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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

FOR THE TRANSITION PERIOD FROM _______________ TO_________________

COMMISSION FILE NUMBER: 001-15405

AGILENT TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE (650) 752-5000

(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)

INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN
SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

YES [X]      NO [   ]

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER’S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.

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AGILENT TECHNOLOGIES, INC.

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
(Unaudited)
(in millions, except per share amounts)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
(in millions, except par value and share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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AGILENT TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(in millions)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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AGILENT TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. OVERVIEW AND BASIS OF PRESENTATION

Agilent Technologies, Inc. (“we” or the “Company”) is a global technology leader in communications, electronics and life sciences. We were incorporated in Delaware in May 1999.

Our fiscal year end is October 31 and our fiscal quarters end on January 31, April 30 and July 31. Unless otherwise stated, all dates refer to our fiscal year and fiscal periods.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Reclassifications.

Amounts in the condensed consolidated financial statements for the periods ended July 31, 2001 have been reclassified to conform to the current period’s presentation.

Basis of Presentation.

We have prepared the accompanying financial data for the three months and nine months ended July 31, 2002 and 2001 pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations.

In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly our consolidated financial position as of July 31, 2002, consolidated results of operations for the three and nine months ended July 31, 2002 and 2001, and consolidated cash flow activities for the nine months ended July 31, 2002 and 2001.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Those estimates and assumptions relate to revenue recognition, inventory valuation, valuation of long-lived assets and accounting for income taxes among others. Actual results could differ from those estimates.

The results of operations for the three and nine months ended July 31, 2002 are not necessarily indicative of the results to be expected for the full year. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto included in our 2001 Annual Report on Form 10-K.

Foreign Currency Translation.

Effective November 1, 2001, we have determined that the functional currency for some of our subsidiaries outside the United States of America has changed from the U.S. dollar to local currency based on the criteria of Statement of Financial Accounting Standards No. 52 “Foreign Currency Translation”. This change did not have a material impact on our condensed consolidated financial position as of November 1, 2001.

Depreciation.

The straight-line method of depreciation was adopted for all property, plant and equipment placed into service after November 1, 2001. For property, plant and equipment placed into service prior to November 1, 2001, depreciation is principally provided using accelerated methods. The change in accounting principle was made in order to align our policies more closely with other companies in our industry. The effect of this change on the net loss for the current quarter and nine-month period ended July 31, 2002 was not material.

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New Accounting Pronouncements.

In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets.” Under SFAS No. 142, goodwill will no longer be amortized but reviewed annually (or more frequently if impairment indicators arise) for impairment. We plan to adopt SFAS No. 142 in the first quarter of 2003, at which time we are required to evaluate our existing goodwill and intangible assets and make any necessary reclassification in order to comply with the new criteria in SFAS No. 142. After the initial assessment of goodwill under the new standard, we are required to identify reporting units and assign all related assets and liabilities and goodwill to these reporting units. We then must complete the two-step transitional goodwill impairment test. The first step, which must be completed within six months of adoption of SFAS No. 142, requires that we determine the fair value of each reporting unit and compare it to the reporting unit’s carrying amount. To the extent that a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and we are then required to complete step two of the transitional goodwill impairment test as soon as possible, but no later than October 31, 2003. Step two requires us to compare the implied fair value of the reporting unit to its carrying amount as of November 1, 2002, the beginning of our fiscal year. Any transitional impairment loss will be recognized as a cumulative change in accounting principle in the first quarter of 2003. Until we adopt the new standard, we will continue to amortize all goodwill existing at June 30, 2001 and to test all goodwill for impairment using the method of projecting undiscounted cash flows as required by SFAS No. 121. Currently, we have not yet completed our analysis under SFAS No. 142. However, the adoption of SFAS No. 142 is expected to have a material impact on our results of operations primarily because goodwill will no longer be amortized subsequent to the adoption of SFAS No. 142. Amortization of goodwill was $82 million and $247 million for the three and nine months ended July 31, 2002, respectively. The value of goodwill in our balance sheet as of July 31, 2002 was $682 million.

