This Form 10-Q contains certain forward-looking statements. For purposes of the safe harbor provisions under The Private Securities Litigation Reform Act of 1995, any statements using the terms "believes," "anticipates," "expects," "plans" or similar expressions are forward-looking statements. The forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected. There are a number of important factors that could cause Varian Semiconductor Equipment Associates, Inc.'s ("Varian Semiconductor," the "Company," "we," "our," or "us") actual results to differ materially from those indicated by forward-looking statements made in this report and presented by management from time to time. Some of the important risks and uncertainties that may cause Varian Semiconductor's financial results to differ are described under the heading "Risk Factors" in this report, which include any material changes to and restate and supersede the risk factors previously disclosed in "Part I, Item 1A. Risk Factors" of our Annual Report on Form 10-K for the year ended October 3, 2008, filed with the SEC on November 25, 2008.

The following information should be read in conjunction with the unaudited interim consolidated financial statements and notes thereto included in "Item 1. Consolidated Financial Statements" of this quarterly report and the audited consolidated financial statements and notes thereto and the section titled "Item
7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended October 3, 2008, filed with the SEC on November 25, 2008.

Overview

We are the leading supplier of ion implantation equipment used in the fabrication of semiconductor chips. We design, manufacture, market and service semiconductor processing equipment for virtually all of the major semiconductor manufacturers in the world. The VIISta ion implanter products are designed to leverage single wafer processing technology for the full range of semiconductor implant applications. We have shipped more than 4,000 systems worldwide.

We provide support, training, and after-market products and services that help our customers obtain high utilization and productivity, reduce operating costs and extend capital productivity of investments through multiple product generations. In fiscal year 2008, we were ranked number one in customer satisfaction in VLSI Research Inc.'s customer survey for all large suppliers of wafer processing equipment, an honor received in eleven of the past twelve years.

Our industry is cyclical. The business depends upon semiconductor manufacturers' expectations and resulting capacity investments for future integrated circuit demand. Historically, our business has experienced significant volatility and we believe the semiconductor capital equipment business will continue to be volatile, largely due to fluctuations in the level of investment by memory manufacturers. During the second quarter of fiscal year 2009, we experienced a significant drop in business compared to the first quarter of fiscal year 2009. This decline is in addition to a decline of approximately 21% in revenue from fiscal year 2007 to fiscal year 2008. We believe that overcapacity in the memory market was the primary driver for the decline in business from fiscal year 2007 to fiscal year 2008. We also believe that continued overcapacity in the memory markets, along with the global credit crisis and the decline in end-user demand for semiconductors has resulted in the rapid decline in revenue during the first six months of fiscal year 2009. These factors are expected to continue to negatively impact our business through at least the remaining quarters of fiscal year 2009. Our revenue has historically been derived from a limited number of customers, some of which require financing to continue upgrade and/or expansion plans that require the purchase of our tools. Our after-market business has also been adversely affected as fabs are running at lower utilization levels, thus requiring fewer parts, upgrades and services.

We believe that our management team has the industry experience to quickly and effectively react to sizing adjustments required by the volatility in the market. As such, we began resizing our business in fiscal year 2008 and continued through the first six months of fiscal year 2009. We expect to continue to closely monitor the industry and may incur additional restructuring charges in subsequent quarters.

We believe that we have the financial strength and liquidity to continue investing in product development such that we can continue to maintain our leading industry position. As of April 3, 2009, we had $307.2 million in cash and investments and approximately $2.5 million in debt. Furthermore, despite the year to date loss, we generated approximately $32.5 million in cash from operations during the first six months of fiscal year 2009.

Our business is tied closely to our market share and the total available market for ion implanters. Calendar year 2008 semiconductor capital expenditure reports show that the total available market for ion implanters decreased by approximately 40% versus calendar year 2007. In addition, based mainly on references to leading industry analyst reports and current customer buying patterns, we believe that semiconductor capital equipment spending will significantly decline in 2009 from 2008.

