibits required to be filed by Item 601 of Regulation S-K:

Exhibit No.	Description
3.2	Registrant’s By-Laws, as amended.
10.1†	Registrant’s Employment Letter dated September 17, 2004 with Dow R. Wilson as Corporate Vice President and President, Oncology Systems, effective January 10, 2005.
10.2†	Registrant's New Compensation Structure for Non-Employee Directors of Varian Medical Systems, Inc.
15.1	Letter Regarding Unaudited Interim Financial Information.
18.1	Letter Regarding Change in Accounting Principles
31.1	Chief Executive Officer Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act.
31.2	Chief Financial Officer Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act.
32.1	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

† Management contract or compensatory arrangement.

48

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Varian Medical Systems, Inc. has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	VARIAN MEDICAL SYSTEMS, INC.
	(Registrant)
Dated: February 7, 2005	By:	/s/ ELISHA W. FINNEY
		Elisha W. Finney
		Senior Vice President, Finance and
		Chief Financial Officer
		(Duly Authorized Officer and
		Principal Financial Officer)

49

INDEX TO EXHIBITS

Exhibit No.	Description
3.2	Registrant’s By-Laws, as amended.
10.1†	Registrant’s Employment Letter dated September 17, 2004 with Dow R. Wilson as Corporate Vice President and President, Oncology Systems, effective January 10, 2005.
10.2†	Registrant's New Compensation Structure for Non-Employee Directors of Varian Medical Systems, Inc.
15.1	Letter Regarding Unaudited Interim Financial Information.
18.1	Letter Regarding Change in Accounting Principles
31.1	Chief Executive Officer Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act.
31.2	Chief Financial Officer Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act.
32.1	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

† Management contract or compensatory arrangement.

50

EX-3.2

Exhibit 3.2

BY-LAWS
OF
VARIAN MEDICAL SYSTEMS, INC.
a Delaware Corporation

As amended on September 22, 2004, to be effective on January 10, 2005.

TABLE OF CONTENTS

ARTICLE I	OFFICES
Section 1.	Registered Office
Section 2.	General Office and Other Offices
ARTICLE II	STOCKHOLDERS’ MEETINGS
Section 3.	Annual Meeting
Section 4.	Business to be Conducted at Annual Meeting
Section 5.	Special Meetings
Section 6.	Place of Meetings
Section 7.	Notice of Meetings
Section 8.	Nominations of Directors
Section 9.	List of Stockholders
Section 10.	Quorum
Section 11.	Voting and Required Vote
Section 12.	Proxies
Section 13.	Inspectors of Election; Polls
Section 14.	Organization
ARTICLE III	BOARD OF DIRECTORS
Section 15.	General Powers, Number, Term of Office
Section 16.	Vacancies
Section 17.	Chairman, Vice Chairman and Lead Director of the Board
Section 18.	Regular Meetings
Section 19.	Special Meetings
Section 20.	Meetings of Non-Management Directors and Independent Directors
Section 21.	Conference Telephone or Other Remote Communication Meetings
Section 22.	Quorum
Section 23.	Organization of Board Meetings
Section 24.	Organization of Non-Management or Independent Directors Meetings
Section 25.	Removal
Section 26.	Action Without a Meeting
Section 27.	Location of Books
Section 28.	Dividends
Section 29.	Compensation of Directors
Section 30.	Additional Powers
ARTICLE IV	COMMITTEES OF DIRECTORS
Section 31.	Designation, Power, Alternate Members
Section 32.	Quorum, Manner of Acting
Section 33.	Minutes

i

ARTICLE V	ADVISORY DIRECTORS
Section 34.	Advisory Directors
ARTICLE VI	OFFICERS
Section 35.	Designation
Section 36.	Election and Term
Section 37.	Removal
Section 38.	Resignations
Section 39.	Vacancies
Section 40.	Chief Executive Officer
Section 41.	President
Section 42.	Chief Operating Officer
Section 43.	Vice Presidents
Section 44.	Secretary
Section 45.	Assistant Secretaries
Section 46.	Chief Financial Officer
Section 47.	Treasurer
Section 48.	Assistant Treasurers
Section 49.	Controller
Section 50.	Assistant Controllers
ARTICLE VII	CONTRACTS, INSTRUMENTS AND PROXIES
Section 51.	Contracts and Other Instruments
Section 52.	Proxies
ARTICLE VIII	CAPITAL STOCK
Section 53.	Stock Certificates; Book-Entry Accounts
Section 54.	Record Ownership
Section 55.	Record Dates
Section 56.	Transfer of Stock
Section 57.	Lost, Stolen or Destroyed Certificates
Section 58.	Terms of Preferred Stock
ARTICLE IX	INDEMNIFICATION
Section 59.	Actions, Suits or Proceedings Other Than By or in the Right of the Corporation
Section 60.	Actions or Suits by or in the Right of the Corporation
Section 61.	Indemnification for Costs, Charges and Expenses of Successful Party
Section 62.	Advancement of Costs, Charges and Expenses
Section 63.	Determination of Right to Indemnification
Section 64.	Other Rights; Continuation of Right to Indemnification; Limitations
Section 65.	Indemnification of Others
Section 66.	Insurance; Contracts; Funding
Section 67.	Savings Clause

ii

ARTICLE X	MISCELLANEOUS
Section 68.	Corporate Seal
Section 69.	Fiscal Year
Section 70.	Auditors
Section 71.	Waiver of Notice
ARTICLE XI	AMENDMENT TO BY-LAWS
Section 72.	Amendments

iii

BY-LAWS
OF
VARIAN MEDICAL SYSTEMS, INC.
A DELAWARE CORPORATION

(Effective January 10, 2005)

ARTICLE I

OFFICES

Section 1.Registered Office.  The name of the registered agent of Varian Medical Systems, Inc.  (the “Corporation”) is The Corporation Trust Company and the registered office of the Corporation shall be located in the City of Wilmington, County of New Castle, State of Delaware.

Section 2.General Office and Other Offices.  The Corporation shall have its General Offices in the City of Palo Alto, State of California (the “General Offices”), and may also have offices at such other places in or outside the State of Delaware as the Board of Directors of the Corporation (the “Board of Directors”) may from time to time designate or the business of the Corporation may require.

ARTICLE II

STOCKHOLDERS’ MEETINGS

Section 3.Annual Meeting.  An annual meeting of stockholders shall be held on such day and at such time as may be designated by the Board of Directors for the purpose of electing directors and for the transaction of such other business as properly may come before such meeting.  Any previously scheduled annual meeting of the stockholders may be postponed by resolution of the Board of Directors upon public notice given on or prior to the date previously scheduled for such annual meeting of stockholders.

Section 4.Business to be Conducted at Annual Meeting.

(a)At an annual meeting of stockholders, only such business shall be conducted as shall have been brought before the meeting (i) pursuant to the Corporation’s notice of the meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who is a stockholder of record at the time of giving of the notice provided for in this By-Law, who shall be entitled to vote at such meeting and who shall have complied with the notice procedures set forth in this By-Law.

