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UNITED STATES

For the quarterly period ended June 28, 2002
or

For the transition period from __________ to __________

Commission File Number 1-7598

VARIAN MEDICAL SYSTEMS, INC.

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

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

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

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

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 68,063,295 shares of Common Stock, par value $1 per share, outstanding as of August 5, 2002.

www.varian.com

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VARIAN MEDICAL SYSTEMS, INC.

FORM 10-Q

TABLE OF CONTENTS

Part I		Financial Information			5
Item 1.		Financial Statements (unaudited)			5
		Condensed Consolidated Statements of Earnings			5
		Condensed Consolidated Balance Sheets			6
		Condensed Consolidated Statements of Cash Flows			7
		Notes to the Condensed Consolidated Financial Statements			8
Item 2.		Management’s Discussion and Analysis of Financial Condition   and Results of Operations			16
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			27
Part II		Other Information			28
Item 1.		Legal Proceedings			28
Item 6.		Exhibits and Reports on Form 8-K			28
Signatures					29
Index to Exhibits					30

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FORWARD-LOOKING STATEMENTS

     Except for historical information, 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 our management. The outcome of the events described in these forward-looking statements is subject to risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in these forward-looking statements and reported results should not be considered an indication of future performance due to the factors listed below, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Business” in our Annual Report on Form 10-K for the fiscal year ended September 28, 2001, and from time to time in our other filings with the Securities and Exchange Commission. For this purpose, statements concerning industry or market segment outlook; market acceptance of or transition to new products or technology such as Intensity Modulated Radiation Therapy, or IMRT, brachytherapy, software, treatment techniques, and advanced X-ray products; growth drivers; Varian Medical Systems, Inc.’s (“VMS,” “we” or “our”) orders, sales, backlog or earnings growth; future financial results and any statements using the terms “believe,” “expect,” “anticipate,” “can,” “should,” “will,” “hopeful,” “continued,” “could,” “estimating,” “optimistic,” or similar statements are forward-looking statements that involve risks and uncertainties that could cause our actual results to differ materially from those projected or management’s current expectations. Such risks and uncertainties include:

	•		market acceptance and demand for our products;
	•		our ability to anticipate and keep pace with changes in the marketplace and technological innovation;
	•		our ability to successfully develop and commercialize new products and new product enhancements;
	•		our ability to meet U.S. Food and Drug Administration and other domestic or foreign regulatory requirements or product clearances, which might limit the products we can sell, subject us to fines or other regulatory actions, and/or increase costs;
	•		the impact of managed care initiatives or other healthcare reforms and/or limitations on third party reimbursements, including resulting pressure on pricing and demand for our products;
	•		the effect on our profit margins of product recycling and related regulatory requirements in European and other countries;
	•		the possibility that material product liability claims could harm our future sales or require us to pay uninsured claims, and the availability and adequacy of our insurance to cover any such liabilities;
	•		our use of distributors for a portion of our sales, the loss of which could reduce sales;
	•		our ability to maintain or increase operating margins;
	•		the potential for continued consolidation in the X-ray tubes market;
	•		our reliance on a limited number of original equipment manufacturer customers for our X-ray computed tomography tubes;
	•		the effect that fluctuations in our operating results, including as a result of changes in accounting policies, may have on the price of our common stock;
	•		the impact on our sales, margins and market share of competitive products and pricing;
	•		economic, political and other risks associated with our significant international operations, including the enforceability of obligations, the extent of taxes and trade restrictions and licensing and other requirements, and protection of intellectual property;
	•		the effect of foreign currency exchange rates;

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	•		our ability to protect our intellectual property and the competitive position of our products;
	•		the possibility of intellectual property infringement claims against us;
	•		the effect of environmental claims and clean-up expenses on our costs;
	•		our reliance on sole source or a limited number of suppliers for some key product components;
	•		our ability to attract and retain qualified employees;
	•		our ability to match manufacturing capacity with demand for our products;
	•		the risk of loss or interruption to our operations or increased costs due to earthquakes, which may not be adequately covered by insurance, the availability and cost of power and energy supplies and other events beyond our control;
	•		our ability to successfully integrate acquired businesses into our existing operations and to realize anticipated benefits;
	•		our ability to meet time requirements for, and implement conversion to, the Euro currency in our business dealings and operations in some European countries;
	•		the effect of price transparency on our business dealings in countries of the European Union following implementation of Euro currency regulations;
	•		our potential responsibility for additional tax obligations and other liabilities arising out of the spin-off of segments of our former businesses; and
	•		the possibility that provisions of our Certificate of Incorporation and stockholder rights plan might discourage a takeover and therefore limit the price of our common stock.

