AGILENT TECHNOLOGIES INC - 10-K Annual Report

Address of principal executive offices: 395 Page Mill Road, Palo Alto, California 94306

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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨

The aggregate market value of the registrant’s common equity held by non-affiliates as of April 30, 2004, was approximately $9.436 billion. The aggregate market value of the registrant’s common stock held by non-affiliates as of October 31, 2004 was approximately $9.425 billion. As of October 31, 2004, there were 486,841,087 outstanding shares of common stock, par value $0.01 per share. Shares of stock held by officers, directors and 5 percent or more stockholders have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

Visual Studio is a registered trademark of Microsoft Corporation in the United States and/or other countries. Affymetrix is a U.S. registered trademark of Affymetrix, Inc.

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This report contains forward-looking statements including, without limitation, statements regarding trends, cyclicality, seasonality and growth in the markets we sell into, our strategic direction, expenditures in research and development, contracts, remediation and indemnification, our future effective tax rate, new product introductions, product pricing, changes to our manufacturing processes, our liquidity position, our ability to generate cash from continuing operations, our image sensor technology and the sale of our camera module business, our expected growth, the potential impact of our adopting new accounting pronouncements, our financial results, revenue generated from international sales, our potential repatriation of earnings, the impact of our enterprise resource planning systems implementation, the impact of our variable cost structure, our obligations under and assumptions about our retirement and post-retirement benefit plans, our lease payment obligations, savings from our restructuring programs and the existence or length of an economic recovery that involve risks and uncertainties. Our actual results could differ from the results contemplated by these forward-looking statements due to certain factors, including those discussed in Item 7 and elsewhere in this report.

Agilent Technologies, Inc. (“we”, “Agilent” or “the company”), incorporated in Delaware in May 1999, is a global diversified technology company that provides enabling solutions to markets within the communications, electronics, life sciences and chemical analysis industries. We have four primary businesses:

Prior to our initial public offering of 15.9 percent of our stock in November 1999, we were a wholly-owned subsidiary of Hewlett-Packard Company (“Hewlett-Packard”). Hewlett-Packard distributed the remaining 84.1 percent of our stock to its stockholders on June 2, 2000 in the form of a stock dividend.

Our test and measurement, automated test and semiconductor products businesses focus on growth opportunities in the communications and electronics industries, while our life sciences and chemical analysis business focuses on growth opportunities in the life sciences industry and in the environmental, chemical, food and petrochemical industries.

We sell our products primarily through direct sales, but we also utilize distributors, resellers, manufacturer’s representatives, telesales and electronic commerce. Of our total net revenue of $7.2 billion for the fiscal year ended October 31, 2004, we generated 31 percent in the United States (“U.S.”) and 69 percent outside the U.S. As of October 31, 2004, we employed approximately 28,000 people worldwide. Our primary research and development (“R&D”) and manufacturing sites are in California, Colorado, Delaware and Washington in the U.S. and in China, Germany, Japan, Malaysia, Singapore and the United Kingdom.

Our net revenue by business segment for each of the years ending October 31, 2004, 2003 and 2002 was:

More financial information about our business segments is contained in Note 19, “Segment Information,” of the consolidated financial statements included in Item 15 of this report. Hewlett-Packard accounted for approximately 4 percent of our total net revenue for the fiscal year ended October 31, 2004, 5 percent for fiscal year 2003 and 8 percent for fiscal year 2002. These figures include items sold to contract manufacturers who manufacture products on Hewlett-Packard’s behalf.

Our test and measurement business provides standard and customized solutions that are used in the design, development, manufacture, installation, deployment and operation of electronics equipment and communications networks and services. These solutions include test and measurement instruments and systems, communications services and network monitoring, management and optimization tools, software design tools and related services. Related services include start-up assistance, instrument productivity and application services and instrument calibration and repair. We also offer customization, consulting and optimization services throughout the customer’s product lifecycle.

Our test and measurement business employed approximately 11,200 people as of October 31, 2004. We sell our test and measurement products through direct sales, distributors, resellers, manufacturer’s representatives, telesales and electronic commerce. Our test and measurement business generated $2.9 billion in revenue in fiscal 2004, $2.5 billion in revenue in fiscal 2003 and $2.6 billion in revenue in fiscal 2002.

We market our communications test products and services to Network Equipment Manufacturers (“NEMs”) and communications service providers.

NEMs manufacture and sell products to facilitate the transmission of voice and data traffic, including network and subscriber equipment. This transmission may be in various forms, such as electronic signals over copper wire, optical signals over fiber cables and radio frequency (“RF”) or microwave signals. The NEMs’ customers are the distributors of end-user subscriber devices, including cell phones and personal digital assistants (“PDAs”), as well as communications service

providers that deploy and operate the networks and services. To meet their customers’ demands, NEMs require test and measurement instruments, systems and solutions for the development, production and installation of each network technology.

Communications service providers require reliable network equipment that enables their networks and services to operate at ever-faster speeds, permits an expanding capacity and provides quick feedback. To achieve this, communications service providers require a range of sophisticated test instruments and systems to evaluate network performance and to identify any sources of communications failure.

Agilent’s communications service provider customers require advanced software and systems, known as operations support systems (“OSSs”), to monitor and manage the network infrastructure and services on a continuous, proactive basis to achieve either regulated or customer-specified service levels. Real-time monitoring of the network infrastructure also enables the implementation of additional services, such as fraud detection and intercarrier billing, which enable service providers to capture the greatest revenue from network usage.

The overall market for cellular mobility, specifically in handsets, grew in recent years as the levels of wireless penetration in developed countries have increased. Wireless communications in emerging economies continues to increase. To advance cellular telephone equipment, manufacturers require electronic design automation software, test instruments and systems for the development of wireless devices, high-frequency communications circuits and systems. Cellular equipment manufacturers also require advanced, high-frequency test instruments and systems to develop, manufacture and deploy cellular base stations for these wireless networks. In addition, the rapid expansion of the cellular handset market, coupled with subscriber turnover created by the introduction of new technologies, has fueled growth for automated test equipment to test cellular handsets on the factory floor. Investments continue for advanced R&D verification solutions for 2.5 generation (“G”) and 3G appliance development and network deployment as the demand for complex wireless data networks increases.

Further, as new standards evolve in the wireless industry, new test and measurement equipment and systems have to be developed to enable testing of the new standards in the research, design and development and later in the manufacturing and deployment phases. An example of this is wireless fidelity (“Wi-Fi”), also called 802.11, for wireless local area networking. Companies are constantly finding applications for wireless technology, and are providing their customers wireless network access in areas called “hot spots,” such as airports, coffee shops and libraries. As the adoption of these new standards becomes mainstream, additional markets are emerging, including larger companies and their network operators. The use of wireless test and measurement solutions is quickly being adopted by these larger companies to ensure robust quality of service.

In the last several years, producers of networking communications equipment have increased their use of contract manufacturers. Contract manufacturers require test solutions that are designed for faster production and for use in different applications. Mobile phone and other appliance producers are also increasing their use of contract manufacturers, original design manufacturers and reference design platforms, including using contract manufacturers for functional test. This requires specialized test products and services to address the particular needs of these high-frequency products.

We market our general purpose test products and services to the electronics industry. The electronics industry designs, develops and manufactures a wide range of products, including those

produced in high volumes, such as computers, computer peripherals, electronic components, consumer electronics, enterprise servers, storage networks and communications devices including PDAs. The components, printed circuit assemblies and functional devices for these products may be designed, developed and manufactured by electronic components companies, by original equipment manufacturers or by contract manufacturers. For the development and timely commercialization of new technologies, manufacturers require state-of-the-art test instruments, systems and software design tools in order to design products for efficient and cost-effective manufacturing and to validate product performance in a variety of configurations and environments. Manufacturers of electronics products require sophisticated test equipment to operate and perform highly accurate tests from design through manufacturing. They also demand automated functional test systems, which test an electronic device as if it were in use in its final environment. Finally, electronics manufacturers require standardized test instruments, system components and complete solutions.

We also market our general purpose test products to the aerospace and defense industry. Aerospace and defense is an important market for standardized electronic equipment because of the high electronic content of advanced defense systems and defense-related communications and surveillance equipment. We believe that defense purchasers will continue to shift from specialized test equipment to commercial off-the-shelf test products and systems and will continue to require solutions that optimize asset utilization and effective technology lifecycle management.

Our test and measurement business designs, develops and manufactures test and measurement products and services that range from single-unit electronic measurement devices priced under $1,000 to large scale test systems or OSS solutions priced at $1 million and higher. We divide our test and measurement products into two groups: (1) communications test products and (2) general purpose test products.

We sell installation and maintenance solutions and OSS, including monitoring and network management systems, for the following types of communications networks and systems: fiber optics networks, transport networks, broadband and data networks, wireless communications and microwave networks.

Fiber Optic Network Products. Our fiber optic network test products include optical signal instruments, spectrum analysis instruments and lightwave optical systems, such as optical amplifier test, passive component test and jitter test instruments. These items are used by the industry’s leading NEMs to develop and manufacture reliable optical components and modules. Our products also include tunable laser sources, multi-wavelength meters, photonic all-parameter testers and high-speed bit-error rate testers that measure key transmission properties of high-speed optical and electrical signals.

Transport Network Products. Our transport network test products, our OmniBER OTN and OmniBER XM network simulators, provide capabilities for testing next generation Synchronous Optical Network/Synchronous Digital Hierarchy (“SONET/SDH”) network equipment. Our N2X multi-service tester combines services testing with carrier-grade infrastructure testing and emulation, and integrates the performance of Router Tester 900, OmniBER XM and SAN Tester.

Broadband and Data Network Products. Our broadband and data network test products include our Network Analyzer and Router Tester 900. Our Network Analyzer product line helps to troubleshoot high-speed local area networks (“LANs”), wide area networks (“WANs”) and asynchronous transfer mode networks. Our Router Tester 900 is the industry leader in core edge router performance verification.

Wireless Communications and Microwave Network Products. We design and sell RF and microwave test instruments and Electronic Design Automation (“EDA”) software tools, which assist in the design and production of cellular handsets and base stations, as well as satellite and aerospace defense systems. Examples of our wireless communications products include specialized versions of RF and microwave network analyzers, spectrum analyzers, signal sources, mobile testers, circuit simulation tools and system simulation tools. Agilent also offers solutions for centralized wireless LAN monitoring and network optimization. Our AiRMS solution provides remote monitoring of network performance using a series of remote probes deployed in service vehicles and taxicabs. The Agilent N5250A PNA series millimeter-wave network analyzer has frequency coverage from 10 MHz to 110 GHz in a single sweep. This capability enables engineers and system integrators working at millimeter-wave frequencies to take advantage of additional performance and connectivity, and gives them the ability to characterize 1.0 mm coaxial and on-wafer components, subsystems and systems.

Installation and Maintenance Solutions. Our solutions for installation test enable service providers to install, commission, and activate networks and services more quickly. Agilent has a breadth of solutions for troubleshooting and maintaining optical, wireless, wireline and large-company networks. These solutions include Fiber Break Locator, Network Tester, Optical Time Domain Reflectometers (“OTDR”), Network Troubleshooting Center, and Framescope. We also market bench-top and handheld measurement devices such as lightwave multimeters, power meters and optical sources.

Operations Support Systems and Services. Agilent’s OSS focus is to help communications service providers manage their business from a customer-centric perspective so they can understand how problems in network or service performance affect individual subscribers or groups of subscribers. Our integrated OSS solutions reduce software integration costs and enable high-value service-level management functions not possible with stand-alone systems. We offer a number of industry-proven monitoring and management systems, such as acceSS7 for Signaling System 7 networks; NETeXPERT for circuit, packet and hybrid networks; NgN Analysis System for next-generation telephony and Internet offload networks; Wireless Service Manager for wireless services and networks; and Wireless QoS Manager for mobile data services and networks.

We sell the following types of products into the general purpose test market: general purpose instruments, modular instruments and test software, digital design products and high frequency electronic design tools.

General Purpose Instruments. General purpose test instruments are used principally by engineers in R&D laboratories, manufacturing, calibration and service for measuring voltage, current, frequency, signal pulse width and other standard electronics measurements. Examples of our general purpose test instruments include spectrum analyzers, network analyzers, signal generators, digitizing oscilloscopes, voltmeters, multimeters, frequency counters, bench and system power supplies, function generators and waveform synthesizers.

Modular Instruments and Test Software. Our modular instruments and test software, including instruments incorporating the new LXI standard (LAN eXtensions for Instrumentation) and modular measurement system software, are used to dynamically configure and reconfigure test systems for designers and manufacturers of electronic devices. This allows easy and fast connectivity between instruments and PCs. In addition, release 14 of Agilent’s IO Library Suite reduces PC configuration and connect time to less than 15 minutes. Together with major revisions of Agilent VEE (7.0) and the Test & Measurement Programmers Toolkit for Visual Studio^® (2.0), these products speed test development and reduce the cost of test for our customers.

Digital Design Products. Our digital design products range from simple digital control circuits to complex, high-speed servers incorporating the latest microprocessor technology, and include high performance oscilloscopes, logic analyzers, logic-signal sources and data generators. Agilent’s 10 to 13 GHz real-time oscilloscopes are the only models in the industry that offer full-bandwidth, 40 GSa/s per channel. When these new scopes are paired with the Agilent InfiniiMax probes of up to 12 GHz, the new system delivers industry-leading performance, accuracy and probing connectivity. This is used by R&D engineers in the computer, communications and semiconductor industries for validating and verifying the performance of new high-speed digital product designs.

High-Frequency Electronic Design Tools. Our high-frequency electronic design automation software tools are used by RF integrated circuit design engineers to model, simulate and analyze communications product designs at the circuit and system levels. The main products in this area are the Advanced Design System (ADS), the RF Design Environment (RFDE) and the IC-CAP Device Modeling Software. Each are well-established software platforms within the wireless and the aerospace and defense design communities. Our customers are also applying this technology more frequently to model signal integrity problems in digital design applications.

Agilent’s test and measurement customers include the NEMs who design, develop, manufacture and install network equipment, and the service providers who implement, maintain and manage communication networks and services. Many of our customers purchase solutions across several of our major product lines for their different business units. As of the end of fiscal 2004, no single customer represented greater than 10% of the net revenue of the business.

The orders and revenues of the test and measurement business are somewhat seasonal, with our fourth quarter traditionally bringing larger volumes of business and our first quarter generally showing reduced volumes. This is especially true of products that we sell to the aerospace and defense industry as well as those that are linked to consumer spending, including some of our communications test equipment. However, the seasonal impact is tempered by the diversity of the test and measurement business’s products and customers, which span multiple industries.

We have a focused sales strategy, using a direct sales force, resellers, manufacturer’s representatives and distributors to strengthen customer satisfaction. Our direct sales force is focused on identifying customer needs and recommending solutions involving the effective use and deployment of our equipment, services, systems and capabilities. Some members of our direct sales force focus on global accounts, providing uniform services on a worldwide basis. Others focus on our more complex products such as our communications OSS monitoring systems, where customers require intensive strategic consultation. Our sales force also specifically targets the contract manufacturer market by collaborating with original equipment manufacturers to specify that contract manufacturers use our test equipment, as well as marketing to contract manufacturers directly.

Our direct sales force consists of field engineers and systems engineers who have in-depth knowledge of the customers’ business and technology needs. Some of our field engineers are account managers for our large accounts, and enhance our understanding of the future needs of these customers. Our systems engineers provide a combination of consulting, systems integration and application and software engineering services, and are instrumental in all stages of the sale, implementation and support of our complex systems and solutions.

To complement our direct sales force we have agreements with many channel partners around the world. These partners, including resellers, manufacturer’s representatives, and distributors, serve Agilent’s customers across a number of product lines and provide the same level of service and support expected from our direct channel. Our products come with clearly outlined warranties and extended warranties available for an additional cost.

We concentrate our test and measurement manufacturing efforts primarily on final assembly and test of our products. To maximize our productivity and our ability to respond to market conditions, we use contract manufacturers for the production of printed circuit boards, sheetmetal fabrication, metal die-casting, plastic molding and standard electronic components. We also manufacture proprietary devices and assemblies, in our own fabrication facilities for competitive advantage.

We generally only manufacture products when we have received firm orders for delivery, and do not generally hold large stocks of finished inventory. However, due to the large number of components and products we manufacture, we hold relatively large amounts of raw materials.

The market for test and measurement equipment is highly competitive, and we expect this competition to increase. Our test and measurement business competes with a number of significant competitors in all our major product categories and across our targeted industries. In the general purpose electronic test market, we compete against companies such as Fluke Corporation (a subsidiary of Danaher Corporation), Keithley Instruments, Inc., LeCroy Corporation, National Instruments Corporation and Tektronix, Inc. In the communications test market, our primary competitors are Acterna Corporation, Aeroflex Incorporated, Anritsu Corporation, EXFO Electro-Optical Engineering, Inc., Ixia, Marconi Corporation, McAfee, Inc. (formerly Network Associates, Inc.), Rohde & Schwartz GmbH & Co. KG, Spirent, Tektronix, Inc., as well as Telcordia, Hewlett Packard Company and Micromuse, Inc. in the communications network monitoring market. Our EDA business also has several software competitors, including Ansoft Corporation, APLAC Solutions Corporation, Applied Wave Research, Inc., Eagleware Manufacturing Company, Inc., and Xpedion Design Systems, Inc.

In fiscal year 2004 and following the general economic recovery, pricing pressure eased in some of our markets.

Our automated test business provides test solutions that are used in the manufacture of semiconductor devices, electronics (primarily printed circuit-board assemblies) and flat panel displays (“FPDs”). These solutions are complemented by consulting, service and support offerings such as start-up assistance, application services and system calibration and repair. Our automated test business’s test solutions enable electronics designers and manufacturers to shorten the design-to-production cycle, lower manufacturing cost of test, confirm the functional quality of their devices and of their manufacturing processes and accelerate the high-volume delivery of their products.

Our automated test business employed approximately 2,200 people as of October 31, 2004. We sell our automated test business’s solutions through direct sales and through manufacturers’ representatives. Our automated test business generated $0.9 billion in revenue in fiscal 2004, $0.8 billion in revenue in fiscal 2003 and $0.7 billion in revenue in fiscal 2002.

Agilent’s automated test business sells to the semiconductor manufacturing markets, the electronics manufacturing markets and the FPD markets. Customers in these markets use our automated test equipment for wafer-level parametric testing, wafer-sort and final sort for memory test, package-level functional test, structural and electrical testing and inspection for printed circuit board assemblies and thin-film transistor (“TFT”) array test for FPDs.

Market demand for automated test equipment is driven both by changes in the increased volume of semiconductor devices produced and by developments in semiconductor performance and function, packaging and assembly technology.

The development of increasingly faster and more complex semiconductor devices stimulates demand for testers capable of evaluating these high-speed devices. In addition, the continuing integration of functions, such as microprocessor, logic, analog, RF and logic, application specific integrated circuits (“ASICs”) and memory on a single integrated circuit has created a category of device called system-on-a-chip (“SOC”). These devices require updates to our sophisticated and flexible automated test equipment.

In the electronics manufacturing market, new technologies and processes, increasing density and miniaturization of parts, stimulate demand. New materials and smaller parts such as ceramic column grid arrays, ceramic ball grid arrays and ultra-miniature resistors or capacitors (“0201s”), make new demands on test equipment. The same is true for new and evolving manufacturing processes, such as the pending introduction of lead-free solder. This increases demand for test equipment that provides increased resolution for the highest call accuracy and a range of solutions to access issues.

The use of FPDs is becoming increasingly common in a wide variety of consumer devices that include cellular phones, digital cameras, liquid crystal display (“LCD”) televisions, computer displays, digital cameras and PDAs. Different technologies are evolving to improve brightness and resolution on the screens. A TFT array tester, such as the two testers introduced by our automated test business in October 2004, helps improve display quality while lowering costs. These TFT array testers detect defects accurately and early in the manufacturing process, regardless of the FPD technology being used.

Our automated test business designs, develops and manufactures semiconductor test equipment, electronics manufacturing test equipment and TFT array test equipment. We typically develop our automated test products on a single system architecture and then deliver, over time, enhancements to that architecture that extend its test capabilities. For instance, in 2004 Agilent expanded the capabilities of our 93000 SOC system by further expanding its high-speed performance to address emerging high-speed interconnect technology. At the same time, Agilent introduced a low-cost parallel probe (wafer sort) solution on the same platform. Our customers can adapt their 93000 SOC system according to their needs without having to buy multiple unique testers. We also introduced the V5400 memory tester, based on current Agilent Versatest architecture, that addresses the growing phenomenon of stacked, mixed memory chips, including any combination of flash, dynamic random access memory (“DRAM”) and static random access memory (“SRAM”).

We produce semiconductor test equipment to perform electrical functional testing of the operation of logic, memory, mixed analog and digital signal, RF, microwave and SOC integrated

circuits. Our parametric test instruments and systems combine hardware technology and customizable system software, and are used to examine semiconductor wafers during the semiconductor manufacturing process. Our product development efforts are targeted at leading edge technologies, such as high-speed interconnects, highly integrated mixed-signal memory, parametric test for 90nm and below geometries, and emerging-technology FPDs.

Our semiconductor test equipment tests a variety of different circuit types. We test both at the wafer level and at final assembly. We are an industry leader in wafer-sort test solutions for flash memory devices, which retain data even when the power is turned off and that are used in digital cameras, cellular phones, PDAs and storage of portable digital audio files. Our flash memory test products can test as many as 4,608 channels to test multiple devices in parallel, greatly improving test throughput and lowering test costs for our customers. Our SOC test system can test not only multiple devices at a time, but also multiple functional elements on a given device at the same time. As a result of its scalable platform architecture, this system can be field-upgraded to the latest technology without the customer needing to buy a new system or shut down the production line for an extended time.

Automated Optical Inspection Products. Our automated optical inspection line of products enables automated visual inspection of printed circuit assemblies. These systems locate, with a high degree of repeatability and reliability, misplaced and misaligned parts, gross solder defects and other process faults without the need for a human inspector.

Automated X-ray Inspection Products. Our leading x-ray inspection products provide a three-dimensional scan of printed circuit board assemblies to identify and isolate quality defects caused by the manufacturing process. Our products can look through a device to identify structural defects in soldering that are not identified by visual inspection and that may not be detected with in-circuit testing.

Automated In-Circuit Testing Products. Our leading in-circuit testers use a probe fixture that makes electrical contact with the circuit board. These systems make electrical measurements that identify quality defects such as bad and incorrect parts that affect electrical performance, and allow repair of the defects while it is still relatively inexpensive to make the diagnosis and repair.

Manufacturing Test System Software. Our Agilent Quality Tool and Agilent Repair Tool software use the Agilent Intelligent Test Framework that connects and integrates information from the Agilent portfolio of test and inspection equipment. The software provides common tools to enable customers to use information across the manufacturing line for effective process control, repair and test design.

Effective production process testing is essential for FPD manufacturing, because most failures occur during the TFT array process, and correcting overlooked failures post-process is prohibitively expensive. Our TFT array tester family, introduced in October 2004, provides FPD manufacturers with a test solution for all key technologies in the rapidly growing FPD market. An array tester can provide significant cost savings by detecting defects early in the process of manufacturing FPDs.

Many of our customers purchase solutions across several of our major product lines for their different business units. Generally, our customers are involved in producing digital consumer and

wireless products, computation, PC and PC peripherals, wireline communications, or enterprise networking and storage. As of the end of fiscal 2004, no single customer represented greater than 10% of the net revenue of the business.

We also engage in collaborative, co-development relationships with electronics industry leaders and contract manufacturers.

The back-to-school and holiday seasons affect our automated test business to the extent that we are subject to the cycles of consumer electronics manufacturing. Our customers include manufacturers who produce a wide range of consumer electronics equipment requiring the test of semiconductors, printed-circuit board assemblies and FPDs.

Our automated test business’s products are distributed using direct sales and through manufacturers’ representatives. Some portions of the direct sales force provide general services around the world, while others provide specialized consultation services for particular segments of the automated test business. Manufacturers’ representatives address specific geographic markets. They provide the same level of service and support to Agilent’s customers as is expected from our direct channel.

Our automated test business has manufacturing facilities in Germany, Japan and Singapore, and contract manufacturing relationships in Europe, Asia, Japan and the U.S. We do not maintain a high level of finished goods inventory, due to a combination of product platform strategy and outsourcing. However, for those products that we do manufacture, we hold relatively large amounts of raw materials.

The market for automated test solutions is highly competitive, and we expect this competition to increase. Our automated test business competes with a number of significant competitors in all our major product categories and across our targeted industries. In the semiconductor test market, we compete primarily against Advantest Corporation and Teradyne. In the electronics manufacturing test market, we compete primarily against Teradyne. In the large-panel FPD test market, we compete against Photon Dynamics, Applied Komatsu Technologies and Shimadzu Corporation. In emerging FPD technologies, we compete primarily against Wintest.

Most of our equipment competes primarily on performance or differentiated capabilities. Other contributing factors include cost of test, system scalability and flexibility, sensitivity, speed, reliability and yield.

Our semiconductor products business is a leading supplier of semiconductor components, modules and assemblies for consumer and commercial electronics applications. We design, develop and manufacture products for the networking and personal systems markets. Our networking products include fiber optic transceivers for sending and receiving data over high-speed networks and ICs for enterprise storage and networking. In 2004 and 2003, about two-thirds of the semiconductor products business came from customers in consumer electronics markets.

As of October 31, 2004, our semiconductor products business had approximately 6,800 employees worldwide. Our semiconductor products business generated revenue of $2.0 billion in fiscal year 2004, $1.6 billion in fiscal year 2003 and $1.6 billion in fiscal year 2002.

We sell products into the Personal Systems market, which are targeted for use in applications including mobile phones, printers, PC peripherals and consumer electronics.

The driving trend in mobile communications is for higher-speed, higher-bandwidth connections to offer subscribers more digital services through their mobile phones. Consumer products that realize the convergence of palm-top computing, mobile telephony and digital imaging are increasingly appearing on the market.

We sell products into the networking market, including computing, storage, local area and public network applications. There is a continued evolution of networks both private (local area and storage area networks) and public (metro and wide area networks) to higher speeds and greater bandwidth driven by the ongoing growth of data traffic. Business-to-consumer and business-to-business e-commerce, the internet, the growing volume of e-mail traffic, the growth of streaming video and audio, the delivery of online services, and peer-to-peer communications are all generating ever greater volumes of electronic data that must be processed, moved and stored. As a result, both private and public network managers drive a continual process of upgrading their networks to higher speeds and increased scalability. Fiber optic transceivers and high-speed digital ICs are the semiconductor technologies that help enable higher speed, higher performance networks.

Our semiconductor products business designs and sells semiconductor components modules and assemblies. The major product areas of our semiconductor products business include:

Radio Frequency and Microwave Communications Device Products. We produce a broad family of RF and microwave communications products, primarily integrated circuits for wireless communications products and infrastructure. Our latest products are the Film Bulk Acoustic Resonator (“FBAR”) duplexer, a semiconductor based filter product, and E-pHEMT power amplifiers, a high power-added efficient wireless transmitter solution. The FBAR duplexer and the E-pHEMT power amplifier help enable smaller, more functionally rich mobile telephones. These two products are targeted for both current and future generation mobile phones. We began increasing the production of these two products towards the end of 2003. They have been among the top growth areas for our semiconductor products business.

Infrared Emitters, Detectors and Transceiver Module Products. We are a leading supplier of infrared (“IR”) products that enable short range, point-to-point wireless communication between portable and stationary devices, including notebook personal computers, printers, cellular phones, PDAs, pagers and digital cameras. In 2003, we delivered the industry’s first infrared transceiver with remote control functionality for consumer electronics devices such as TVs and VCRs. The semiconductor products business also introduced a solution, known as the Ambient Light Photo Sensor, that senses available light and signals whether backlighting for displays or keypads is required. By not turning on backlighting when it is not needed, mobile systems can save significant battery life. In 2004 we introduced products for Infrared Financial Messaging (“IrFM”), a standard for wirelessly sending digital transactions through use of an IR transceiver in a cell phone, PDA or

digital wallet. These payment transactions can take place between a customer and millions of point-of-sale devices to provide instant IR connectivity for secure wireless payment.