(b)For business to be properly brought before an annual meeting by a stockholder pursuant to Section 4(a)(iii) of this By-Law, notice in writing must be delivered or mailed to the Secretary and received at the General Offices, not less than 60 days nor more than 90 days prior to the first anniversary of the date on which the Corporation first mailed its proxy materials for the preceding year’s annual meeting of stockholders; provided, however, that in the event that the date of the meeting is advanced by more than 30 days or delayed by more than 60

days from such meeting’s anniversary date, notice by the stockholder must be received not earlier than the 90th day prior to such date of mailing of proxy materials and not later than the close of business on the later of the 60th day prior to such date of mailing of proxy materials or the 10th day following the day on which public announcement of the date of the annual meeting is first made.  Such stockholder’s notice shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business to be brought before the annual meeting and the reasons for conducting such business at such meeting; (ii) the name and address, as they appear on the Corporation’s books, of the stockholder proposing such business, and the name and address of the beneficial owner, if any, on whose behalf the proposal is made; (iii) the class and number of shares of the Corporation’s stock which are beneficially owned by the stockholder, and by the beneficial owner, if any, on whose behalf the proposal is made; and (iv) any material interest of the stockholder, and of the beneficial owner, if any, on whose behalf the proposal is made, in such business.  For purposes of these By-Laws, “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

(c)Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this By-Law.  The chairman of the meeting may, if the facts warrant, determine that the business was not properly brought before the meeting in accordance with the provisions of this By-Law; and if the chairman should so determine, the chairman shall so declare to the meeting, and any such business not properly brought before the meeting shall not be transacted.  Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law.  Nothing in this By-Law shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act, and any such proposal so included shall be deemed timely given for purposes of this By-Law.

Section 5.Special Meetings.  Special meetings of stockholders for any proper purpose or purposes, unless otherwise provided by the General Corporation Law of the State of Delaware, may be called by the Chairman of the Board or the Chief Executive Officer, or in the absence of each of them, by the Vice Chairman of the Board, or by the Secretary at the written request of a majority of the directors.  Business transacted at a special meeting of stockholders shall be confined to the purpose or purposes of the meeting as stated in the notice of the meeting.  Any previously scheduled special meeting of the stockholders may be postponed by resolution of the Board of Directors upon notice by public announcement given on or prior to the date previously scheduled for such special meeting of stockholders.

Section 6.Place of Meetings.  All meetings of stockholders shall be held at such place as may be determined by resolution of the Board of Directors; provided, however, that the Board may, in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication as authorized by Section 211(a)(2) of the General Corporation Law of the State of Delaware.

2

Section 7.Notice of Meetings.

(a)Except as otherwise required by applicable law, notice of each meeting of the stockholders, whether annual or special, shall, at least 10 days but not more than 60 days before the date of the meeting, be given to each stockholder of record entitled to vote at the meeting by mailing such notice in the U.S. mail, postage prepaid, addressed to such stockholder at such stockholder’s address as the same appears on the records of the Corporation.  Such notice shall state the place, date and hour of the meeting, the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, and in the case of a special meeting, shall also state the purpose or purposes thereof.

(b)Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to a stockholder given by the Corporation may be given by a form of electronic transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the Corporation. Any such consent shall be deemed revoked (i) if the Corporation is unable to deliver by electronic transmission two consecutive notices given by the Corporation in accordance with such consent and (ii) such inability becomes known to the Secretary or an Assistant Secretary of the Corporation or to the transfer agent or other person responsible for the giving of notice; provided, however, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action.

(c)Notice given pursuant to subsection (a) of this section shall be deemed given:  (1) if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice; (2) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; (3) if by a posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and (4) if by any other form of electronic transmission, when directed to the stockholder.  An affidavit of the Secretary or an Assistant Secretary or of the transfer agent or other agent of the Corporation that the notice has been given by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein.

(d)For purposes of these By-Laws, “electronic transmission” means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.

Section 8.Nominations of Directors.

(a)Only persons who are nominated in accordance with the procedures set forth in these By-Laws shall be eligible for election as directors.  Nominations of persons for election to the Board of Directors may be made at a meeting of stockholders (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who is a stockholder of record at the time of giving of the notice provided for in this By-Law, who shall

3

be entitled to vote for the election of directors at the meeting and who complies with the notice procedures set forth in this By-Law.

(b)Nominations by stockholders shall be made pursuant to notice in writing, delivered or mailed to the Secretary and received at the General Offices (i) in the case of an annual meeting, not less than 60 days nor more than 90 days prior to the first anniversary of the date on which the Corporation first mailed its proxy materials for the preceding year’s annual meeting of stockholders, provided, however, that in the event that the date of the meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder must be received not earlier than the 90th day prior to such date of mailing of proxy materials and not later than the close of business on the later of the 60th day prior to such date of mailing of proxy materials or the 10th day following the day on which public announcement of the date of the meeting is first made; or (ii) in the case of a special meeting at which directors are to be elected, not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement of the date of the meeting and of the nominees proposed by the Board of Directors to be elected at such meeting is first made.  In the case of a special meeting of stockholders at which directors are to be elected, stockholders may nominate a person or persons (as the case may be) for election only to such position(s) as are specified in the Corporation’s notice of meeting as being up for election at such meeting.  Such stockholder’s notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director, all information relating to such person that would be required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person’s written consent to being named as a nominee and to serving as a Director if elected); (ii) as to the stockholder giving the notice, the name and address, as they appear on the Corporation’s books, of such stockholder and the class and number of shares of the Corporation’s stock which are beneficially owned by such stockholder; and (iii) as to any beneficial owner on whose behalf the nomination is made, the name and address of such person and the class and number of shares of the Corporation’s stock which are beneficially owned by such person.  At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary that information required to be set forth in a stockholder’s notice of nomination that pertains to the nominee.  Notwithstanding anything in this By-Law to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public statement naming all the nominees for Director or specifying the size of the increased Board of Directors made by the Corporation at least 70 days prior to the first anniversary of the preceding year’s annual meeting, a stockholder’s notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the General Offices not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation.

(c)No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in these By-Laws.  The chairman of the meeting may, if the facts warrant, determine that a nomination was not made in accordance with the procedures prescribed in this By-Law; and if the chairman should so determine, the chairman shall so declare to the meeting, and the defective nomination shall be

4

disregarded.  Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act, and the rules and regulations thereunder with respect to the matters set forth in this By-Law.

Section 9.List of Stockholders.

(a)The Secretary of the Corporation shall prepare, at least 10 days before each meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder.  Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting: (i) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (ii) during ordinary business hours, at the principal place of business of the Corporation.  In the event that the Corporation determines to make the list available on an electronic network, the Corporation may take reasonable steps to ensure that such information is available only to stockholders of the Corporation.  If the meeting is to be held at a place, then the list shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.  If the meeting is to held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting.

(b)The stock ledger of the Corporation shall be the only evidence as to the identity of the stockholders entitled (i) to vote in person or by proxy at any meeting of stockholders, or (ii) to exercise the rights in accordance with applicable law to examine the stock ledger, the list required by this By-Law or the books and records of the Corporation.