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

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PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)

				Three Months Ended								Nine Months Ended
				June 28,				June 29,				June 28,				June 29,
(Amounts in thousands, except per share amounts)				2002				2001				2002				2001
Sales:
	Product			$	187,565			$	160,986			$	527,527			$	475,497
	Service contracts and other				28,517				25,185				84,205				72,092
		Total sales			216,082				186,171				611,732				547,589
Cost of sales:
	Product				110,495				97,716				318,618				292,527
	Service contracts and other				21,715				19,946				61,557				54,881
		Total cost of sales			132,210				117,662				380,175				347,408
Gross profit					83,872				68,509				231,557				200,181
Operating expenses:
	Research and development				12,163				11,068				35,312				33,174
	Selling, general and administrative				36,855				31,456				103,455				97,968
	Reorganization expense				5				(799	)			8				(487	)
		Total operating expenses			49,023				41,725				138,775				130,655
Operating earnings					34,849				26,784				92,782				69,526
Interest income					1,476				1,752				3,906				4,527
Interest expense					(1,101	)			(999	)			(3,266	)			(3,024	)
Earnings from operations before taxes					35,224				27,537				93,422				71,029
Taxes on earnings					12,390				10,140				33,630				26,160
Earnings before cumulative effect of change in accounting principles					22,834				17,397				59,792				44,869
Cumulative effect of change in accounting principles — net of taxes					—				—				—				(13,720	)
Net earnings				$	22,834			$	17,397			$	59,792			$	31,149
Net earnings per share — Basic:
	Earnings before cumulative effect of change in accounting principles			$	0.34			$	0.26			$	0.88			$	0.69
	Cumulative effect of change in accounting principles — net of taxes				—				—				—				(0.21	)
		Net earnings per share — Basic		$	0.34			$	0.26			$	0.88			$	0.48
Net earnings per share — Diluted:
	Earnings before cumulative effect of change in accounting principles			$	0.32			$	0.25			$	0.85			$	0.66
	Cumulative effect of change in accounting principles — net of taxes				—				—				—				(0.20	)
		Net earnings per share — Diluted		$	0.32			$	0.25			$	0.85			$	0.46
Shares used in the calculation of net earnings per share:
	Weighted average shares outstanding — Basic				67,876				66,640				67,582				65,437
	Weighted average shares outstanding — Diluted				70,868				69,530				70,192				68,023

See accompanying notes to the condensed consolidated financial statements.

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VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

				June 28,				September 28,
(Dollars in thousands, except par values)				2002				2001
Assets
Current assets:
	Cash and cash equivalents			$	162,027			$	218,961
	Short-term marketable securities				29,990				—
	Accounts receivable, net				221,265				227,794
	Inventories				134,072				111,777
	Other current assets				65,349				60,971
		Total current assets			612,703				619,503
Property, plant and equipment					222,033				209,105
	Accumulated depreciation and amortization				(142,041	)			(133,279	)
		Net property, plant and equipment			79,992				75,826
Long-term marketable securities					80,929				—
Goodwill					52,462				49,870
Other non-current assets					15,885				14,000
		Total assets		$	841,971			$	759,199
Liabilities and Stockholders’ Equity
Current liabilities:
	Notes payable			$	116			$	174
	Accounts payable—trade				41,297				44,839
	Accrued expenses				163,925				149,424
	Product warranty				28,685				23,975
	Advance payments from customers				76,570				66,942
		Total current liabilities			310,593				285,354
Long-term accrued expenses and other					18,448				20,949
Long-term debt					58,500				58,500
		Total liabilities			387,541			$	364,803
Commitments and contingencies (Note 12)
Stockholders’ equity:
	Preferred stock
		Authorized 1,000,000 shares, par value $1 per share, issued and outstanding none			—				—
	Common stock
		Authorized 99,000,000 shares, par value $1 per share, issued and outstanding 68,031,000 shares at June 28, 2002 and 67,359,000 shares at September 28, 2001			68,031				67,359
	Capital in excess of par value				116,056				92,160
	Deferred stock compensation				(3,450	)			(4,247	)
	Retained earnings				273,793				239,124
		Total stockholders’ equity			454,430				394,396
		Total liabilities and stockholders’ equity		$	841,971			$	759,199

See accompanying notes to the condensed consolidated financial statements.