There have been no changes in our assessment of the timing and impact of the adoption of SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” since the filing of our Annual Report on Form 10-K. We are expecting to adopt SFAS No. 144 in fiscal year 2003. We do not believe that it will have a material impact on our consolidated financial position, results of operations, or cash flows.

In July 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 146 (“SFAS No. 146”), “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. It requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability in the FASB’s conceptual framework. SFAS No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with earlier adoption encouraged. We are currently assessing the impact that adoption of SFAS No. 146 will have on our financial position and results of operations.

3. DISCONTINUED OPERATIONS

The condensed consolidated financial statements present our healthcare solutions business as a discontinued operation. This business was sold to Koninklijke Philips Electronics, N.V. (“Philips”) on August 1, 2001 pursuant to an Asset Purchase Agreement dated as of November 17, 2000, as amended. The purchase price was subject to adjustment based on the terms of the agreements with Philips.

We recorded an after-tax gain of $646 million as a result of the sale to Philips in the fourth quarter of last year and $5 million and $9 million after-tax losses in the three and nine months ended July 31, 2002, respectively.

We signed an agreement with Philips, dated as of May 15, 2002, finalizing the purchase price adjustments from the sale. The adjustments were based on the determination of the final purchased net assets and our performance of integration services for Philips and did not result in a material adjustment to the gain on sale. Since August 1, 2001, we have received $95 million of the $100 million withheld by Philips from the total purchase price at the time of the sale. We expect to receive the remaining $5 million by the end of our fourth quarter, after we have completed integration services to Philips. Our contractual obligation to provide services to Philips will end by October 31, 2002.

4. NET (LOSS) EARNINGS PER SHARE

The following is a presentation of the numerators and a reconciliation of the denominators of the basic and diluted net (loss) earnings per share computations for the periods presented below:

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5. INVENTORY

Inventory-related charges of $32 million and $272 million were recorded for the nine months ended July 31, 2002 and 2001, respectively.

6. COMPREHENSIVE LOSS

The following table presents the components of comprehensive loss:

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7. SENIOR CONVERTIBLE DEBENTURES AND LINES OF CREDIT

Senior Convertible Debentures.

On November 27, 2001, we completed a private offering of $1.15 billion aggregate principal amount of 3 percent senior convertible debentures (the “debentures”) due 2021 and generated net proceeds of $1.12 billion after deducting fees and expenses. A registration statement filed on behalf of certain holders of the debentures became effective on April 11, 2002. The debentures are convertible at any time into our common stock at an initial conversion price of $32.22 per share, subject to adjustment (as defined in the related Indenture agreement dated November 27, 2001) and are redeemable at our option beginning at any time on or after December 6, 2004. Holders of the debentures have the ability to require us to repurchase the debentures, in whole or in part, on specified dates in 2006, 2011 and 2016. Holders also have the right to require us to repurchase all or a portion of the outstanding debentures if we undergo a Fundamental Change (as defined in the Indenture agreement) at a price equal to 100 percent of the principal amount plus interest. The debentures bear interest at an annual rate of 3 percent, which is payable on June 1 and December 1 of each year beginning June 1, 2002; the interest rate resets (as defined in the Indenture agreement) in June 2006, June 2011 and June 2016, but in no event will it reset below 3 percent or above 5 percent per annum.

Lines of Credit.

As of November 2, 2001, our 364-day revolving credit line was extended for an additional year. As of November 19, 2001, our 364-day and five-year revolving credit agreements were amended. Among other changes, the financial covenants were changed to limit the amount of debt that we can have relative to the sum of shareholders’ equity and debt, and to require minimum amounts of earnings before interest, taxes, depreciation and amortization on a rolling four-quarter basis. As of July 31, 2002, there were no outstanding balances under these agreements.