Section 10.Quorum.  The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for the transaction of any business at all meetings of the stockholders, except as otherwise provided by applicable law, by the Certificate of Incorporation or by these By-Laws.  The stockholders present at any duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of sufficient stockholders to render the remaining stockholders less than a quorum.  Whether or not a quorum is present, either the Chairman of the meeting or a majority of the stockholders entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting.  If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.  At such adjourned meeting at which the requisite amount of voting stock shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed.

Section 11.Voting and Required Vote.  Subject to the provisions of the Certificate of Incorporation, each stockholder shall, at every meeting of stockholders, be entitled to one vote for each share of capital stock held by such stockholder.  Subject to the provisions of the

5

Certificate of Incorporation and applicable law, directors shall be chosen by the vote of a plurality of the shares present in person or represented by proxy at the meeting; and all other questions shall be determined by the affirmative vote of the majority of shares present in person or represented by proxy at the meeting.  Elections of directors shall be by written ballot.

Section 12.Proxies.  Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy, provided the instrument authorizing such proxy to act shall have been executed in writing in the manner prescribed by applicable law.  No proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period.

Section 13.Inspectors of Election; Polls.  Before each meeting of stockholders, the Chairman of the Board or another officer of the Corporation designated by resolution of the Board of Directors shall appoint one or more inspectors of election for the meeting and may appoint one or more inspectors to replace any inspector unable to act.  If any of the inspectors appointed shall fail to attend, or refuse or be unable to serve, substitutes shall be appointed by the chairman of the meeting.  Each inspector shall have such duties as are provided by applicable law, and shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such person’s ability.  The chairman of the meeting shall fix and announce at the meeting the date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting.

Section 14.Organization.  The Chairman of the Board of Directors, or in the Chairman’s absence, (i) the Chief Executive Officer, (ii) the Vice Chairman of the Board of Directors, (iii) the President, or (iv) in the absence of each of them, a chairman chosen by a majority of the directors present, shall act as chairman of the meetings of the stockholders, and the Secretary or, in the Secretary’s absence, an Assistant Secretary or any employee of the Corporation appointed by the chairman of the meeting, shall act as secretary of the meeting.  The order of business and the procedure at any meeting of stockholders shall be determined by the chairman of the meeting.

ARTICLE III

BOARD OF DIRECTORS

Section 15.General Powers, Number, Term of Office.  The business of the Corporation shall be managed under the direction of its Board of Directors.  The Board of Directors shall be composed of a majority of “independent directors” as defined under the rules of the New York Stock Exchange and the Exchange Act (“Independent Directors”).  Subject to the rights of the holders of any series of preferred stock, $0.01 par value per share, of the Corporation (“Preferred Stock”) to elect additional directors under specified circumstances, the number of directors of the Corporation shall be fixed from time to time exclusively by resolution of a majority of the then authorized number of directors of the Corporation (the number of then authorized directors of the Corporation is referred to herein as the “Whole Board”), but in no event shall the number of directors be fewer than three.  The directors, other than those who may be elected solely by the holders of any series of Preferred Stock (unless the relevant Certificate of Designation for such Preferred Stock so provides), shall be divided into three classes, as

6

nearly equal in number as possible, designated “Class I,” “Class II” and “Class III.” Directors of each class shall serve for a term ending on the third annual meeting of stockholders following the annual meeting at which such class was elected.  The foregoing notwithstanding, each director shall serve until his or her successor shall have been duly elected and qualified, unless such director shall die, resign, retire or be disqualified or removed.  At each annual election, the directors chosen to succeed those directors whose terms then expire shall be identified as being of the same class as the directors they succeed.  If for any reason the number of directors in the various classes shall not be as nearly equal as possible, the Board of Directors may redesignate any director into a different class in order that the balance of directors in such classes shall be as nearly equal as possible.

Section 16.Vacancies.  Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, vacancies resulting from one or more directors’ death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, or by a sole remaining director, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such director’s successor shall have been duly elected and qualified.  No decrease in the number of authorized directors constituting the Board of Directors shall shorten the term of any incumbent director.

Section 17.Chairman, Vice Chairman and Lead Director of the Board.  The Chairman of the Board of Directors shall be chosen from among the directors.  The Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors, except as may be otherwise required under applicable law.  The Chairman shall act in an advisory capacity with respect to matters of policy and other matters of importance pertaining to the affairs of the Corporation.  The Chairman, alone or with the Chief Executive Officer, the President, and/or the Secretary shall sign and send out reports and other messages which are to be sent to stockholders from time to time.  The Chairman shall also perform such other duties as may be assigned to the Chairman by these By-Laws or the Board of Directors.  The Board of Directors may also choose a Vice Chairman of the Board of Directors from among the directors.  The Vice Chairman if chosen shall perform such duties as may be assigned by these By-Laws, the Board of Directors or the Chairman of the Board.  When the Chairman of the Board and the Chief Executive Officer (CEO) are the same person, the Board of Directors shall select a Lead Director.  The Lead Director shall perform such duties as may be assigned by the Board of Directors or these By-Laws.

Section 18.Regular Meetings.  Following the annual meeting of stockholders, the first meeting of each newly elected Board of Directors may be held, without notice, on the same day and at the same place as such stockholders’ meeting.  The Board of Directors by resolution may provide for the holding of regular meetings and may fix the times and places at which such meetings shall be held.  Notice of regular meetings shall not be required, provided that whenever the time or place of regular meetings shall be fixed or changed, notice of such action shall be given promptly to each director who was not present at the meeting at which such action was taken.

7

Section 19.Special Meetings.  Special Meetings of the Board of Directors shall be held whenever called by the Chairman of the Board of Directors, the Vice Chairman of the Board, the Lead Director, the Chief Executive Officer, the president, or in the absence of each of them, by the Secretary at the written request of a majority of the directors.

Section 20.Meetings of Non-Management Directors and Independent Directors.  The non-management directors of the Corporation shall schedule regular executive sessions in which such directors meet without representatives of the Corporation’s management present to discuss significant corporate governance matters, executive review, management succession and other items.  If the group of non-management directors includes directors who are not Independent Directors, the Independent Directors shall also meet at least once a year in an executive session including only Independent Directors.

Section 21.Conference Telephone or Other Remote Communication Meetings.  Members of the Board of Directors or any committee thereof, may participate in a meeting of the Board of Directors or such committee by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting.

Section 22.Quorum.  One-half of the total number of directors constituting the Whole Board, but not less than two, shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such required number of directors for a quorum is present at a meeting, a majority of the directors present may adjourn the meeting from time to time without further notice.  Except as otherwise specifically provided by applicable law, the Certificate of Incorporation or these By-Laws, the act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors.

Section 23.Organization of Board Meetings.  At each meeting of the Board of Directors, the Chairman of the Board or, in the Chairman’s absence, (i) the Chief Executive Officer, if a member of the Board of Directors, (ii) the Vice Chairman of the Board, (iii) the President, if a member of the Board of Directors, or (iv) in the absence of each of them, a chairman chosen by a majority of the directors present, shall act as chairman of the meeting, and the Secretary or, in the Secretary’s absence, an Assistant Secretary or any employee of the Corporation appointed by the chairman of the meeting, shall act as secretary of the meeting.