Wafer size and market. Most advanced devices below 90nm are produced on 300mm wafers. Memory manufacturers typically produce integrated circuits used for flash and dynamic random access memory, or DRAM, which store and retrieve information, while logic manufacturers typically produce integrated circuits used to process data. Foundry manufacturers have the capability to produce both memory and logic wafers.

Market Share and Total Available Market. The table below shows our calendar year 2008 and 2007 market share, as reported by Gartner Dataquest in April 2009 and April 2008, respectively. Market share estimates are calculated on a subset of revenue, and information reported by Gartner Dataquest may not be consistent on a company by company basis. The table below also shows the total available market for ion implanter sales in calendar years 2008 and 2007, also reported by Gartner Dataquest in April 2009 and April 2008, respectively. The total available market represents estimated worldwide total revenue for ion implanters sold during each of the calendar years.

                               Market Share                  Total Available Market
                            Calendar Year Ended               Calendar Year Ended
                       December 31,     December 31,     December 31,     December 31,
                           2008             2007             2008             2007
                                                             (Amounts in millions)
     By market
     Medium current            41.5 %           56.6 %   $         281    $         454
     High current              78.1 %           77.8 %             371              672
     High energy               22.8 %           12.8 %              79              147
     Ultra high dose          100.0 %          100.0 %              67               64

     Overall                   61.5 %           64.5 %   $         798    $       1,337

Market share and total available market research data is also published by VLSI Research Inc. In May 2009, VLSI Research Inc. reported that our overall market share was 65% and that the total available market was $757.8 million for calendar year 2008.

We estimate our market share on a regular basis. We do so based on extensive information, including our own revenues, competitor orders and other key information such as tool move-ins at the fabs. Our market share estimates are usually closely aligned with those of Gartner Dataquest. Revenue recognition disparities do not normally cause significant swings in calculations of market share. However, we believe the significant decline in semiconductor capital equipment business in 2008 caused revenue recognition delays from 2007 shipments to distort 2008 market share metrics. Our information indicates that based on a competitor's delayed revenue recognition, a significant portion of their medium current tool shipments in 2007 was not recognized as revenue until 2008. As such, we believe our 2008 medium current market share, if normalized for these shipments, would be approximately flat from 2007 and our overall 2008 market share would be several percentage points higher than our overall 2007 market share. Since 2007 we have not lost a medium current customer. Our high current market share is a result of the industry shift to single wafer implanters at advanced technology nodes (65nm and below). We began developing single wafer high current tools in 1994 and are currently the industry leader. The increase in high energy market share is primarily related to customer mix in the total available market for high energy tools. Our position in the ultra high-dose market has resulted from the success of our new plasma doping tool, known as the VIISta PLAD, which is currently used by memory manufacturers.

Critical Accounting Policies and Significant Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles ("GAAP") in the U.S. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On a continual basis, we evaluate our estimates, including those related to revenues, inventories, accounts receivable, long-lived assets, income taxes, warranty obligations, deferred revenue, post-retirement benefits, contingencies, stock-based compensation and foreign currencies. We continue to have the same critical accounting policies and estimates as are described in Item 7 in the Annual Report on Form 10-K for the fiscal year ended October 3, 2008, filed with the SEC on November 25, 2008. We operate in a highly cyclical and competitive industry that is influenced by a variety of diverse factors including, but not limited to, technological advances, product life cycles, customer and supplier lead times, and geographic and macroeconomic trends. Estimating product demand beyond a relatively short forecasting horizon is difficult and prone to forecasting error due to the cyclical nature and inherent lack of visibility in the industry. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. See also the factors discussed in the section titled "Risk Factors" in Part II, Item 1A.