8. RESTRUCTURING AND ASSET IMPAIRMENT

During the third quarter of 2002, we continued to take steps to restructure our businesses as a result of the economic downturn that has impacted many of the markets that we serve. On November 15, 2001, we announced that we would eliminate an additional 4,000 jobs. This action enhanced and supplemented the plan we announced to eliminate approximately 4,000 jobs on August 20, 2001. As of July 31, 2002 we have reduced our workforce by approximately 7,100 and expect the program to be complete by the end of the calendar year. Approximately $78 million of restructuring and asset impairment charges were recognized this quarter. Of this amount, $16 million was included in costs of products and services (which included $6 million of asset impairment charges), $16 million was included in research and development expenses (which included $3 million of asset impairment charges) and $46 million was included in selling, general and administrative expenses (which included $11 million of asset impairment charges). In the nine months ended July 31, 2002 approximately $218 million of restructuring and asset impairment charges were recognized. Of this amount, $69 million was included in costs of products and services (which included $13 million of asset impairment charges), $32 million was included in research and development expenses (which included $3 million of asset impairment charges), and $117 million was included in selling, general and administrative expenses (which included $19 million of asset impairment charges) .

The three main components of our plan were related to workforce reductions, the consolidation of excess facilities and asset impairments, primarily property, plant and equipment. Workforce related charges were incurred as a result of our plan to reduce our workforce by 8,000 people; the cuts impacted all regions, all expense categories and most of our segments. Our plan to consolidate excess facilities resulted in charges for lease termination fees and losses anticipated from sub-lease agreements. Machinery and equipment were impaired when production capacity for some product lines was reduced; leasehold improvement assets were deemed to be impaired where they related to facilities that we were vacating.

Restructuring charges for the nine months ended July 31, 2002 are shown in the table below:

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9. SEGMENT INFORMATION

In November 2001, we changed the method by which we allocate corporate expenses to the segments. Prior period (loss) earnings from operations have been restated accordingly. (Loss) earnings from operations of the segments continue to be measured before the effect of the amortization of goodwill and other intangible assets, restructuring charges and other non-recurring items.

The following tables reflect the results of our reportable segments under our management system. These results are not necessarily a depiction that is in conformity with accounting principles generally accepted in the United States of America. The performance of each segment is measured based on several metrics including earnings from operations. These metrics are used, in part, by management in evaluating the performance of, and in allocating resources to, each of the segments.

     The following table reconciles segment results to Agilent’s total enterprise results from continuing operations before taxes:

This table highlights the material components of the reconciliation of our segment results to total enterprise results. In the three months ended July 31, 2001 we incurred a one-time $74 million charge for capitalized software that reflected a change in strategy for providing information systems for customer support. Other includes non-recurring adjustments. Other income (expense), net is comprised of one-time receipts of income such as the gain from sale of land, interest expense and other non-cash investment gains and losses.

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

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS FORM 10-Q. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING OUR LIQUIDITY POSITION, OUR EXPECTED OVERALL GROWTH, THE MATERIAL IMPACT FROM THE ADOPTION OF SFAS NO. 144, OUR FINANCIAL RESULTS, THE IMPACT OF THE ENTERPRISE RESOURCE PLANNING IMPLEMENTATION, SAVINGS FROM RESTRUCTURING PROGRAMS AND THE LENGTH OF THE ECONOMIC DOWNTURN THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS CONTEMPLATED BY THESE FORWARD-LOOKING STATEMENTS DUE TO CERTAIN FACTORS, INCLUDING THOSE DISCUSSED BELOW IN “FACTORS THAT MAY AFFECT FUTURE RESULTS” IN THIS FORM 10-Q.

BASIS OF PRESENTATION

The financial information presented in this Form 10-Q is not audited and is not necessarily indicative of our future consolidated financial position, results of operations or cash flows.