Section 24.Organization of Non-Management or Independent Directors Meetings.  The Lead Director, when chosen as provided in Section 17 above, shall chair each meeting of non-management or Independent Directors as provided in Section 20.  At all other meetings of the Board of Directors, the Chairman of the Board or, in the Chairman’s absence (i) the Chief Executive Officer, if a member of the Board of Directors, (ii) the Vice Chairman of the Board, (iii) the Lead Director, (iv) the President, if a member of the Board of Directors, or (v) in the absence of each of them, a chairman chosen by a majority of the directors present, shall act as chairman of the meeting, and the Secretary or, in the Secretary’s absence, an Assistant Secretary or any employee of the Corporation appointed by the chairman of the meeting, shall act as secretary of the meeting.

8

Section 25.Removal.  Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, any director may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least a majority of the voting power of the then outstanding Voting Stock, voting together as a single class.  For purposes of these By-Laws, “Voting Stock” shall mean the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors.

Section 26.Action Without a Meeting.  Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board of Directors or committee, as the case may be, consent thereto in writing, or by electronic transmission and the writing or writings or electric transmission or transmissions are filed with the minutes of proceedings of the Board of Directors or committee.  Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

Section 27.Location of Books.  Except as otherwise provided by resolution of the Board of Directors and subject to applicable law, the books of the Corporation may be kept at the General Offices and at such other places as may be necessary or convenient for the business of the Corporation.

Section 28.Dividends.  Subject to the provisions of the Certificate of Incorporation and applicable law, dividends upon the capital stock of the Corporation may be declared by the Board of Directors at any regular or special meeting.  Dividends may be paid in cash, in property, or in shares of the Corporation’s capital stock.

Section 29.Compensation of Directors.  Directors shall receive such compensation and benefits as may be determined by resolution of the Board of Directors for their services as members of the Board of Directors and committees.  Directors shall also be reimbursed for their expenses of attending Board of Directors and committee meetings.  Nothing contained herein shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor.

Section 30.Additional Powers.  In addition to the powers and authorities by these By-Laws expressly conferred upon it, the Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders.

ARTICLE IV

COMMITTEES OF DIRECTORS

Section 31.Designation, Power, Alternate Members.  The Board of Directors may, by resolution or resolutions passed by a majority of the Whole Board, designate an Executive Committee, an Audit Committee, a Compensation and Management Development Committee, a Nominating and Corporate Governance Committee and one or more additional committees, each

9

committee to consist of one or more of the directors of the Corporation; provided, however, that the Audit Committee, the Compensation and Management Development Committee and the Nominating and Corporate Governance Committee shall consist of three or more Independent Directors of the Corporation. Any such committee, to the extent provided in said resolution or resolutions and in any subsequent resolutions or any charter passed by a majority of the Whole Board and, subject to any limitations provided by applicable law, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation.The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee.  The term of office of the members of each committee shall be as fixed from time to time by the Board of Directors and any committee member may be removed, with our without cause, at any time by the Board of Directors; provided, however, that any committee member who ceases to be a member of the Board of Directors shall automatically cease to be a committee member.

Section 32.Quorum, Manner of Acting.  At any meeting of a committee, the presence of one-halfof its members then in office shall constitute a quorum for the transaction of business; and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of the committee; provided, however, that in the event that any member or members of the committee is or are in any way interested in or connected with any other party to a contract or transaction being approved at such meeting, or are themselves parties to such contract or transaction, the act of a majority of the members present who are not so interested or connected, or are not such parties, shall be the act of the committee.  Each committee may provide for the holding of regular meetings, make provision for the calling of special meetings and, except as otherwise provided in these By-Laws or by resolution of the Board of Directors, make rules for the conduct of its business.

Section 33.Minutes.  The committees shall keep minutes of their proceedings and report the same to the Board of Directors when required; but failure to keep such minutes shall not affect the validity of any acts of the committee or committees.

ARTICLE V

ADVISORY DIRECTORS

Section 34.Advisory Directors.  The Board of Directors may, by resolution adopted by a majority of the Whole Board, appoint such Advisory Directors as the Board of Directors may from time to time determine.  The Advisory Directors shall have such advisory responsibilities as the Chairman of the Board may designate and the term of office of such Advisory Directors shall be as fixed by the Board of Directors.

ARTICLE VI

OFFICERS

Section 35.Designation.  The officers of the Corporation shall be the Chief Executive Officer, a President, a Secretary, a Chief Financial Officer, a Treasurer and a Controller.  The

10

Board of Directors may also elect a Chief Operating Officer, one or more Executive Vice Presidents, Senior Vice Presidents, Group Vice Presidents, Vice Presidents, Assistant Secretaries, Assistant Treasurers, Assistant Controllers and such other officers as it shall deem necessary.  Any number of offices may be held by the same person.

Section 36.Election and Term.  At its first meeting after each annual meeting of stockholders, the Board of Directors shall elect the officers of the Corporation and at any time thereafter the Board of Directors may elect additional officers of the Corporation, and each such officer shall hold office until the officer’s successor is elected and qualified or until the officer’s earlier death, resignation or removal.  Alternatively, at the last regular meeting of the Board of Directors prior to an annual meeting of stockholders, the Board of Directors may elect the officers of the Corporation, contingent upon the election of the persons nominated to be directors by the Board of Directors; and each such officer so elected shall hold office until the officer’s successor is elected and qualified or until the officer’s earlier death, resignation or removal.

Section 37.Removal.  Any officer shall be subject to removal or suspension at any time, for or without cause, by the affirmative vote of a majority of the Whole Board.

Section 38.Resignations.  Any officer may resign at any time by giving written notice to the Chairman of the Board, the President or to the Secretary.  Such resignation shall take effect upon receipt thereof or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

Section 39.Vacancies.  A vacancy in any office because of death, resignation, removal or any other cause may be filled for the unexpired portion of the term by the Board of Directors.

Section 40.Chief Executive Officer.  The Chief Executive Officer shall have the general and active management and supervision of the business of the Corporation.  The Chief Executive Officer, if a member of the Board of Directors, shall, in the absence of the Chairman of the Board, preside at all meetings of the stockholders and of the Board of Directors.  The Chief Executive Officer shall see that all orders and resolutions of the Board of Directors are carried into effect.  The Chief Executive Officer shall also perform such other duties as may be assigned to the Chief Executive Officer by these By-Laws or the Board of Directors.  The Chief Executive Officer shall designate who shall perform the duties of the Chief Executive Officer in the Chief Executive Officer’s absence.

Section 41.President.  The President shall perform such duties as may be assigned to the President by these By-Laws, the Board of Directors or, if applicable, the Chief Executive Officer.

Section 42.Chief Operating Officer.  The Chief Operating Officer, if one shall be elected, shall perform such duties as may be assigned to the Chief Operating Officer by these By-Laws, the Board of Directors, the Chief Executive Officer or the President.