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VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

				Nine Months Ended
				June 28,				June 29,
(Dollars in thousands)				2002				2001
Operating activities:
Net cash provided by operating activities				$	95,565			$	74,699
Investing activities:
	Purchase of marketable securities				(111,157	)			—
	Purchase of property, plant and equipment				(18,726	)			(12,257	)
	Proceeds from sale of property, plant and equipment				111				51
	Purchase of a business, net of cash received				(3,111	)			571
	Increase in cash surrender value of life insurance				(2,895	)			(3,371	)
	Other, net				(612	)			46
		Net cash used by investing activities			(136,390	)			(14,960	)
Financing activities:
	Net repayments on short-term obligations				(58	)			(384	)
	Proceeds from common stock issued to employees				19,188				38,748
	Repurchase of common stock				(34,470	)			(24	)
		Net cash provided by (used in) financing activities			(15,340	)			38,340
Effects of exchange rate changes on cash					(769	)			1,088
Net increase (decrease) in cash and cash equivalents					(56,934	)			99,167
Cash and cash equivalents at beginning of period					218,961				83,321
Cash and cash equivalents at end of period				$	162,027			$	182,488

See accompanying notes to the condensed consolidated financial statements.

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VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 — BASIS OF PRESENTATION

NOTE 2 — REORGANIZATION

NOTE 3 — MARKETABLE SECURITIES

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VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

NOTE 4 — INVENTORIES

NOTE 5 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

NOTE 6 — EARNINGS PER SHARE

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VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

NOTE 7 — INDUSTRY SEGMENTS

NOTE 8 — ADOPTION OF SAB 101

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VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

NOTE 9 — ADOPTION OF SFAS 142

NOTE 10 — STOCK SPLIT

NOTE 11 — STOCK REPURCHASE PROGRAM

NOTE 12 — COMMITMENTS AND CONTINGENCIES

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VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

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VARIAN MEDICAL SYSTEMS, INC. AND SUBSIDIARY COMPANIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)
(Unaudited)

NOTE 13 — RECENT ACCOUNTING PRONOUNCEMENTS

NOTE 14 — SUBSEQUENT EVENT

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REPORT OF INDEPENDENT ACCOUNTANTS

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

We have reviewed the accompanying condensed consolidated balance sheets of Varian Medical Systems, Inc. and its subsidiaries as of June 28, 2002 and September 28, 2001, and the related condensed consolidated statements of earnings for each of the three-month and nine-month periods ended June 28, 2002 and June 29, 2001 and the condensed consolidated statements of cash flows for the nine-month periods ended June 28, 2002 and June 29, 2001. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, 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.

/S/ PRICEWATERHOUSECOOPERS LLP

San Jose, California
July 19, 2002

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

     VMS is a world leader in the design and manufacture of integrated cancer therapy systems, as well as high-quality, cost-effective X-ray tubes for original equipment manufacturers, replacement X-ray tubes and imaging subsystems. Our Oncology Systems business consists of a fully integrated system of products, including not only linear accelerators and simulators but also information management and treatment planning software and other sophisticated ancillary products and services. Our linear accelerators and simulators are sold and are in service around the world. Our X-ray tubes business consists of tubes that cover a range of applications including computed tomography, or CT, scanning, radioscopic/fluoroscopic imaging, special procedures and mammography, and are sold to most major diagnostic equipment manufacturers as well as directly to end-users for replacement purposes. Sales from our Ginzton Technology Center, or GTC, consist primarily of brachytherapy products and, to a lesser extent, amounts earned under research contracts. GTC is also pursuing other new business areas, including the potential of combining advances in focused energy and imaging technology with the latest breakthroughs in biotechnology.

     On November 16, 2001, 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 January 15, 2002 to stockholders of record as of December 10, 2001. Unless otherwise stated, all references 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 split.

     In December 1999, the Securities and Exchange Commission, or SEC, issued Staff Accounting Bulletin No. 101, or SAB 101, “Revenue Recognition in Financial Statements.” We implemented the provisions of SAB 101 in the fourth quarter of fiscal year 2001, retroactive to the beginning of fiscal year 2001. As a result of SAB 101 and the associated SEC guidance, we changed our revenue recognition accounting policy for our linear accelerators and related hardware products in the Oncology Systems business and one hardware product in GTC’s brachytherapy business, which collectively represented approximately half of our annual revenue in the last fiscal year. Sales of these products generally include the provision for installation and related obligations. Prior to the adoption of SAB 101, we recognized revenue for these products upon transfer of risk of loss for products to customers, which typically coincided with shipment of products and preceded installation and customer acceptance because acceptance was deemed probable. Subsequent to the adoption of SAB 101, our accounting policy is to defer revenue recognition on these products on the greater of the fair value of the installation services or the amount of payment that is contractually linked to the installation or acceptance clause.