Printing ASICs. We are a leading supplier to Hewlett-Packard for printing ASICs, which are the central processing ICs for Hewlett-Packard laser printers, inkjet printers and all-in-one products. Agilent provides subsystem solutions for Hewlett-Packard printers, aimed at capturing more content of printer components and offering higher integration and shorter time-to-market.

Optical Image Sensors and Processors, and Optical Position Sensors. Our products include sensors used in embedded camera modules for mobile phones, and navigation sensors for laser and LED optical mice. We also produce optical motion control products used primarily for precision paper handling and positioning in inkjet printers and all-in-one products. In the fourth quarter of 2004 we agreed to sell inventory and fixed assets relating to our camera module business. We will continue to sell the image sensors that are a component part of the camera modules, but after the sale we will no longer produce the assembled modules. We will retain intellectual property and research and development activities associated with the image sensor technology.

LEDs and Optocoupler Products. We manufacture and sell a broad range of LEDs, alphanumeric displays and optocouplers used in consumer electronics, factory automation and transportation. LEDs are semiconductor devices that emit light when an electrical signal is applied. Optocoupler products are devices that provide both electrical insulation, for protection, and signal isolation, to prevent distortion of data between differing electrical environments. We are a leading supplier of optocouplers for use in Plasma Display Panel (“PDP”) digital TVs. We provide integrated color management solutions and color sensor applications for LEDs which are used for color detection, measurement and control capabilities that can be integrated into different applications including LCD TVs using LED backlights. We are a leading supplier of LED optoelectronic solutions used for keypad and display backlighting, and for camera flash.

Lighting Joint Venture. We are engaged in a global joint venture, Lumileds, with Philips Electronics. Lumileds develops, manufactures and sells LEDs, modules, products and systems for a broad spectrum of lighting applications, including automotive lighting, high-brightness traffic signals, contour lighting and signs, outdoor illumination and white LEDs for both indoor and outdoor applications. In 2004, consumer electronics companies introduced the first products that employ LEDs as an alternative to Cold Cathode Fluorescent lamps (“CCFLs”) as a source of backlighting in LCD displays.

Fibre Channel Controller Products. We are the leading supplier of controller ICs for Fibre Channel. The Fibre Channel interconnect protocol, a standard for the transfer of information between computers and storage devices defined by the American National Standards Institute, is the leading technology for building storage area networks (“SANs”). In 2004 we introduced the industry’s first 4 Gb/s Fibre Channel controller ICs. The controllers offer storage OEMs performance and port density in a single chip. 4 Gb/s Fibre Channel controller IC provides the industry’s highest performance for redundant arrangement of independent disk (“RAID”) arrays, storage subsystem virtualization devices, storage routers, host bus adapters and host computer motherboards for mid- to high-end storage applications that use multiprocessor systems. These newest products expand our leading portfolio of Fibre Channel controller solutions for 1 and 2 Gb/s. We also offer physical layer ICs, which connect processing ICs, such as our Fibre Channel controllers, to fiber optic transceivers for data transmission.

Fiber Optic Products. We are a leading supplier of fiber optic transceivers, which convert electronic digital data into light signals for transmission, and convert light signals back into

electronic digital form on the receiving end of the communication. We market optical transceivers, transmitters and receivers for high-speed data communications for Fast, Gigabit and 10-Gigabit Ethernet, 2 and 4 Gb/s Fibre Channel, and Asynchronous Transfer Mode/Synchronous Optical Network (“ATM/SONET”) applications up to 2.5 gigabits per second (OC-48). In addition, we are developing products for dense wave division multiplexing (“DWDM”) optical transport applications.

High-Speed Digital Integrated Circuit Products. We provide core electronics chipsets that support central processing units for selected Hewlett-Packard workstations and servers. We provide customer-specific ASIC solutions for next-generation data switching products. Finally, we are a provider of state-of-the-art ASICs and networking ICs for use in next-generation network switches.

We sell to customers in the networking and personal systems markets. We sell to original equipment manufacturers directly, as well as contract manufacturers. As we move toward more consumer-centric products, including components for mobile phones and for optical mice, we expect our business to reflect the seasonality inherent in the consumer market.

Our semiconductor technology licensing and supply arrangements with Hewlett-Packard limit our ability to sell products to other companies, subject to restrictions contained in the exhibits to our Master Patent Ownership and License Agreement with Hewlett-Packard and our ICBD Technology Ownership and License Agreement with Hewlett-Packard, which are exhibits to this Annual Report on Form 10-K. Through sales of ASICs, storage area networking components and motion-control products, Hewlett-Packard accounted for approximately 14 percent of our semiconductor products revenue in fiscal year 2004, 20 percent in fiscal year 2003 and approximately 33 percent in fiscal year 2002.

Our semiconductor sales organization consists of approximately 300 employees who have responsibility for emerging accounts or for large, global accounts. Our sales force has specialized product and service knowledge that enables it to sell specific offerings at key levels throughout a customer’s organization. We also have a direct sales team that focuses on supporting major contract manufacturers. In addition to direct sales, we generate approximately 30 percent of our revenue through our relationships with key electronic distributors worldwide. We also provide a broad range of products and applications-related information to customers and channel partners via the Internet.

The majority of our silicon and gallium arsenide wafer fabrication is done in the U.S. and Singapore, while our assembly and test operations are in Malaysia and Singapore. In addition to these facilities, we utilize a network of contract manufacturers throughout Asia for semiconductor fabrication, packaging and test.

Our manufacturing strategy has been to outsource more mature technologies while using our in-house manufacturing fabrication, assembly and test capabilities to develop new products. Our production facilities have developed several quality-management processes designed to increase productivity. We have developed proprietary automated test systems, particularly in optical, LED and microwave test.

For selected customers, we maintain finished goods inventory near or at customer manufacturing sites to support their just-in-time production. In 2004, we negotiated extended payment terms for most of the materials that we purchased.

The markets for our semiconductor products are intensely competitive, and we expect competition to increase. Our ability to compete effectively depends on a number of factors, including:

In the fiber-optic products market, our principal competitors are Finisar, Infineon and JDS Uniphase. In the market for high-speed digital ICs, our principal competitors are IBM, LSI Logic, Texas Instruments and Vitesse Semiconductor Corporation. Our principal competitors in RF wireless are Renesas, RF Micro Devices and SkyWorks. In the market for infrared products, our principal competitor is Vishay Intertechnology, Inc. We compete with companies including LSI Logic, Motorola and STMicroelectronics for printer ASICs. Principal competitors in our LED businesses include Lite-on, Inc., Nichia, Osram, Stanley Electronic Co. Ltd. and Toshiba.

We employed approximately 3,900 people as of October 31, 2004 in our life sciences and chemical analysis business. This business generated revenue of $1.3 billion in fiscal 2004, $1.2 billion in fiscal 2003 and $1.1 billion in fiscal 2002.

Primarily, our life sciences and chemical analysis business serves the following markets:

Our life science markets account for approximately 40 percent of revenue from our life sciences and chemical analysis business. Agilent’s life science solutions are used by academic researchers, government institutes and pharmaceutical and biopharmaceutical companies in every phase of the drug development process. The drug development process includes research into the basic causes and understanding of disease, drug discovery, drug development, drug manufacturing and quality assurance/quality control (“QA/QC”). Within the life sciences, we focus on the following areas: pharmaceutical analysis (drug development, manufacturing and QA/QC), gene expression and proteomics.

The Pharmaceutical Analysis Market. Pharmaceutical and biopharmaceutical companies develop and manufacture drugs under strict regulatory guidelines intended to ensure the quality of products developed and given to patients, and to ensure the security and quality of information given to regulatory agencies. We provide liquid chromatography, gas chromatography and mass

spectrometry solutions for the analysis of chemicals, and provide compliance services and data systems designed to further enable compliance with relevant regulations of the Food and Drug Administration (“FDA”) and other regulatory agencies.

The Gene Expression Market. Biological researchers today can study organisms and diseases based on genetic material. Gene expression researchers use devices called microarrays to measure the activity levels of many genes in a cell simultaneously for the purpose of understanding and characterizing disease, identifying drug targets and identifying patterns of gene activity that correlate to the potential toxicity or effectiveness of a drug. This is a double-digit growth market in which our microarray, microfluidics and informatics solutions are sold.

The Proteomics Market. When a drug enters the body, it usually targets one or more proteins. Proteomics is a new and growing field with the goal of identifying, characterizing and analyzing proteins on a high-volume scale. Proteomics is also important to the large-scale manufacture of protein-based therapies in development by biotech companies. Protein scientists currently apply traditional protein analysis technologies such as liquid chromatography, gas chromatography and mass spectrometry, as well as newer microfluidics technologies and reagents. We provide solutions in all of these areas and are investigating new technologies for proteomics research.

Our chemical analysis markets account for approximately 60 percent of revenue from the life sciences and chemical analysis business. Agilent’s chemical analysis solutions are used by corporations, government organizations and academic researchers to detect, characterize, quantify and analyze chemicals and biological entities that could affect human health, both those found in the environment and those created in the manufacturing of products. Within chemical analysis, we focus primarily on the following areas: petrochemical, environmental, homeland security and forensics and bioagriculture and food safety.

The Petrochemical Market. The natural gas and petroleum refining markets use our products to measure and control the quality of their finished products and to verify the environmental safety of their operations. We sell gas chromatographs, liquid chromatographs and mass spectrometers into these markets. Petroleum refiners use our measurement solutions to analyze crude oil composition, perform raw material analysis, verify and improve refining processes and ensure the overall quality of gasoline, fuels, lubricants and other products. Our gas chromatographs are also used to monitor consistent quality in the delivery of natural gas.

The Environmental Market. Our gas chromatography, liquid chromatography and mass spectrometry solutions are used by the environmental market for applications such as laboratory and field analysis of chemical pollutants in air, water, soil and solid waste. Environmental industry customers include all levels of government, the industrial and manufacturing sectors, engineering and consulting companies, commercial testing laboratories and colleges and universities. We are seeing increased international demand for environmental instrumentation in the Asia-Pacific region.

The Homeland Security and Forensics Market. Our liquid chromatography, gas chromatography, mass spectrometry and microfluidics solutions are used by health and forensics laboratories in the U.S. and abroad, particularly in the analysis of evidence associated with crime or with the detection and identification of biological and chemical warfare agents. This instrumentation is either used in static or mobile laboratories. Customers include local, state, federal, and international law enforcement agencies and health laboratories.

The Bioagriculture and Food Safety Market. Food safety industries apply the same general technologies for chemical analysis as the pharmaceutical and environmental markets, including gas and liquid chromatography and mass spectrometry. Additionally, bioagriculture industries seek to improve crops and foods by conducting research on these organisms, as well as testing for genetically modified content, using microarray and microfluidics solutions.

A key factor in all of our life sciences and chemical target markets is the need for new products that increase customer productivity and provide high quality data that enables decision-making by our customers.

Since announcing the launch of our DNA microarray program for the life sciences in December 1999, we have become the second leading supplier of microarray solutions which we sell primarily to pharmaceutical companies, biotech companies and academia. Using our refined inkjet manufacturing process, we make highly sensitive 60-mer oligonucleotide (“oligo”) microarrays. This unique inkjet process is highly flexible and accurate, enabling the faster manufacture of new and custom high-density microarrays with highly uniform spot shape.

In 2004, we introduced our line of whole genome microarrays, including kits for human, mouse and Arabidopsis, a model plant organism. In a collaborative effort, we also commercialized the first 60-mer oligo microarray for the study of rice, a staple food for half the world’s population. We now provide microarrays for the study of human, mouse, rat, Arabidopsis, rice, rice blast (a type of rice fungus) and yeast.

The Agilent 2100 bioanalyzer is the first commercial microfluidics solution for the analysis of a wide range of biological molecules, including DNA, RNA, proteins and cells. The bioanalyzer chips allow sample quality assessment to be done in a fraction of the usual time using less sample and reagents. This technology could eventually replace traditional gel electrophoresis in many applications.

In 2004, we introduced the Agilent 2100 Expert Software with compliance features that enable the bioanalyzer to be used for the development and manufacture of protein-based therapeutics in the pharmaceutical and biotechnology industries.

To standardize RNA quality measurement using the bioanalyzer, Agilent introduced a beta version of its RNA integrity number (“RIN”) software. It is the first tool for objectively grading and communicating the quality of RNA used in experiments.

In November 2004, Agilent introduced the first fully automated, high-throughput lab-on-a-chip system, which will enable unattended analysis of thousands of DNA or protein samples per day.

We produce gas chromatography systems, both portable and stationary. A gas chromatograph (“GC”) is used to separate any gas, liquid or solid molecules that can be vaporized in order to determine the quantity and identity of the molecules present. As a market leader in gas chromatography, we continue to expand its applications with new columns and supplies, as well as product and software enhancements.

In 2004, we introduced a network headspace sampler that features an inert sample pathway and significant improvements in sensitivity, performance and productivity. We also introduced a thermal

performance qualification service for Agilent gas chromatographs, which helps to verify that a GC’s heated zones (oven, injection ports and detectors) are working properly. In April, Agilent also became the first company to offer online training for gas chromatography.

A liquid chromatograph (“LC”) or a high performance liquid chromatograph (“HPLC”) is used to separate molecules of a liquid mixture to determine the quantity and identity of the molecules present. Used when gas chromatography is not an option, these instruments are modular in construction and can be configured to form instruments that perform specific analyses. We offer a HPLC system, the Agilent 1100 Series, with over 50,000 systems sold since its introduction. As a leader in liquid chromatography, we continue to expand its applications with new LC and HPLC columns and provide ongoing product and software enhancements.

In 2004, we introduced improvements to the Agilent 1100 Series HPLC purification system. We released a new dual loop autosampler for the purification platform that provides flexible sample handling and high sample throughput in a compact design that conserves critical bench space. We also released new purification system software, which provide flexible functionality for preparative HPLC, enabling users to add modules for specific needs.

We also introduced the Agilent 1100 Series HPLC micro collection/spotting system. It is a complete software-controlled separation solution for proteomics that features direct spotting on matrix-assisted laser desorption/ionization mass spectrometry (MALDI-MS) targets.

A mass spectrometer (“MS”) identifies and quantifies chemicals based on a chemical’s molecular mass and on characteristic patterns of fragment masses that result when a molecule is broken apart. Mass spectrometry is an important tool in analyzing proteins and other biological entities that undergo transformations because it enables the understanding and characterization of their many different states. MS systems are typically used in combination with gas or liquid chromatographs.

In the past three years, Agilent significantly expanded its mass spectrometry portfolio with a focus on ease of use, sensitivity and reliability. We introduced several instruments including new ion trap, time-of-flight (“TOF”) and inductively coupled plasma mass spectrometry (“ICP-MS”) systems. We also significantly upgraded our existing LC/MS and GC/MS quadrupole systems.

In 2004, we continued to expand our MS portfolio with several new products and solutions. We introduced a new 7500ce ICP-MS system, which is up to five times more sensitive than its predecessor. We introduced the Agilent LC/MSD Trap XCT Plus ion trap MS, which is four times more sensitive than its predecessor. We upgraded our TOF MS by providing new autotuning and compatibility features and improving its integration with our capillary electrophoresis system. We introduced the Agilent protein identification solution, a multiple-system LC/MS package for proteomics and pharmaceutical applications.

We provide software for controlling instruments, managing the laboratory, and analyzing the data generated by instrument platforms.

Early in 2004, Agilent introduced a new version of the Agilent Cerity Networked Data System for Pharmaceutical QA/QC that is the first system of its kind to provide automated 3-D analysis, generic instrument control and a spreadsheet-style custom calculator. We also released the Agilent

MSD Security ChemStation, the first Agilent data system for GC/MS that facilitates the regulatory-compliant use of GC/MS in pharmaceutical environments.

Agilent also announced an exclusive agreement in the life sciences area to market, sell and support Scientific Software’s CyberLAB Enterprise Content Management System, a Web-based electronic library that collects, organizes, indexes, stores, archives and shares electronic records.

Agilent shipped an upgrade to its Spectrum Mill MS proteomics workbench for better performance and ease of use in a broad range of proteomics applications. We also released new protein confirmation software for the TOF that allows researchers to easily and reliably check the identity and purity of proteins.

In October 2004, we acquired Silicon Genetics, a leading provider of software solutions for life science discovery. The acquisition adds several new products to Agilent’s portfolio: GeneSpring, a genomics expression data visualization and analysis solution; Varia, high-volume genetic variation analysis software; and GeNet, a scalable repository for expression data.

We also announced an agreement to partner in an $11.7 million grant from the National Institute of Standards and Technology’s Advanced Technology Program to develop informatics technologies for life science research.

We also offer a broad range of consumable products, which support our LC, GC and MS technology platforms. These consumable products include chemical and biological reagents, instrument replacement parts, brand-specific chromatography columns and consumable supplies to meet our customers’ analysis needs. All of our products, which include generic and proprietary supplies, are designed to work together.

Our support services include all of our chemical and bioinstrumentation analysis hardware and software maintenance, troubleshooting, repair and training. Special service bundles have also been designed to meet the specific analysis instrument needs of various industries.

In 2004, we continued to expand our portfolio of consumables and services. We introduced new versions of our multiple affinity removal system for protein research, including a new LC column that removes the three most abundant proteins from mouse serum and a new spin cartridge format.

We introduced a Lys Tag 4H reagent kit for tagging lysine peptides during MS analysis. We released Agilent Prep LC columns, a line of preparative LC columns designed specifically for industrial-scale purification of target compounds in the pharmaceutical industry. We also introduced the HP-88, a long-lasting GC column designed specifically for efficient, reliable analysis of trans fatty acid content in food.

Our top 25 customers account for approximately 21 percent of revenue within our life sciences and chemical analysis businesses. We have roughly 21,000 customers, and as of the end of fiscal 2004, no single customer represented greater than 10% of the net revenue of the business.

The life sciences and chemical analysis business is susceptible to seasonality in its orders and revenues primarily based on U.S. government and large pharmaceutical company budgets. The result is that our first and fourth fiscal quarters tend to deliver the strongest profits for this group.

However, general economic trends, new product introductions and competition might overshadow this trend in any given year.

Our sales and support delivery channels are aligned by key markets. We market products to our customers through direct sales, electronic commerce, resellers, manufacturers’ representatives and distributors. Additionally, we are optimizing our worldwide distribution capabilities to address high-growth opportunities such as the environmental, food safety and pharmaceutical markets in the Asia-Pacific region.

We use direct sales to market our solutions to all of our pharmaceutical and biopharmaceutical accounts, large- and medium-sized chemical customers and environmental accounts. Sales agents supplement direct sales by providing broader geographic coverage and coverage of smaller accounts. Our active reseller program augments our ability to provide more complete solutions to our customers. We sell our consumable products through distributors, telesales and electronic commerce.

We offer a wide range of startup, operational, educational and compliance support services for our measurement and data handling systems. We deliver our support services to customers in a variety of ways, including on-site assistance with repair or exchange of returned products, telephone support and self-diagnostic services provided over the Internet. We also offer special industry-focused service bundles that are designed to meet the specific needs of hydrocarbon processing, environmental, pharmaceutical and biopharmaceutical customers to keep instruments fully operational and compliant with the respective industry requirements.

Our manufacturing supports our diverse product range and customer-centric focus. We assemble highly configurable products to individual customer orders and make standard products to stock. We employ advanced manufacturing techniques and supply chain management systems to reduce costs and manufacturing cycle times. We selectively use third parties to provide manufacturing capabilities outside our core competencies, such as the manufacture of printed circuit assemblies and the delivery of shipment logistics. We have manufacturing facilities in California and Delaware in the U.S., China, Germany and Japan. We utilize just-in-time manufacturing, and so typically do not maintain a high level of inventory. Our products typically come with standard warranties, and extended warranties are available for additional cost.

The markets for analytical instruments in which we compete are characterized by evolving industry standards and intense competition. Our principal competitors in the life sciences arena include: Affymetrix®, Applied Biosystems, GE Healthcare, Invitrogen, Thermo Electron and Waters. Our principal competitors in the chemical analysis arena include: Applied Biosystems, Perkin Elmer Corp., Shimadzu Corporation, Thermo Electron and Varian. Agilent competes on the basis of product performance, reliability, support quality, applications expertise and global channel coverage.

The analysis products and related consumables marketed by our chemical analysis business are subject to regulation in the U.S. by the Environmental Protection Agency (“EPA”) under the Toxic Substances Control Act, and by government agencies in other countries under similar laws. The Toxic Substances Control Act regulations govern, among other things, the testing, manufacture, processing and distribution of chemicals, the testing of regulated chemicals for their effects on

human health and safety and import and export of chemicals. The Toxic Substances Control Act prohibits persons from manufacturing any chemical in the U.S. that has not been reviewed by EPA for its effect on health and safety, and placed on an EPA inventory of chemical substances. Therefore, we must continually adapt our chemical analysis products to changing regulations. If we fail to comply with the notification, record-keeping and other requirements in the manufacture or distribution of our products, the EPA can obtain an order from a court that would prohibit the further distribution or marketing of a product that does not comply or we could face fines, civil penalties or criminal prosecution.

Agilent Labs, based in Palo Alto, California, with satellite offices in China; Fort Collins, Colorado; and Scotland, is our central research organization. Agilent Labs engages primarily in two types of research: 1) applied research that leads to technology that can be transferred to our existing businesses in communications, life sciences, and electronics, and 2) research that creates new businesses that are outside of our current markets but within our fields of interest. Agilent Labs also provides technology integration across our company.

Agilent Labs employs approximately 300 people. About 70 percent of Agilent Labs’ employees are members of the technical staff, and about 70 percent of the technical staff have advanced degrees that cover a wide range of scientific fields, including biology, bioinformatics, chemistry, computer science, electrical engineering, image processing, materials science, mathematics, optoelectronics, photonics, physics, physiology, semiconductor technology and systems integration.

The following discussions of Research and Development, Backlog, Intellectual Property, Materials, Environmental, International Operations and Acquisition and Disposal of Material Assets include information common to all four of our segments.

Research and development expenditures were $933 million in 2004, $1,051 million in 2003 and $1,250 million in 2002, the vast majority of which was company-sponsored. We anticipate that we will continue to have significant R&D expenditures in order to maintain our competitive position with a continuing flow of innovative, high-quality products and services.

We believe that backlog orders are not a meaningful indicator of future business prospects. Backlog, as we define it, generally only represents cumulative outstanding orders that are scheduled for delivery within a six-month period. Therefore backlog is not a material indicator of our future medium- to long-term business prospects. We believe that our incoming orders in any given period are more indicative of short-term revenue trends for our businesses. However, for our Semiconductor Products business, neither backlog nor orders are indicative of future business prospects since the time between receipt of an order and revenue recognition has decreased significantly during 2004. See “Results of Continuing Operations” in Item 7 of this report.

Our general policy has been to seek patent and other intellectual property protection for those inventions and improvements likely to be incorporated into our products and services or to give us a competitive advantage. While we believe that our licenses, patents and applications have value, in general no single patent or license is in itself essential. In addition, there can be no assurance that any of our proprietary rights will not be challenged, invalidated or circumvented, or that our rights will provide significant competitive advantages.

Our manufacturing operations employ a wide variety of semiconductors, electromechanical components and assemblies and raw materials such as plastic resins and sheet metal. Each of our segments purchases materials from thousands of suppliers on a global basis. No single supplier is material, although some of the parts that require custom design work are not readily available from alternate suppliers due to their unique design or the length of time necessary for design work. Our long-term relationships with our suppliers allow us to proactively manage technology road maps and product discontinuance plans and monitor their financial health. Even so, some suppliers may still extend their lead times, limit supplies, increase prices or cease to produce necessary parts for our products. If these are unique components, we may not be able to find a substitute quickly, or at all. To address the potential disruption in our supply chain, we use a number of techniques, including qualifying multiple sources of supply, redesign of products for alternative components and purchase of incremental inventory for supply buffer.

Our R&D, manufacturing and distribution operations involve the use of hazardous substances and are regulated under international, federal, state and local laws governing health and safety and the environment. We apply strict standards for protection of the environment and worker health and safety to sites inside and outside the U.S., even if not subject to regulation imposed by foreign governments. We believe that our properties and operations at our facilities comply in all material respects with applicable environmental laws and worker health and safety laws; however, the risk of environmental liabilities cannot be completely eliminated and there can be no assurance that the application of environmental and health and safety laws to Agilent will not require us to incur significant expenditures. We are also regulated under a number of international, federal, state and local laws regarding recycling, product packaging and product content requirements. These laws are gradually becoming more stringent and may in the future cause us to incur significant expenditures.

Some of our operations are located on properties that are known to have subsurface contamination undergoing remediation by Hewlett-Packard. Hewlett-Packard has agreed to retain the liability for the contamination, perform the required remediation and indemnify us with respect to claims arising out of the contamination. The determination of the existence and cost of any additional contamination caused by us could involve costly and time-consuming negotiations and litigation. While we expect that Hewlett-Packard will meet its remediation and indemnification obligations in this regard, there can be no guarantee that it will do so. Under our agreement with Hewlett-Packard, Hewlett-Packard will have access to these properties to perform the remediation. Hewlett-Packard has agreed to minimize interference with on-site operations at those properties during the course of the remediation, but there can be no guarantee that our operations will not be interrupted or that we will not be required to incur unreimbursed costs associated with the remediation. Remediation could also harm on-site operations and the future use and value of the properties.

In addition, some of these properties are undergoing remediation by Hewlett-Packard under an order of an agency of the state in which the property is located. Although Hewlett-Packard has agreed to indemnify us with respect to that subsurface contamination, it is possible that one or more of the governmental agencies will require us to be named on any of these orders. The naming of Agilent will not affect Hewlett-Packard’s obligation to indemnify us with regard to these matters.

We are liable and are indemnifying Hewlett-Packard for any contamination found at all facilities transferred to us by Hewlett-Packard excluding the properties undergoing remediation. In addition, we are indemnifying Hewlett-Packard for any liability associated with past non-compliance with environmental laws regulating ongoing operations at all properties transferred to us by Hewlett-

Packard, as well as at sold or discontinued businesses that are related to our businesses. While we are not aware of any material liabilities associated with such indemnified matters, there is no guarantee that such contamination or regulatory non-compliance does not exist, and will not expose us to material liability in the future.

We are being indemnified by Hewlett-Packard with respect to all environmental liabilities for which Hewlett-Packard accrued a reserve and we are not aware of any material and probable environmental liabilities being assumed by us which are not subject to the indemnity.

Our net revenue originating outside the U.S., as a percentage of our total net revenue, was approximately 69 percent in fiscal 2004, 64 percent in fiscal 2003 and 61 percent in fiscal 2002, the majority of which was from customers other than foreign governments. Approximately 11 percent of our revenue in the last three years was derived from Japan. Revenues from external customers are generally attributed to countries based upon the location of the Agilent sales representative. Long-lived assets located outside of the U.S., as a percentage of our total long-lived assets, was approximately 53 percent in fiscal year 2004, 47 percent in fiscal year 2003 and 43 percent in fiscal year 2002. Approximately 12 percent of our long-lived assets were located in Japan in fiscal year 2004, approximately 14 percent were located in Japan in fiscal year 2003 and approximately 10 percent in fiscal year 2002.

Most of our sales in international markets are made by foreign sales subsidiaries. In countries with low sales volumes, sales are made through various representatives and distributors. However, we also sell into international markets directly from the U.S.

Our international business is subject to risks customarily encountered in foreign operations, including interruption to transportation flows for delivery of parts to us and finished goods to our customers, changes in a specific country’s or region’s political or economic conditions, trade protection measures, import or export licensing requirements, unexpected changes in tax laws and regulatory requirements, difficulty in staffing and managing widespread operations, differing labor regulations and differing protection of intellectual property. We are also exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, and assets and liabilities denominated in currencies other than the local functional currency, and may also become subject to interest rate risk inherent in any debt we incur, or investment and finance receivable portfolios we hold. The U.S. and international response to recent terrorist activities could exacerbate these risks. For example, there may be an increased risk of political unrest in regions where we have significant manufacturing operations such as Southeast Asia. However, we believe that our international diversification provides stability to our worldwide operations and reduces the impact on us of adverse economic changes in any single country. Financial information about our international operations is contained in Note 19, “Segment Information,” of the consolidated financial statements included in Item 15 of this report.