Section 43.Vice Presidents.  Each Executive Vice President, Senior Vice President, Group Vice President and each other Vice President shall perform the duties and functions and

11

exercise the powers assigned to such officer by these By-Laws, the Board of Directors, the Chief Executive Officer, the President or, if one shall be elected, the Chief Operating Officer.

Section 44.Secretary.  The Secretary shall attend all meetings of the Board of Directors and of the stockholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose.  The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors and, when appropriate, shall cause the corporate seal to be affixed to any instruments executed on behalf of the Corporation.  The Secretary shall also perform all duties incident to the office of Secretary and such other duties as may be assigned to the Secretary by these By-Laws, the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President.

Section 45.Assistant Secretaries.  The Assistant Secretaries shall, during the absence of the Secretary, perform the duties and functions and exercise the powers of the Secretary.  Each Assistant Secretary shall perform such other duties as may be assigned to such Assistant Secretary by these By-Laws, the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President or the Secretary.

Section 46.Chief Financial Officer.  The Chief Financial Officer shall have overall responsibility for causing (1) the funds and securities of the Corporation to be deposited in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors or by any officer or officers authorized by the Board of Directors to designate such depositories; (2) the disbursement of funds of the Corporation when properly authorized by vouchers prepared and approved by the Controller; (3) the investment of funds of the Corporation when authorized by the Board of Directors or a committee thereof; and (4) to be kept full and accurate account of receipts and disbursements in books of the Corporation.  The Chief Financial Officer shall render to the Board of Directors, the Chief Executive Officer, or the President, whenever requested, an account of all transactions as Chief Financial Officer and shall also perform all duties incident to the office of Chief Financial Officer and such other duties as may be assigned to the Chief Financial Officer by these By-Laws, the Board of Directors, the Chief Executive Officer, or the President.

Section 47.Treasurer.  The Treasurer shall have the custody of the funds and securities of the Corporation and shall deposit them in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors or by any officer or officers authorized by the Board of Directors to designate such depositories; disburse funds of the Corporation when properly authorized by vouchers prepared and approved by the Controller; and invest funds of the Corporation when authorized by the Board of Directors or a committee thereof.  The Treasurer shall render to the Board of Directors, the Chief Executive Officer, the President or the Chief Financial Officer, whenever requested, an account of all transactions as Treasurer and shall also perform all duties incident to the office of Treasurer and such other duties as may be assigned to the Treasurer by these By-Laws, the Board of Directors, the Chief Executive Officer, the President or the Chief Financial Officer.

Section 48.Assistant Treasurers.  The Assistant Treasurers shall, during the absence of the Treasurer, perform the duties and functions and exercise the powers of the Treasurer.  Each Assistant Treasurer shall perform such other duties as may be assigned to the Assistant

12

Treasurer by these By-Laws, the Board of Directors, the Chief Executive Officer, the President, the Chief Financial Officer or the Treasurer.

Section 49.Controller.  The Controller shall serve as the principal accounting officer of the Corporation and shall keep full and accurate account of receipts and disbursements in books of the Corporation and render to the Board of Directors, the Chief Executive Officer, the President, the Chief Financial Officer, whenever requested, an account of all transactions as Controller and of the financial condition of the Corporation.  The Controller shall also perform all duties incident to the office of Controller and such other duties as may be assigned to the Controller by these By-Laws, the Board of Directors, the Chief Executive Officer, or the President.

Section 50.Assistant Controllers.  The Assistant Controllers shall, during the absence of the Controller, perform the duties and functions and exercise the powers of the Controller.  Each Assistant Controller shall perform such other duties as may be assigned to such officer by these By-Laws, the Board of Directors, the Chief Executive Officer, the President or the Controller.

ARTICLE VII

CONTRACTS, INSTRUMENTS AND PROXIES

Section 51.Contracts and Other Instruments.  Except as otherwise required by applicable law, the Certificate of Incorporation or these By-Laws, any contracts or other instruments may be signed by such person or persons as from time to time may be designated by the Board of Directors or by any officer or officers authorized by the Board of Directors to designate such signers; and the Board of Directors or such officer or officers may determine that the signature of any such authorized signer may be facsimile.  Such authority may be general or confined to specific instances as the Board of Directors or such officer or officers may determine.

Section 52.Proxies.  Except as otherwise provided by resolution of the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President, the Vice Chairman of the Board, any Vice President, the Treasurer and any Assistant Treasurer, the Controller and any Assistant Controller, the Secretary and any Assistant Secretary of the Corporation, shall each have full power and authority, in behalf of the Corporation, to exercise any and all rights of the Corporation with respect to any meeting of stockholders of any corporation in which the Corporation holds stock, including the execution and delivery of proxies therefor, and to consent in writing to action by such corporation without a meeting.

ARTICLE VIII

CAPITAL STOCK

Section 53.Stock Certificates; Book-Entry Accounts.  The interest of each stockholder of the Corporation shall be evidenced by (a) certificates signed by, or in the name of the Corporation by, the Chairman of the Board, the Chief Executive Officer, the President, any Vice

13

President, the Chief Financial Officer or the Treasurer, and by the Secretary or any Assistant Secretary of the Corporation, certifying the number of shares owned by such holder in the Corporation, or (b) registration in book-entry accounts without certificates for shares of stock in such form as the appropriate officers of the Corporation may from time to time prescribe.  Any of or all the signatures on a stock certificate may be a facsimile.  In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue.

Section 54.Record Ownership.  The Corporation shall be entitled to treat the person in whose name any share, right or option is registered as the owner thereof, for all purposes, and shall not be bound to recognize any equitable or other claim to or interest in such share, right or option on the part of any other person, whether or not the Corporation shall have notice thereof, except as otherwise provided by applicable law.

Section 55.Record Dates.  In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action.

Section 56.Transfer of Stock.  Transfers of shares of stock of the Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by the registered holder’s attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or a transfer agent of the Corporation, and on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon, or by appropriate book-entry procedures.

Section 57.Lost, Stolen or Destroyed Certificates.  The Board of Directors may authorize a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of the fact by the person claiming the certificate of stock to be lost, stolen or destroyed.  When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or the owner’s legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against the Corporation on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate.

Section 58.Terms of Preferred Stock.  The provisions of these By-Laws, including those pertaining to voting rights, election of directors and calling of special meetings of stockholders, are subject to the terms, preferences, rights and privileges of any then outstanding class or series of Preferred Stock as set forth in the Certificate of Incorporation and in any

14

resolutions of the Board of Directors providing for the issuance of such class or series of Preferred Stock; provided, however, that the provisions of any such Preferred Stock shall not affect or limit the authority of the Board of Directors to fix, from time to time, the number of directors which shall constitute the Whole Board as provided in Section 16 above, subject to the right of the holders of any class or series of Preferred Stock to elect additional directors as and to the extent specifically provided by the provisions of such Preferred Stock.