Our fiscal year end is October 31 and our fiscal quarters end on January 31, April 30 and July 31. Unless otherwise stated, all dates refer to our fiscal year and fiscal periods.

RECLASSIFICATIONS

Amounts in the condensed consolidated financial statements for the periods ended July 31, 2001 have been reclassified to conform to the current period’s presentation.

DISCONTINUED OPERATIONS

The condensed consolidated financial statements present our healthcare solutions business as a discontinued operation. This business was sold to Koninklijke Philips Electronics, N.V. (“Philips”) on August 1, 2001 pursuant to an Asset Purchase Agreement dated as of November 17, 2000, as amended. The purchase price was subject to adjustment based on the terms of the agreements with Philips.

We recorded an after-tax gain of $646 million as a result of the sale to Philips in the fourth quarter of last year and $5 million and $9 million after-tax losses in the three and nine months ended July 31, 2002, respectively.

We signed an agreement with Philips, dated as of May 15, 2002, finalizing the purchase price adjustments from the sale. The adjustments were based on the determination of the final purchased net assets and our performance of integration services for Philips and did not result in a material adjustment to the gain on sale. Since August 1, 2001, we have received $95 million of the $100 million withheld by Philips from the total purchase price at the time of the sale. We expect to receive the remaining $5 million by the end of our fourth quarter, after we have completed integration services to Philips. Our contractual obligation to provide services to Philips will end by October 31, 2002.

IMPACT OF FOREIGN CURRENCIES

In the three and nine months ended July 31, 2002, the U.S. dollar weakened against both the Japanese yen and the euro. Movements in U.S. dollar exchange rates with respect to the Japanese yen, euro, and other foreign currencies had no material effect on our net revenue or operating expenses in the three or nine months ended July 31, 2002. Our hedging activities are expected to reduce the risk of material impact on our financial statements from further fluctuations in the currency markets for the rest of the fiscal year.

FOREIGN CURRENCY TRANSLATION

Effective November 1, 2001, we have determined that the functional currency for several of our subsidiaries outside the United States of America has changed from the U.S. dollar to local currency based on the criteria of Statement of Financial Accounting Standards No. 52 “Foreign Currency Translation”. This change did not have a material impact on our condensed consolidated financial position as of November 1, 2001.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements requires that management make a number of assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Actual results may differ from these estimates and assumptions.

Our critical accounting policies are those that affect our financial statements materially and involve a significant level of judgment by management. Those policies are revenue recognition, inventory valuation, valuation of long-lived assets and accounting for income taxes.

Revenue is recognized on a sale to a customer only after the product or service has been delivered or installed and accepted by the customer, if necessary. We record estimated reductions to revenue for product returns and price protection activities where necessary. We monitor the creditworthiness of our customers and do not record revenue on sales if collection is not reasonably assured. Most of these conditions are subjective and actual results could vary from the estimated outcome, requiring future revisions to revenue.

We continually assess the valuation of our inventory and periodically write down the value for estimated excess and obsolete inventory based upon assumptions about future demand and market conditions. Such estimates are difficult to make under current economic conditions. If actual market conditions are less favorable than those projected by management, additional write-downs may be required. If actual market conditions are more favorable than anticipated, inventory previously written down may be sold, resulting in cost of sales lower than expected in that period.

We assess the recoverability of long-lived assets, including intangible assets, by determining whether the carrying value of such assets will be recovered through undiscounted future cash flows. If the total of future cash flows is less than the carrying amount of the assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Estimates of the future cash flows associated with the assets are critical to these assessments. Changes in these estimates based on changed economic conditions could result in material impairment charges in future periods.