On January 5, 2001, we acquired Objective Systems Integrators, Inc. (“OSI”) for approximately $716 million. OSI was a provider of next-generation operations-support-system software for communications service providers and has become part of our test and measurement business. In January 2000, April 2000 and January 2001, we acquired Yokogawa Electric Corporation’s 25 percent equity interest in Agilent Technologies Japan, Ltd. for approximately $521 million. In addition to the OSI and Yokogawa acquisitions, we acquired several other companies since our incorporation that were not material.

In the fourth quarter of 2000, we entered into an asset purchase agreement with CIT Group Inc. (“CIT,” formerly Tyco Capital Corporation) to sell them substantially all of our leasing portfolio over the course of 2000 and 2001. We also entered into a vendor financing arrangement with CIT whereby CIT will provide equipment financing and leasing services to our customers on a global basis.

In February 2001, we sold a parcel of surplus land in San Jose, California for $287 million in cash.

The names of our executive officers and their ages, titles and biographies as of December 16, 2004, appear below.

Edward W. Barnholt, 61, Mr. Barnholt has served as Agilent’s President and Chief Executive Officer and as a director since May 1999 and also as Chairman of the Board since November 2002. Before being named Agilent’s Chief Executive Officer, Mr. Barnholt served as Executive Vice President and General Manager of Hewlett-Packard Company’s Measurement Organization from 1998 to 1999, which included the business organizations that have become Agilent. From 1990 to 1998, he served as General Manager of Hewlett-Packard Company’s Test and Measurement Organization. He was elected a Senior Vice President of Hewlett-Packard Company in 1993 and an Executive Vice President in 1996. He is a director of KLA-Tencor Corporation.

Adrian T. Dillon, 50, has served as our Executive Vice President and Chief Financial Officer since December 2001. Prior to assuming this position, Mr. Dillon served as Executive Vice President and Chief Financial and Planning Officer of Eaton Corporation from April 1997 to December 2001. Mr. Dillon held various management positions at Eaton Corporation from 1979 to 1997.

Jean M. Halloran, 52, has served as our Senior Vice President, Human Resources since August 1999. From 1997 to 1999, Ms. Halloran served as Director of Corporate Education and Development for Hewlett-Packard. Prior to assuming this position, from 1993 to 1997, Ms. Halloran acted as human resources manager for Hewlett-Packard’s Measurement Systems Organization. Ms. Halloran joined Hewlett-Packard in 1980 in the Medical Products Group, where she held a variety of positions in human resources, manufacturing and strategic planning.

Didier Hirsch, 53, has served as our Vice President and Corporate Controller since April 2003. Prior to assuming that position, Mr. Hirsch served as Vice President and Treasurer from September 1999 to April 2003. In 1996, Mr. Hirsch became Director of Finance and Administration of Hewlett-Packard Europe, Middle East, and Africa. In 1993, Mr. Hirsch became Director of Finance and Administration of Hewlett-Packard Asia Pacific. Mr. Hirsch joined Hewlett-Packard Company in 1989 as Director of Finance and Administration of Hewlett-Packard France.

D. Craig Nordlund, 55, was named our Senior Vice President, General Counsel and Secretary in May 1999 and serves as an officer or director for a variety of Agilent subsidiaries. He is also a director of the Addison Avenue Federal Credit Union. Mr. Nordlund served as Associate General Counsel and Secretary of Hewlett-Packard Company from 1987 to 1999.

Young K. Sohn, 48, has served as Senior Vice President of Agilent Technologies, Inc. and President of the Semiconductor Products Group since August 2003. He also has served as a Senior Vice President of Agilent Technologies, Inc. since August 2003. Prior to assuming that position, Mr. Sohn was Chairman and Chief Executive Officer of Oak Technology, from February 1999 to August 2003. Before joining Oak Technology, from January 1993 to February 1999, Mr. Sohn held a variety of management positions at Quantum Corporation, including President of its Hard Drive Group, Vice

President of Marketing for the Desktop Division, and President of the Asia-Pacific region. From August 1983 to January 1993, Mr. Sohn held a number of management positions at Intel Corporation. Mr. Sohn serves on the Boards of Directors of Cymer Corporation and Synnex Technology, Inc.

William P. Sullivan, 54, has served as our Executive Vice President and Chief Operating Officer since March 2002. In this capacity, he shares the responsibilities of the president’s office with Agilent President and Chief Executive Officer Edward W. Barnholt. Mr. Sullivan also has overall responsibility for Agilent’s Electronic Products and Solutions Group, the company’s largest business group. Prior to assuming this position, Mr. Sullivan served as our Senior Vice President, Semiconductor Products Group from August 1999 to March 2002. Before that, Mr. Sullivan held various management positions at Hewlett-Packard. Mr. Sullivan serves on the Board of the Children’s Discovery Museum in San Jose, California.

Jack P. Trautman, 54, has served as Senior Vice President of Agilent Technologies, Inc. and President of the Automated Test Group since May 2002. Prior to assuming that position, Mr. Trautman served as Vice President and General Manager of Communications Management Solutions Business Unit from 2001 to 2002. He served as General Manager of the Data Protection Unit of Hewlett-Packard from 2000 to 2001. Mr. Trautman was the General Manager of Hewlett-Packard’s Computer Peripherals Bristol Division in Bristol, England from 1997 to 2000. Mr. Trautman joined Hewlett-Packard in 1974 and held a number of managerial positions over the years.

Chris van Ingen, 58, has served as Senior Vice President of Agilent Technologies, Inc. and President of the Life Sciences and Chemical Analysis Group since May 2001. Prior to assuming this position, Mr. Van Ingen held a number of positions at Hewlett-Packard including, Chemical Analysis Group Sales and Marketing Manager from 1996 to April 2001, the Americas Marketing Center Manager from 1989 to 1996, Product Marketing Manager at Little Falls Division from 1986 to 1989, and Sales Support Manager at Little Falls Division from 1984 to 1986.

Thomas E. White, 47, has served as Senior Vice President of Agilent Technologies, Inc. and President of the Communications Solutions Group since August 1999. From 1997 to August 1999, Mr. White served as Vice President and General Manager of the Communications Solutions Group of Hewlett-Packard. From 1996 to 1997, he served as General Manager of Hewlett-Packard’s Computer Peripherals Bristol Division and, beginning in 1994, he served as General Manager for Hewlett-Packard’s Telecommunications Systems Division, South Queensferry, Scotland.

We are subject to the informational requirements of the Securities Exchange Act of 1934 (the ”Exchange Act”). Therefore, we file periodic reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 450 Fifth Street, NW, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file electronically.

You can access financial and other information at our Investor Relations website. The address is www.investor.agilent.com. We make available, free of charge, copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the SEC.

Our Corporate Governance Standards, the charters of our Audit and Finance Committee, our Compensation Committee, our Executive Committee and our Nominating/Corporate Governance Committee, as well as our Standards of Business Conduct (including code of ethics provisions that apply to our principal executive officer, principal financial officer, controller and senior financial officers) are available on our website at www.investor.agilent.com under “Corporate Governance Policies.” These items are also available in print to any stockholder who requests them by calling (877) 942-4200 in the U.S. and Canada, and (402) 573-9919 outside the U.S. and Canada.

Our corporate headquarters and Agilent Technologies Laboratories are located in Palo Alto, California. In total, we have 17 primary sites. Of these primary sites, 10 are located in the U.S. and the remaining 7 are located in China, Germany, Japan, Malaysia, Singapore and the United Kingdom. Nearly all of our primary functions are conducted at multi-building campuses.

As of October 31, 2004, we owned or leased a total of approximately 16.0 million square feet of space worldwide. Of that, we owned approximately 11.5 million square feet and leased the remaining 4.5 million square feet. Our sales and support facilities occupied a total of approximately 2.0 million square feet. Our manufacturing plants, R&D facilities and warehouse and administrative facilities occupied approximately 14.0 million square feet. Information about each of our businesses appears below:

Test and Measurement. Our test and measurement business has manufacturing and R&D facilities in Australia, Canada, China, Germany, Japan, Malaysia, Singapore, the United Kingdom

and the U.S. Additionally, we have marketing centers in Germany, Hong Kong, Japan, the United Kingdom, and the U.S., and sales offices throughout the world.

Automated Test. Our automated test business has manufacturing and R&D facilities in Germany, Japan, Singapore and the U.S.

Semiconductor Products. Our semiconductor products business has manufacturing and R&D facilities in Italy, Malaysia, Singapore, the United Kingdom and the U.S. Additionally, we have marketing centers in Germany, Malaysia, Singapore and the U.S., and sales offices throughout the world.

Life Sciences and Chemical Analysis. Our life sciences and chemical analysis business has manufacturing facilities in China, Germany, Japan and the U.S. Additionally, we have marketing centers in Germany, Japan, Singapore and the U.S., and sales offices throughout the world.

In November 2001, a securities class action, Kassin v. Agilent Technologies, Inc., et al., Civil Action No. 01-CV-10639, was filed in United States District Court for the Southern District of New York (the “Southern District Court of New York”) against certain investment bank underwriters for our initial public offering (“IPO”), Agilent and various of our officers and directors at the time of the IPO. On February 19, 2003, the Southern District Court of New York granted Agilent’s motion to dismiss the claims against the Company based on Section 10 of the Securities Exchange Act of 1934, as amended, but denied Agilent’s motion to dismiss the claims based on Section 11 of the Securities Act of 1933, as amended. Agilent and more than 200 other issuer defendants have reached an agreement in principle for a settlement with plaintiffs. Under the settlement, plaintiffs’ claims against the Company and its directors and officers would be released, in exchange for a contingent payment (which, if made, would be paid by the Company’s insurer) and an assignment of certain potential claims. On June 14, 2004, papers formalizing the settlement among the plaintiffs, issuer defendants and insurers were presented to the Southern District Court of New York. The settlement remains subject to Court approval. Plaintiffs continue to prosecute their claims against the underwriter defendants, and discovery is now underway.

We are involved in lawsuits, claims, investigations and proceedings, including, but not limited to, patent, commercial and environmental matters, which arise in the ordinary course of business. Other than the matter described above, there are no matters pending that we expect to be material in relation to our business, consolidated financial condition, results of operations or cash flows.

During the fourth quarter of fiscal 2004, there were no matters submitted to a vote of securities holders, through the solicitation of proxies or otherwise.

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

Our common stock is listed on the New York Stock Exchange with the ticker symbol “A.” For the 2004 and 2003 fiscal years, the New York Stock Exchange reported the high and low prices per quarter as follows:

As of October 29, 2004, there were 62,831 stockholders of record of common stock. The closing share price for our common stock on October 29, 2004, as reported by the New York Stock Exchange, was $25.06.

We have not paid any dividends to date, and we currently intend to retain any future income to fund the development and growth of our business. We do not anticipate paying any cash dividends in the foreseeable future.

On October 28, 2004, we issued 771,573 shares of Agilent common stock in consideration of all the shares of Silicon Genetics. The shares were issued in reliance on Section 3(a)(10) of the Securities Act of 1933, as amended.

The following table summarizes information about our equity compensation plans as of October 31, 2004. All outstanding awards relate to our common stock.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

contemplated by these forward-looking statements due to certain factors, including those discussed in Item 7 and elsewhere in this report.

Agilent, incorporated in Delaware in May 1999, is a global diversified technology organization that provides enabling solutions to markets within the communications, electronics, life sciences and chemical analysis industries. Prior to our initial public offering of 15.9 percent of our stock in November 1999, we were a wholly-owned subsidiary of Hewlett-Packard. Hewlett-Packard distributed the remaining 84.1 percent of our stock to its stockholders on June 2, 2000 in the form of a stock dividend.

Our fiscal year end is October 31. Unless otherwise stated, all years and dates refer to our fiscal year.

Amounts in the consolidated financial statements as of and for the years ended October 31, 2003 and October 31, 2002 have been reclassified to conform to the presentation used in 2004.

The sales of our products and services are dependent, to a large degree, on customers whose industries are subject to cyclical trends in the demand for their products. Shifts in the semiconductor market, electronics industry, computer industry and telecommunications markets, as well as rapidly shifting global economic conditions, have had and will have significant impacts on our businesses.

In those industry segments where we are a capital equipment provider, our revenue is dependent on the capital expenditure budgets and spending patterns of our customers, who often delay or accelerate purchases in reaction to changes in their businesses and in the economy. We expect some portions of our businesses to remain cyclical in the foreseeable future. Given these spending patterns, we are moving towards a more variable cost structure in order to minimize any adverse impact to our profitability. This includes the use of contract manufacturers and third-party service providers.

We generate revenue directly from sales of components incorporated in consumer electronics, such as cell phones, cameras, games, personal computers, and printers, or indirectly from sales of test and measurement equipment used to design, manufacture or test such components. Sales of these components and test and measurement equipment are concentrated during the holiday season. This seasonal pattern means that we typically experience higher revenues and orders during our fourth quarter as manufacturers ramp up production and then decline in our first quarter. We also experience larger volumes of business in our fourth quarter for products that we sell to the aerospace and defense industry and the U.S. government and generally experience reduced volumes during our first quarter. However, in the fourth quarter of 2004 our usual seasonal increase in revenues and orders did not occur. We experienced a decline in orders in the third and fourth quarter largely in the semiconductor and wireless handset manufacturing test markets.

Orders in 2004 were up by 15 percent, with much of that growth in the first half of the year. Test and measurement orders increased 18 percent year-over-year related to a strong Aerospace and Defense industry, growth in consumer electronics, and expansion of the Asian handset manufacturing capacity. Semiconductor products orders grew 20 percent over 2003, with strength in the personal systems market, offset by a decline in the networking market. Our automated test business saw a slight decline in orders over the prior year, caused by a market decrease in the second half of the year. Orders increased 13 percent over last year in the life sciences and chemical analysis markets. This increase was driven by the demand for replacement systems over our large

installed base, increased U.S. government spending for homeland security, spending related to environmental testing in Asia, and increased demand from generic drug manufacturers.

Annual revenues were at their highest level since 2001. Net revenue for the year was $7,181 million, an increase of 19 percent over 2003. Our test and measurement and our life sciences and chemical analysis businesses experienced revenue growth throughout 2004. However our automated test and semiconductor products business experienced revenue declines in the second half of the year, particularly in the fourth quarter. These declines were in large part due to our customers’ excess capacity and excess inventory in the semiconductor industry.

Cost of sales as a percentage of net revenue decreased 5 percentage points from 2003 to 2004. This is a reflection of our continued work on lowering our cost structure. We will continue to see the benefits of a more variable cost structure, including the impact of using contract manufacturers and third-party service providers.

Operating expenses as a percent of revenue have declined from 62 percent in 2002 and 50 percent in 2003 to 38 percent in 2004. In dollar terms, operating expenses have declined $720 million from 2002 to 2003 and $294 million from 2003 to 2004. Reduced restructuring and asset impairment charges, coupled with increased savings from these efforts, account for the majority of the expense reduction in both years. In 2004, pension and post-retirement benefits decreased by $45 million due to additional funding, better investment results and a favorable interest rate environment. Our efforts to reduce our infrastructure costs and to control discretionary spending also contributed to the decrease. We completed the implementation of our Enterprise Resource Planning (“ERP”) and Customer Relationship Management (“CRM”) projects, and have now begun to see some of the benefits in cost savings and operational improvement.

Total cash and cash equivalents increased $708 million to $2.3 billion at October 31, 2004. Net cash provided from operating activities was $663 million for 2004. Cash on hand as of October 31, 2004 was $2,315 million. Days sales outstanding decreased to 52 days as of October 31, 2004 from 58 days a year ago. We have improved our inventory days-on-hand from 93 days as of October 31, 2003 to 89 days as of the end of the current period.

Income from operations in 2004 was $386 million, an increase of approximately $1,111 million. The increase was due to an increase in revenue of $1,125 million, as well as the benefit of our restructuring plans. As we increased our revenues, we continued to keep spending under tight control allowing this revenue increase to fully impact our profit increase.

Looking forward, we expect increases in the test and measurement and life sciences and chemical analysis markets in 2005. We expect the semiconductor and semiconductor capital equipment markets to be slightly down. We intend to further reduce our costs and expenses to meet our operating cost structure goals. The announced sale of our camera module business is not expected to have a material impact on operating profits in 2005. The revenues for 2004 associated with the camera module business were approximately $300 million.

The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the company in the future, actual results may be different from the

estimates. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, restructuring and asset impairment charges, inventory valuation, retirement and post-retirement plan assumptions, valuation of long-lived assets and accounting for income taxes.

Revenue recognition. We enter into agreements to sell products (hardware or software), services, and other arrangements (multiple element arrangements) that include combinations of products and services. Revenue from product sales, net of trade discounts and allowances, is recognized provided that persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, and collectibility is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer. Revenue is reduced for estimated product returns and distributor price protection, when appropriate. For sales that include customer-specified acceptance criteria, revenue is recognized after the acceptance criteria have been met. For products that include installation, if the installation meets the criteria to be considered a separate element, product revenue is recognized upon delivery, and recognition of installation revenue occurs when the installation is complete. Otherwise, neither the product nor the installation revenue is recognized until the installation is complete. Revenue from services is deferred and recognized over the contractual period or as services are rendered and accepted by the customer. When arrangements include multiple elements, we use objective evidence of fair value to allocate revenue to the elements and recognize revenue when the criteria for revenue recognition have been met for each element. The amount of product revenue recognized is affected by our judgments as to whether an arrangement includes multiple elements and if so, whether vendor-specific objective evidence of fair value exists for those elements. Changes to the elements in an arrangement and the ability to establish vendor-specific objective evidence for those elements could affect the timing of the revenue recognition. Most of these conditions are subjective and actual results could vary from the estimated outcome, requiring future adjustments to revenue.

Restructuring and asset impairment charges. We recognize a liability for restructuring costs at fair value only when the liability is incurred. The three main components of our restructuring plans are related to workforce reductions, the consolidation of excess facilities and asset impairments. Asset impairments primarily consist of property, plant and equipment. Workforce-related charges are accrued when it is determined that a liability has been incurred, which is generally after individuals have been notified of their termination dates and expected severance payments. Plans to consolidate excess facilities result in charges for lease termination fees and future commitments to pay lease charges, net of estimated future sublease income. We recognize charges for consolidation of excess facilities when we have vacated the premises. Asset impairment charges are based on an estimate of the amounts and timing of future cash flows related to the expected future remaining use and ultimate sale or disposal of buildings and equipment. These estimates were derived using the guidance of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), Staff Accounting Bulletin 100, “Restructuring and Impairment Charges” (“SAB 100”), Emerging Issues Task Force 94-3, “Liability Recognition for Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”) and lastly, SFAS No. 146 “Accounting for Exit or Disposal Activities” (“SFAS No. 146”) which is effective for exit and disposal activities initiated after December 31, 2002. If the amounts and timing of cash flows from restructuring activities are significantly different from what we have estimated, the actual amount of restructuring and asset impairment charges could be materially different, either higher or lower, than those we have recorded.

Inventory valuation. We assess the valuation of our inventory on a quarterly basis and periodically write down the value for estimated excess and obsolete inventory based upon estimates about future demand and actual usage. Such estimates are difficult to make under most economic

conditions. The excess balance determined by this analysis becomes the basis for our excess inventory charge. Our marketing department plays a key role in our excess inventory review process by providing updated sales forecasts, managing product rollovers and working with manufacturing to maximize recovery of excess inventory. 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 lower cost of sales and higher income from operations than expected in that period.

Retirement and post-retirement plan assumptions. Retirement and post-retirement benefit plans are a significant cost of doing business and yet represent obligations that will be ultimately settled far in the future and therefore are subject to estimation. Pension accounting is intended to reflect the recognition of future benefit costs over the employee’s approximate service period based on the terms of the plans and the investment and funding decisions made by us. We are required to make assumptions regarding such variables as the expected long-term rate of return on assets and the discount rate, which are used to determine service cost and interest cost to arrive at pension income or expense for the year. As of October 31, 2004, the expected long-term rate of return in the U.S. was 8.5 percent, and ranged from 4.5 to 7.5 percent for our plans outside the U.S. We have analyzed the rates of return on assets used and determined that these rates are reasonable based on the plans’ historical performance relative to the overall markets in the countries where the plans are effective. Management will continue to assess the assumptions on the expected long-term rate of return on plan assets for each plan based on relevant market conditions as prescribed by accounting principles generally accepted in the U.S. and will make adjustments to the assumptions as appropriate. Discount rate assumptions were based on the prevailing market long-term interest rates at the measurement date. We are also required to make assumptions for the long-term health care cost trend rates for our post-retirement benefit plans. If any of our assumptions were to change, our benefit plan expenses would also change. A one percent decrease in the estimated return on plan assets would result in increased pension expense of $6 million for 2005 in the U.S. and $11 million for 2005 for all plans outside the U.S. Retirement and post-retirement benefit plan expense is allocated to cost of sales, research and development and selling, general and administrative expenses in the consolidated statement of operations. We incurred expenses of $142 million in 2004, $187 million in 2003 and $122 million in 2002 for our retirement and post-retirement plans. We expect expenses of approximately $117 million in 2005 for our retirement and post-retirement plans.

Workforce-related events such as restructuring cause curtailment and settlement gains or losses when they have a material impact on the average future working lifetime or total number of participants in our retirement and postretirement plans. Our restructuring programs have resulted in material changes to our plan demographics in the U.S. and several other countries in 2002 and 2003. The curtailment and settlement gains and losses related to each event are separately identified in Note 14, “Retirement Plans and Post-retirement Benefits” to the consolidated financial statements in Item 15 of this report.

Valuation of long-lived assets. We performed our fiscal 2004 annual goodwill impairment analysis in the fourth quarter of 2004. Based on our estimates of forecasted discounted cash flows and our market capitalization, at that time, we concluded that we did not have any impairment. We have also assessed the recoverability of our long-lived assets, by determining whether the carrying value of such assets will be recovered through undiscounted future cash flows. We incurred $25 million of asset impairment charges in 2004, primarily relating to a manufacturing site in California.

The process of evaluating the potential impairment of goodwill and other intangibles is highly subjective and requires significant judgment. We estimate expected future cash flows of our various businesses, which operate in a number of markets and geographical regions. We then determine the carrying value of these businesses. We exercise judgment in assigning and allocating certain assets

and liabilities to these businesses. We then compare the carrying value including goodwill and other intangibles to the discounted 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 or business strategies could result in material impairment charges in future periods. We performed the required transitional impairment test upon our adoption of SFAS No. 142 in the first quarter of 2003 and recorded a $268 million charge related to goodwill.

The process of evaluating the potential impairment of long-lived assets such as our property plant and equipment is also highly subjective and requires significant judgment. In order to estimate the fair value of long-lived assets, we typically make various assumptions about the future prospects for the business that the asset relates to, consider market factors specific to that business and estimate future cash flows to be generated by that business. Based on these assumptions and estimates, we determine whether we need to take an impairment charge to reduce the value of the asset stated on our balance sheet to reflect its estimated fair value. Assumptions and estimates about future values and remaining useful lives are complex and often subjective. They can be affected by a variety of factors, including external factors such as the real estate market, industry and economic trends, and internal factors such as changes in our business strategy and our internal forecasts. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, changes in assumptions and estimates could materially impact our reported financial results.

Accounting for income taxes. Significant management judgment is required in determining our provision for income taxes and in determining whether deferred tax assets will be realized in full or in part. When it is more likely than not that all or some portion of specific deferred tax assets such as net operating losses or foreign tax credit carryforwards will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that are determined not to be realizable. Realization is based on our ability to generate sufficient future taxable income. During the third quarter of 2003, we recorded a non-cash charge to establish a valuation allowance of $1.4 billion, which included approximately $0.4 billion of tax benefits recorded during the first six months of 2003 resulting in an approximately $1.0 billion net tax provision recorded within provision for taxes for 2003. The valuation allowance was determined in accordance with the provisions of SFAS No. 109 “Accounting for Income Taxes” (“SFAS No. 109”), which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. Cumulative losses incurred in the U.S. and in the U.K. jurisdictions in recent years represented sufficient negative evidence, which made it difficult for positive evidence to overcome under SFAS No. 109. Accordingly, a full valuation allowance was recorded. We intend to maintain a full valuation allowance until sufficient positive evidence exists to support reversal of the valuation allowance. Profits or losses incurred in the U.S. and the U.K. affect the ongoing amount of the valuation allowance. We expect that pre-tax income in fiscal 2005 will be recognized at a lower rate because future income taxes in the U.S. and the U.K. will be offset against adjustments to the valuation allowance to effectively eliminate any tax expense or benefit in those jurisdictions. Income taxes will continue to be recorded for various jurisdictions subject to the need for valuation allowances in those jurisdictions.

We have not provided for U.S. federal income and foreign withholding taxes on a portion of our non-U.S. subsidiaries’ undistributed income as of October 31, 2004 because we intend to reinvest such income indefinitely. Should we decide to remit this income to the U.S. in a future period, our provision for income taxes may increase materially in that period.

On October 22, 2004, the American Jobs Creation Act (“AJCA”) was signed into law. The AJCA includes a deduction of 85 percent for certain foreign earnings that are repatriated, as defined in the AJCA, at an effective tax cost of 5.25 percent on any such repatriated foreign earnings. Agilent may elect to apply this provision to qualifying earnings repatriations in fiscal 2005. We have begun an evaluation of the effects of the repatriation provision. However, Agilent does not expect to be able to complete this evaluation until after Congress or the Treasury Department provides additional clarifying language on key elements of the provision. We expect to complete our evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the additional clarifying language. The range of possible amounts that Agilent is considering for repatriation under this provision is between zero and $970 million. The related potential range of income tax is between zero and $51 million.

We are subject to ongoing tax examinations of our tax returns by the Internal Revenue Service and other tax authorities in various jurisdictions. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

We currently have three restructuring plans – one initiated in the fourth quarter of 2001 (the “2001 Plan”), a second initiated in the fourth quarter of 2002 (the “2002 Plan”), and a third initiated in the first quarter of 2003 (the “2003 Plan”) after it became clear that the actions taken in fiscal 2001 and fiscal 2002 would not be sufficient to return the company to profitability.

All of our plans were designed to reduce costs and expenses in order to return the company to profitability. As of the end of 2004, we have reduced our workforce by approximately 16,700 people (approximately 15,100 from involuntary terminations and approximately 1,600 from net attrition) to approximately 28,000 employees.

Our plans to consolidate excess facilities resulted in charges for lease termination fees and losses anticipated from sub-lease agreements. We have exited more than 115 production, support and sales facilities in the U.S., Korea, Japan, U.K. and other countries, representing more than 4.6 million square feet, or about 24 percent of our worldwide property. We will continue to make lease payments on some of this space over the next five years. We lease most of these buildings from third parties, and the closures impacted all segments. In most cases, we are exiting administrative office buildings which house sales and administrative employees. However, a small number of production facilities were closed as a result of our plans to consolidate manufacturing into fewer sites.

Actions for all plans have been focused on segments that were impacted most severely by the market downturn – primarily our test and measurement and semiconductor products businesses – but actions have also been taken to reduce the costs associated with support services such as finance, information technology, workplace services and to a lesser extent our other business segments. Cost reductions were initiated by moving manufacturing and some of our global shared services operations sites to lower cost regions, reducing the number of properties, particularly sales and administrative sites, and by reducing our workforce through involuntary terminations and selected outsourcing of manufacturing and administrative functions. Our strategy is to move towards a more variable operating cost structure.

We have executed all key actions under our 2001 Plan, although there may be changes in estimates for the consolidation of excess facilities due to changes in market conditions from those originally expected at the time the charges were recorded. Our 2002 Plan is complete. We are continuing to see the estimated savings of $350 million per quarter ($300 million from the 2001 Plan

and $50 million from the 2002 Plan) that was initially projected. The 2003 Plan is still being implemented, however, we have already realized the expected $125 million reduction in quarterly operational costs. We expect to incur further restructuring costs and increase the savings related to the 2003 Plan in the first half of 2005.

