Lettter to Stockholders

During fiscal 1999 we spun off the semiconductor equipment and instruments businesses, changed our name to Varian Medical Systems, Inc., and created a focused, stand-alone medical business. We have put a strong management team in place, consolidated real estate, and updated our enterprise systems and benefit plans. We've also marched through a myriad of logistical and financial details that had to be addressed in order to complete this transformation. Today, Varian Medical Systems is an entirely new company that is in the unique position of being well established as the world's market and technology leader for radiotherapy systems and X-ray tubes.

Varian Medical Systems reported a record $590 million in sales of products and services in fiscal 1999, pushing sales up 9 percent over fiscal 1998. Net orders reached a record $638 million, up 17 percent, and backlog finished at a near record $400 million, up 14 percent from the previous year-end. Demonstrating the fundamental earnings power of the business, we generated $39 million or $1.28 per diluted share of pro forma net earnings that assume a 35 percent tax rate and exclude incremental costs and gains on sales of assets related to the spin-off. After accounting for an unusual 55 percent tax rate and other spin-off-related costs, reported net earnings from continuing operations for the year were $8 million or $0.27 per diluted share.

The Oncology Systems business, which comprised 78 percent of our sales in fiscal 1999, drove the company's growth in sales and orders during the year. Oncology Systems generated $459 million in sales, up 13 percent from fiscal 1998, and $504 million in net orders, up an impressive 22 percent from the prior year. Through this business, Varian Medical Systems is supplying hospitals and clinics around the world with the most advanced systems for radiotherapy, including the very promising high-resolution IMRT (intensity modulated radiation therapy).

In fiscal 1999 we announced the addition of several powerful new elements to our Generation 6 system of equipment and software that operates off a single shared database for planning, delivering, and verifying treatment. Some key additions include our Millennium MLC-120 multileaf collimator for finely shaping and targeting beams of radiation, our Helios inverse treatment planning software that cuts treatment planning from hours to minutes, and our PortalVision amorphous silicon imaging system for verifying the accuracy of treatments as they're delivered. These new tools give clinicians the ability to deliver high-resolution IMRT, with which they can precisely target tumors, minimize healthy tissue exposure, and significantly step up radiation doses to improve the possibility of a cure.

The X-Ray Products business main-tained gross margins and contributed to the operating profits of the company despite declines in sales and orders for its X-ray tubes. Its fiscal 1999 sales and net orders each totaled $123 million, down 6 percent and 4 percent, respectively, from fiscal 1998 levels. Consolidation among original equipment manufacturers led to the declines. However, several new products should begin to put this business back onto a modest growth track.

During fiscal 1999, the X-Ray Products team began shipping the world's most powerful tube for high-speed CT scanning. Shipments also began on two products with high growth potential: Varian Medical Systems' proprietary cost-reduced, air-cooled X-ray tube and our amorphous-silicon-based imaging subsystems.

We have given the Ginzton Technology Center, our premier research and development facility, the mission of serving as an incubator and launchpad for breakthrough businesses, including our current BrachyTherapy and Biosynergy enterprises. Fiscal 1999 sales, principally from BrachyTherapy products, totaled $8 million, and net orders totaled $12 million. Our acquisition in fiscal 1999 of the Therapy Planning Systems Division of Multimedia Medical Systems extends our reach from high-dose-rate to low-dose-rate brachytherapy with treatment planning for permanent seed implants.

We have also opened the door to the possibility of treating coronary artery disease with radiotherapy. Work during fiscal 1999 culminated in a recent agreement with Cordis Corporation, a Johnson and Johnson company, to supply and service brachytherapy systems that complement angioplasty for clearing blocked arteries. We hope to begin supplying the system to markets outside the United States in 2000. Pending FDA clearance, the system also will be marketed in the United States.

As you will see in the following pages, leading physicians are beginning to talk about dramatic outcomes using high-resolution IMRT, and the medical community is moving to put these systems in place for patients. New studies involving the treatment of prostate cancer with IMRT are showing substantial gains in cure rates with fewer complications for selected patient populations. Clinics are now using IMRT to treat other cancers, including breast cancer and head and neck tumors. The work is just beginning, but it is the most exciting and promising development that I have seen in more than 30 years of working with radiotherapy. The potential of IMRT is tremendous and Varian Medical Systems is at the forefront of this revolution in cancer treatment.

We ended fiscal 1999 with strong forward momentum that we're carrying into fiscal 2000. Our employees have done extraordinary work, persevering through a spin-off while successfully developing and shipping technological products that are advancing medical science. It's clear from the many successes of the last year that this company has the team and the technology to make a big difference in how patients are treated for cancer and heart disease - two of the most devastating illnesses in the world. Varian Medical Systems has emerged as a company focused on life with committed people who share a passion for contributing to the betterment of our world. We are entering fiscal 2000 with enthusiasm, great confidence, and high hopes.

Richard M. Levy, President and CEO
December 17, 1999