Significant management judgment is required in determining our provision for income taxes and our deferred tax assets and liabilities. Our provision or benefit from income taxes is dependent upon an estimate of taxable income or loss and other factors for the full year in each of the jurisdictions in which we operate. However, if our actual results differ from our estimates, our tax rate may change in future periods. We have not provided for U.S. federal income and foreign withholding tax on a portion of our non-U.S. subsidiaries’ undistributed earnings as of July 31, 2002 because we intend to reinvest such earnings indefinitely. If management decides to remit these earnings to the U.S. in a future period, our provision for taxes may increase materially in that period.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 142 (SFAS No. 142), “Goodwill and Other Intangible Assets.” Under SFAS No. 142, goodwill will no longer be amortized but reviewed annually (or more frequently if impairment indicators arise) for impairment. We plan to adopt SFAS No. 142 in the first quarter of 2003, at which time, we are required to evaluate our existing goodwill and intangible assets and make any necessary reclassification in order to comply with the new criteria in SFAS No. 142. After the initial assessment of goodwill under the new standard, we are required to identify reporting units and assign all related assets and liabilities and goodwill to these reporting units. We then must complete the two-step transitional goodwill impairment test. The first step, which must be completed within six months of adoption of SFAS No. 142, requires that we determine the fair value of each reporting unit and compare it to the reporting unit’s carrying amount. To the extent that a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and we are then required to complete step two of the transitional goodwill impairment test as soon as possible, but no later than October 31, 2003. Step two requires us to compare the implied fair value of the reporting unit to its carrying amount as of November 1, 2002, the beginning of our fiscal year. Any transitional impairment loss will be recognized as a cumulative change in accounting principle in the first quarter of 2003. Until we adopt the new standard, we will continue to amortize all goodwill existing at June 30, 2001 and to test all goodwill for impairment using the method of projecting undiscounted cash flows as required by SFAS No. 121. Currently, we have not yet completed our analysis under SFAS No. 142. However, the adoption of SFAS No. 142 is expected to have a material impact on our results of operations primarily because goodwill will no longer be amortized subsequent to the adoption of SFAS No. 142. Amortization of goodwill was $82 million and $247 million for the three and nine months ended July 31, 2002, respectively. The value of goodwill in our balance sheet as of July 31, 2002 was $682 million.

There have been no changes in our assessment of the timing and impact of the adoption of SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, since the filing of our Annual Report on Form 10-K. We are expecting to adopt SFAS No. 144 in fiscal year 2003. We do not believe that it will have a material impact on our consolidated financial position, results of operations, or cash flows.

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In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (“SFAS No. 146”), “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. It requires that a liability be recognized for those costs only when the liability is incurred, that is, when it meets the definition of a liability in the FASB’s conceptual framework. SFAS No. 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with earlier adoption encouraged. We are currently assessing the impact that adoption of SFAS No. 146 will have on our financial position and results of operations.

BUSINESS OVERVIEW AND OUTLOOK

The outlook for the specific markets that we serve remains mixed. Most of our businesses have been impacted by the slowdown in the global economy and by the cyclical nature of the semiconductor and telecommunications industries. Three of our businesses, Life Sciences and Chemical Analysis, Semiconductor Products and Semiconductor Test within the test and measurement segment had year over year order growth of 7 percent, 38 percent and 121 percent, respectively. The gains were, however, largely offset by continued declines in our test and measurement businesses that serve the wireline telecommunications markets. In every business, pricing pressures remained intense, reducing our gross margins. Operationally, we continue to drive toward profitability and to make the new product investments that have been our growth engine for many years. We have plans to reduce costs by $50 million per quarter to an operational run rate of $1.6 billion over the next six to nine months by further reducing costs in those businesses most impacted by weak telecommunications markets, and by realizing savings from our ongoing IT systems investments. For the fourth quarter, we expect revenue in the range of $1.6 billion to $1.7 billion resulting in a net loss on a GAAP basis. After excluding goodwill and other intangible amortization, restructuring and asset impairment charges and other non-recurring items, we expect to record per share operating results in the range of $0.10 loss to breakeven.