We recorded restructuring and asset impairment charges of $161 million, $372 million and $474 million for 2004, 2003 and 2002, respectively. Our plans to consolidate excess facilities resulted in charges of $35 million in 2004 for lease termination fees and losses anticipated from sub-lease agreements related to our 2001 and 2003 Plans. Similar charges in 2003 and 2002 were $37 million and $53 million, respectively. We will continue to make lease payments on some of this excess facility space over the next five years. Charges associated with workforce reductions and asset impairments related to our 2003 Plan were $101 million and $25 million, respectively, for 2004. Similar charges relating to all plans were $353 million for 2003 and $421 million for 2002.

The restructuring accrual for all plans, representing future outlays, which totaled $87 million as of October 31, 2004 and $89 million as of October 31, 2003 is recorded in other accrued liabilities on the consolidated balance sheet. For further details on our restructuring plans, see Note 13, “Restructuring and Asset Impairment” to the consolidated financial statements in Item 15 of this report.

In January 2003 the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”) which was amended by FIN 46R issued in December 2003. FIN 46 addresses consolidation by business enterprises of variable interest entities (“VIE’s”) that either: (1) do not have sufficient equity investment at risk to permit the entity to finance its activities without additional subordinated financial support, or (2) for which the equity investors lack an essential characteristic of a controlling financial interest. FIN 46 requires consolidation of VIE’s for which Agilent is the primary beneficiary and disclosure of a significant interest in a VIE for which Agilent is not the primary beneficiary. As a result of our review, no entities were identified requiring disclosure or consolidation under FIN 46.

In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” (“SAB No. 104”). SAB No. 104 rescinds certain sections of SAB No. 101, “Revenue Recognition in Financial Statements” (“SAB No. 101”), related to multiple element revenue arrangements, superceded as a result of the issuance of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). The revenue recognition principles of SAB No. 101 remain largely unchanged by the issuance of SAB No. 104. The adoption of this standard did not affect our financial condition, results of operations or cash flows.

In December 2003, the FASB issued a revision SFAS No. 132 (the “revision”), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. The revision requires additional disclosures relating to the description of the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans recognized during interim periods. We adopted the disclosure requirements beginning with the first quarter of 2004 and the standard is effective for all future quarterly and annual reports; see Note 14 for such disclosures.

accounted for under the cost or equity method and investments accounted for under FAS 115, “Accounting for Certain Investments in Debt and Equity Securities.” EITF No. 03-01 also includes new disclosure requirements for cost method investments and for all investments that are in an unrealized loss position. In September 2004, the FASB delayed the accounting provisions of EITF No. 03-01; however the disclosure requirements remain effective and the applicable ones have been adopted for our year-end 2004. We will evaluate the effect, if any, of EITF 03-01 when final guidance is issued.

In March 2004, the EITF reached a consensus on EITF Issue No. 03-16, “Accounting for Investments in Limited Liability Companies” (“EITF 03-16”). The EITF concluded that if investors in a limited liability company have specific ownership accounts, they should follow the guidance prescribed in Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures, and EITF Topic No. D-46, Accounting for Limited Partnership Investments.” Otherwise, investors should follow the significant influence model prescribed in Accounting Principles Board Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.” The adoption of this Issue did not have a material impact on the company’s financial condition, results of operations or cash flows.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004) “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R addresses all forms of share-based payment (“SBP”) awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123R will require Agilent to expense SBP awards with compensation cost for SBP transactions measured at fair value. The FASB originally stated a preference for a lattice model because it believed that a lattice model more fully captures the unique characteristics of employee stock options in the estimate of fair value, as compared to the Black-Scholes model which Agilent currently uses for its footnote disclosure. The FASB decided to remove its explicit preference for a lattice model and not require a single valuation methodology. SFAS No. 123R requires Agilent to adopt the new accounting provisions beginning in our fourth quarter of 2005. Agilent has not yet determined the impact of applying the various provisions of SFAS No. 123R.

In May 2004, the FASB issued a FASB Staff Position (“FSP”) regarding SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”. FSP No. 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” discusses the effect of the Medicare Prescription Drug, Improvement and Modernization Act (the “Act”) enacted in December 2003 and supersedes FSP No. 106-1, which was issued in January 2004. FSP No. 106-2 considers the effect of the two new features introduced in the Act in determining our accumulated postretirement benefit obligation (“APBO”) and net periodic postretirement benefit cost. The effect on the APBO will be accounted for as an actuarial experience gain to be amortized into income over the average remaining service period of plan participants. Companies may elect to defer accounting for this benefit or may attempt to reflect the best estimate of the impact of the Act on their net periodic costs currently. The adoption of FSP No. 106-2 in the fourth quarter of 2004 did not have a material impact on our consolidated financial position, results of operations or cash flows.

In November 2004, the FASB issued FASB Statement No. 151, “Inventory Costs – an amendment of ARB No. 43” (“FAS 151”), which is the result of its efforts to converge U.S. accounting standards for inventories with International Accounting Standards. FAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. FAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We are evaluating the impact of this standard on our consolidated financial statements.

In December 2004, the FASB issued an FSP regarding “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the AJCA, FSP 109-b. FSP 109-b allows Agilent time beyond the fourth quarter of 2004, the period of enactment, to evaluate the effect of the AJCA on our plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109 “Accounting of Income Taxes.” See the discussion of the potential impact on Agilent in “Critical Accounting Policies and Estimates — Accounting for Income Taxes,” above.

We made one acquisition during 2003 and three during 2004, which were not significant to our consolidated financial position, results of operations or cash flows. These acquisitions were accounted for either under the purchase method of accounting as defined in SFAS No. 141 or as a purchase of assets. For the acquisitions accounted for under SFAS No. 141, the results of operations of the acquired companies were included prospectively from the date of acquisition and the acquisition cost was allocated to the acquired tangible assets and liabilities and identifiable intangible assets based on fair values at the date of acquisition. Residual amounts were recorded as goodwill. In-process research and development write-offs were insignificant.

Unaudited pro forma statement of operations information has not been presented because the effects of the purchase method acquisitions were not material on either an individual or an aggregated basis.

Our revenues, costs and expenses, and monetary assets and liabilities are exposed to changes in foreign currency exchange rates as a result of our global operating and financing activities. We hedge net cash flow and balance sheet exposures that are not denominated in the functional currencies of our subsidiaries on a short term and anticipated basis. We do experience some fluctuations within individual lines of the consolidated statement of operations and balance sheet as our hedging program is not designed to offset the currency movements in each category of revenues, expenses, monetary assets and liabilities. However, movements in exchange rates net of our hedging activities had no material effect on our net income (loss) in the periods presented. For example, the weakening of the U.S. dollar throughout 2004 led to an increase in revenue of approximately $150 million, which primarily affected Europe and Japan. However, this was offset by an increase to cost of sales of approximately $65 million and an increase to operating expenses of approximately $80 million relating to those foreign currency movements. Our hedging activities resulted in an increase of cost of sales of approximately $3 million for the fiscal year end October 31, 2004. The effect of exchange rate movements on our consolidated statement of cash flows was $14 million in 2004 compared to $20 million and $6 million in 2003 and 2002, respectively.

We have given multiple indemnities to Hewlett-Packard Company in connection with our activities prior to our spin-off from Hewlett-Packard for the businesses that constituted Agilent prior to the spin-off. These indemnifications cover a variety of aspects of our business, including, but not limited to, employee, tax, intellectual property and environmental matters. The agreements containing these indemnifications have been previously disclosed as exhibits to our registration statement on Form S-1 filed on August 16, 1999. In our opinion, the fair value of these indemnifications is not material.

In connection with the sale of our healthcare solutions business to Philips on August 1, 2001, we indemnified Philips for various matters, including product liability issues arising within two years of the sale agreement. In our opinion, the fair value of these indemnifications is not material.

Our corporate by-laws require that we indemnify our officers and directors, as well as those who act as directors and officers of other entities at our request, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceedings arising out of their services to Agilent. In addition, we have entered into separate indemnification agreements with each director and each board-appointed officer of Agilent which provide for indemnification of these directors and officers under similar circumstances and under additional circumstances. The indemnification obligations are more fully described in the by-laws and the indemnification agreements. See Exhibits 3.2 and 10.6 of this document. We purchase standard insurance to cover claims or a portion of the claims made against our directors and officers. Since a maximum obligation is not explicitly stated in our by-laws or in our indemnification agreements and will depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, we have not made payments related to these obligations, and the fair value for these obligations is zero on the consolidated balance sheet as of October 31, 2004.

As is customary in our industry and as provided for in local law in the U.S. and other jurisdictions, many of our standard contracts provide remedies to our customers and others with whom we enter into contracts, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of our products. From time to time, we indemnify customers, as well as our suppliers, contractors, lessors, lessees, companies that purchase our businesses or assets and others with whom we enter into contracts, against combinations of loss, expense, or liability arising from various triggering events related to the sale and the use of our products and services, the use of their goods and services, the use of facilities and state of our owned facilities, the state of the assets and businesses that we sell and other matters covered by such contracts, usually up to a specified maximum amount. In addition, from time to time we also provide protection to these parties against claims related to undiscovered liabilities, additional product liability or environmental obligations. In our experience, claims made under such indemnifications are rare and the associated estimated fair value of the liability is not material.

Income from continuing operations increased to $349 million in 2004 from losses of $1,790 million in 2003 and $1,022 million in 2002. The increase in income from 2003 to 2004 of approximately $2,139 million was primarily due to revenues increasing by $1,125 million, gross margins improving by 5 percentage points, while operating expenses were down $294 million year-over-year. The provision for taxes also decreased by $1,009 million year over year due to the $1,022 million valuation allowance charge in 2003. The increase in loss from 2002 to 2003 of approximately $768 million was also primarily due to this tax provision of $1,022 million, offset by a reduction of $326 million of goodwill amortization charges. Fiscal year 2004 was an improved year for Agilent. Agilent had strong profitability in all four quarters of 2004 due to tight controls on our operating structure and 19 percent revenue growth. This is despite a weakening in our semiconductor-related businesses markets, which we began to experience in the third quarter after a strong first half. We have accomplished cost reductions via streamlining our IT systems environment and the number of IT applications. This was brought about by the completion of the implementation

of our ERP and CRM projects. Direct IT costs incurred for the implementation of our ERP and CRM projects were $162 million in 2004, $180 million in 2003 and $146 million in 2002. We have also reduced our workforce to 28,000 employees from a peak of 44,000 in April 2001. The final step of our restructuring was the consolidation of excess manufacturing facilities and moving global shared services to lower cost regions and outsourcing services where it made economic sense. Our gross margins improved in 2004. We have reduced our indirect spending by approximately $82 million. This reduction was accomplished by focusing our spending with preferred suppliers and by continuing to reduce spending on IT consulting services. We have also continued to monitor our professional service agreements for savings and value provided to the business. Indirect spending has been reduced through a combination of stronger sourcing negotiations, demand management and compliance with our policy of using preferred suppliers.

We have continued to maintain our research and development expenditures in order to prepare for our future. We introduced several new products including new proteomic tools and the industry’s first fully automated lab-on-a-chip system for basic research and drug discovery in our life sciences and chemical analysis business. In our automated test business, we introduced a new memory test system as well as strengthened the systems on a chip platform with enhancements and new products. We have also entered into the flat panel display test market with our acquisition of IBM’s flat panel display business. In our test and measurement segment we introduced the world’s first 13 gigahertz oscilloscope.

Orders in 2004 were up by 15 percent, with much of that growth in the first half of the year. Orders were up year over year in all businesses except automated test, which saw a 2 percent decrease over the prior year, primarily caused by our customers’ excess capacity and excess inventory that had built up over the second half. We started experiencing a weakening in orders in the third and fourth quarters largely in the semiconductor related and wireless handset manufacturing test markets. The order demand remained strong in aerospace defense, personal systems, life sciences and chemical analysis markets. Orders in 2003 were flat compared to 2002, although during the fourth quarter of 2003, we saw a marked increase from earlier in the year. Orders in 2003 were driven by an increase in orders from cell phone manufacturers and demand for components that are included in consumer electronics, such as cell phones, cameras, games, personal computers, printers and test and measurement solutions used in the design and manufacturing of consumer electronics.

Net revenue in 2004 increased by 19 percent over 2003, including the impact of foreign currency exchange rates. All of our businesses experienced this increase in revenue. The semiconductor products market was very strong in the first half, but we have seen a decline as our customers work off inventory. We experienced a similar decline in the second half of the year in our automated test business, which is also highly dependent on the semiconductor market. Geographically, net revenue significantly increased in Europe and especially in Asia Pacific while having a modest increase in the U.S., Canada, Latin America (collectively referred to as the “Americas”). This modest improvement in the Americas was as expected as the economy in the U.S. recovered and the excess supply of used equipment was depleted. The strong growth in Asia Pacific was due to continued growth in the contract manufacturing and outsourcing markets in that region. Net revenue in 2003 was flat compared to 2002, although during fiscal year 2003 we saw an increase at the end of the year during our seasonally high fourth quarter.

Services and other includes revenue generated from servicing our installed base of products, warranty extensions and consulting in all years. In 2004 and 2003, services and other revenue increased as our installed base of products increased.

Total cost of sales as a percentage of net revenue decreased 5 percentage points from 2003 to 2004. Cost of services and other as a percentage of services and other revenue decreased by 5 percentage points and cost of products as a percentage of product revenue decreased 6 percentage points from 2003. This is a reflection of our continued work on lowering our cost structure, principally through our restructuring programs that contributed incremental savings of $248 million in 2004 as compared to 2003. We will continue to see the benefits of a more variable cost structure through use of selective outsourcing and our variable pay programs for our employees.

Total cost of sales as a percentage of net revenue was relatively flat from 2002 to 2003. Cost of services and other as a percentage of services and other revenue increased by 5 percentage points

while cost of products as a percentage of product revenue decreased slightly from 2002. The increase in cost of services and other was driven by increased materials consumption for our service and support businesses. Cost of products decreased primarily due to net incremental restructuring savings of $310 million, and a reduction of inventory charges. This decrease was offset by unfavorable mix and volume impacts and the unfavorable currency impact due to the weakening of the U.S. dollar.

Inventory charges totaled $45 million in 2004, $11 million in 2003 and $74 million in 2002. Inventory charges in 2004 included a $20 million charge relating to our camera module business. Inventory charges in 2002 reflected continuing weakness in some of our largest markets, particularly in the telecommunications market. We experienced a significant decline in inventory charges in 2003 compared to 2002 primarily due to our efforts to effectively manage our inventory levels. Sales of previously reserved inventory were $24 million in 2004, compared to $17 million in 2003 and $34 million in 2002.

Research and development expenses as a percentage of net revenue decreased by 4 percentage points in 2004 as a result of net incremental savings from our restructuring efforts of approximately $89 million. The actual decrease from 2003 to 2004 was $118 million. Research and development expenses as a percentage of net revenue decreased in 2003 from 2002 as a result of savings from our restructuring efforts of approximately $220 million and decreased indirect spending of approximately $95 million in 2003. These savings were offset by increased costs due to the weakening of the U.S. dollar of approximately $30 million. Our research and development efforts focus on potential new products and product improvements covering a wide variety of technologies in communications, electronics, life sciences and chemical analysis, none of which is individually significant to our operations. At our central research facility, Agilent Laboratories, we conduct five types of research and development: basic research, which contributes to the fundamental understanding of areas anticipated to be important in the very long term; foundation technologies research, which enables fundamental advances across all businesses; communications research, which creates technologies to enable pervasive access to information; life sciences research, which enables new measurement solutions to facilitate the development of next-generation pharmaceuticals and molecular diagnostics; and measurement research, which provides critical advances in test and measurement electronics and systems. The research at Agilent Laboratories represents less than 10 percent of Agilent’s consolidated spending on research and development and is intended to be relatively high in technical risk and to be the foundation for future products over a longer time horizon, generally five to ten years out. The majority of our research and development is nearer term and occurs in Agilent’s four business segments. This research and development is aimed at improving the more than 20,000 products already in production and on new product releases. Because of the large number of new and existing products and research and development projects across all of our businesses and at Agilent Laboratories, it is difficult to quantify the impact of any specific products or projects. We are committed to bringing new products to the market and have focused our development efforts on key strategic opportunities in order to align our business with available markets and position ourselves to capture market share.

Selling, general and administrative expenses as a percentage of net revenue decreased 8 percentage points in 2004 compared to 2003. Of the $176 million decline, approximately $137 million related to our ongoing restructuring cost savings. The decline was also driven in part by the decrease in indirect spending. The remainder of the decrease reflects our efforts in reducing our infrastructure costs and initiatives to control discretionary spending. Selling, general and administrative expenses as a percentage of net revenue decreased 9 percentage points in 2003 compared to 2002. Selling and general and administrative expenses declined primarily due to a decrease in goodwill amortization and impairments of $326 million. The decline was also driven in part by a decline in indirect spending of $55 million, and incremental net restructuring savings of

approximately $170 million, which were partially offset by increased costs due to the weakening of the U.S. dollar.

At October 31, 2004, our headcount was approximately 28,000 compared to 29,000 in 2003 and 36,000 in 2002.

Income from operations in 2004 was $386 million, an increase of approximately $1,111 million. The increase was primarily due to a revenue increase of $1,125 million, combined with $211 million less restructuring charges in 2004 compared to 2003 and approximately $474 million of incremental savings that the restructuring produced.

Our decrease in loss from operations in 2003 to 2002 of $882 million was primarily due to a decrease in goodwill amortization and impairments of $326 million, decreased spending on indirect expenses of approximately $160 million, decreased inventory charges of $63 million and net incremental savings from our restructuring plans.

Other income (expense), net generally includes interest income, interest expense, rental income, currency gain (loss) on balance sheet remeasurement, our share of income from joint ventures and equity investments and other miscellaneous items. Other income (expense), net increased by $19 million in 2004 compared to 2003 due primarily to an increase in equity income from a joint venture of $22 million. Other income (expense), net decreased $25 million in 2003 over 2002. This decrease was driven primarily by a decrease in net interest income of $17 million as interest rates and cash decreased.

For the year ended October 31, 2004, we recorded an income tax provision of $91 million as compared with an income tax provision of $1,100 million, for the year ended October 31, 2003. The current year-to-date provision was recorded for taxes on income generated in certain jurisdictions

other than the U.S. and the U.K. During the third quarter of 2003, we recorded a non-cash charge to establish a valuation allowance of $1.4 billion which included approximately $0.4 billion of tax benefits recorded during the first six months of 2003, resulting in an approximately $1.0 billion net deferred tax provision recorded within provision for taxes for 2003. The valuation allowance was determined in accordance with the provisions of SFAS No. 109 which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable; such assessment is required on a jurisdiction by jurisdiction basis. Cumulative losses incurred in the U.S. and the U.K. in recent years represented sufficient negative evidence under SFAS No. 109 to require a full valuation allowance in these jurisdictions. We intend to maintain a full valuation allowance in these jurisdictions until sufficient positive evidence exists to support the reversal of the valuation allowance.

For 2004, the annual effective tax rate was 20.7 percent. With the exception of other comprehensive income (“OCI”), this tax rate reflects taxes in jurisdictions other than the U.S. and the U.K., in which income tax or benefit continues to be offset by adjustments to the valuation allowance. From time to time the company undertakes certain employment, capital and other investment actions that subjects the company’s income to reduce tax rates. This tax rate may change over time as the amount or mix of income and taxes changes. Our effective tax rate is calculated using our projected annual pre-tax income or loss and is affected by research and development tax credits, the expected level of other tax benefits, the effects of business acquisitions and dispositions, the impact of changes to the valuation allowance, changes in OCI, as well as changes in the mix of income and losses outside the U.S. and the U.K. jurisdictions having varying statutory rates. The income tax provision of $91 million includes a $53 million (12 percent) benefit for valuation allowance adjustments based on changes in OCI items during 2004, which is comprised of $16 million due to increases in currency translation adjustments and $37 million due to the elimination of the minimum pension liability in the U.K. Under SFAS No. 109, adjustments to the valuation allowance may be required to be recorded to the provision for income taxes line item, even though the tax effects arose from changes in items in other comprehensive income.

For 2003, the effective tax rate was affected by the charge for the valuation allowance. For 2002, the effective tax rate was 34 percent. In 2004 compared to 2003, the lower tax rate in 2004 results principally from the company recording a net $1 billion deferred tax expense related to the valuation allowance charge in 2003 combined with the mix of income and losses outside the U.S. and U.K. jurisdictions having varying statutory rates.

As a result of cumulative actions we have undertaken such as restructuring, geographic location of activities and other actions, our tax rate is lower than in the past and we expect it to continue to be lower in the future. For 2005, we expect an effective tax rate of roughly 20 percent plus or minus 5 percentage points.

Overall, we have decreased our infrastructure costs primarily through our restructuring programs and cost controls. We have reduced the number of employees in our workforce that provide support services such as finance, information technology and workplace services, decreased the space that we occupy in our sales and administrative buildings and moved some of our global shared services operations sites to lower cost regions. Compared to the same time last year, incremental savings for infrastructure costs for the twelve months ended October 31, 2004 associated with restructuring plans and cost controls were approximately $230 million. We allocated these savings to all businesses according to usage of related services. The general infrastructure and shared services ended 2004 with approximately 4,000 employees, a decrease of approximately 200 employees from one year ago and approximately 1,700 employees from two years ago.

Agilent is a global diversified technology company that provides enabling solutions to markets within the communications, electronics, life sciences and chemical analysis industries. We have four primary businesses: test and measurement, automated test, semiconductor products and life sciences and chemical analysis. In addition to the discussion below, also see Note 19, “Segment Information” in Notes to Consolidated Financial Statements.

Our test and measurement business provides standard and customized solutions that are used in the design, development, manufacture, installation, deployment and operation of electronic equipment and systems and communications networks and services. Our communications test solutions generated approximately 70 percent of test and measurement revenues in 2004 while our general purpose test solutions generated approximately 30 percent. Overall order activity over the last 3 years demonstrates the cyclical nature of the markets for our test and measurement products. Orders dropped dramatically during 2002 (29 percent) and 2003 (5 percent) and grew 18 percent year-over-year in 2004.

The increase in orders in 2004 compared to 2003, was related to strong aerospace defense business, growth in consumer electronics (DVD players, LCD TVs, cell phones) and expansion of the Asian handset manufacturing capacity. Compared to 2003, test and measurement has experienced an 18 percent increase in orders. While our wireline test orders grew slightly from last year, we experienced significant growth in our wireless communications test (primarily one box testers, network analyzers and wireless systems) and general purpose test (mainly driven by integrated circuit (“IC”) lithography and basic instruments like multi-meters, oscilloscopes and counters) businesses. The decrease in orders in 2003 compared to 2002 was driven by the deterioration of the wireline communications market, pricing pressures, the competitive pressures of the used equipment market and reduction in capital expenditure spending by telecommunications providers.

Test and measurement revenues were up 15 percent year-over-year. Leading this trend in the communications test markets, wireless test revenues were up 22 percent while wireline test was down 11 percent year-over-year. The good results in wireless test was in large part due to the expansion of cell phone handset production in Asia. Pricing pressure and the used equipment market impacted wireline revenues. Communications test makes up approximately 70 percent of the test and measurement revenues and wireless test makes up approximately 80 percent of communications test. General purpose test revenues were up 13 percent year-over-year mainly as a result of growth in aerospace defense as well as in our logic analyzers, oscilloscopes and design software.

We saw a reduction in orders from wireless handset manufacturers in the fourth quarter of 2004, as they began to absorb the excess capacity that they put in place earlier in the year. This was partially offset by growth in our wireless handset R&D products as customers began to focus on new cellular formats, investments in 3.5G technologies and the development of converged cellular and wireless network devices. In the fourth quarter of 2004, we saw growth in our wireless infrastructure test as top base station manufacturers continued to expand capacity of existing formats to upgrade or improve the quality of service. In some regions, the expansion of 3G capacity has increased the need for additional test equipment. We expect our wireless test business to remain soft through most of the first half 2005 as handset manufacturers rebalance their manufacturing capacity versus the demand. In our general purpose test market, we expect to see continued demand from the U.S. government and prime military contractors, as recapitalization and modernization continues.

Net revenue for 2003 declined 3 percent compared to 2002, following the same trends as orders. The decline in net revenue was primarily the result of the slowdown in the telecommunications industry partially offset by favorable currency impacts.

The following table shows the percentage point decrease in our test and measurement business’s costs and expenses as a percentage of net revenue for 2004 versus 2003 and 2003 versus 2002.

Over the past three years, we have implemented cost reduction and restructuring plans to help the company lower it’s cost structure. Our test and measurement segment ended 2004 with approximately 11,200 employees, a decrease of approximately 660 employees from one year ago and 4,600 employees from two years ago. Inventory charges were not material for 2004 or 2003 and were $69 million in 2002. The impact of sales of inventory previously reserved was $7 million in 2004, was not material for 2003 and was $7 million for 2002.

Cost of products and services as a percentage of net revenue decreased by 8 percent year-over-year in 2004. The reduction in 2004 was attributable to incremental restructuring savings of approximately $90 million from consolidation of manufacturing sites, transfer of some manufacturing lines from Sonoma, California to Penang, Malaysia and savings in people related expenses due to headcount reductions, benefit of higher volumes, and improvements in discount levels. By the end of 2003, the restructuring plans had provided cumulative savings to cost of products and services of $140 million. Cost of products and services as a percentage of net revenue decreased in 2003 over 2002 by 4 percent year-over-year.

Research and development expenses as a percentage of net revenue decreased 5 percent year-over-year. On a dollar basis, expenses were down 15 percent, mainly due to $35 million of restructuring savings and an $11 million reduction in indirect expenses. We have reduced our research and development headcount to match the size and focus of the business. We have focused our development efforts on strategic opportunities that align our business with available markets and have cancelled new product introductions that would not result in an adequate return on investment. Research and development expenses as a percentage of net revenue decreased 5 percent in 2003 from 2002 due to restructuring savings and reduction in indirect expense savings.

Selling, general and administrative expenses as a percentage of net revenue decreased 8 percent in 2004 compared to 2003 due to increased revenue, $42 million in restructuring savings, efficiencies gained from our ERP implementation and a $2 million reduction in indirect expenses. These reductions were partially offset by an unfavorable currency impact of $26 million. Selling, general and administrative expenses as a percentage of net revenue decreased 5 percent in 2003 compared to 2002 due to restructuring savings, efficiencies gained from our ERP implementation and reduction in indirect expenses.

Operating profit increased by $534 million compared to 2003 on a revenue increase of only $374 million. Aggressive restructuring through workforce reductions, reduction in our cost structure and strict discretionary spending controls helped comparative operating results. This resulted in restructuring savings of $167 million for the test and measurement business. This segment’s return on invested capital (“ROIC”) was 8 percent, negative 9 percent and negative 17 percent for 2004, 2003 and 2002, respectively.

Our automated test business provides test system solutions that are used in the manufacture of semiconductor devices, electronics (primarily printed circuit-board assemblies) and flat panel displays. Our test solutions enable electronics designers and manufacturers to shorten the design-to-production cycle, lower manufacturing cost of test, confirm the functional quality of their devices and of their manufacturing processes, and accelerate the high-volume delivery of their products. The main driver of our customers’ business (IT, networking, and internet infrastructure) are the consumers who drive the market for PC’s, cell phones, electronic games, and similar consumer electronics. Our automated test segment experienced a difficult last quarter in 2004 as the business environment was much weaker than expected. This segment is undergoing major product transitions in several of its product lines.

Orders in 2004 decreased 2 percent compared to 2003, primarily due to a weak second half caused by our customers’ excess inventory. Our customers also delayed purchases in anticipation of our recently released next-generation flash memory and system-on-a-chip (“SOC”) test systems. Semiconductor test orders were down 6 percent while electronic manufacturing test orders were up 18 percent compared to last year. In the fourth quarter of 2004, our automated test segment reached its lowest level of quarterly orders since the first quarter of 2003. This downturn could continue through the first half of next year.

Orders in 2003 increased 13 percent compared to 2002 primarily due to increasing strength in the semiconductor test market as customers started to build increased production capacity for next generation devices. This increase was mainly driven by demand for consumer products in computation such as PC chip sets, graphics, and networking, digital consumer products and wireless products. In the fourth quarter of 2003, our automated test segment reached its highest level of quarterly orders since the fourth quarter of 2000 and continued to achieve market growth through design wins.