Results of Operations

Revenue

The following table sets forth revenue by category for the three and six month
periods ended April 3, 2009 and March 28, 2008:



                                           Fiscal Three Months Ended                            Fiscal Six Months Ended
                                April 3,    March 28,                   Percent     April 3,    March 28,                   Percent
                                  2009         2008        Change       Change        2009         2008        Change       Change
                                      (Amounts in thousands)                              (Amounts in thousands)
Revenue
Product                         $  48,958   $  234,962   $ (186,004 )     -79.2 %   $ 140,986   $  470,472   $ (329,486 )     -70.0 %
Service                            14,785       20,347       (5,562 )     -27.3 %      30,150       38,876       (8,726 )     -22.4 %
Royalty and license                    11           29          (18 )     -62.1 %          59           46           13        28.3 %

Revenue                         $  63,754   $  255,338   $ (191,584 )     -75.0 %   $ 171,195   $  509,394   $ (338,199 )     -66.4 %


Revenue by territory:
Asia Pacific                    $  30,235   $  179,448   $ (149,213 )     -83.2 %   $  85,527   $  373,778   $ (288,251 )     -77.1 %
North America                      24,935       63,383      (38,448 )     -60.7 %      64,851      114,220      (49,369 )     -43.2 %
Europe                              8,584       12,507       (3,923 )     -31.4 %      20,817       21,396         (579 )      -2.7 %

Revenue                         $  63,754   $  255,338   $ (191,584 )     -75.0 %   $ 171,195   $  509,394   $ (338,199 )     -66.4 %

Product

During the second quarter and the first six months of fiscal year 2009, product revenue was $49.0 million and $141.0 million, respectively, compared to $235.0 million and $470.5 million, respectively, for the same periods a year ago. Overcapacity in the memory market, along with the global credit crisis and the decline in end-user demand for semiconductors, has caused our customers to significantly decrease their spending for our products. On a unit basis, the number of tools recorded in revenue declined 76% for the first six months of fiscal year 2009, compared to the first six months of fiscal year 2008. In addition, revenue from parts and upgrades sales during the first six months of fiscal year 2009 decreased 53%, compared to the same fiscal period a year ago, due to lower utilization levels at most foundry and memory customers.

Service

Service revenue during the second quarter and first six months of fiscal year 2009 was $14.8 million and $30.2 million, respectively, compared to $20.3 million and $38.9 million, respectively, for the same periods a year ago. This decrease in the second quarter and first six months of fiscal year 2009 as compared to the same periods in fiscal year 2008 is primarily related to a decrease in installation revenue due to fewer tool shipments and a decrease in service contract revenue as a result of customer fab closures and reduced utilization levels.

Revenue by Territory

The Asia Pacific region has historically accounted for a significant percentage of our revenues. The decrease in revenue from this region for the second quarter and first six months of fiscal year 2009 as compared to the same periods in fiscal year 2008 is due to the worldwide decrease in semiconductor manufacturing, particularly among memory customers in the Asia Pacific region. North American sales also decreased during the second quarter and first six months of fiscal year 2009, although not as much as the Asia Pacific region because of increased sales to a logic customer in the first six months of fiscal year 2009. The most significant driver of change across all regions is the substantial drop in memory business.

Royalty and License

Royalty revenue during the second quarter and first six months of fiscal years 2009 and 2008 was less than $0.1 million, as all agreements have now expired.

Customers

In the second quarter of fiscal year 2009, revenue from two customers accounted for 25% and 10%, respectively, of our total revenue. In the second quarter of fiscal year 2008, revenue from four customers accounted for 21%, 15%, 12% and 10%, respectively, of our total revenue. During the first six months of fiscal year 2009, revenue from two customers accounted for 29% and 13%, respectively, of our total revenue. During the first six months of fiscal year 2008, revenue from four customers accounted for 19%, 13%, 10% and 10%, respectively, of our total revenue.

Fluctuations in the timing and mix of product shipments, customer requirements for systems, and the completion of the installation of the product will continue to have a significant impact on the timing and amount of revenue in any given reporting period (see also "Item 1A. Risk Factors").