RESTRUCTURING AND ASSET IMPAIRMENT

At October 31, 2001, we had one restructuring plan under way which was announced on August 20, 2001. On November 15, 2001 we enhanced and supplemented our plan once we had determined that the actions contemplated in August would not be sufficient to return Agilent to profitability. The three main components of our plan were related to workforce reductions, the consolidation of excess facilities and asset impairments, primarily property, plant and equipment. Workforce related charges were incurred as a result of our plan to reduce our workforce by 8,000 people; the cuts impacted all regions, all expense categories and most of our segments. Our plan to consolidate excess facilities resulted in charges for lease termination fees and losses anticipated from sub-lease agreements. Machinery and equipment were impaired when production capacity for some product lines was reduced; leasehold improvement assets were deemed to be impaired where they related to facilities that we were vacating.

During the third quarter of 2002, we continued to take steps to restructure our businesses as a result of the economic downturn that has impacted many of the markets that we serve. We recorded approximately $78 million of restructuring and asset impairment charges in the quarter ended July 31, 2002. Of this amount, $16 million was included in costs of products and services, $16 million was included in research and development expenses and $46 million was included in selling, general and administrative expenses. Of the $78 million recorded in the three months ended July 31, 2002, $41 million was for workforce reduction, $17 million was for consolidation of excess facilities and $20 million was for asset impairment charges. In the nine months ended July 31, 2002 approximately $218 million of restructuring and asset impairment charges were recognized. Of this amount, $69 million was included in costs of products and services, $32 million was included in research and development expenses and $117 million was included in selling, general and administrative expenses. Of the $218 million recorded in the nine months ended July 31, 2002, $166 million was for workforce reduction, $17 million was for consolidation of excess facilities and $35 million was for asset impairment charges. We have reduced our workforce by approximately 7,100 as of July 31, 2002 and have achieved collective savings of approximately $265 million this quarter from the restructuring efforts compared to our cost structure at the time of the original plan to reduce our costs. We believe we are on track to achieve our planned savings of approximately $300 million per quarter, and to substantially complete the restructuring plan we put in place in 2001, by the fourth quarter of this year.

We expect additional workforce related charges in the fourth quarter of 2002 of approximately $5 million in respect of the restructuring plan that is currently under way. The majority of workforce-related payments of $42 million that were accrued as of July 31, 2002 will be paid out to approximately 800 employees during the fourth quarter of 2002.

In addition to the plan announced in August and expanded in November 2001, on August 19, 2002 we announced our intention to further reduce our operational costs by $50 million per quarter. We expect to incur additional restructuring charges in the fourth quarter of 2002 and the first half of 2003 with respect to this new plan, but we are not yet in a position to accurately estimate these charges.

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ENTERPRISE RESOURCE PLANNING (ERP) SYSTEM

During the current quarter, we implemented a new ERP system which covers over fifty percent of our volume and virtually all of our financial processes. Disruptions from implementing our new ERP system had a negative impact on our orders, revenue and operating profit for the third quarter. Our orders were impacted as customers delayed or did not place purchases due to such issues as our inability to quickly provide accurate shipment dates following the implementation. Our revenues were impacted as a result of orders delayed or lost during the period and due to shipment interruptions and system downtime. In addition to these specific issues, many of our employees were engaged in learning the system and implementation activities during the quarter, rather than ongoing business activities. We believe that these major system interruptions and conflicts now have been largely resolved.

The table below shows the estimated negative impact on orders, product revenue and operating profits. These estimates were determined using information gathered from many different sources and are provided only as an approximation because the actual impact cannot be determined precisely. In some cases we have generated these estimates from trend data, such as expected orders or shipments per day; in other cases, we have estimated the reductions in orders and revenues based on specific criteria such as information from individual customer actions. In most cases it is difficult to precisely differentiate between the impact of the new system and the impact of the economic environment, but the figures we are presenting below are our best estimate of the impact of the disruptions caused by implementation of our new ERP system.