Net revenue in 2004 increased 22 percent compared to 2003 primarily due to an improved marketplace. Semiconductor test revenue growth was mixed, with strong parametric test revenue from our investments in 300-millimeter fabrication and wafer production test and solid SOC test revenue. Revenue for our flash memory business declined 13 percent. Services and other revenue increased 16 percent. Services and other includes the sale of support for hardware and software, and the sale of services such as, training, application development and test consulting for new installations and our installed base. We expect the downturn in orders we experienced in the second half of 2004 to impact revenues in the first half of 2005.

Net revenue in 2003 increased 7 percent compared to 2002 primarily due to increased sales of our products across the board in semiconductor test such as, flash memory and SOC, and electronic manufacturing test markets. Semiconductor test grew 7 percent and electronic manufacturing test also grew 7 percent. Support and services revenue increased 13 percent.

The following table shows the percentage point increase/(decrease) in our automated test segment’s costs and expenses as a percentage of net revenue for 2004, 2003 and 2002.

As a part of the effort to lower our company’s cost structure, our automated test segment ended this fiscal year with approximately 2,200 employees, a decrease of approximately 60 employees from one year ago and 600 employees from two years ago.

Cost of products and services as a percentage of net revenue decreased in 2004 compared to 2003. Our automated test segment continued to control costs through outsourcing to contract manufacturers, and monitoring indirect and direct material costs. The decreases were driven primarily by higher revenue, savings from costs controls, lower infrastructure costs and efficiencies from outsourcing to contract manufacturers. The pricing environment remains highly competitive.

Cost of products and services as a percentage of net revenue increased in 2003 compared to 2002. Savings from cost controls, and efficiencies from outsourcing to contract manufacturers were offset by competitive pricing pressures. In 2002, integrated device manufacturers (“IDMs”), design houses, and contract manufacturers focused on buying technology capability through high margin testers. However in 2003, as we saw signs of economic recovery, our customers added capacity and bought more focused cost effective systems. Pricing pressures affected the majority of our products.

We sold $3 million of inventory in 2004 that was previously reserved compared to $8 million in 2003 and $4 million in 2002.

Research and development expenses in 2004 as a percentage of net revenue decreased 3 percentage points from 2003. On a dollar basis, expenses increased 7 percent compared to last year. The increase is related to the company’s plan to aggressively expand the breadth of its offerings in flash and SOC test systems. The 2 percentage point decrease in research and development expenses as a percentage of net revenue in 2003 compared to 2002 was due to aggressive cost controls put in place, which focused our efforts on more strategic opportunities to align our business with available markets. On a dollar basis, research and development expenses in 2003 decreased 4 percent from 2002.

Selling, general and administrative expenses as a percentage of net revenue decreased 7 percentage points in 2004 compared to 2003, while on a dollar basis, expenses were down 7 percent. The decreases reflect our efforts in reducing our infrastructure costs and initiatives to control discretionary spending. In 2003, selling, general, and administrative expenses as a percentage of net revenue were down 6 percentage points compared to 2002, while on a dollar basis, expenses were down 9 percent. The decrease reflects our success in controlling discretionary spending.

In 2004, our automated test segment achieved an operating profit of $66 million, a rebound from an operating loss of $34 million from 2003. This $100 million profit improvement was the result of $169 million in revenue growth, gross margin improvement and expense controls. In 2003, our automated test segment reduced operating losses by 51 percent compared to 2002 while revenue increased 7 percent. Automated test returned to profitability in the second half of 2003. The reduction in loss from operations in 2003 compared to 2002 was primarily due to higher net revenue and reduced spending resulting from our cost reduction measures. In addition, operational efficiencies arising from outsourcing to contract manufacturers contributed to the return to profitability in the second half and improvement in 2003. This segment achieved a ROIC of 6 percent in 2004 compared to a ROIC of negative 3 percent in 2003 and negative 6 percent in 2002.

Our semiconductor products business is a leading supplier of semiconductor components, modules and assemblies for consumer and commercial electronics applications. We design, develop and manufacture products for the networking and personal systems markets. Our personal systems products, which accounted for 72 percent of our 2004 revenue, are used in mobile phones, optical mice, flat panel displays, printers and plasma televisions. Our networking products include fiber optic transceivers for sending and receiving data over high-speed networks and ICs for enterprise storage and networking.

Overall, 2004 marked the semiconductor products business’s return to healthy financial performance, with orders and revenue growing over 2003 by 20 percent and 27 percent, respectively. A small operating loss in 2003 was replaced by solid profit in 2004. After a strong first half of 2004, this business, along with most of our industry, experienced a decline in the second half, due to our customers working off excess inventory. The decline is expected to extend into 2005, but we do anticipate growth opportunities for some of our new products, such as E-pHEMT based front-end modules and laser mouse navigation devices.

Total orders grew 20 percent in 2004, up from 5 percent growth experienced in 2003. Our personal systems market achieved 32 percent growth in 2004 orders, but our networking market suffered a 4 percent decline. There is a continuing geographic shift of our business, with orders from Asia increasing 5 percent in 2003 and 40 percent in 2004, and accounting for 62 percent of total orders in 2004. Orders from the Americas declined 1 percent in 2003 and 11 percent in 2004.

Robust 2004 order growth in the personal systems market was driven by strength in physical layer networking components, FBAR duplexers, E-pHEMT power modules, optocouplers and camera modules. Within our networking segment, despite being down as a whole, there were a number of product lines that had marked increases. For example, application specific integrated circuits (“ASICs”) grew 18 percent and physical layer networking components grew 74 percent over 2003. Fiber optics and storage area network products, however, suffered double-digit declines compared to 2003.

Revenue grew 27 percent overall in 2004 compared to a 2 percent increase in 2003. Growth continued in the personal systems segment, as revenue increased 37 percent in 2004, following 3 percent growth in 2003. Optocouplers and wireless communication components led the increase in 2004. The Networking segment grew 7 percent in 2004 after declining 1 percent in 2003. Revenues from sales to Hewlett-Packard, primarily for ASICs, storage area networking and motion-control products, were 14 percent of the business’s net revenue in 2004, compared to 20 percent in 2003 and 33 percent in 2002.

The following table shows the percentage point increase/(decrease) in our semiconductor products business’s costs and expenses as a percentage of its net revenue for 2004 versus 2003, and 2003 versus 2002.

Though gross margins suffered in the final quarter of 2004 as revenue fell, 2004 as a whole still showed a four percentage point improvement in cost of sales compared to 2003. Despite typical erosion of average selling prices within the semiconductor industry, most notably in our fiber-optics and camera module businesses, significant gross margin improvement was achieved as a result of the incremental margins on $435 million in additional revenue over 2003, as well as approximately $100 million of incremental restructuring savings and ERP implementation efforts that took place largely in 2002 and 2003.

The erosion of average selling prices of established products is typical of the industry and new products typically yield larger gross margins. Consistent with trends in the semiconductor markets, we anticipate that average-selling prices will continue to deteriorate in 2005. However, as part of our normal course of business, we plan to offset this deterioration with ongoing cost reduction activities and new product introductions.

The sale of previously reserved inventory, due to unanticipated demand for products previously considered to be unmarketable, had a small impact on year-over-year cost of sales comparisons. In 2004 we sold $11 million worth of inventory that we had previously written down, compared to $5 million in 2003 and $18 million in 2002. Inventory charges were not material in any of the periods presented.

Research and development expenses dropped 4 percentage points expressed as a percentage of revenue from 2003 to 2004. Selling, general and administrative expenses dropped 3 percentage points as a percentage of revenue from 2003 to 2004. This improvement resulted from the increase in revenue from 2003 to 2004 in combination with expenses being held slightly under 2003’s level in absolute dollar terms. Total semiconductor products headcount was flat from 2003 to 2004.

Operating profit in 2004 of $166 million represents a $225 million improvement over the operating loss of $59 million in 2003, and a 12 percentage point improvement in operation margins. The segment’s ROIC was 17 percent, negative 2 percent and negative 3 percent for 2004, 2003 and 2002 respectively. The improvement achieved in 2004 drew from a variety of previously mentioned sources, such as higher revenue, ERP efficiencies, restructuring efforts from early 2003, and the continual release of new products. Restructuring efforts played a proportionally larger role in the improvement seen in 2003 compared to 2002.

In the fourth quarter of 2004 we agreed to sell inventory and fixed assets relating to our camera module business. We will continue to sell the image sensors that are a component part of the camera modules, but after the sale we will no longer produce the assembled modules. We will retain intellectual property and research and development activities associated with the image sensor technology. This announced sale is not expected to have a material impact on operating profits in 2005. The revenues for 2004 associated with the camera module business were approximately $300 million.

Our life sciences and chemical analysis business provides application-focused solutions that include instruments, software, consumables and services that enable customers to identify, quantify and analyze the physical and biological properties of substances and products. Our seven key product categories include: microarrays, microfluidics, gas chromatography, liquid chromatography, mass spectrometry, software and informatics, and related consumables, reagents and services. The business achieved solid growth in 2004, with orders and revenue growing by 13 percent and 12 percent, respectively, compared to 2003, and operating income up 30 percent. Growth was relatively even between our businesses serving the life sciences and chemical analysis markets.

Current year growth rates for orders and revenue were the highest seen for several years, causing 2004 revenues and orders to exceed levels achieved in prior years. Growth was achieved in all geographies, with the highest rates achieved in Asia and Europe. In 2004, growth over 2003 was driven by demand for replacement systems in our large installed base in the U.S. and Europe, increased U.S. government spending for homeland security, spending related to environmental testing in Asia, and increased demand from generic drug manufacturers.

Looking forward to 2005, we anticipate order and revenue levels to grow from 2004’s level, with strength across both our life science and chemical analysis businesses. We anticipate growth to be driven by new products such as the XCT Plus Ion Trap and other proteomics solutions, microfluidic products, software and informatics solutions, and new offerings in consumables and services.

The following table shows the percentage point decrease in our life sciences and chemical analysis business’s costs and expenses as a percentage of its net revenue for 2004 versus 2003, and 2003 versus 2002.

Cost of products and services as a percentage of net revenue has been flat for the past two years. The benefits of higher revenue levels and savings from restructuring programs have largely been offset by increases in wages, restoration of full pay in 2003, and information technology expenses associated with our ERP implementation. Looking forward to 2005, we expect to make progress in improving our cost of products and services as revenue grows and ERP efficiencies are realized.

Inventory charges have not had a material impact on life sciences and chemical analysis results for several years, at $3 million in 2004 and 2003, down from $5 million in 2002.

Research and development expenses, as well as selling, general and administrative expenses, rose slightly in absolute dollar terms in 2004 as we continued to invest to accommodate growth. Expressed as a percentage of net revenue, however, selling, general and administrative expenses declined 1 percentage point and research and development expenses remained flat compared to 2003, due to strong revenue growth outweighing increased expenses.

Our life science and chemical analysis business’s 30 percent increase in income from operations in 2004 compared to 2003 was accomplished by strong, broad-based revenue growth combined with prudent expense management. Operating profit as a percentage of revenue increased 2 percentage points in 2004 compared to 2003, reaching 14 percent of revenue. The segment’s ROIC was 22 percent, 21 percent and 21 percent for 2004, 2003 and 2002 respectively.

Our financial position remained strong at October 31, 2004, with cash and cash equivalents of $2,315 million.

We generated cash from continuing operations of $663 million in 2004 compared to $164 million used in 2003. We spent $138 million on restructuring activities in 2004, primarily in the form of severance payments, compared to $379 million in fiscal 2003. We generated cash from continuing operations of $409 million in the last quarter of 2004.

In 2004, accounts receivable generated cash of $80 million versus cash generated of $52 million in 2003. In 2004, accounts payable generated cash of $43 million versus cash generated of $69 million in 2003. Cash used from inventory was $79 million in 2004 compared to cash generation of $157 million in 2003. Inventory days on hand were slightly improved as of the end of 2004 at 89 days compared to 93 days in 2003.

We used $63 million of cash in 2004 to fund our U.S. defined benefit plan and contributed $83 million to our international defined benefits plans. Cash contributions in 2004 were approximately $72 million or 33 percent less than in 2003. In 2005, we expect funding requirements for our various benefit plans to continue to decrease. Our annual contributions are highly dependent on the relative performance of our assets versus our projected liabilities, among other factors. As the value of our assets increases relative to our future projected obligations we will make smaller contributions to maintain our funded status.

In 2004, as in 2003, we recorded no goodwill amortization in accordance with SFAS No. 142. Depreciation and amortization decreased from $362 million in 2003 to $292 million in 2004 reflecting the reduced acquisitions of property plant and equipment over the past few years and the full amortization of other intangibles relating to business combinations. We had a non-cash charge of $268 million related to the adoption of SFAS No. 142 in the first quarter of 2003.

We paid income taxes amounting to $149 million in 2004, as compared to $122 million in 2003.

Net cash used in investing activities for 2004 was $114 million compared to $203 million in 2003. Investments in property, plant and equipment continue to decrease to $118 million, a decrease of $87 million from 2003. Over half of the property, plant and equipment purchases were related to our investments in information technology programs such as the ERP and CRM systems and the development of our website. We also have been making investments in some of our facilities. The total cash outlays for these initiatives were $102 million in 2004 compared to $209 million in 2003. Cash used for investments in property, plant and equipment has decreased driven by our overall

strategy of tight spending controls and cash conservation. However, we are making appropriate investments in our IT and facility infrastructure with our improved cash position.

Net cash generated by financing activities for 2004 was $145 million compared to $110 million in 2003. In the first quarter of 2002, we borrowed $1,123 million, net of issuance costs, under a private offering of three percent senior convertible debenture due 2021. Beginning in December 2004, we have an option to redeem the debt in whole or in part in cash. If we choose to redeem the debt, the holders may elect to receive common stock at the initial conversion price of $32.22 per share in place of cash. Holders of the debentures have an option to require us to repurchase debentures, in whole or in part, on December 1 in each of 2006, 2011 and 2016.

We have contractual commitments for non-cancelable operating leases and vendor financing arrangements with CIT and others. We provide lease guarantees on these financing arrangements and we have no other material guarantees or commitments. See Note 17, “Commitments” in Item 15 of this report for further information on our non-cancelable operating leases.

Our liquidity is affected by many factors, some of which are based on normal ongoing operations of our business and some of which arise from fluctuations related to global economics and markets. Our cash balances are generated and held in many locations throughout the world. Local government regulations may restrict our ability to move cash balances to meet cash needs under certain circumstances. We do not currently expect such regulations and restrictions to impact our ability to pay vendors and conduct operations throughout our global organization.

On February 7, 2003 Standard and Poor’s Rating Services lowered its corporate credit and senior note ratings for Agilent to “speculative grade” status, from BBB minus to BB. On May 22, 2003 Moody’s Investors Service downgraded its senior unsecured rating of Agilent from Baa2 to Ba2. Moody’s also assigned the company a first time senior implied rating of Ba2. Both Moody’s and S&P attached a “negative outlook” to their ratings at the time of the downgrades. The downgrades did not have any material impact on our liquidity. On May 25, 2004, S&P revised its outlook to “positive” from “negative”. On December 20, 2004, Moody’s revised its outlook to “stable” from “negative”. There are no financial covenants related to our senior unsecured convertible notes. We believe that our current cash and cash equivalents and other financing capabilities will be sufficient to satisfy our working capital, capital expenditure and other liquidity needs for 2005.

Our cash flows from operations are dependent on a number of factors, including fluctuations in our operating results, accounts receivable collections, inventory management, and the timing of tax and other payments. As a result, the impact of contractual obligations on our liquidity and capital resources in future periods should be analyzed in conjunction with such factors.

The following table summarizes our contractual obligations at October 31, 2004 and excludes amounts recorded in our Consolidated Balance Sheet with the exception of long-term debt obligations (in millions):

Operating leases. Commitments under operating leases relate primarily to leasehold property.

Long-term debt obligations. Our Senior Convertible Debentures bear interest of 3 percent per annum, or approximately $34 million. See Note 16, “Senior Convertible Debentures and Lines of Credit” in Notes to Consolidated Financial Statements.

Commitments to contract manufacturers and suppliers. We purchase components from a variety of suppliers and use several contract manufacturers to provide manufacturing services for our products. During the normal course of business, we issue purchase orders with estimates of our requirements several months ahead of the delivery dates. However, our agreements with these suppliers usually allow us the option to cancel, reschedule, and adjust our requirements based on our business needs prior to firm orders being placed. Typically purchase orders outstanding with delivery dates within 30 days are non-cancelable. Therefore, only approximately 40 percent of our reported purchase commitments arising from these agreements are firm, non-cancelable, and unconditional commitments. We expect to fulfill the purchase commitments for inventory within one year.

In addition to the above, we record a liability for firm, non-cancelable, and unconditional purchase commitments for quantities in excess of our future demand forecasts consistent with our allowance for inventory. As of October 31, 2004, the liability for our firm, non-cancelable, and unconditional purchase commitments was $16 million, compared with $11 million as of October 31, 2003. These amounts are included in other accrued liabilities in our Consolidated Balance Sheets at October 31, 2004 and 2003, and are not included in the preceding table.

Other purchase commitments. Relate primarily to contracts with professional services suppliers. Purchase commitments are typically cancelable within a 90-day period without significant penalties.

Retirement plans. Retirement plan funding includes the expected tax-deductible contribution planned for 2005. Funding projections beyond the current year are not practical to estimate due to the rules affecting tax deductible contributions and the impact from asset performance and interest rates.

We had no material off-balance sheet arrangements as of October 31, 2004 or October 31, 2003.

ROIC is a tool by which we track how much value we are creating for our shareholders. ROIC is calculated by dividing the annualized segment return by the average of the last five quarter-end balances of segment invested capital, as shown below. We utilize ROIC as a performance measure for our businesses, and our senior managers’ compensation is linked to ROIC improvements as well as other performance criteria. We believe that ROIC provides our management with a means to analyze and improve their business, measuring segment profitability in relation to net asset investments.

We provide non-GAAP financial information in order to provide meaningful supplemental information regarding our operational performance and to enhance our investors’ overall understanding of our core current financial performance and our prospects for the future. We believe that our investors benefit from seeing our results “through the eyes” of management in addition to the GAAP presentation. Management measures segment and enterprise performance, including employee performance, using measures such as those that are disclosed in this report. This information facilitates management’s internal comparisons to the company’s historical operating results and comparisons to competitors’ operating results.

Non-GAAP information allows for greater transparency to supplemental information used by management in its financial and operational decision-making. Historically, we have reported similar non-GAAP information to our investors in our press releases and in items furnished to the SEC. We believe that the inclusion of comparative numbers provides consistency in our financial reporting.

This information is not in accordance with, or an alternative for generally accepted accounting principles in the United States. The non-GAAP information we provide may be different from the non-GAAP information provided by other companies.

Our operating results and financial condition could be harmed if the markets into which we sell our products decline.

We recently experienced reduced demand for our products and services in many of the markets that we serve worldwide, as was the case in semiconductor test and semiconductor products. Revenues in the semiconductor test and semiconductor products businesses fluctuated significantly over the past three years. However, other markets we serve have stabilized or demonstrated growth, such as life sciences and chemical analysis. Agilent consists of several diverse businesses, and demand in our markets remains cyclical and volatile. Pricing pressures and competition remain especially intense in semiconductor-related industries, which could prevent achievement of our long-term gross margin goals and could require us to implement additional cost cutting measures to sustain profitability.

Visibility into our markets is limited. Any decline in our customers’ markets or in general economic conditions would likely result in a reduction in demand for our products and services. For example, if the Asia Pacific market does not grow as anticipated, or if the semiconductor market continues to slow, our results could suffer. As the broader semiconductor market is one of the drivers for our test and measurement business, a continued slowdown in the semiconductor market could result in a slowdown in our Test and Measurement business. Also, if our customers’ markets decline, we may not be able to collect on outstanding amounts due to us. Such decline could harm our consolidated financial position, results of operations, cash flows and stock price, and could limit our ability to sustain profitability. Also, in such an environment, pricing pressures could intensify, and if we were unable to respond quickly enough this could further reduce our gross margins.

Finally, we may be required to secure additional debt or equity financing at some time in the future, and we cannot assure you that such financing will be available on acceptable terms when required. If our senior unsecured convertible notes rating is downgraded, we could be required to pay a higher interest rate for future borrowing needs and we may have stricter terms.

We may not be successful in our efforts to maintain a reduced cost structure, and the actions that we take in order to accomplish this transition could have long-term adverse effects on our business.

We have taken, and continue to take, various actions to transition our company to a reduced cost structure. In response to declining revenues, beginning in 2001 we scaled back our operations, reduced our expenses, decreased our workforce by approximately one-third, froze hiring, cut back significantly on our use of temporary workers and reduced discretionary spending. We also initiated facility closures to reduce production levels. Although our revenues are no longer declining, we continue to take steps to reach or maintain our quarterly operating cost structure goal.

There are several risks inherent in our efforts to maintain a reduced cost structure. These include the risk that we will not be able to reduce expenditures quickly enough and hold them at a level necessary to sustain or increase profitability, and that we may have to undertake further restructuring initiatives that would entail additional charges and cause us to take additional actions. Our expenses were higher than anticipated during the second quarter of 2004, which adversely affected our performance. As we grow, we expect to face ongoing pressure to control expenses. If we are not able to hold down expenses we may have to further reduce our workforce. There is also the risk that cost-cutting initiatives will impair our ability to effectively develop and market products, to remain competitive in the industries in which we compete and to operate effectively. Each of the above measures could have long-term effects on our business by reducing our pool of technical talent, decreasing or slowing improvements in our products, making it more difficult for us to respond to customers, limiting our ability to increase production quickly if and when the demand for our products increases and limiting our ability to hire and retain key personnel. These circumstances could cause our income to be lower than it otherwise might be, which would adversely affect our stock price.

If we do not introduce successful new products and services in a timely manner, our products and services will become obsolete, and our operating results will suffer.

We generally sell our products in industries that are characterized by rapid technological changes, frequent new product and service introductions and changing industry standards. In addition, many of the markets in which we operate are seasonal and cyclical. Without the timely introduction of new products, services and enhancements, our products and services will become technologically obsolete over time, in which case our revenue and operating results would suffer. The success of our new products and services will depend on several factors, including our ability to:

Dependence on contract manufacturing and outsourcing other portions of our supply chain may adversely affect our ability to bring products to market and damage our reputation. Dependence on outsourced information technology function may impair our ability to operate effectively.

As part of our efforts to streamline operations and to cut costs, we have been outsourcing and will continue to evaluate additional outsourcing. If our contract manufacturers or other outsourcers fail to perform their obligations in a timely manner or at satisfactory quality levels, our ability to bring products to market and our reputation could suffer. For example, during a market upturn, our contract manufacturers may be unable to meet our demand requirements, which may preclude us from fulfilling our customers’ orders on a timely basis. The ability of these manufacturers to perform is largely outside of our control. In addition, we outsourced significant portions of our information technology function. Since information technology is critical to our operations, any failure to perform on the part of the contract manufacturers could impair our ability to operate effectively. In addition to the risks outlined above, problems with manufacturing or IT outsourcing could result in lower revenues, and impact our results of operations and our stock price. Much of our outsourcing takes place in developing countries, and as a result may be subject to geopolitical uncertainty.

Future changes in financial accounting standards or taxation rules may adversely affect our reported results of operations.

A change in accounting standards or a change in existing taxation rules can have a significant effect on our reported results. New accounting pronouncements and taxation rules and varying interpretations of accounting pronouncements have occurred and may occur in the future. These new accounting pronouncements and taxation rules may adversely affect our reported financial results or the way we conduct our business.

For example, under the newly-issued SFAS No. 123R we will be required to account for equity under our stock plans as a compensation expense and our net income and net income per share will be significantly reduced. Currently, we record compensation expense only in connection with option grants that have an exercise price below fair market value. For option grants that have an exercise price at fair market value, we calculate compensation expense and disclose their impact on net income (loss) and net income (loss) per share, as well as the impact of all stock-based compensation expense in a footnote to the consolidated financial statements. SFAS No. 123R requires Agilent to adopt the new accounting provisions beginning in our fourth quarter of 2005, and will require Agilent to expense SBP awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights, as compensation cost.

Fluctuations in our quarterly operating results may cause volatility in the price of our common stock and the senior convertible debentures.

Given the nature of the markets in which we participate, we cannot reliably predict future revenue and profitability. Our quarterly sales and operating results have become highly dependent on the volume and timing of orders received during the quarter, which are difficult to forecast. These results are also dependent on the seasonal and cyclical nature of our end markets such as consumer electronics, including cell phones. In addition, a significant portion of our operating expenses is relatively fixed in nature due to our significant sales, research and development and manufacturing costs. If we cannot adjust spending quickly enough to compensate for a revenue shortfall, this may magnify the adverse impact of such revenue shortfall on our results of operations. Fluctuations in our operating results may cause volatility in the price of our common stock and the debentures.

Our income may suffer if our manufacturing capacity does not match our demand.

Because we cannot immediately adapt our production capacity and related cost structures to rapidly changing market conditions, when demand does not meet our expectations, our manufacturing capacity will likely exceed our production requirements. If, during a general market upturn or an upturn in one of our segments, we cannot increase our manufacturing capacity to meet product demand, we will not be able to fulfill orders in a timely manner. This inability could materially and adversely affect our results. By contrast, during the economic downturn we had excess manufacturing capacity as a result of the decrease in purchasing and capital spending in the communications, electronics and semiconductor industries. The fixed costs associated with excess manufacturing capacity adversely affected, and could in the future affect our income.

Failure to adjust our purchases due to changing market conditions or failure to estimate our customers’ demand could adversely affect our income.

Our income could be harmed if we are unable to adjust our purchases to market fluctuations, including those caused by the seasonal or cyclical nature of the markets in which we operate. The sale of our products and services are dependent, to a large degree, on customers whose industries are subject to seasonal or cyclical trends in the demand for their products. For example, the consumer electronics market is particularly volatile, making demand difficult to anticipate. During a market upturn, we may not be able to purchase sufficient supplies or components to meet increasing product demand, which could materially affect our results. In addition, some of the parts that require custom design are not readily available from alternate suppliers due to their unique design or the length of time necessary for design work. Should a supplier cease manufacturing such a component, we would be forced to reengineer our product. In addition to discontinuing parts, suppliers may also extend lead times, limit supplies or increase prices due to capacity constraints or other factors. By contrast, in order to secure components for the production of products, we may continue to enter into non-cancelable purchase commitments with vendors, or at times make advance payments to suppliers, which could impact our ability to adjust our inventory to declining market demands. Prior commitments of this type have resulted in an excess of parts when demand for our communications, semiconductor and electronics products has decreased. If demand for our products is less than we expect, we may experience additional excess and obsolete inventories and be forced to incur additional charges.

Economic, political and other risks associated with international sales and operations could adversely affect our results of operations.

Because we sell our products worldwide, our business is subject to risks associated with doing business internationally. We anticipate that revenue from international operations will continue to represent a majority of our total revenue. In addition, many of our employees, contract manufacturers, suppliers, job functions and manufacturing facilities are increasingly located outside the U.S. Accordingly, our future results could be harmed by a variety of factors, including:

We centralized most of our accounting processes to two locations: Malaysia and India. These processes include general accounting, accounts payable and accounts receivables functions. If conditions change in those countries, it may adversely affect operations, including impairing our ability to pay our suppliers and collect our receivables. Our results of operations, as well as our liquidity, may be adversely affected and possible delays may occur in reporting financial results.

Our business will suffer if we are not able to retain and hire key personnel.

Our future success depends partly on the continued service of our key research, engineering, sales, marketing, manufacturing, executive and administrative personnel. If we fail to retain and hire a sufficient number of these personnel, we will not be able to maintain or expand our business. Since 2001, we have experienced temporary pay reductions, workforce reductions and limited pay increases, which may harm our long-term ability to hire and retain key personnel. As the market continues its recovery, there is intense competition for certain highly technical specialties in geographic areas where we continue to recruit, and it may become more difficult to retain our key employees.

Our acquisitions, strategic alliances, joint ventures and divestitures may result in financial results that are different than expected.