     In conjunction with this change in accounting policy, we recognized an after-tax charge in the first quarter of fiscal year 2001 of $13.8 million (net of income taxes of $8.0 million), or $0.20 per diluted share, representing the cumulative effect on prior years of the application of SAB 101. Periods prior to fiscal year 2001 were not restated.

     In July 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 142, or SFAS 142, “Goodwill and Other Intangible Assets.” SFAS 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment upon initial adoption and on an annual basis going forward. The amortization of goodwill ceases upon adoption of SFAS 142. The provisions of SFAS 142 are effective for fiscal years beginning after December 15, 2001; however, we elected to early adopt SFAS 142 in the first quarter of fiscal year 2002. If we had not adopted SFAS 142, we would have recorded approximately $0.7 million and $2.1 million of goodwill amortization for the third quarter and first nine months of fiscal year 2002, respectively, or the equivalent of $0.01 and $0.02 per diluted share, respectively. We recorded $0.7 million and $2.1 million of goodwill amortization in the third quarter and first nine months of fiscal year 2001, respectively, or the equivalent of $0.1 and $0.02 per diluted share, respectively. Our net earnings and net earnings per share amounts would have been $17.8 million and $0.26 per diluted share, respectively, in the third quarter of fiscal year 2001 had SFAS 142 been adopted at the beginning of fiscal year 2001. For the nine months ended June 29, 2001, our earnings before cumulative effect of change in accounting principles, net earnings and related per share amounts would have been $46.2 million, $32.5 million and $0.68 and $0.48 per diluted share, respectively, had SFAS 142 been adopted at the beginning of fiscal year 2001.

     On July 12, 2002, we acquired the HDR, or High Dose Rate, brachytherapy business of MDS Nordion, a division of MDS (Canada), Inc., for approximately $11 million in cash, subject to post-closing adjustments. The acquisition will expand our capability to offer a more complete range of HDR brachytherapy services and products.

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Item 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (CONTINUED)

     This discussion and analysis of financial condition and results of operations is based upon and should be read in conjunction with the consolidated financial statements and the notes included elsewhere in this report, as well as the information contained under “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors Affecting Our Business” in our Annual Report on Form 10-K for the fiscal year ended September 28, 2001.

     The preparation of financial statements in conformity with accounting standards 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 the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

Critical Accounting Policies

     The SEC recently released Financial Reporting Release No. 60, which requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements.

     Our critical accounting policies include revenue recognition, allowance for doubtful accounts, inventories, warranty obligations, impairment of goodwill and environmental matters. The following is a brief discussion of the critical accounting policies and methods we use.

Revenue Recognition

     We implemented the provisions of SAB 101 in the fourth quarter of fiscal year 2001, retroactive to the beginning of fiscal year 2001. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable and collectibility is reasonably assured. In general, for hardware products which include provisions for installation, our policy is to recognize the amount earned upon transfer of risk of loss and defer revenue recognition on the greater of the fair value of the installation services or the amount of payment that is contractually linked to the installation or acceptance clause. For amounts deferred, revenue is recognized upon completion or satisfaction of remaining obligations. SAB 101 has no impact on our revenue recognition policies related to sales of software products or products in the X-ray Products business. Revenue for product sales in the X-ray Products business is recognized upon shipment because these products do not include any installation obligations. Sales for software products are generally recognized at the time of customer acceptance. Revenue related to spare part sales in the Oncology Service business is generally recognized upon delivery. Revenue related to service performed on a time-and-materials basis is recognized when it is earned and billable. Revenue related to service contracts is recognized ratably over the period of the related contract. Revenue is dependent on the timing of shipment and is subject to customer acceptance and readiness. If shipments are not made on scheduled timelines or the products are not accepted by the customer, material differences in the amount of our reported revenue may result.

Allowance For Doubtful Accounts

     Credit evaluations are undertaken for all major sale transactions before shipment is authorized. Normal payment terms require a small portion upon signing of the purchase order contract, a significant amount upon transfer of risk of loss and a small portion upon completion of the installation. On a quarterly basis, we evaluate aged items in the accounts receivable aging and provide adequate reserves for doubtful accounts. Customer economic conditions may change and increase the risk of collectibility and may require additional provisions which would negatively impact our operating results. As of June 28, 2002, our provisions for doubtful accounts represented approximately 1% of total accounts receivable.

Inventories

     We regularly review inventory quantities on hand and adjust for excess and obsolete inventory based primarily on historical usage rates and our estimated forecast 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.