ARTICLE IX

INDEMNIFICATION

Section 59.Actions, Suits or Proceedings Other Than By or in the Right of the Corporation.  In the case of any person who, by reason of the fact that such person is or was a director, officer or employee of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of an affiliate of the Corporation or by reason of anything done or not done by such person was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or arbitration, whether civil, criminal, administrative or investigative in nature other than an action by or in the right of the Corporation, the Corporation shall to the fullest extent permitted by applicable law indemnify such person against all expenses (including attorneys’ fees), costs, judgments, penalties, fines, and amounts paid in settlement, actually and reasonably incurred by such person or on such person’s behalf in connection with such action, suit or proceeding and any appeal therefrom, if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that such person’s conduct was unlawful.

Section 60.Actions or Suits by or in the Right of the Corporation.  In the case of any person who, by reason of the fact that such person is or was a director, officer or employee of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of an affiliate of the Corporation or by reason of anything done or not done by such person, was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit brought by or in the right of the Corporation to procure a judgment in its favor, the Corporation shall to the fullest extent permitted by applicable law indemnify such person against all expenses (including attorneys’ fees) and costs actually and reasonably incurred by such person or on such person’s behalf in connection with such action or suit and any appeal therefrom, if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made under this Section 60 in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation for gross negligence or misconduct in the performance of such person’s duty to the Corporation, unless and only to the extent that the Court of Chancery of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of such liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such costs, charges and expenses which the Court of Chancery or such other court shall deem proper.

Section 61.Indemnification for Costs, Charges and Expenses of Successful Party.  Notwithstanding any other provision of this Article IX, to the extent that any person entitled to

15

indemnification pursuant to Sections 59 or 60 of these By-Laws (an “Indemnitee”) has been successful on the merits or otherwise in defense of any action, suit, proceeding or arbitration or appeal thereof (a “Proceeding”) referred to in Sections 59 or 60 or in defense of any claim, issue or matter described therein, the Corporation shall indemnify such Indemnitee against expenses (including attorneys’ fees) and costs actually and reasonably incurred by such Indemnitee in connection therewith; provided that such person shall not be entitled to indemnification in connection with any Proceeding commenced by such person unless such indemnification has been provided by the Corporation in the specific Proceeding.

Section 62.Advancement of Costs, Charges and Expenses.  All reasonable expenses (including attorney’s fees) and costs incurred by an Indemnitee in connection with a Proceeding shall be paid by the Corporation, in advance of a determination of right to indemnification pursuant to Section 63 of these By-Laws or the final disposition of such Proceeding, upon the written request of such director or officer (which request shall be directed to the Secretary of the Corporation and include a statement or statements reasonably evidencing the expenses, costs and/or charges incurred by such person); provided, however, that the payment of such expenses in advance of the determination of right to indemnification or the final disposition of such Proceeding shall be made only upon receipt of an undertaking by or on behalf of such Indemnitee to repay such amount if it shall ultimately be determined that such Indemnitee is not entitled to be indemnified by the Corporation as authorized in this Article IX.  The Corporation shall so advance expenses, costs and other charges within 20 days’ of receipt of such request (together with such statement or statements) from such Indemnitee.

Section 63.Determination of Right to Indemnification.  Any indemnification under Sections 59 or 60 of these By-Laws (unless ordered by a court) shall be paid by the Corporation only as authorized in the specific case upon a determination that indemnification is proper in the circumstances because the Indemnitee has met the applicable standard of conduct set forth in Sections 59 and 60 of these By-Laws.  Such determination shall be made (i) by the Board of Directors by a majority vote or decision of a quorum consisting of directors who are or were not parties to or a subject of the Proceeding in respect of which indemnification is being sought by the Indemnitee, (ii) if such a vote or decision is not obtainable, or, even if obtainable, if a majority of such disinterested directors so directs, by Independent Legal Counsel in a written opinion to the Board of Directors, or (iii) by the stockholders.  In the event such determination is to be made by Independent Legal Counsel, a majority of such disinterested directors shall select the Independent Legal Counsel.  “Independent Legal Counsel” means a law firm or a member of a law firm that neither presently is, nor in the past five years has been, retained to represent: (x) the Corporation or the Indemnitee in any matter material to either such party or (y) any other party to the Proceeding giving rise to a claim for indemnification under this Article IX. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Corporation or the Indemnitee in an action to determine the Indemnitee’s rights under this Article IX.

(i) To obtain indemnification under this Article IX, an Indemnitee shall submit to the Secretary of the Corporation a written request, including such documentation and information as is reasonably available to the Indemnitee and reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification (the

16

“Supporting Documentation”). The determination of the Indemnitee’s entitlement to indemnification shall be made not later than 60 days after receipt by the Corporation of the written request for indemnification together with the Supporting Documentation. The Secretary shall, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that the Indemnitee has requested indemnification.

(ii)  In the event that a determination is made pursuant to this Section 63 that the Indemnitee is not entitled to indemnification under this Article IX, (A) the Indemnitee shall be entitled to seek an adjudication of entitlement to such indemnification either, at the Indemnitee’s sole option, in (x) an appropriate court of the State of Delaware or any other court of competent jurisdiction or (y) an arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association; and (B) any such judicial proceeding or arbitration shall be de novo and the Indemnitee shall not be prejudiced by reason of such prior adverse determination.

Section 64.Other Rights; Continuation of Right to Indemnification; Limitations.  The indemnification (including attorney’s fees) and advancement of costs provided by, or granted pursuant to, this Article IX shall not be deemed exclusive of any other rights to which an Indemnitee may be entitled under any applicable law, agreement, vote of stockholders or otherwise, whether as to action in Indemnitee’s official capacity and as to action in another capacity while holding such office or employment as set forth in Sections 59 and 60 of these By-Laws or otherwise, and, unless otherwise provided when authorized or ratified, shall continue as to a person who has ceased to hold such office or employment.

Section 65.Indemnification of Others.  The Board of Directors in its discretion shall have the power on behalf of the Corporation, subject to applicable law, and upon such terms and subject to such conditions as the Board shall determine, to indemnify any person that is or was an agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (including, without limitation, service with respect to employee benefit or welfare plans), who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or arbitration, whether civil, criminal, administrative or investigative against all expenses (including attorneys’ fees), costs, judgments, penalties, fines, amounts paid in settlement and excise taxes or penalties assessed with respect to any employee benefit or welfare plan reasonably incurred or suffered by such person or on such person’s behalf in connection with any such action, suit, proceeding or arbitration and any appeal therefrom, if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that such person’s conduct was unlawful.

Section 66.Insurance; Contracts; Funding.  The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise (including, without limitation, service with respect to employee benefit or welfare plans) against any liability asserted against such person and incurred by such person or on such person’s behalf in any such capacity, or arising out of such person’s status as such, whether or not the

17

Corporation would have the power to indemnify such person against such liability under the provisions of this Article IX.  The Corporation may enter into contracts with any such person in furtherance of the provisions of this Article IX and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided or authorized in this Article IX.

Section 67.Savings Clause.If this Article IX or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each director and officer of the Corporation as to expenses (including attorneys’ fees), costs, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred with respect to any Proceeding, including an action by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of this Article IX that shall not have been invalidated.

ARTICLE X

MISCELLANEOUS

Section 68.Corporate Seal.  The seal of the Corporation shall be circular in form, containing the words “Varian Medical Systems, Inc.” and the word “Delaware” on the circumference surrounding the word “Seal.” Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced.