In the normal course of business, we frequently engage in discussions with third parties relating to possible acquisitions, strategic alliances, joint ventures and divestitures. As a result of such transactions, our financial results may differ from the investment community’s expectations in a given quarter. In addition, acquisitions and strategic alliances may require us to integrate a different company culture, management team and business infrastructure. We may have difficulty developing, manufacturing and marketing the products of a newly acquired company in a way that enhances the performance of our combined businesses or product lines to realize the value from expected synergies. Depending on the size and complexity of an acquisition, our successful integration of the entity depends on a variety of factors, including:

Any additional impairment of the value of purchased assets and goodwill could have a significant negative impact on our future operating results.

In addition, if customers of the divested business do not receive the same level of service from the new owners, this may adversely affect our other businesses to the extent that these customers

also purchase other Agilent products. All of these efforts require varying levels of management resources, which may divert our attention from other business operations. Further, if market conditions or other factors lead us to change our strategic direction, we may not realize the expected value from such transactions. If we do not realize the expected benefits or synergies of such transactions, our consolidated financial position, results of operations, cash flows and stock price could be negatively impacted.

Unforeseen problems with the stability and maintenance of our new information systems have interfered and could further interfere with our operations.

As a part of the effort to replace our current information systems, we implemented new enterprise resource planning software and other software applications to manage our business operations. Our profit projections could be inaccurate if we misjudged the potential savings from the implementation of the new systems, or if we are unable to adequately maintain or adjust the systems. In addition, if our new systems fail to provide accurate and increased visibility into pricing and cost structures, we may be unable to improve or maximize our profit margins. Following the first phase of our enterprise resource planning software implementation, we experienced difficulties in providing customer quotes and in acknowledging and shipping customer orders. Although we believe that these systems are stable, as we add additional functionality, new problems could arise that we have not foreseen. Such problems could adversely impact our ability to do the following in a timely manner: provide quotes, take customer orders, ship products, provide services and support to our customers, bill and track our customers, fulfill contractual obligations and otherwise run our business. As a result, our financial position, results of operations, cash flows and stock price could be adversely affected.

Environmental contamination from past operations could subject us to unreimbursed costs and could harm on-site operations and the future use and value of the properties involved and environmental contamination caused by ongoing operations could subject us to substantial liabilities in the future.

Some of our properties are undergoing remediation by Hewlett-Packard for subsurface contaminations that were known at the time of our separation from Hewlett-Packard. Hewlett-Packard has agreed to retain the liability for this subsurface contamination, perform the required remediation and indemnify us with respect to claims arising out of that contamination. The determination of the existence and cost of any additional contamination caused by us could involve costly and time-consuming negotiations and litigation. In addition, Hewlett-Packard will have access to our properties to perform remediation. While Hewlett-Packard has agreed to minimize interference with on-site operations at those properties, remediation activities and subsurface contamination may require us to incur unreimbursed costs and could harm on-site operations and the future use and value of the properties. We cannot be sure that Hewlett-Packard will continue to fulfill its indemnification or remediation obligations.

We have agreed to indemnify Hewlett-Packard for any liability associated with contamination from past operations at all other properties transferred from Hewlett-Packard to us other than those properties currently undergoing remediation by Hewlett-Packard. While we are not aware of any material liabilities associated with any potential subsurface contamination at any of those properties, subsurface contamination may exist, and we may be exposed to material liability as a result of the existence of that contamination.

Our semiconductor and other manufacturing processes involve the use of substances regulated under various international, federal, state and local laws governing the environment. We may be subject to liabilities for environmental contamination, and these liabilities may be substantial. Although our policy is to apply strict standards for environmental protection at our sites inside and

outside the U.S., even if the sites outside the U.S. are not subject to regulations imposed by foreign governments, we may not be aware of all conditions that could subject us to liability.

Our customers and we are subject to various governmental regulations, compliance with which may cause us to incur significant expenses, and if we fail to maintain satisfactory compliance with certain regulations, we may be forced to recall products and cease their manufacture and distribution, and we could be subject to civil or criminal penalties.

Our businesses are subject to various significant international, federal, state and local regulations, including but not limited to health and safety, packaging, product content, labor and import/export regulations. These regulations are complex, change frequently and have tended to become more stringent over time. We may be required to incur significant expenses to comply with these regulations or to remedy violations of these regulations. Any failure by us to comply with applicable government regulations could also result in cessation of our operations or portions of our operations, product recalls or impositions of fines and restrictions on our ability to carry on or expand our operations. In addition, because many of our products are regulated or sold into regulated industries, we must comply with additional regulations in marketing our products.

Our products and operations are also often subject to the rules of industrial standards bodies, like the International Standards Organization, as well as regulation by other agencies such as the U.S. Federal Communications Commission. We also must comply with work safety rules. If we fail to adequately address any of these regulations, our businesses could be harmed.

Some of our chemical analysis products are used in conjunction with chemicals whose manufacture, processing, distribution and notification requirements are regulated by the U.S. Environmental Protection Agency under the Toxic Substances Control Act, and by regulatory bodies in other countries with laws similar to the Toxic Substances Control Act. We must conform the manufacture, processing, distribution of and notification about these chemicals to these laws and adapt to regulatory requirements in all countries as these requirements change. If we fail to comply with these requirements in the manufacture or distribution of our products, then we could be made to pay civil penalties, face criminal prosecution and, in some cases, be prohibited from distributing our products in commerce until the products or component substances are brought into compliance.

We are subject to laws and regulations governing government contracts, and failure to address these laws and regulations or comply with government contracts could harm our business by leading to a reduction in revenue associated with these customers.

We have agreements relating to the sale of our products to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government. The laws governing government contracts differ from the laws governing private contracts. For example, many government contracts contain pricing terms and conditions that are not applicable to private contracts. We are also subject to investigation for compliance with the regulations governing government contracts. A failure to comply with these regulations might result in suspension of these contracts, or administrative penalties.

Third parties may claim that we are infringing their intellectual property, and we could suffer significant litigation or licensing expenses or be prevented from selling products.

While we do not believe that any of our products infringe the valid intellectual property rights of third parties, we may be unaware of intellectual property rights of others that may cover some of our technology, products or services. Any litigation regarding patents or other intellectual property could be costly and time-consuming and could divert our management and key personnel from our business operations. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Claims of intellectual property infringement might also

require us to enter into costly license agreements. However, we may not be able to obtain license agreements on terms acceptable to us, or at all. We also may be subject to significant damages or injunctions against development and sale of certain of our products.

We often rely on licenses of intellectual property useful for our businesses. We cannot ensure that these licenses will be available in the future on favorable terms or at all.

Third parties may infringe our intellectual property, and we may expend significant resources enforcing our rights or suffer competitive injury.

Our success depends in large part on our proprietary technology. We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our proprietary rights. If we fail to successfully enforce our intellectual property rights, our competitive position could suffer, which could harm our operating results.

Our pending patent and trademark registration applications may not be allowed, or competitors may challenge the validity or scope of our patents, copyrights or trademarks. In addition, our patents may not provide us a significant competitive advantage.

We may be required to spend significant resources to monitor and police our intellectual property rights. We may not be able to detect infringement and our competitive position may be harmed before we do so. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights and our ability to enforce them may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture market share and result in lost revenues. Furthermore, some intellectual property rights are licensed to other companies, allowing them to compete with us using that intellectual property.

If we suffer loss to our factories, facilities or distribution system due to catastrophe, our operations could be seriously harmed.

Our factories, facilities and distribution system are subject to catastrophic loss due to fire, flood, terrorism or other natural or man-made disasters. In particular, several of our facilities could be subject to a catastrophic loss caused by earthquake due to their locations. Our production facilities, headquarters and Agilent Technologies Laboratories in California, and our production facilities in Washington and Japan, are all located in areas with above average seismic activity. If any of these facilities were to experience a catastrophic loss, it could disrupt our operations, delay production, shipments and revenue and result in large expenses to repair or replace the facility. In addition, since we have recently consolidated our manufacturing facilities, we are more likely to experience an interruption to our operations in the event of a catastrophe in any one location. Although we carry insurance for property damage and business interruption, we do not carry insurance or financial reserves for interruptions or potential losses arising from earthquakes or terrorism.

We are exposed to foreign currency exchange rate risks inherent in our sales commitments, anticipated sales, and assets and liabilities denominated in currencies other than the functional currency of our subsidiaries. We hedge future cash flows denominated in currencies other than the functional currency using sales forecasts up to twelve months in advance. Our exposure to exchange rate risks is managed on an enterprise-wide basis. This strategy utilizes derivative financial instruments, including option and forward contracts, to hedge foreign currency exposures with the intent of offsetting gains and losses that occur on the underlying exposures with gains and losses on the derivative contracts hedging them. We do not currently and do not intend to utilize derivative financial instruments for trading purposes.

Our operations generate non-functional currency cash flows such as revenues, third party vendor payments and inter-company payments. In anticipation of these foreign currency cash flows and in view of volatility of the currency market, we enter into such foreign exchange contracts as are described above to manage our currency risk. Approximately 75 percent of our revenues in 2004, 74 percent of our revenues in 2003 and 75 percent of our revenues in 2002 were generated in U.S. dollars.

We performed a sensitivity analysis assuming a hypothetical 10 percent adverse movement in foreign exchange rates to the hedging contracts and the underlying exposures described above. As of October 31, 2004 and October 31, 2003, the analysis indicated that these hypothetical market movements would not have a material effect on our consolidated financial position, results of operations or cash flows.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

We carried out an evaluation required by Rule 13a-15(b) of the Securities Exchange Act of 1934 under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Agilent’s “disclosure controls and procedures” and “internal control over financial reporting” as of the end of the period covered by this report.

Disclosure controls and procedures are designed with the objective of ensuring that (i) information required to be disclosed in the company’s reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. Internal controls over financial reporting are procedures designed with the objective of providing reasonable assurance that our (a) transactions are properly authorized, (b) assets are safeguarded against unauthorized or improper use and (c) transactions are properly recorded and reported; all to permit the preparation of our financial statements in conformity with generally accepted accounting principles.

The evaluation of Agilent’s disclosure controls and procedures and internal control over financial reporting included a review of our objectives and processes, implementation by the company and the effect on the information generated for use in this Annual Report on Form 10-K. In the course of this evaluation and in accordance with Section 302 of the Sarbanes Oxley Act of 2002 (but not in accordance with Section 404 of the Sarbanes Oxley Act of 2002), we sought to identify any significant deficiencies or material weaknesses in our controls, to determine whether we had identified any acts of fraud involving personnel who have a significant role in our internal controls over financial reporting, and to confirm that any necessary corrective action, including process improvements, were being undertaken. This type of evaluation will be done quarterly so that the conclusions concerning the effectiveness of these controls can be reported in our periodic reports filed with the SEC. Our internal control over financial reporting are also evaluated on an ongoing basis by Agilent’s internal auditors and by other personnel in Agilent’s finance organization. The

overall goals of these evaluation activities are to monitor our disclosure and internal controls over financial reporting and to make modifications as necessary. We intend to maintain these controls as processes that may be appropriately modified as circumstances warrant.

Based on their evaluation, Agilent’s Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the company (including our consolidated subsidiaries) required to be included in our periodic reports filed with the SEC as of the end of the period covered by this report. There were no changes in our internal control over financial reporting that occurred during Agilent’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Management necessarily applied its judgment in assessing the benefits of controls relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and may not be detected.

Items 308(a) and (b) of Regulations S-K and S-B will require management to include in their annual reports a report of management on the company’s internal controls over financial reporting, and to evaluate, as of the end of each fiscal period, any change in the company’s internal control over financial reporting that occurred during the period that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting. On February 24, 2004, the Securities and Exchange Commission issued a release extending the deadline for certain issuers to comply with the management report on internal control over financial reporting requirement. Accordingly, Agilent will begin reporting this information in fiscal 2005, its first fiscal year ending after November 15, 2004. In addition, the release extended, until the first fiscal year ending after November 15, 2004, compliance dates for amendments to certain representations that must be included in the certifications required by Exchange Act Rules 13a-14 and 15d-14 and Investment Company Act of 1940 Rule 30a-2, regarding the company’s internal control over financial reporting.

Information regarding our directors appears under “Proposal No. 1—Election of Directors” in our Proxy Statement for the Annual Meeting of Stockholders (the “Proxy Statement”), to be held March 1, 2005. That portion of the Proxy Statement is incorporated by reference into this report. Information regarding our executive officers appears in Item 1 of this report under “Executive Officers of the Registrant.” Information regarding our Audit and Finance Committee and our Audit and Finance Committee’s financial expert appears under “Audit and Finance Committee Report” in our Proxy Statement. That portion of the Proxy Statement is incorporated by reference into this report. There were no material changes to the procedures by which security holders may recommend nominees to our Board of Directors. Information regarding our code of ethics (the company’s Standards of Business Conduct) applicable to our principal executive officer, our principal financial officer, our controller and other senior financial officers appears in Item 1 of this report under “Investor Information.” We will post amendments to or waivers from a provision of the Standards of Business Conduct on our website at www.investor.agilent.com.

Information about compliance with Section 16(a) of the Exchange Act appears under “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement. That portion of the Proxy Statement is incorporated by reference into this report.

Information about compensation of our named executive officers appears under “Executive Compensation” and under “Compensation Committee Interlocks and Insider Participation” in the Proxy Statement. Information about compensation of our directors appears under “Director Compensation Arrangements and Stock Ownership Guidelines” in the Proxy Statement. Those portions of the Proxy Statement are incorporated by reference into this report.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information about security ownership of certain beneficial owners and management appears under “Common Stock Ownership of Certain Beneficial Owners and Management” in the Proxy Statement. That portion of the Proxy Statement is incorporated by reference into this report. Information regarding securities authorized for issuance under equity compensation plans appears in Item 5 of this report.

Information about certain relationships and related transactions appears under “Certain Relationships and Related Transactions” in the Proxy Statement. That portion of the Proxy Statement is incorporated by reference into this report.

Information about principal accountant fees and services as well as related pre-approval policies appears under “Fees Paid to PricewaterhouseCoopers LLP” and “Policy on Audit and Finance Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm” in the Proxy Statement. Those portions of the Proxy Statement are incorporated by reference into this report.

See Index to Exhibits. The Exhibits listed in the accompanying Index to Exhibits are filed as part of this report.

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, cash flows and stockholders’ equity present fairly, in all material respects, the financial position of Agilent Technologies, Inc. and its subsidiaries at October 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2004 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in the notes to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” as of November 1, 2002.

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

Agilent Technologies, Inc. (“we,” “Agilent” or “the company”), incorporated in Delaware in May 1999, is a global diversified technology organization that provides enabling solutions to technology markets within the communications, electronics, life sciences and chemical analysis industries. Prior to our initial public offering of 16 percent of our stock in November 1999, we were a wholly-owned subsidiary of Hewlett-Packard Company (“Hewlett-Packard”). Hewlett-Packard distributed the remaining 84 percent of our stock to its stockholders on June 2, 2000 in the form of a stock dividend.

Our fiscal year end is October 31. Unless otherwise stated, all years and dates refer to our fiscal year.

Basis of presentation. The accompanying financial data has been prepared by us pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Amounts in the consolidated financial statements as of and for the years ended October 31, 2003 and October 31, 2002 were reclassified to conform to the presentation in 2004.

Principles of consolidation. The consolidated financial statements include the accounts of the company and our wholly- and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Partially owned, non-controlled equity affiliates are accounted for under the equity method.

Use of estimates. The preparation of financial statements in accordance with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, restructuring and asset impairment charges, inventory valuation, retirement and post-retirement plan assumptions, valuation of long-lived assets and accounting for income taxes.

Revenue recognition. We enter into agreements to sell products (hardware and/or software), services and other arrangements (multiple element arrangements) that include combinations of products and services.

We recognize revenue, net of trade discounts and allowances, provided that (1) persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the price is fixed or determinable and (4) collectibility is reasonably assured. Delivery is considered to have occurred when title and risk of loss have transferred to the customer, for products, or when the service has been provided. We consider the price to be fixed or determinable when the price is not subject to refund or adjustments. We consider arrangements with extended payment terms not to be fixed or determinable and accordingly we defer revenue until amounts become due. At the time of the transaction, we evaluate the creditworthiness of our customers to determine the appropriate timing of revenue recognition.

Product revenue. Our product revenue is generated predominantly from the sales of various types of test equipment and semiconductor components. Software is embedded in many of our test

equipment products, but the software component is generally considered to be incidental. Product revenue, including sales to resellers and distributors, is reduced for estimated returns and distributor price protection, when appropriate. For sales or arrangements that include customer-specified acceptance criteria, including those where acceptance is required upon achievement of performance milestones, revenue is recognized after the acceptance criteria have been met. For products that include installation, if the installation meets the criteria to be considered a separate element, product revenue is recognized upon delivery, and recognition of installation revenue is delayed until the installation is complete. Otherwise, neither the product nor the installation revenue is recognized until the installation is complete.

Where software is licensed separately, revenue is recognized when the software is delivered and title and risk of loss have been transferred to the customer or, in the case of electronic delivery of software, when the customer is given access to the licensed software programs. We also evaluate whether collection of the receivable is probable, the fee is fixed or determinable and whether any other undelivered elements of the arrangement exist, on which a portion of the total fee would be allocated based on vendor-specific objective evidence. Revenue from software licensing was not material for all periods presented.

Service revenue. Revenue from services includes extended warranty, customer support, consulting, training and education. Service revenue is deferred and recognized over the contractual period or as services are rendered and accepted by the customer. For example, customer support contracts are recognized ratably over the contractual period, while training revenue is recognized as the training is provided to the customer. In addition the four revenue recognition criteria described above must be met before service revenue is recognized.

Multiple element arrangements. We use objective evidence of fair value to allocate revenue to elements in multiple element arrangements and recognize revenue when the criteria for revenue recognition have been met for each element. If the criteria are not met, then revenue is deferred until such criteria are met or until the period(s) over which the last undelivered element is delivered. In the absence of objective evidence of fair value of a delivered element, we allocate revenue to the fair value of the undelivered elements and the residual revenue to the delivered elements. The price charged when an element is sold separately generally determines fair value.

Deferred revenue. Deferred revenue is primarily comprised of advanced billing and customer deposits for service, support and maintenance agreements.

Accounts receivable and allowance for doubtful accounts. Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Such accounts receivable has been reduced by an allowance for doubtful accounts, which is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance based on our historical write-off experience and the aging of such receivables, among other factors. The allowance has not been material for any periods presented. We do not have any off-balance-sheet credit exposure related to our customers.

Warranty. Our warranty terms typically extend 90 days after delivery for on-site repairs and one to three years for products returned to Agilent for repair. Our warranty is accounted for in accordance with Statement of Financial Standards No. 5, “Accounting for Contingencies” (“SFAS No. 5”), such that an accrual is made when it is estimable and probable based on historical experience. We accrue for warranty costs based on historical trends in warranty charges as a percentage of gross product shipments. A provision for estimated future warranty costs is recorded

as cost of products when revenue is recognized and the resulting accrual is reviewed regularly and periodically adjusted to reflect changes in warranty cost estimates. See Note 12, “Guarantees”.

Stock-based compensation. We account for stock-based awards to employees and directors using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB 25”). Under the intrinsic value method, we record compensation expense related to stock options in our consolidated statement of operations when the exercise price of our employee stock-based award is less than the market price of the underlying stock on the date of the grant. See Note 5, “Stock-Based Compensation” for the impact on net income (loss) and net income (loss) per share if we had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) to stock-based incentives.

Pro forma information. Pro forma net income (loss) and net income (loss) per share information, as required by SFAS No. 123 have been determined as if we had accounted for all employee stock options granted, including shares issuable to employees under the Agilent Technologies, Inc. Employee Stock Purchase Plan (the “423(b) Plan”), the Agilent Technologies, Inc. Long-Term Performance Program (the “LTPP”) and the Option Exchange Program described below, under SFAS No. 123’s fair value method. The pro forma effect of recognizing compensation expense in accordance with SFAS No. 123 is as follows:

The fair value of options granted was estimated at grant date using a Black-Scholes option-pricing model with the following weighted-average assumptions:

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of the options and amortized over six months to two years for the 423(b) Plan.

Shipping and handling costs. Our shipping and handling costs charged to customers are included in net revenue and the associated expense is recorded in total costs for all periods presented.

Goodwill and purchased intangible assets. On November 1, 2002, we adopted SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”), which requires that goodwill no longer be amortized but reviewed annually (or more frequently if impairment indicators arise) for impairment. Subsequently, we were 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.

As part of our initial assessment of goodwill impairment, we used the fair value measurement requirement, rather than the previously required undiscounted cash flows approach. As a result of that assessment, we recorded a transitional impairment loss from the implementation of SFAS No. 142 as a change in accounting principle in the first quarter of 2003. The fair value of the reporting units was determined primarily by the income approach, which estimates the fair value based on the future discounted cash flows. The first step evaluation of reporting units on a fair value basis, as required by SFAS No. 142, indicated that an impairment existed in the communications solutions reporting unit within our test and measurement business. The revenue forecasts of the communications solutions reporting unit have been impacted by the prolonged economic downturn in the communications test markets. As such, we were required to perform the second step analysis to determine the amount of the impairment loss for the reporting unit that failed the first step test. The second step analysis consisted of comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill, with an impairment charge resulting from any excess of the carrying value of the reporting unit’s goodwill over the implied fair value of the reporting unit’s goodwill. Based upon this evaluation, we recorded an impairment charge of $268 million, representing 100 percent of the reporting unit’s goodwill and approximately 44 percent of total consolidated goodwill recorded as of November 1, 2002. We also reclassified approximately $6 million of intangible assets associated with workforce-in-place to goodwill on November 1, 2002. The adoption of SFAS No. 142 had a material impact on our results of operations because goodwill is no longer being amortized. Amortization of goodwill was $326 million for the year ended October 31, 2002.

Net loss and basic and diluted net loss per share for the year ended October 31, 2002 is disclosed below, adjusted to remove goodwill amortization, certain intangibles amortization and its related tax impact, as if SFAS No. 142 had applied to the period.

Purchased intangible assets are carried at cost less accumulated amortization. Amortization is computed using the straight-line method over the economic lives of the respective assets, generally three to five years.

Advertising. Advertising costs are expensed as incurred and amounted to $48 million in 2004, $44 million in 2003 and $81 million in 2002.

Research and Development. Costs related to research, design and development of our products are charged to research and development expense as they are incurred.

Taxes on income. Income tax expense or benefit is based on income or loss before taxes. Deferred tax assets and liabilities are recognized principally for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Tax expense is also affected by any valuation allowance against deferred tax assets and changes in other comprehensive income (“OCI”).

Net income (loss) per share. Basic net income (loss) per share is computed by dividing net income (loss) — the numerator — by the weighted average number of common shares outstanding — the denominator — during the period excluding the dilutive effect of stock options, other employee stock plans and our senior convertible debentures. Diluted net income (loss) per share gives effect to all potentially dilutive common stock equivalents outstanding during the period. In computing diluted net income (loss) per share, the average stock price for the period is used in determining the

number of shares assumed to be purchased from the proceeds of stock option exercises. Diluted net income per share for 2004 excluded the potentially dilutive effect of 41 million common stock equivalents as their effect was antidilutive. Diluted net loss per share for 2003 and 2002 excluded the potentially dilutive effect of all common stock equivalents as the effect was antidilutive.

Cash and cash equivalents. We classify investments as cash equivalents if their original maturity is three months or less at the date of purchase. Cash equivalents are stated at cost, which approximates fair value.

Approximately 30 percent of our cash and cash equivalents is held in the U.S. and 50 percent is held in a centrally managed global cash pool outside the U.S. The remainder is diversified among various major financial institutions throughout the world. Approximately 10 percent of our overall cash and cash equivalents is maintained in demand deposit accounts with global financial institutions of high credit quality, and is available to be used in paying and receiving activities. The remainder is invested in institutional money market funds, short-term bank time deposits and similar short-duration instruments with fixed maturities from overnight to 90 days. Agilent monitors the credit-worthiness of these financial institutions and institutional money market funds on a continuous basis. We have not experienced any credit losses from cash investments placed with these institutions.

Fair value of financial instruments. The carrying values of certain of our financial instruments, including cash and cash equivalents, accrued compensation and other accrued liabilities approximate fair value because of their short maturities. The fair values of investments are determined using quoted market prices for those securities or similar financial instruments.

Concentration of credit risk. We sell the majority of our products through our direct sales force. No single customer accounted for 10 percent or more of the combined accounts receivable balance at October 31, 2004 and 2003. Credit risk with respect to accounts receivable is generally diversified due to the large number of entities comprising our customer base and their dispersion across many different industries and geographies. We perform ongoing credit evaluations of our customers’ financial conditions, and require collateral, such as letters of credit and bank guarantees, in certain circumstances.

Derivative instruments. For derivative instruments that are designated and qualify as a fair value hedge, changes in value of the derivative are recognized in income in the current period, along with the offsetting gain or loss on the hedged item attributable to the hedged risk. For derivative instruments that are designated and qualify as a cash flow hedge, changes in the value of the effective portion of the derivative instrument are recognized in other comprehensive loss, a component of stockholders’ equity. These amounts are reclassified and recognized in income when either the forecasted transaction occurs or it becomes probable the forecasted transaction will not occur. Changes in the fair value of the ineffective portion of derivative instruments are recognized in income in the current period. Ineffectiveness in 2004, 2003 and 2002 was not significant.

We enter into foreign exchange contracts, primarily forward contracts and purchased options, to hedge exposures to changes in foreign currency exchange rates. These contracts are designated at inception as hedges of the related foreign currency exposures, which include committed and anticipated intercompany transactions and assets and liabilities that are denominated in currencies other than the functional currency of the subsidiary, which has the exposure. To achieve hedge accounting, contracts must reduce the foreign currency exchange rate risk otherwise inherent in the amount and duration of the hedged exposures and comply with established risk management

policies; hedging contracts generally mature within twelve months. We do not use derivative financial instruments for speculative or trading purposes.

When hedging anticipated cash flow exposure, foreign exchange contract expirations are set so as to occur in the same period that the goods are expected to be sold to third parties, allowing realized gains and losses on the contracts to be recognized into total costs. When hedging balance sheet exposure, gains and losses on foreign exchange contracts are recognized in other income (expense), net in the same period as the occurrence of gains and losses on remeasurement of the non-functional currency denominated assets and liabilities. The gains and losses, which have not been material, are included in cash flows from operating activities in the consolidated statement of cash flows.

We may also, from time to time, acquire warrants to purchase securities of other companies as part of strategic relationships.

Inventory. Inventory is valued at standard cost, which approximates actual cost computed on a first-in, first-out basis, not in excess of market value. We assess the valuation of our inventory on a quarterly basis and periodically write down the value for estimated excess and obsolete inventory based on estimates about future demand and actual usage.

Property, plant and equipment. Property, plant and equipment are stated at cost less accumulated depreciation. Additions, improvements and major renewals are capitalized; maintenance, repairs and minor renewals are expensed as incurred. When assets are retired or disposed of, the assets and related accumulated depreciation and amortization are removed from our general ledger and the resulting gain or loss is reflected in the consolidated statement of operations. Buildings and improvements are depreciated over fifteen to forty years and machinery and equipment over three to ten years. The straight-line method of depreciation is used for all property, plant and equipment.

Capitalized software. We capitalize certain internal and external costs incurred to acquire or create internal use software in accordance with AICPA Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Capitalized software is included in property, plant and equipment and is depreciated over three to five years when development is complete.

Impairment of long-lived assets. We continually monitor events and changes in circumstances that could indicate carrying amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the undiscounted future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.

Foreign currency translation. The functional currency for many of our subsidiaries outside the U.S is local currency based on the criteria of SFAS No. 52 “Foreign Currency Translation”. For those subsidiaries that operate in a local currency functional environment, all assets and liabilities are translated into U.S. dollars using current exchange rates; revenue and expenses are translated using average exchange rates in effect during each period. Resulting translation adjustments are reported as a separate component of accumulated comprehensive income (loss) in stockholders’ equity.

For those subsidiaries that operate in a U.S. dollar functional environment, foreign currency assets and liabilities are remeasured into U.S. dollars at current exchange rates except for inventory, property, plant and equipment, other assets and deferred revenue, which are remeasured at historical exchange rates. Revenue and expenses are generally translated at average exchange rates in effect during each period, except for those expenses related to balance sheet amounts that are remeasured at historical exchange rates. Gains or losses from foreign currency remeasurement are included in consolidated net income (loss).