Shipment Mix

Our tools are used primarily in 300mm wafer-size fabs. Our tools are used by logic, memory and foundry manufacturers for integrated circuit production. Logic manufacturers make chips that process information and are owned by the companies that design the chips. Memory manufacturers make chips that store information and they, too, are owned by the companies that design the chips. Foundry manufacturers are contractors that take chip designs from other companies and make the chips for them. Over the last several years the demand for memory chips has outstripped the demand for logic chips. However, overcapacity in the memory market has caused a significant decline in demand from memory customers. Virtually all of our tool shipments are 300mm tools, which began to replace 200mm tools at the end of the 1990s. The following table sets forth tool shipments by market, as a percent of total tool shipments, for the second quarter and first six months, respectively, of fiscal years 2009 and 2008. Percentages are based on the number of tools shipped during the respective period.

                      Fiscal Three Months Ended         Fiscal Six Months Ended
                     April 3,          March 28,        April 3,        March 28,
                       2009               2008            2009            2008
        By market
        Memory               30 %               56 %           26 %            69 %
        Logic                40 %               16 %           55 %            12 %
        Foundry              30 %               28 %           19 %            19 %

        Shipments           100 %              100 %          100 %           100 %

Cost of Product Revenue

Cost of product revenue was $33.4 million and gross margin was 32% for the second quarter of fiscal year 2009, compared to cost of product revenue of $121.5 million and gross margin of 48% for the second quarter of fiscal year 2008. For the first six months of fiscal 2009, the cost of product revenue was $91.4 million and gross margin was 35%, compared to cost of product revenue of $241.0 million and gross margin of 49% for the first six months of fiscal year 2008. The primary reason for the decrease in gross margin for both the second quarter and the first six months of fiscal year 2009 is unfavorable factory absorption due to significantly lower volume. Unfavorable factory absorption impacted gross profit by $4.7 million, or 9.6%, in gross margin and $10.0 million, or 7.1%, in gross margin in the second quarter and first six months of fiscal year 2009, respectively. We anticipate that the factory will continue to be significantly under utilized for at least the next quarter.

Cost of Service Revenue

Cost of service revenue was $9.1 million and gross margin was 39% for the second quarter of fiscal year 2009, compared to cost of service revenue of $12.6 million and gross margin of 38% for the second quarter of fiscal year 2008. Cost of service revenue was $18.6 million and gross margin was 38% for the first six months of fiscal year 2009, compared to cost of service revenue of $24.9 million and gross margin of 36% for the first six months of fiscal year 2008. Cost of service revenue primarily consists of installation expenses. Thus, fluctuations in service margins are mainly attributed to the change in installation margins, which are influenced by product and regional mix. The fair value of installations is assessed periodically and is largely based upon the historical experience of the effort and cost to complete installations.

Research and Development

Research and development expense for the second quarter and first six months of fiscal year 2009 was $19.0 million and $41.1 million, respectively, compared to $28.5 million and $57.3 million, respectively, for the same periods in fiscal year 2008. Although we have reduced our spending in response to the industry downturn, we continue to maintain our investments in new product development and growth initiatives.

Marketing, General and Administrative

Marketing, general, and administrative expense for the second quarter and first six months of fiscal year 2009 was $24.1 million and $50.9 million, respectively, compared to $32.8 million and $65.4 million, respectively, for the same periods in fiscal year 2008. The decrease in the second quarter and first six months of fiscal year 2009 was primarily due to cost reduction efforts. Compensation plans have been significantly reduced and/or suspended and cost reduction efforts have resulted in lower levels of headcount and associated costs, such as travel. In addition, we have had mandated shutdowns for several weeks each quarter during fiscal year 2009. For the first six months of fiscal year 2009, these reductions were partially offset by a $1.0 million increase to bad debt expense related to one customer insolvency and one customer restructuring, both recently announced.

Restructuring Costs

Our business is cyclical and depends upon the capital expenditures of semiconductor manufacturers, which in turn depend on the current and anticipated market demand for integrated circuits and products utilizing integrated circuits. The semiconductor industry has historically experienced periodic downturns and in response, we have historically recorded restructuring charges in connection with cost reduction initiatives implemented in response to the industry downturns. Restructuring charges typically consist of severance, benefits and outplacement services offered to terminated employees and sometimes include charges for remaining lease payments on facilities that are closed. Prior to any restructuring announcements, the restructuring is approved by the appropriate level of management necessary to commit to the specific actions of the reduction in force.