Section 69.Fiscal Year.  The fiscal year of the Corporation is the 51- to 53-week period that ends on the Friday nearest September 30.

Section 70.Auditors.  The Audit Committee of the Board of Directors shall select certified public accountants to audit the books of account and other appropriate corporate records of the Corporation annually and at such other times as the Audit Committee of the Board of Directors shall determine by resolution.

Section 71.Waiver of Notice.  Whenever notice is required to be given pursuant to applicable law, the Certificate of Incorporation or these By-Laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice.  Attendance of a person at a meeting of stockholders or the Board of Directors or a committee thereof shall constitute a waiver of notice of such meeting, except when the stockholder or Director attends such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.  Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders or the Board of Directors or committee thereof need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or by these By-Laws.

18

ARTICLE XI

AMENDMENT TO BY-LAWS

Section 72.Amendments.  These By-Laws may be amended or repealed, or new By-Laws may be adopted, at any meeting of the Board of Directors or of the stockholders, provided notice of the proposed change was given in the notice of the meeting and, in the case of a meeting of the Board of Directors, in a notice given not less than 24 hours prior to the meeting.

19

EX-10.1

Exhibit 10.1

September 17, 2004

Dow Wilson

Dear Dow,

I am pleased to confirm our offer of employment to you for the position of President, Oncology Systems and Corporate Vice-President, Varian Medical Systems, Inc. (VMS) reporting to Tim Guertin, in his role as Chief Operating Officer of VMS.  This offer is contingent on approval by our Board of Directors.  Your start date has yet to be determined but this offer is contingent on a start date not later than January 30, 2005.

The specific components making up this offer are as follows:

Salary

Your starting weekly base salary will be $8,847.00 ($460,044.00 annualized). VMS is on a bi-weekly payroll cycle.

Management Incentive Plan

You will be eligible to participate in the VMS Management Incentive Plan (MIP) beginning in fiscal year 2006. Your target award percentage will be 75% of base salary (at 100% achievement of funding target levels).  Under the terms of the MIP (please refer to the Plan document for the actual terms governing awards), awards are based on specific VMS financial achievements. In general, to be eligible for the award, you must be actively employed and in good standing at the end of the specified performance period.  The award is typically payable in December for the prior fiscal year’s performance.  A separate MIP participation letter will be issued to you along with the highlights and terms of the plan.

In lieu of MIP participation in fiscal year 2005, we will grant you a lump sum bonus of $500,000.00 which will be payable within the first month of your employment.  In the event that a payout of more than $500,000 would have been made to you under the MIP had you been a participant for fiscal year 2005 at your FY2006 participation level, we will provide you an additional incremental bonus to cover the differential no later than December of 2005.

Executive Car

While employed by VMS, you will participate in the VMS Executive Car Program. Your current purchase price limit will be $66,000 per the car plan terms. Vehicles are leased for 36 months or 60,000 miles whichever occurs first. Insurance, maintenance expenses and fuel costs are included in the program. A copy of the Executive Car Plan will be provided to you.

Stock Options, Restricted Stock & Restricted Cash

We shall recommend to the Compensation and Management Development Committee of the Board of Directors that you be granted a non-qualified stock option for 50,000 shares of VMS stock and a restricted stock grant equal to $1,8000,000.00 for shares of the corporation’s Common Stock (calculated on the closing price of our stock on the first date of your employment) (the “Employment Date”).

For the non-qualified stock options, the exercise price would be the closing price on the New York Stock Exchange on the effective day of the grant, which will be your Employment Date.  These non-qualified options vest over a three-year period and expire after 10 years. The first one-third of the options vest and are exercisable after the end of the first year following the option grant and the remainder of the options

vest and are exercisable on a monthly basis thereafter.  The details of the grant will be set forth in the option agreement.

For the restricted stock, the grant will be effective as of the Employment Date.  The shares will vest over a 15-year period according to the following vesting schedule: the first one-third after the end of the fifth year following the restricted stock grant date, the second one-third after the end of the tenth year following the restricted stock grant date, and the last one-third after the end of the fifteenth year following the restricted stock grant date. The details of the grant will be set forth in the restricted stock agreement.

Additionally, also effective as of the Employment Date, we will grant you $1,600,000.00 cash over a 5-year period.  The initial payment of $320,000 will be paid on the first anniversary of the Employment Date, followed by forty seven (47) monthly payments in the amount of $26,666 beginning on the first month following the initial payment; and one (1) final payment in the amount of $26,700.

Benefit Programs

While employed by VMS, you will be eligible to participate in health, life, benefit and retirement plans offered by VMS in accordance with plan enrollment requirements. While some plans are provided at no costs, others do require an employee contribution.

Additionally, you will be entitled to the following executive benefits while employed by VMS:

•Reimbursement for financial and tax planning up to a maximum of $6,500/year.

•Reimbursement of annual executive physical examination up to a maximum of $1,500/year.

•Supplemental Retirement Plan (SRP) match beginning after one year of employment.  Equal to 6% of the participant’s base salary and applicable incentive payments earned during the year, reduced by the amount of any company matching contributions that would be made to the 401(k) Retirement Plan if the participant had contributed the maximum 401(k) amount for the plan year.

•Participation in the VMS Deferred Compensation Plan (DCP).  This non-qualified DCP is designed to allow its participants to defer current compensation on a pre-tax basis.

Relocation Program

As part of a relocation package, VMS offers the following:

•Three house hunting trips for you and your wife, including airfare, lodging, rental car and a $75 a day per diem.

•Reimbursement of duplicate housing costs for up to six months, if necessary, not to exceed ½ of the monthly mortgage expense on a home you purchase in California.

•Movement of household items up to a maximum of 30,000 lbs.

•Shipment of up to two automobiles or mileage reimbursement for driving to the SF Bay Area.

•Should you relocate to the SF Bay Area in advance of your family, Varian will pay for home visits to Wisconsin every two weeks for up to six months.

•30 days of temporary housing for you.

•30 days of temporary storage of household goods.

•30 days usage of a rental car.

•A one-time relocation allowance of $30,000.00 (net of taxes).

Varian will assist you in the sale of your primary residence in Wisconsin by paying all normal seller-closing costs (cost of sales), up to 6% of the sale price. This benefit will be available to you for up to twelve (12) months from the date you move to the SF Bay Area.

With respect to your new residence in California, VMS’s policy on closing costs on a new home is the following:  an employee may be reimbursed for actual normal closing costs for an appraisal, document preparation, home inspection, credit report, mortgage application and loan origination points, title search and title insurance, legal fees, recording fees, state transfer taxes etc. up to a maximum of 4% of the mortgage value assuming 100% equity reinvestment of the home purchased.  Costs for such items as home warranties, prorated property taxes, homeowners insurance, interest rate buy-down points or prorated interest expense are not reimbursable.  Varian will not pay for any assumed buyer closing costs.