In March 2004, the FASB issued EITF No. 03-01, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments,” which provides new guidance for assessing impairment losses on debt and equity investments. The new impairment model applies to investments accounted for under the cost or equity method and investments accounted for under FAS 115, “Accounting for Certain Investments in Debt and Equity Securities.” EITF No. 03-01 also includes new disclosure requirements for cost method investments and for all investments that are in an unrealized loss position. In September 2004, the FASB delayed the accounting provisions of EITF No. 03-01; however the disclosure requirements remain effective and the applicable ones have been adopted for our year-end 2004. We will evaluate the effect, if any, of EITF 03-01 when final guidance is issued.

In November 2004, the FASB issued FASB Statement No. 151, “Inventory Costs — an amendment of ARB No. 43” (“FAS 151”), which is the result of its efforts to converge U.S. accounting standards for inventories with International Accounting Standards. FAS No. 151 requires idle facility expenses, freight, handling costs, and wasted material (spoilage) costs to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. FAS No. 151 will be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We are evaluating the impact of this standard on our consolidated financial statements.

In December 2004, the FASB issued an FSP regarding “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (“AJCA”), FSP 109-b. FSP 109-b allows Agilent time beyond the fourth quarter of 2004, the period of enactment, to evaluate the effect of the AJCA on our plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109 “Accounting of Income Taxes.” See the discussion of the potential impact on Agilent in Note 4 below.

The significant components of deferred tax assets and deferred tax liabilities included on the consolidated balance sheet are:

During the third quarter of 2003, we recorded a non-cash charge to establish a valuation allowance of $1.4 billion, which included approximately $0.4 billion of tax benefits recorded during the first six months of 2003 resulting in an approximately $1.0 billion net tax provision recorded within provision for taxes for 2003. The valuation allowance was determined in accordance with the provisions of SFAS No. 109 “Accounting for Income Taxes” (“SFAS No. 109”), which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction-by-jurisdiction basis. Cumulative losses incurred in the U.S. and the U.K. jurisdictions in recent years represented sufficient negative evidence under SFAS No. 109 to require a full valuation allowance in these jurisdictions. Accordingly, a full valuation allowance was recorded. We intend to maintain a full valuation allowance until sufficient positive evidence exists to support reversal of the valuation allowance.

At October 31, 2004, we had federal net operating loss carryforwards of approximately $2,037 million and tax credit carryforwards of approximately $316 million. An immaterial amount of net operating losses will expire in 2005 with the remainder expiring in tax years through 2024, if not utilized. The tax credit carryforwards will expire beginning in 2007 through 2024, if not utilized. In addition, the company has California net operating loss carryforwards of approximately $395 million. An immaterial amount of California net operating losses will expire in 2005 with the remainder expiring in tax years through 2013, if not utilized. Included in the total net operating loss carryforwards are net operating losses of $50 million related to employee stock option exercises, the benefits of which will increase additional paid in capital when realized.

The differences between the U.S. federal statutory income tax rate and our effective tax rate are:

The domestic and foreign components of income (loss) earnings from continuing operations before taxes are:

We consider the operating income of non-United States subsidiaries to be indefinitely invested outside the United States. No provision has been made for United States federal and state, or foreign taxes that may result from future remittances of undistributed earnings of foreign subsidiaries, the cumulative amount of which is approximately $1,179 million as of October 31, 2004. If management decides to remit this income to the U.S. in a future period, our provision for income taxes may increase materially in that period.

On October 22, 2004, the AJCA was signed into law. The AJCA includes a deduction for 85 percent of certain foreign earnings that are repatriated, as defined in the AJCA, at an effective tax cost of 5.25 percent on any such repatriated foreign earnings. Agilent may elect to apply this provision to qualifying earnings repatriations in fiscal 2005. Agilent has begun an evaluation of the effects of the repatriation provision; however, we do not expect to be able to complete this evaluation until after Congress or the Treasury Department provide additional clarifying language on key elements of the provision. We expect to complete our evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the additional clarifying language. The range of possible amounts that Agilent is considering for repatriation under this provision is between zero and $970 million. The related potential range of income tax is between zero and $51 million.

We follow the accounting provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) for stock-based compensation granted to employees. Accordingly, compensation expense is recognized in our consolidated statement of operations only when options are granted at an exercise price that is less than the market price of the underlying stock on the date of the grant. Any compensation expense is recognized ratably over the associated service period, which is generally the option vesting term.

Employee stock purchase plans. In February 2000, we implemented the Agilent Technologies, Inc. Employee Stock Purchase Plan (the “Legacy Plan”) that allowed eligible employees to contribute up to ten percent of their base compensation to the purchase of our common stock. Under the provisions of the Legacy Plan, employee contributions were partially matched with shares contributed by us. These matching shares also generally vested over two years. Compensation expense for the matching provision for the Legacy Plan was measured using the fair value of shares on the date of purchase by Agilent for the Legacy Plan and was recognized over the two-year vesting period.

Effective October 31, 2000, purchases and contributions under the Legacy Plan ceased. All unvested matching shares under the Legacy Plan maintained their original vesting terms based on the employee’s continued employment. Vesting of these matching shares was completed by October 31, 2002. Compensation expense under the Legacy Plan was nil in 2004 and 2003 and $16 million in 2002. At October 31, 2004, 9,802,100 shares of our common stock had been authorized for issuance under the Legacy Plan and 3,426,716 of these shares had been issued. The remainder of the authorized shares are not expected to be issued, as the Legacy Plan is no longer functioning.

Effective November 1, 2000, we adopted a new plan, the 423(b) Plan. Under the provisions of the 423(b) Plan, eligible employees may contribute up to ten percent of their base compensation to purchase shares of our common stock at 85 percent of the lower of the fair market value at the entry date or the purchase date as defined by the 423(b) Plan. As of October 31, 2004, 39,868,411 shares of our common stock were authorized for issuance under the 423(b) Plan and 20,595,128 of these shares have been issued.

Incentive compensation plans. On September 17, 1999, we adopted the Agilent Technologies, Inc. 1999 Stock Plan (the “Stock Plan”) and subsequently reserved 67,800,000 shares of our common stock for issuance under the Stock Plan. In addition, on May 31, 2000, 19,000,000 shares of our common stock were registered pursuant to converted stock options previously granted by Hewlett-Packard Company. In February 2001, our stockholders approved an additional 45,000,000 shares of our common stock for issuance under the Stock Plan. These shares were subsequently registered in May 2002. Stock options, stock appreciation rights, stock awards and cash awards may be granted under the Stock Plan. Options granted under the Stock Plan may be either “incentive stock options,” as defined in section 422 of the Internal Revenue Code, or non-statutory. Options generally vest at a rate of 25 percent per year over a period of four years from the date of grant and have a maximum term of ten years. The exercise price for incentive stock options is generally not less than 100 percent of the fair market value of our common stock on the date the stock award is granted.

On March 4, 2003, our stockholders approved an amendment to the Stock Plan. The amendment permits the company to offer a one-time exchange of options issued under the Stock Plan having an exercise price greater than $25 for a lesser number of options to be granted at least six months and one day from the cancellation of surrendered options (the “Option Exchange Program”). On May 20, 2003, we implemented the Option Exchange Program by filing a Tender Offer Statement with the SEC, which allowed eligible employees a one-time opportunity to exchange options to purchase shares of the company’s common stock, whether vested or unvested, which were granted under our Stock Plan, with exercise prices greater than $25 per share. The Option Exchange Program was offered from May 20, 2003 to June 18, 2003 and options to purchase approximately 26 million shares were exchanged, with an average exercise price of $51. As a result, the company issued options to purchase approximately 13.8 million shares at a weighted-average exercise price of $28 per share during the first quarter of 2004. Under the provisions of APB 25 no compensation expense has been, or will be, recognized in our consolidated statement of operations for the issuance of the replacement options.

Effective November 1, 2003, the Compensation Committee of the Board of Directors approved the LTPP for the company’s executive officers. Participants in this program are entitled to receive unrestricted shares of the company’s stock after the end of a three-year period, if specified performance targets are met. On November 18, 2003 the Compensation Committee approved approximately 322,000 shares to be issued to the company’s executive officers. We include the dilutive impact of this program in our diluted net income per share calculation. The amount of compensation expense, using the variable accounting method pursuant to APB No. 25, was not material for the year ended October 31, 2004. The stock will be awarded in fiscal 2007, and the final award may vary as it is based on certain performance metrics. On November 16, 2004, the Compensation Committee approved approximately 419,000 shares to be issued for the company’s executive officers in connection with the LTPP. The shares will be awarded in fiscal year 2008, and the final award may vary as it is based on certain performance metrics.

At October 31, 2004, shares registered and available for option and restricted stock grants were 61,945,186. Compensation expense for discounted options, stock appreciation rights and restricted

stock is recognized based on the intrinsic value method defined by APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). Any compensation expense is recognized ratably over the associated service period, which is generally the vesting period. The compensation expense related to discounted options, stock appreciation rights and restricted stock was $4 million in 2004, $6 million in 2003 and $7 million in 2002.

The following table summarizes option activity for the years ended October 31, 2004, 2003 and 2002:

The following table summarizes options exercisable and the fair value of options granted:

The following table summarizes information about all options outstanding at October 31, 2004:

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

Options to purchase 41 million shares of common stock at a weighted average exercise price of $35 per share were outstanding in 2004, but were not included in the computation of diluted net income per share because the options were antidilutive for 2004. Options to purchase 51 million shares of common stock at a weighted average exercise price of $29 per share were outstanding in 2003, but were not included in the computation of diluted net loss per share because the options were antidilutive for 2003. The options, which expire no later than 2014, were still outstanding at the end of 2004. Options to purchase 74 million shares of common stock at a weighted average exercise price of $40 per share were outstanding in 2002, but were not included in the computation of diluted net loss per share because the options were antidilutive in that year.

Our senior convertible debentures were also antidilutive during 2004, 2003 and 2002. Income from continuing operations for 2004, 2003 and 2002 included approximately $35 million in interest expense associated with the senior convertible debentures. If the shares had been dilutive, then this amount would have been added back to income from operations, and approximately 36 million of shares would have been added to the weighted average number of shares for the purposes of calculating diluted income per share. See Note 16, “Senior Convertible Debentures and Lines of Credit.”

Cash paid for income taxes was $149 million in 2004, $122 million in 2003 and $160 million in 2002. Cash paid for interest was approximately $36 million in 2004, $36 million in 2003 and $36 million in 2002.

Non-cash transactions in 2004 related primarily to an acquisition in October 2004. We issued approximately 772 thousand shares with an approximate value of $18 million. We issued the final block of common stock under The Legacy Plan in the amount of $23 million in 2002.

Inventory-related charges of $45 million, $11 million and $74 million were recorded in total cost of products in 2004, 2003 and 2002, respectively. We record excess and obsolete inventory charges for both inventory on our site as well as inventory at our contract manufacturers and suppliers where we have non-cancelable purchase commitments.

We have sold substantially all of our portfolio of operating leases to CIT. Equipment under operating leases was $7 million at October 31, 2004 and $10 million at October 31, 2003 and was included in machinery and equipment. Accumulated depreciation related to equipment under operating leases was $5 million at October 31, 2004 and $8 million at October 31, 2003.

We sold assets related to portions of our businesses to third parties during 2004, 2003 and 2002. Gross proceeds from these dispositions were zero in 2004 and 2003 and $31 million in 2002. (Loss) gains from the dispositions, included in other income (expense), net in the consolidated statement of operations, were ($1 million) in 2004, $5 million in 2003 and $18 million in 2002.

Investments in cost basis and equity method investments and securities classified as trading securities or available-for-sale were as follows at October 31, 2004 and 2003 (net book value):

Cost method investments consist of non-marketable equity securities and are accounted for at historical cost. For investments where we have significant influence over the investee, the equity method of accounting is used. Agilent’s proportionate share of income or loss for equity method investments is recorded currently in earnings. Trading securities are reported at fair value, with gains or losses resulting from changes in fair value recognized currently in earnings. Investments designated as available-for-sale are reported at fair value, with unrealized gains and losses, net of tax, included in stockholders’ equity.

All of our investments (excluding trading securities) are subject to periodic impairment review. However, the impairment analysis requires significant judgment to identify events or circumstances that would likely have significant adverse effect on the future use of the investment.

Charges related to other than temporary impairments were $15 million for 2004, $15 million in 2003 and $9 million in 2002. These impairment charges were recorded in other income (expense), net in the consolidated statement of operations.

Agilent’s share of income (loss) from equity investments was $29 million in 2004, $5 million in 2003, and ($11 million) in 2002. Realized gains and losses on Agilent’s trading securities portfolio were $5 million gain in 2004 and 2003 and $5 million loss in 2002. These amounts have been included in other income (expense), net in the consolidated statement of operations.

The goodwill balances as of October 31, 2004 and 2003 and the movements in the year ended October 31, 2004 for each of our reportable segments are shown in the table below:

The component parts of other intangibles as of October 31, 2004 and October 31, 2003 are shown in the table below:

The net book value of other intangibles includes a $5 million favorable impact related to currency during 2004. We purchased $22 million of other intangibles during 2004, which was primarily related to two acquisitions. These acquisitions also resulted in additional goodwill of $21 million. Pro-forma disclosures are not required for these acquisitions as they were immaterial.

Amortization for intangible assets was $20 million in 2004, $45 million in 2003 and $52 million in 2002. Future amortization expense related to existing intangible assets is estimated to be $8 million for 2005, $5 million for 2006, $3 million for 2007 and $5 million thereafter.

During 2003, we recognized an impairment charge pursuant to SFAS No. 144 of approximately $10 million for intangible assets (representing developed technology and customer relationships) in our test and measurement business as a result of a decline in the projected future cash flows. The impairment charge was recorded in cost of sales ($8 million) and selling, general, and administrative ($2 million) in the consolidated statement of operations.

A summary of the standard warranty accrual activity for October 31, 2004 and 2003 is shown in the table below:

Revenue for our extended warranty contracts with terms beyond one year is deferred and recognized on a straight-line basis over the contract period. Related costs are expensed as incurred. Amounts recorded for extended warranty contracts are included in deferred revenue on the consolidated balance sheet.

As of October 31, 2004, we have issued credit guarantees to CIT Group Inc. with an aggregate maximum exposure of $13 million that has been fully accrued as a component of other accrued liabilities. In addition to the credit guarantees, we gave CIT Group Inc. guarantees that could require us to repurchase individual leases if, for example, the documentation we provided to support the lease was not materially accurate. In our opinion, the fair value of these additional guarantees is not material.

We have evaluated our relationship with the CIT Group Inc. and have determined that CIT is not a variable interest entity under FIN 46.

Our corporate by-laws require that we indemnify our officers and directors, as well as those who act as directors and officers of other entities at our request, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceedings arising out of their services to Agilent. In addition, we have entered into separate indemnification agreements with each director and each board-appointed officer of Agilent, which provides for indemnification of these directors and officers under similar circumstances and under additional circumstances. The indemnification obligations are more fully described in the by-laws and the indemnification agreements. See Exhibits 3.2 and 10.6 of this document. We purchase standard insurance to cover claims or a portion of the claims made against our directors and officers. Since a maximum obligation is not explicitly stated in our by-laws or in our indemnification agreements and will depend on the facts and circumstances that arise out of any future claims, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, we have not made payments related to these obligations, and the fair value for these obligations is zero on the consolidated balance sheet as of October 31, 2004.

We currently have three restructuring plans — one initiated in the fourth quarter of 2001 (the “2001 Plan”), a second initiated in the fourth quarter of 2002 (the “2002 Plan”), and a third initiated in the first quarter of 2003 (the “2003 Plan”) after it became clear that the actions taken in fiscal 2001 and fiscal 2002 would not be sufficient to return the company to profitability.

Our plans to consolidate excess facilities resulted in charges for lease termination fees and losses anticipated from sub-lease agreements. We have exited more than 115 production, support and sales facilities in the U.S., Korea, Japan, U.K. and other countries, representing more than 4.6 million square feet, or about 24 percent of our worldwide property. We will continue to make lease payments on some of this space over the next five years. We lease most of these buildings from third parties, and the closures impacted all segments. In most cases, we are exiting administrative office buildings, which house sales and administrative employees. However, a small number of production facilities were closed as a result of our plans to consolidate manufacturing into fewer sites.

We have executed all key actions under our 2001 Plan, although there may be changes in estimates for the consolidation of excess facilities due to changes in market conditions from those originally expected at the time the charges were recorded. Our 2002 Plan is complete. Our 2003 Plan is substantially complete, although we anticipate some charges in the first half of 2005 as we complete the Plan.

The 2001 plan impacted the test and measurement business and the semiconductor products business and had little direct impact on the automated test and life sciences and chemical analysis businesses except as the plan related to support services reductions across all of our businesses.

We have executed all key actions under this plan, however we will continue to make lease payments over the next five years.

We continue to carry out our plan to consolidate excess facilities. During 2004 we recorded an additional $7 million in net charges and adjustments due primarily to reductions in our estimate of

expected sublease income. Due to the length of some of the lease terms and the uncertainty of the real estate market, we expect to make periodic adjustments to the accrual balance to reflect changes in our estimates, and to reflect actual events as they occur.

The cost of the 2001 Plan through October 31, 2004 was $533 million: $154 million in 2001, $357 million in 2002, $15 million in 2003 and $7 million in 2004.

A summary of restructuring activity for the 2001 Plan through October 31, 2004 is shown in the table below:

On August 19, 2002, we announced our intention to further reduce our workforce by 2,500 to achieve a quarterly operating cost structure of approximately $1.6 billion. This plan primarily affected the manufacturing and field operations serving the wireline markets that are components of our test and measurement business as well as information technology support services.

Our workforce reductions impacted all regions, all expense categories and most of our segments, particularly our test and measurement and semiconductor products segments. We reduced the number of employees at production facilities that experienced declining demand, outsourced selective operations and also reduced the number of employees that provided information technology support services as we streamlined our operations with the implementation of our new information systems.

Our 2002 Plan is complete. The cost of the 2002 Plan through October 31, 2004 totaled $166 million: $117 million in 2002, $49 million in 2003 and zero in 2004.

A summary of restructuring activity for the 2002 Plan through October 31, 2004 is shown in the table below:

On February 21, 2003, we announced our intention to further reduce our quarterly operational costs to a level of $1.45 billion as part of the 2003 Plan. In order to accomplish this, we announced a workforce reduction of approximately 4,000 jobs in addition to previously announced cuts.

In order to achieve the goals of the 2003 Plan we have reduced our workforce by approximately 5,800 as of October 31, 2004, primarily in our U.S. operations. Reductions were made across all businesses with significant reductions in our test and measurement and semiconductor products businesses. We continued to reduce the number of employees at production facilities and employees that provide support services across all businesses. We have also reduced the number of research and development employees as we continue to look for opportunities to align our business with available markets.

With respect to the 2003 plan, we have continued to consolidate excess facilities. We have exited administrative office buildings, research and development facilities, and moved manufacturing to lower cost regions. Our plan to consolidate excess facilities resulted in increased charges of $28 million in 2004 and $13 million in 2003 for lease termination fees and losses estimated from sub-lease agreements.

During 2004, we incurred asset impairment charges of $25 million, primarily related to a manufacturing site in California. We announced our plans to exit this site, used primarily by the test and measurement business, during the second quarter of 2004. We may incur some additional asset impairment charges upon the sale of this site. In 2003 we incurred asset impairment charges of $57 million for fixed assets primarily owned by our semiconductor products segment.

As of October 31, 2004, the cost of the 2003 Plan totaled $462 million: $308 million in 2003 and $154 million in 2004.

A summary of restructuring activity for the 2003 Plan through October 31, 2004 is shown in the table below:

The restructuring accrual for all plans, which totaled $87 million as of October 31, 2004 and $89 million as of October 31, 2003, is recorded in other accrued liabilities on the consolidated balance sheet and represents estimated future cash outlays. Lease payments are expected over the next five years. Other payments, primarily severance, are expected within a one-year period.

A summary of the statement of operations impact of the charges resulting from all restructuring plans is shown below.

General. Substantially all of our employees are covered under various defined benefit and/or defined contribution plans. Additionally, we sponsor post-retirement health care benefits and a death benefit under the Agilent Survivor Protection Plan for our eligible U.S. employees.

Retirement, deferred profit-sharing, and post-retirement plans. Worldwide costs included in net income (loss) from continuing operations were $142 million in 2004, $187 million in 2003 and $122 million in 2002.

Agilent provides U.S. employees, who meet eligibility criteria under the retirement and deferred profit-sharing plans, defined benefits which are generally based on an employee’s highest five

consecutive years’ average pay during the years of employment and on length of service. For eligible service through October 31, 1993, the benefit payable under the Agilent Retirement Plan is reduced by any amounts due to the eligible employee under our fixed and frozen defined contribution Deferred Profit-Sharing Plan (“DPSP”), which was closed to new participants in November 1993.

As of October 31, 2004 and 2003, the status of the Agilent Retirement Plan and DPSP for U.S. Agilent Employees follows.

Eligible employees outside the U.S. generally receive retirement benefits under various retirement plans based upon factors such as years of service and employee compensation levels. Eligibility is generally determined in accordance with local statutory requirements.

401(k) defined contribution plan. Our U.S. eligible employees may participate in the Agilent Technologies, Inc. 401(k) Plan (“the 401(k) Plan”). Enrollment in the 401(k) Plan is automatic for employees who meet eligibility requirements unless they decline participation. Under the 401(k) Plan, we provide matching contributions to employees up to a maximum of 4 percent of an employee’s annual eligible compensation. The maximum contribution to the 401(k) Plan is 50 percent of an employee’s annual eligible compensation, subject to regulatory and plan limitations. The 401(k) Plan expense included in income (loss) from continuing operations was $36 million in 2004, $41 million in 2003 and $48 million in 2002.

Post-retirement benefit plans. In addition to receiving pension benefits, our U.S. employees who meet retirement eligibility requirements as of their termination dates may participate in our Continued Group Medical or SeniorMed Plans (the “Post-retirement Medical Plans”). Our current U.S. employees could become eligible for these benefits, and the existing benefit obligation relates primarily to those employees. Once participating in a medical plan, retirees may choose from managed-care and indemnity options, with their contributions dependent on the options chosen and length of service. Our U.S. retirees are also covered by a lump sum death benefit that is part of the Agilent Survivor Protection Plan.

Plan amendments. In July 2004, the Compensation Committee of the Board of Directors approved design changes to Agilent’s Post-retirement Medical Plans and the Survivor Protection Plan. In addition, the Compensation Committee delegated certain authority to the Benefits Committee to amend plans as necessary to effectuate these design changes. The existing post-65 retirees are expected to be covered by a new Medicare Supplement Plan in 2005. The Medicare Supplement Plan will supplement Medicare coverage by reimbursing Medicare Parts A and B deductibles at 100 percent after Medicare pays its portion of the retiree’s expenses. No changes were made to the Post-retirement Medical Plans for current pre-65 retirees. The Post-retirement Medical Plans for certain future pre-65 retirees will be revised to establish retiree medical accounts for the benefit of such retirees, and will be funded with amounts as determined by Agilent, in lieu of the managed care and indemnity options currently offered under the Post-retirement Medical Plans.

Finally, the Agilent Survivor Protection Plan was revised to eliminate the $5,000 Retiree Survivor Benefit for all U.S. retirees who retire on or after January 1, 2005. None of these design changes had a material impact on the financial statements as of and for the year ended October 31, 2004.

Components of net periodic cost. For the years ended October 31, 2004, 2003 and 2002, our net pension and post-retirement benefit costs were comprised of:

Measurement date. Agilent uses an October 31 measurement date for the U.S. plans and a September 30 measurement date for non-U.S. plans.

Funded status. As of October 31, 2004 and 2003, the funded status of the defined benefit and post-retirement benefit plans was:

Investment policies and strategies. Plan assets consist primarily of listed stocks and bonds. In the U.S. our Agilent Retirement Plan and post-retirement benefit assets are allocated approximately 80 percent to equities and approximately 20 percent to fixed income investments. Our DPSP assets are allocated approximately 60 percent to equities and approximately 40 percent to fixed income investments. Approximately 10 percent of our U.S. equity portfolio consists of alternative investments consisting largely of private equity partnerships. We desire to obtain the optimum rate of investment return on the total investment portfolio consistent with the assumption of a reasonable level of risk. The safety and protection of principal is a primary concern and we believe that a well-diversified investment portfolio will result in the highest attainable investment return (income plus capital appreciation) with the lowest overall risk. Specific investment objectives for the plans are: maintain and enhance the purchasing power of the plans’ assets; achieve investment returns consistent with the level of risk being taken; and earn performance rates of return in accordance with the benchmarks adopted for each asset class. Outside the U.S., our assets are allocated between 50-75 percent to equities and 25-50 percent to fixed income investments depending on the plan. All plans’ assets are broadly diversified.

As of October 31, 2004 and October 31, 2003, our defined benefit plans in aggregate had projected benefit obligations (“PBO”) that were in excess of the fair value of the plan assets. The amounts of the obligations and assets for the plans were:

Contributions and estimated future benefit payments. During fiscal year 2005, we expect to contribute $40 million to the Agilent Retirement Plan, $44 million to plans outside the U.S., and zero to the Post-retirement Medical Plans. We expect to pay the following benefit payments, which include expected future service.

No additional minimum pension liability was required for 2004 due to improved investment performance and employer contributions. For 2003, an additional minimum pension liability adjustment was required for our pension plans in Germany, Japan and the United Kingdom as the

accumulated benefit obligation of $439 million for those plans exceeded the $408 million of pension plan assets for those plans as of the measurement date. The $31 million difference was increased by $105 million for net prepaid pension costs for all of the affected plans and reduced by $4 million for intangible assets in the United Kingdom’s plan and one of the Japanese plans, resulting in a gross additional minimum pension liability of $132 million. Of this amount, $92 million impacted accumulated comprehensive loss in 2003, offset by $40 million applied to deferred tax assets. For 2002, an additional minimum pension liability adjustment was required for our pension plans in Germany, Japan and the United Kingdom as the accumulated benefit obligation of $529 million for those plans exceeded the $441 million of pension plan assets for those plans as of the measurement date. The $88 million difference was increased by $142 million for net prepaid pension costs for all of the affected plans and reduced by $6 million for intangible assets in the United Kingdom’s plan and one of the Japanese plans, resulting in a gross additional minimum pension liability of $224 million. Of this amount, $146 million impacted accumulated comprehensive loss in 2002, offset by $78 million applied to deferred tax assets.

Assumptions. The assumptions used to determine the benefit obligations and expense for our defined benefit and post-retirement benefit plans are presented in the table below. The impacts of the assumptions listed for the years 2004, 2003 and 2002 have already been recognized in our consolidated statement of operations. The assumptions for the year 2005 were used to determine the obligations presented as of October 31, 2004 in the funded status table above, and their impacts will be recognized in our consolidated statements of operations during 2005. The expected long-term return on assets of 8.50 percent is based on the historical rate of return for our chosen asset mix of equities and fixed income investments adjusted for anticipated future movements.

Assumed health care trend rates could have a significant effect on the amounts reported for Post-retirement Medical Plans. A one percentage point change in the assumed health care cost trend rates for the year ended October 31, 2005 would have the following effects:

Other accrued liabilities and other long-term liabilities at October 31, 2004 and 2003 were as follows:

Our accrued vacation balance totaled $201 million and $193 million at October 31, 2004 and 2003, respectively, and is recorded in employee compensation and benefits in the consolidated balance sheet.

Senior convertible debentures. On November 27, 2001, we completed a private offering of $1.15 billion aggregate principal amount of three percent senior convertible debentures (the “debentures”) due 2021 and generated net proceeds of $1.12 billion after deducting fees and expenses. The debentures are convertible at any time into our common stock at an initial conversion price of $32.22 per share (approximately 36 million shares), subject to adjustment (as defined in the related Indenture dated November 27, 2001). They are redeemable for cash at the company’s option

beginning at any time on or after December 6, 2004 at a price equal to 100 percent of the principal amount plus interest. Holders of the debentures have the ability to require us to repurchase the debentures, in whole or in part, on December 1 in each of 2006, 2011 and 2016. Holders also have the right to require us to repurchase all or a portion of the outstanding debentures if the company undergoes a Fundamental Change (as defined in the Indenture). The debentures bear interest at an annual rate of three percent, which is payable on June 1 and December 1 of each year beginning June 1, 2002. The interest rate will reset (as defined in the Indenture) in June 2006, June 2011 and June 2016, but in no event will it be reset below three percent or above five percent per annum. To date there have been no adjustments to the conversion price of the debentures.