In the second quarter of fiscal year 2009, we incurred a restructuring charge of $2.1 million of which $1.9 million is related to the U.S. and Asia Pacific in connection with the continuation of cost reduction initiatives in response to the continued deterioration in the semiconductor capital equipment market. The expense is related to a reduction of headcount in the U.S. and Asia Pacific of approximately 50 people, primarily within manufacturing and engineering. The restructuring charge, part of an ongoing benefit arrangement, is accounted for under SFAS No. 112, "Accounting for Postemployment Benefits."

We began relocating the European operations in Houten, the Netherlands to Schaffhausen, Switzerland, in the fiscal fourth quarter of 2008. The restructuring is accounted for under SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," and is comprised primarily of one-time termination benefits, and contract termination expense related to a facility lease.

We estimate that the European restructuring activity, inclusive of activity through the first six months of fiscal year 2009 ($1.8 million) will cost $2.5 million. The estimate also includes future, one-time termination benefits of $0.3 million.

The following table summarizes the restructuring activity for the first six months of fiscal year 2009.

                                          Ongoing             One-time            Contract             Other
                                          Benefit            Termination         Termination        Associated
                                        Arrangements          Benefits              Costs              Costs           Total
                                                                       (Amounts in thousands)
Accrued charges at October 3, 2008     $          184       $         324                  -        $        75       $    583
Costs incurred                                  4,393               1,053       $         438               365          6,249
Costs paid                                     (3,829 )              (663 )                -               (178 )       (4,670 )
Non-cash settlements                               -                   -                   -                (68 )          (68 )

Accrued charges at January 2, 2009     $          748       $         714       $         438       $       194       $  2,094
Costs incurred                                  1,377                 238                  -                249          1,864
Adjustments                                       243                  -                   -                (56 )          187
Costs paid                                     (2,114 )              (363 )               (33 )            (169 )       (2,679 )
Non-cash settlements                               -                   -                   -               (124 )         (124 )

Accrued charges at April 3, 2009       $          254       $         589       $         405       $        94       $  1,342

Cash outlays related to one-time termination benefits and contract termination costs to exit the Houten facility will continue through fiscal years 2010 and 2013, respectively.

We expect to continue cost reduction initiatives during the third quarter of fiscal year 2009.

Interest Income and Interest Expense

During the second quarter and first six months of fiscal year 2009, we earned $0.8 million and $2.5 million in net interest income, respectively, compared to $2.2 million and $4.9 million, respectively, for the same periods of fiscal year 2008. The decrease in net interest income for the second quarter and first six months of fiscal year 2009 was due to a decrease in interest rates as a result of global economic conditions. In addition, we recorded $0.3 million of interest expense during the second quarter of fiscal year 2009 related to financing charges associated with the termination of the $100.0 million line of credit. For more information on the termination of this line of credit, see Note 12, "Notes Payable," in the accompanying notes to the unaudited interim consolidated financial statements.

Other (Expense) Income, Net

Other expense, net was $0.4 million and $0.5 million for the second quarter and first six months of fiscal year 2009, respectively, compared to other income, net of less than $0.1 million for the same periods of fiscal year 2008. Other (expense) income includes foreign currency exchange gains and losses.

Provision for Income Taxes

Our effective tax rate is based on our current profitability outlook and our expectation of earnings from operations in the U.S. and other tax jurisdictions throughout the world.

In fiscal year 2007, we implemented a plan to realign the legal entities within our worldwide affiliated group to make our legal structure more consistent with the geographic mix of our customers and suppliers. The realignment of our entities has caused the tax rate to become more sensitive to the geographic distribution of profits.

We recorded an income tax benefit of $3.9 million for the six months ended April 3, 2009. Exclusive of discrete items, the projected effective tax benefit . . .