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Item 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (CONTINUED)

Warranty Obligations

     We generally warrant our products for a specific period of time against material defects. We provide for the estimated future costs of warranty obligations in costs of goods sold when the related revenue is recognized. The accrued warranty costs represent our best estimate at the time of the sale 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 estimate amounts. On a quarterly basis, we review the accrued balances and update the historical warranty cost trends. If we were required to accrue additional warranty cost in the future, it would negatively affect operating results.

Impairment of Goodwill

     We adopted SFAS 142 during the first quarter of fiscal year 2002. This statement requires us to make an initial assessment within the first six months of adoption and then annual assessments thereafter as to the carrying value of the goodwill. During the first quarter of fiscal year 2002, we determined that the fair value of the goodwill exceeded the carrying value and thus did not need to record an impairment charge. In assessing the value of goodwill, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the goodwill. If these estimates or their related assumptions change in the future, we may be required to record impairment charges which would negatively impact operating results. As of June 28, 2002, the carrying value of goodwill was $52.5 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. 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 incur significant 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 proposed directives that may require medical equipment manufacturers to bear some or all of the cost of product disposal at the end of the products’ useful life and to be unable to use some hazardous substances in products sold in the EU. These directives, if approved, would create increased costs for our operations.

     From the time we began operating, we handled and disposed of hazardous materials and wastes following procedures that were considered appropriate under regulations, if any, existing at the time. We also hired companies to dispose of wastes generated by our operations. Under various laws (such as the federal “Superfund” law) and under our obligations concerning operations before the spin-offs, we are overseeing environmental cleanup projects from our pre-spun-off operations and as applicable reimbursing third parties (such as the U.S. Environmental Protection Agency or other responsible parties) for cleanup activities. Under the terms of the agreement governing the distribution, 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 30 years to complete. As described below, we have accrued a total of $20.9 million as of June 28, 2002 to cover our liabilities for these cleanup projects:

•

Our estimate of future costs to complete cleanup activities at certain sites ranges from $4.5 million to $13.4 million. For these estimates, we have not discounted the costs to present dollars because of the uncertainties that make it difficult to develop a best estimate and have accrued $4.5 million, which is the amount at the low end of the range.

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Item 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (CONTINUED)

•

For eight cleanup projects, we have sufficient knowledge to develop better estimates of our future costs. While our estimate of future costs to complete these cleanup projects, including third party claims, ranges from $20.7 million to $42.4 million, our best estimate within that range is $23.9 million. For these projects, we have accrued $16.4 million, which is our best estimate of the $23.9 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 financial statements in any single fiscal year. We spent $0.6 million and $0.9 million (net of amounts borne by VI and VSEA) during the third quarter of fiscal years 2002 and 2001, respectively. We spent $1.5 million and $1.6 million (net of amounts borne by VI and VSEA) during the first nine months of fiscal years 2002 and 2001, respectively.

     We have received cash payments in the form of settlements and judgments from various insurance companies and other third parties in 1995, 1996, 1997, 1998 and 2001. 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 $4.1 million receivable included in “other assets” as of June 28, 2002. We believe that this receivable is collectible because it is based on a binding, written settlement agreement with a financially viable insurance company. Although we continue to aggressively pursue other recoveries, we have not reduced our liability in anticipation of recovery from third parties for claims that we 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, which are or might be considered hazardous, and we have generated and disposed of wastes, which are or might be considered hazardous. Therefore, it is possible that additional environmental issues may arise in the future that we cannot now predict.

Results of Operations

     Fiscal Year

          Our fiscal year is the 52- or 53-week period ending on the Friday nearest September 30. Fiscal year 2002 is the 52-week period ending September 27, 2002, and fiscal year 2001 was the 52-week period ending September 28, 2001. The fiscal quarters ended June 28, 2002 and June 29, 2001 were both 13 weeks long. The nine-month periods ended June 28, 2002 and June 29, 2001 were both 39 weeks long.

     Third Quarter of Fiscal Year 2002 Compared to Third Quarter of Fiscal Year 2001

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Table of Contents

Item 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (CONTINUED)

Sales (by segment and revenue classification)			Three Months Ended
			June 28,				June 29,
(Dollars in millions)			2002				2001
Oncology Systems:
	Product		$	148.6			$	123.4
	Service contracts and other			26.3				23.6
Total Oncology Systems			$	174.9			$	147.0
X-ray Products:
	Product		$	33.6			$	33.1
	Service contracts and other			—				—
Total X-ray Products			$	33.6			$	33.1
GTC:
	Product		$	5.3			$	4.5
	Service contracts and other			2.2				1.6
Total GTC			$	7.5			$	6.1