Please be aware that if you voluntarily terminate your employment with Varian following your relocation to the SF Bay Area, you will be expected to repay all relocation expenses in accordance with the following schedule:

Resignation Following Relocation	Repayment Obligation
0 - 6 Months	100	%
7 - 12 Months	75	%
13 - 18 Months	50	%
19 -24 Months	25	%
25+ Months	0	%

Except for amounts grossed up for applicable taxes as provided in VMS’s policies, any amounts referenced in and paid pursuant to this letter and referenced policies are subject to all applicable state, local and federal withholding taxes.

Please note that these proposed terms of employment supersede any prior agreement, representations or promises of any kind, whether written, verbal, expressed or implied between the parties hereto with respect to the subject matters herein.

This offer is contingent upon your ability to perform the essential functions of the position with or without reasonable accommodation, and pass a drug screen.  Until you have been notified that you have successfully passed the drug screen, do not take any actions in reliance upon this offer letter, such as resigning from your current employment.

This offer is also contingent upon your ability to provide proof of employment eligibility under applicable regulations.

VMS’s offer of employment is based on your individual skills and talent.  Please make sure not to bring with you to VMS any materials that contain the trade secret or proprietary information of third parties.  VMS respects the trade secret rights of other companies and expects all employees to do the same.

Your employment at VMS is an at-will employment relationship, meaning that either VMS, or you, has the right to terminate the employment relationship at any time with or without cause or notice.  Your signature below acknowledges your agreement to VMS’s at-will employment relationship and supercedes all other agreements on this subject. The at-will nature of the employment relationship can only be modified by a written agreement signed by you and VMS’s Chief Executive Officer.

We are including new hire materials for you to review and complete and return to MVS as of your Employment Date.  Should you have any questions in the meantime, please feel free to contact me at (650) 424-6180.

Dow, we are very enthusiastic about the prospect of your joining Varian Medical Systems, Inc. and hope you will have a stimulating and satisfying career here.

Sincerely,

/s/ Wendy Reitherman

Wendy Reitherman

Vice President, Human Resources

cc:	H.R. File
	Tim Guertin
	Dick Levy

Your signature below will indicate your understanding and intention to accept the offer of employment set forth in this letter and enter into an employment arrangement with Varian.  In addition to the contingencies set forth above and not withstanding your signature below, it is understood and agreed that the terms of this letter shall become effective only upon your Employment Date following termination of your current employment. Please sign both copies and return one copy in the envelope provided.

/s/ Dow Wilson	20 December 2004
Dow Wilson (signature)	Date

EX-10.2

Exhibit 10.2

New Compensation Structure for Non-Employee Directors

of Varian Medical Systems, Inc.

On November 19, 2004, the Board of Directors (the “Board”) of Varian Medical Systems, Inc. approved a new non-employee director compensation structure. Under the new non-employee director compensation structure, which will become effective on February 18, 2005, annual retainer, chair and meeting fees to be paid to non-employee directors (“Directors,” or individually a “Director”) are as follows:

•Each Director (except the Lead Director) will receive an annual retainer fee of $35,000.

•The Lead Director will receive an annual retainer fee of $50,000.

•The chair of the Compensation and Management Development Committee will receive an additional fee of $5,000.

•The chair of the Nominating and Corporate Governance Committee will receive an additional fee of $5,000.

•The chair of the Audit Committee will receive an additional fee of $10,000.

•Each Director will also receive $1,500 per meeting for each Board meeting attended.

•Each Director will also receive $1,500 per meeting for each committee meeting attended.

EX-15.1

Exhibit 15.1

January 21, 2005

Securities and Exchange Commission
450 Fifth Street
N.W. Washington, D.C. 20549

Commissioners:

We are aware that our report dated January 21, 2005 on our review of interim financial information of Varian Medical Systems, Inc. as of December 31, 2004 and for the three-month period ended December 31, 2004 and January 2, 2004 and included in the Company’s quarterly report on Form 10-Q for the quarter then ended is incorporated by reference in its Registration Statement on Form S-8 (No. 333-75531) dated April 1, 1999, its Registration Statement on Form S-8 (No. 333-57006) dated March 14, 2001, its Registration Statement on Form S-8 (No. 333-57008) dated March 14, 2001, its Registration Statement on Form S-8 (No. 333-57010) dated March 14, 2001, and its Registration Statement on Form S-8 (No. 333-57012) as amended on June 20, 2001.

Yours very truly,

/S/ PRICEWATERHOUSECOOPERS LLP

EX-18.1

Exhibit 18.1

January 21, 2005

Board of Directors

Varian Medical Systems, Inc

3100 Hansen Way

Palo Alto, CA

Dear Directors:

We are providing this letter to you for inclusion as an exhibit to your Form 10-Q filing pursuant to Item 601 of Regulation S-K.

We have been provided a copy of the Company’s Quarterly Report on Form 10-Q for the period ended December 31, 2004.  Note 3 therein describes a change in accounting principle from the last-in, first-out method of inventory pricing to the first-in, first-out method of inventory pricing.  It should be understood that the preferability of one acceptable method of accounting over another for inventory pricing has not been addressed in any authoritative accounting literature, and in expressing our concurrence below we have relied on management’s determination that this change in accounting principle is preferable.  Based on our reading of management’s stated reasons and justification for this change in accounting principle in the Form 10-Q, and our discussions with management as to their judgment about the relevant business planning factors relating to the change, we concur with management that such change represents, in the Company’s circumstances, the adoption of a preferable accounting principle in conformity with Accounting Principles Board Opinion No. 20.

We have not audited any financial statements of the Company as of any date or for any period subsequent to October 1, 2004.  Accordingly, our comments are subject to change upon completion of an audit of the financial statements covering the period of the accounting change.

Very truly yours,

/S/ PRICEWATERHOUSECOOPERS LLP

EX-31.1

Exhibit 31.1

Chief Executive Officer Certification

Pursuant to Rule 13a-14(a) of the Securities Exchange Act

I, Richard M. Levy, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Varian Medical Systems, Inc. (the “Registrant”);

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

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

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

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

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

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

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

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

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

Dated: February 7, 2005	/s/	Richard M. Levy
	Richard M. Levy
	Chairman of the Board,
	President and Chief
	Executive Officer

EX-31.2

Exhibit 31.2

Chief Financial Officer Certification

Pursuant to Rule 13a-14(a) of the Securities Exchange Act

I, Elisha W. Finney, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Varian Medical Systems, Inc. (the “Registrant”);

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

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

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

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

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

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

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

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

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

Dated: February 7, 2005	/s/	Elisha W. Finney
	Elisha W. Finney
	Senior Vice President Finance, and
	Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report of Varian Medical Systems, Inc. (the “Company”), on Form 10-Q for the quarter ended December 31, 2004 (the “Report”), I, Richard M. Levy, President and Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: February 7, 2005	/s/	Richard M. Levy
		Richard M. Levy
	Chairman of the Board,
	President and Chief
	Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the accompanying Quarterly Report of Varian Medical Systems, Inc. (the “Company”), on Form 10-Q for the quarter ended December 31, 2004 (the “Report”), I, Elisha W. Finney, Senior Vice President, Finance and Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: February 7, 2005	/s/	Elisha W. Finney
		Elisha W. Finney
	Senior Vice President, Finance, and
	Chief Financial Officer