Lines of credit. Effective November 1, 2002, we terminated our $250 million five-year revolving credit facility that was due to expire on November 5, 2005 and did not extend the $250 million 364-day revolving credit facility that expired on November 1, 2002. There were no balances outstanding under either facility at October 31, 2004.

Operating Lease Commitments: Agilent Technologies leases certain real and personal property from unrelated third parties under non-cancelable operating leases. Future minimum lease payments under leases at October 31, 2004 were $108 million for 2005, $87 million for 2006, $67 million for 2007, $55 million for 2008, $46 million for 2009 and $ 81 million thereafter. Certain leases require Agilent Technologies to pay property taxes, insurance and routine maintenance, and include escalation clauses. Rent expense was $116 million in 2004, $126 million in 2003 and $177 million in 2002.

We are involved in lawsuits, claims, investigations and proceedings, including patent, commercial and environmental matters that arise in the ordinary course of business. There are no such matters pending that we expect to be material in relation to our business, consolidated financial condition, results of operations or cash flows.

Description of segments. We are a diversified technology company that provides enabling solutions to customers in markets within the communications, electronics, life sciences and chemical analysis industries.

We organize our business operations into four major businesses — test and measurement, automated test, semiconductor products, and life sciences and chemical analysis — each of which comprises a reportable segment. The segments were determined based primarily on how the chief operating decision maker views and evaluates our operations. Other factors, including customer base, homogeneity of products, technology and delivery channels, were also considered in determining our reportable segments.

Segment revenue and profit. The accounting policies used to derive reportable segment results are generally the same as those described in Note 2, “Summary of Significant Accounting Policies.”

A significant portion of the segments’ expenses arise from shared services and infrastructure that we have historically provided to the segments in order to realize economies of scale and to efficiently use resources. These expenses, collectively called corporate charges, include costs of centralized research and development, legal, accounting, employee benefits, real estate, insurance services, information technology services, treasury and other corporate infrastructure expenses. Charges are allocated to the segments and the allocations have been determined on a basis that we considered to be a reasonable reflection of the utilization of services provided to or benefits received by the segments.

The following tables reflect the results of our reportable segments under our management reporting system. These results are not necessarily a depiction that is in conformity with accounting principles generally accepted in the U.S. The performance of each segment is measured based on several metrics, including income (loss) from operations. These results are used, in part, by the chief operating decision maker in evaluating the performance of, and in allocating resources to, each of the segments.

The profitability of each of the segments is measured after excluding amortization of goodwill, amortization and impairment of other intangibles, restructuring and asset impairment charges and other items as noted in the reconciliation below.

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

Major customers. No customer represented 10 percent or more of our total net revenue in 2004, 2003 or 2002.

During 2004, we changed the basis by which segment assets are measured and reported to the chief operating decision maker to include allocated corporate assets, the largest component of which relates to deferred tax assets before the valuation adjustment. Unallocated assets primarily consist of cash and cash equivalents, accumulated amortization of goodwill and other intangibles, the valuation allowance relating to deferred tax assets and other assets. The following table reflects the updated measure of segment assets, capital expenditures and investments in equity-method investees and capital expenditures directly managed by each segment. All amounts have been reclassified to conform to the current period presentation:

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


AGILENT TECHNOLOGIES, INC.

BY		/s/ D. CRAIG NORDLUND
		D. Craig Nordlund Senior Vice President, General Counsel and Secretary

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints D. Craig Nordlund and Marie Oh Huber, or either of them, his or her attorneys-in-fact, for such person in any and all capacities, to sign any amendments to this report and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that either of said attorneys-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Document Description		10-K Part
Portions of the Proxy Statement for the Annual Meeting of Stockholders (the “Proxy Statement”) to be held on March 1, 2005, and to be filed pursuant to Regulation 14A within 120 days after registrant’ s fiscal year ended October 31, 2004 are incorporated by reference into Part III of this Report		III


	2004		2003		2002
	(in millions)
Test and Measurement	$	2,903	$	2,529	$	2,612
Automated Test		924		755		706
Semiconductor Products		2,021		1,586		1,559
Life Sciences and Chemical Analysis		1,333		1,186		1,133

Total Net Revenue	$	7,181	$	6,056	$	6,010


Site	Major Activity	Owned/Leased
Palo Alto, CA, U.S. — Corporate Headquarters	Corporate Administration	Owned
Palo Alto, CA, U.S. — Agilent Laboratories	R&D	Primarily Owned
Santa Clara, CA, U.S.	Manufacturing, R&D, Marketing, and Sales and Administration	Owned
San Jose, CA, U.S.	Manufacturing, R&D	Owned
Santa Rosa, CA, U.S.	Manufacturing, R&D	Owned
Loveland, CO, U.S.	Manufacturing, R&D, and Marketing	Owned
Fort Collins, CO, U.S.	Manufacturing, R&D	Owned
Colorado Springs, CO, U.S.	Manufacturing, R&D, Marketing, and Sales and Administration	Owned
Wilmington, DE, U.S. (Little Falls Area)	Manufacturing, R&D, and Administration	Owned
Spokane, WA, U.S.	Manufacturing, R&D, and Marketing	Owned
Shanghai, China	Manufacturing, R&D	Leased
Boeblingen, Germany	Manufacturing, R&D, and Marketing	Owned
Waldbronn, Germany	Manufacturing, R&D	Owned
Hachioji, Japan	Manufacturing, R&D, Marketing, and Sales and Administration	Owned
Penang, Malaysia	Manufacturing, R&D	Owned
Yishun, Singapore	Manufacturing, R&D, Marketing, Sales and Administration	Primarily Owned
South Queensferry, United Kingdom	Manufacturing, R&D	Owned


Fiscal 2004	High		Low
First Quarter (ended January 31, 2004)	$	38.80	$	24.97
Second Quarter (ended April 30, 2004)	$	37.62	$	26.91
Third Quarter (ended July 31, 2004)	$	29.68	$	22.63
Fourth Quarter (ended October 31, 2004)	$	25.31	$	19.51


Fiscal 2003	High		Low
First Quarter (ended January 31, 2003)	$	20.30	$	13.19
Second Quarter (ended April 30, 2003)	$	16.82	$	11.30
Third Quarter (ended July 31, 2003)	$	22.64	$	15.48
Fourth Quarter (ended October 31, 2003)	$	26.48	$	20.31


		Page
PART I

Item 1	Business	3
Item 2	Properties	27
Item 3	Legal Proceedings	28
Item 4	Submission of Matters to a Vote of Security Holders	28

PART II

Item 5	Market for the Registrant’s Common Equity and Related Stockholder Matters	29
Item 6	Selected Financial Data	31
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	68
Item 8	Financial Statements and Supplementary Data	69
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	69
Item 9A	Controls and Procedures	69
Item 9B	Other Information	70

PART III

Item 10	Directors and Executive Officers of the Registrant	71
Item 11	Executive Compensation	71
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	71
Item 13	Certain Relationships and Related Transactions	71
Item 14	Principal Accountant Fees and Services	71

PART IV

Item 15	Exhibits and Financial Statement Schedules	72

Exhibit Index		116


Plan category	Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights	Weighted-average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a))
	(a)	(b)		(c)
Equity compensation plans approved by security holders	71,149,209	$	29	76,349,608	(1)(2)(3)
Equity compensation plans not approved by security holders	—		—	—

Total	71,149,209	$	29	76,349,608


	Years Ended October 31,
	2004		2003			2002			2001			2000
	(in millions, except per share data)
Consolidated Statement of Operations Data (1, 2, 3):
Net revenue	$	7,181	$	6,056		$	6,010		$	8,396		$	9,361
Income (loss) from continuing operations before taxes		440		(690	)		(1,547	)		(477	)		1,018
Income (loss) from continuing operations		349		(1,790	)		(1,022	)		(406	)		672
Income from discontinued operations, net of taxes		—		—			—			6			85
Gain (loss) from the sale of discontinued operations, net of taxes		—		—			(10	)		646			—

Income (loss) before cumulative effect of accounting changes		349		(1,790	)		(1,032	)		246			757
Cumulative effect of adopting SFAS No. 133, net of taxes		—		—			—			(25	)		—
Cumulative effect of adopting SAB 101, net of taxes		—		—			—			(47	)		—
Cumulative effect of adopting SFAS No. 142		—		(268	)		—			—			—

Net income (loss)	$	349	$	(2,058	)	$	(1,032	)	$	174		$	757

Net income (loss) per share — Basic:
Income (loss) from continuing operations	$	0.72	$	(3.78	)	$	(2.20	)	$	(0.89	)	$	1.49
Income from discontinued operations, net		—		—			—			0.01			0.19
Gain (loss) from the sale of discontinued operations, net		—		—			(0.02	)		1.41			—
Cumulative effect of adopting SFAS No. 133, net		—		—			—			(0.05	)		—
Cumulative effect of adopting SAB 101, net		—		—			—			(0.10	)		—
Cumulative effect of adopting SFAS No. 142		—		(0.57	)		—			—			—

Net income (loss)	$	0.72	$	(4.35	)	$	(2.22	)	$	0.38		$	1.68

Net income (loss) per share — Diluted:
Income (loss) from continuing operations	$	0.71	$	(3.78	)	$	(2.20	)	$	(0.89	)	$	1.48
Income from discontinued operations, net		—		—			—			0.01			0.18
Gain (loss) from the sale of discontinued operations, net		—		—			(0.02	)		1.41			—
Cumulative effect of adopting SFAS No. 133, net		—		—			—			(0.05	)		—
Cumulative effect of adopting SAB 101, net		—		—			—			(0.10	)		—
Cumulative effect of adopting SFAS No. 142		—		(0.57	)		—			—			—

Net income (loss)	$	0.71	$	(4.35	)	$	(2.22	)	$	0.38		$	1.66

Weighted average shares used in computing basic net income (loss) per share		483		473			465			458			449
Weighted average shares used in computing diluted net income (loss) per share		490		473			465			458			455


	October 31,
	2004		2003		2002		2001		2000
	(in millions)
Consolidated Balance Sheet Data (1):
Cash and cash equivalents	$	2,315	$	1,607	$	1,844	$	1,170	$	996
Working capital	$	2,706	$	1,983	$	2,899	$	2,797	$	2,476
Total assets	$	7,056	$	6,297	$	8,203	$	7,986	$	8,330
Senior convertible debentures	$	1,150	$	1,150	$	1,150	$	—	$	—
Stockholders’ equity	$	3,569	$	2,824	$	4,627	$	5,659	$	5,265


	Years Ended October 31,									2004 over 2003 % Change		2003 over 2002 % Change
	2004			2003			2002			2004 over 2003 % Change		2003 over 2002 % Change
				(in millions)
Orders	$	6,997		$	6,084		$	6,013		15	%	1	%

Net Revenue:
Products	$	6,302		$	5,240		$	5,234		20	%	—
Services and other		879			816			776		8	%	5	%

Total net revenue	$	7,181		$	6,056		$	6,010		19	%	1	%


	Years Ended October 31,									2004 over 2003 Ppts Change		2003 over 2002 Ppts Change
	2004			2003			2002			2004 over 2003 Ppts Change		2003 over 2002 Ppts Change
% of Total Net Revenue:
Products		88	%		87	%		87	%	1	%	—
Services and other		12	%		13	%		13	%	(1	)%	—

Total		100	%		100	%		100	%	—		—


	Years Ended October 31,									2004 over 2003 % Change		2003 over 2002 % Change
	2004			2003			2002			2004 over 2003 % Change		2003 over 2002 % Change
				(in millions)
Americas	$	2,424		$	2,347		$	2,553		3	%	(8	)%
Europe		1,474			1,214			1,154		21	%	5	%
Asia Pacific		3,283			2,495			2,303		32	%	8	%

Total net revenue	$	7,181		$	6,056		$	6,010		19	%	1	%


As a % of Net Revenue	Years Ended October 31,						2004 over 2003 Ppts Change		2003 over 2002 Ppts Change
As a % of Net Revenue	2004		2003		2002		2004 over 2003 Ppts Change		2003 over 2002 Ppts Change
Cost of products as a percentage of product revenue	55	%	61	%	64	%	(6	)	(3	)
Cost of services and other as a percentage of services and other revenue	65	%	70	%	65	%	(5	)	5
Total costs as a percentage of total net revenue	57	%	62	%	64	%	(5	)	(2	)
Research and development	13	%	17	%	21	%	(4	)	(4	)
Selling, general and administrative	25	%	32	%	41	%	(7	)	(9	)


	Years Ended October 31,									2004 over 2003 Change	2003 over 2002 Change
	2004			2003			2002			2004 over 2003 Change	2003 over 2002 Change
	(in millions)
Income (loss) from operations	$	386		$	(725	)	$	(1,607	)	153%	55%
Operating profit (deficit) margin		5	%		(12	)%		(27	)%	17 ppts	15 ppts


	Years Ended October 31,									2004 over 2003 Change	2003 over 2002 Change
	2004			2003			2002			2004 over 2003 Change	2003 over 2002 Change
	(in millions)
Orders	$	2,856		$	2,413		$	2,549		18%	(5)%

Net revenue from products	$	2,498		$	2,135		$	2,219		17%	(4)%
Net revenue from services and other		405			394			393		3%	—

Total net revenue	$	2,903		$	2,529		$	2,612		15%	(3)%

Income (loss) from operations		219			(315	)		(710	)	170%	56%
Operating margin (deficit)		8	%		(12	)%		(27	)%	20 ppts	15 ppts
Return on invested capital (“ROIC”)		8	%		(9	)%		(17	)%	17 ppts	8 ppts


Decrease as a % of Net Revenue	2004 over 2003 Ppts Change		2003 over 2002 Ppts Change
Cost of products and services	(8	)	(4	)
Research and development	(5	)	(5	)
Selling, general and administrative	(8	)	(5	)


Increase/(Decrease) as a % of Net Revenue	2004 over 2003 Ppts Change		2003 over 2002 Ppts Change
Cost of products and services	(2	)	2
Research and development	(3	)	(2	)
Selling, general and administrative	(7	)	(6	)


	Less than one year		One to three years		Three to five years		More than five years
Operating leases	$	108	$	154	$	101	$	81
Long-term debt obligations (Senior Convertible Debentures)		—		1,150		—		—
Commitments to contract manufacturers and suppliers		380		—		—		—
Other purchase commitments		131		216		77		34
Retirement plans		84		—		—		—

Total	$	703	$	1,520	$	178	$	115


	FY04			FY04			FY04			FY04
	Test and Measurement			Automated Test			Semiconductor Products			Life Sciences and Chemical Analysis
Numerator:
Segment income from operations	$	219		$	66		$	166		$	192
Less:
Other (income) expense and taxes		68			23			(34	)		75

Segment return	$	151		$	43		$	200		$	117

Denominator:
Segment assets (1)	$	2,148		$	718		$	1,434		$	725
Less:
Net current liabilities (2)		414			117			241			181

Invested capital (4)	$	1,734		$	601		$	1,193		$	544

Average invested capital	$	1,816		$	666		$	1,158		$	525
ROIC		8	%		6	%		17	%		22	%

	FY03			FY03			FY03			FY03
Numerator:
Segment income (loss) from operations	$	(315	)	$	(34	)	$	(59	)	$	148
Less:
Other (income) expense and taxes		(140	)		(12	)		(29	)		55

Segment return	$	(175	)	$	(22	)	$	(30	)	$	93

Denominator: (3)
Segment assets (1)	$	2,268		$	804		$	1,420		$	680
Less:
Net current liabilities (2)		470			115			289			181

Invested capital (4)	$	1,798		$	689		$	1,131		$	499

Average invested capital	$	1,869		$	655		$	1,256		$	449
ROIC		(9	)%		(3	)%		(2	)%		21	%

	FY02			FY02			FY02			FY02
Numerator:
Segment income (loss) from operations	$	(710	)	$	(70	)	$	(115	)	$	140
Less:
Other (income) expense and taxes		(348	)		(31	)		(67	)		48

Segment return	$	(362	)	$	(39	)	$	(48	)	$	92

Denominator: (3)
Segment assets (1)	$	2,717		$	852		$	1,797		$	643
Less:
Net current liabilities (2)		696			148			296			205

Invested capital (4)	$	2,021		$	704		$	1,501		$	438

Average invested capital	$	2,162		$	708		$	1,402		$	437
ROIC		(17	)%		(6	)%		(3	)%		21	%


		Page
Report of Independent Registered Public Accounting Firm		73
Consolidated Statement of Operations for each of the three years ended October 31, 2004		74
Consolidated Balance Sheet at October 31, 2004 and 2003		75
Consolidated Statement of Cash Flows for each of the three years ended October 31, 2004		76
Consolidated Statement of Stockholders’ Equity for each of the three years ended October 31, 2004		77
Notes to Consolidated Financial Statements		78
Quarterly Summary (unaudited)		112


	Number of Shares	Common Stock				Retained Income/ (Accumulated Deficit)			Accumulated Comprehensive Income/(Loss)			Total
	Number of Shares	Par Value		Additional Paid-in Capital		Retained Income/ (Accumulated Deficit)			Accumulated Comprehensive Income/(Loss)			Total
	(in millions, except number of shares in thousands)
Balance as of October 31, 2001	461,031		5		4,723		931			—			5,659
Components of comprehensive loss:
Net loss	—		—		—		(1,032	)		—			(1,032	)
Reclassification adjustment relating to derivatives (net of tax benefit of $4 million)	—		—		—		—			(7	)		(7	)
SFAS No. 133 cumulative transition adjustment (net of tax benefit of $3 million)	—		—		—		—			(6	)		(6	)
Foreign currency translation (net of tax of $4 million)	—		—		—		—			7			7
Change in unrealized gain (loss) on investment (net of tax benefit of $1 million)	—		—		—		—			(1	)		(1	)
Unrealized gain on derivatives (net of tax expense of $2 million)	—		—		—		—			4			4
Change in minimum pension liability adjustment (net of tax benefit of $78 million)	—		—		—		—			(146	)		(146	)

Total comprehensive loss													(1,181	)

Shares issued for employee benefit plans and other	5,993		—		145		—			—			145
Other additional paid-in-capital	—		—		4		—			—			4

Balance as of October 31, 2002	467,024		5		4,872		(101	)		(149	)		4,627
Components of comprehensive loss:
Net loss	—		—		—		(2,058	)		—			(2,058	)
Reclassification adjustment relating to derivatives (net of tax expense of $2 million)	—		—		—		—			4			4
Reclassification adjustment relating to investments (net of tax expense of $1 million)	—		—		—		—			2			2
Foreign currency translation (net of tax benefit of $46 million)	—		—		—		—			96			96
Unrealized gain (loss) on derivatives (net of tax expense of $7 million)	—		—		—		—			(13	)		(13	)
Change in minimum pension liability adjustment (net of tax expense of $38 million)	—		—		—		—			54			54

Total comprehensive loss													(1,915	)

Shares issued for employee benefit plans and other	9,125		—		112		—			—			112

Balance as of October 31, 2003	476,149		5		4,984		(2,159	)		(6	)		2,824
Components of comprehensive income:
Net income	—		—		—		349			—			349
Reclassification adjustment relating to derivatives (net of tax expense of $3 million)	—		—		—		—			5			5
Reclassification adjustment relating to investments (net of tax expense of $2 million)	—		—		—		—			3			3
Foreign currency translation (net of tax expense of $14 million)	—		—		—		—			89			89
Unrealized gain (loss) on derivatives (net of tax benefit of $2 million)	—		—		—		—			(4	)		(4	)
Change in minimum pension liability adjustment (net of tax expense of $40 million)	—		—		—		—			92			92

Total comprehensive income													534

Shares issued for employee benefit plans and other	9,920		—		193		—			—			193
Issuance of common stock for an acquisition	772		—		18		—			—			18

Balance as of October 31, 2004	486,841	$	5	$	5,195	$	(1,810	)	$	179		$	3,569


	For the Year Ended October 31, 2002
Reported loss before cumulative effect of accounting changes	$	(1,032	)
Add back: Goodwill and workforce-in-place amortization, net		320

Adjusted loss before cumulative effect of accounting changes		(712	)

Per share data — Basic and diluted reported loss before cumulative effect of accounting changes per share	$	(2.22	)
Adjustment for goodwill and workforce-in-place amortization, net		0.69

Adjusted loss before cumulative effect of accounting changes per share	$	(1.53	)

Reported net loss	$	(1,032	)
Add back: Goodwill and workforce-in-place amortization, net		320

Adjusted net loss	$	(712	)

Per share data — Basic and diluted reported net loss per share	$	(2.22	)
Adjustment for goodwill and workforce-in-place amortization, net		0.69

Adjusted net loss per share	$	(1.53	)

Weighted average shares used in per share computations above — Basic and diluted:		465


	Shares		Weighted Average Exercise Price
	(in thousands)
Outstanding as of October 31, 2001	63,955		$	46
Granted	20,152		$	25
Exercised	(1,128	)	$	12
Cancelled	(9,140	)	$	51

Outstanding as of October 31, 2002	73,839		$	40
Granted	13,152		$	16
Exercised	(1,768	)	$	12
Cancelled under Option Exchange Program	(25,882	)	$	51
Other Cancellations	(7,975	)	$	41

Outstanding as of October 31, 2003	51,366		$	29
Granted	12,136		$	32
Exercised	(2,859	)	$	19
Granted under Option Exchange Program	13,797		$	28
Other Cancellations	(3,464	)	$	38

Outstanding as of October 31, 2004	70,976		$	29


	Shares	Weighted Average Exercise Price		Value using Black-Scholes model
	(in thousands)
Options exercisable as of October 31, 2002	31,501	$	41
Black-Scholes value of options granted during 2002				$	15
Options exercisable as of October 31, 2003	26,141	$	35
Black-Scholes value of options granted during 2003				$	9
Options exercisable as of October 31, 2004	31,023	$	32
Black-Scholes value of options granted during 2004				$	14


	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price

					Number Exercisable	Weighted Average Exercise Price
	(in thousands)				(in thousands)
$ 0 – 15	2,093	6.0 years	$	13	1,772	$	13
$15.01 – 25	14,382	8.0 years	$	18	4,611	$	19
$25.01 – 30	31,564	7.5 years	$	27	12,418	$	27
$30.01 – 40	16,509	7.4 years	$	34	6,084	$	35
$40.01 – 50	3,586	4.5 years	$	44	3,574	$	44
$50 and over	2,842	5.6 years	$	68	2,564	$	69

	70,976		$	29	31,023	$	32


	For the Years Ended October 31,
	2004		2003			2002
	(in millions)
Numerator:
Income (loss) from continuing operations	$	349	$	(1,790	)	$	(1,022	)
Loss from the sale of discontinued operations, net of taxes		—		—			(10	)

Income (loss) before cumulative effect of accounting changes		349		(1,790	)		(1,032	)
Cumulative effect of adopting SFAS No. 142		—		(268	)		—

Net income (loss)	$	349	$	(2,058	)	$	(1,032	)

Denominators:
Basic weighted average shares		483		473			465
Diluted weighted average shares		490		473			465


	October 31
	2004			2003
	(in millions)
Land	$	97		$	106
Buildings and leasehold improvements		1,684			1,838
Software		430			404
Machinery and equipment		1,804			1,923

Total property, plant and equipment		4,015			4,271
Accumulated depreciation and amortization		(2,757	)		(2,824	)

	$	1,258		$	1,447


	Test and Measurement			Automated Test		Semiconductor Products		Life Sciences and Chemical Analysis		Total
	(in millions)
Goodwill at October 31, 2002	$	434		$	74	$	85	$	23	$	616
Adoption of SFAS No. 142 goodwill impairment		(268	)		—		—		—		(268	)
Foreign currency translation impact		17			11		10		1		39
Goodwill arising from acquisitions		—			—		1		—		1

Goodwill at October 31, 2003		183			85		96		24		388
Foreign currency translation impact		8			3		2		—		13
Goodwill arising from acquisitions		—			5		—		16		21

Goodwill at October 31, 2004	$	191		$	93	$	98	$	40	$	422


	Other Intangible Assets
	Gross Carrying Amount		Accumulated Amortization		Net Book Value
	(in millions)
As of October 31, 2004:
Purchased technology	$	143	$	128	$	15
Customer relationships		29		23		6

Total	$	172	$	151	$	21

As of October 31, 2003:
Purchased technology	$	122	$	110	$	12
Customer relationships		23		21		2

Total	$	145	$	131	$	14


	For the Years Ended October 31,
	2004			2003
	(in millions)
Balance at October 31, 2003 and 2002	$	71		$	72
Accruals for warranties issued during the period		68			70
Accruals related to pre-existing warranties (including changes in estimates)		(2	)		5
Settlements made during the period		(78	)		(76	)

Balance at October 31, 2004 and 2003	$	59		$	71


	For the Year Ended October 31, 2004
	(in millions)
Balance at October 31, 2003	$	33
Recognition of revenue		(19	)
Deferral of revenue for new contracts		38

Balance at October 31, 2004	$	52


	Workforce Reduction			Consolidation of Excess Facilities			Impairment of Assets, Property, Plant and Equipment			Total
				(in millions)
Balance at October 31, 2001	$	52		$	20		$	17		$	89
Total charge		175			53			129			357
Asset impairment		—			—			(146	)		(146	)
Cash payments		(210	)		(10	)		—			(220	)

Balance at October 31, 2002		17			63			—			80
Total charge and adjustment (a)		—			24			(9	)		15
Asset impairment		—			—			9			9
Cash payments		(17	)		(25	)		—			(42	)

Balance at October 31, 2003		—			62			—			62
Total charge		—			7			—			7
Cash payments		—			(26	)		—			(26	)

Balance at October 31, 2004	$	—		$	43		$	—		$	43


	Workforce Reduction			Impairment of Assets, Property, Plant and Equipment			Total
	(in millions)
Balance at July 31, 2002	$	—		$	—		$	—
Total charge		83			34			117
Asset impairment		—			(34	)		(34	)
Cash payments		(15	)		—			(15	)

Balance at October 31, 2002		68			—			68
Total charge		44			5			49
Asset impairment		—			(5	)		(5	)
Cash payments		(98	)		—			(98	)

Balance at October 31, 2003		14			—			14
Cash payments		(14	)		—			(14	)

Balance at October 31, 2004	$	—		$	—		$	—


	Workforce Reduction			Consolidation of Excess Facilities			Impairment of Assets, Property, Plant and Equipment			Total
	(in millions)
Balance at October 31, 2002	$	—		$	—		$	—		$	—
Total charge		238			13			57			308
Asset impairments		—			—			(57	)		(57	)
Cash payments		(234	)		(4	)		—			(238	)

Balance at October 31, 2003		4			9			—			13
Total charge		101			28			25			154
Asset impairments		—			—			(25	)		(25	)
Cash payments		(84	)		(14	)		—			(98	)

Balance at October 31, 2004	$	21		$	23		$	—		$	44


	Agilent Retirement Plan				DPSP
	2004		2003		2004		2003
	(in millions)
Fair value of plan assets	$	564	$	488	$	847	$	863
Retirement benefit obligation	$	718	$	660	$	847	$	863


	Pensions																		U.S. Post Retirement Benefit Plans
	U.S. Plans									Non-U.S. Plans									U.S. Post Retirement Benefit Plans
	2004			2003			2002			2004			2003			2002			2004			2003			2002
	(in millions)
Service cost — benefits earned during the period	$	63		$	70		$	83		$	41		$	44		$	42		$	12		$	13		$	13
Interest cost on benefit obligation		39			44			46			52			46			41			32			30			27
Expected return on plan assets		(45	)		(39	)		(41	)		(65	)		(53	)		(59	)		(25	)		(22	)		(28	)
Amortization and deferrals:
Actuarial loss (gain)		3			14			10			33			33			13			6			1			(8	)
Prior service cost		1			1			1			—			—			—			(5	)		—			—

Net plan costs		61			90			99			61			70			37			20			22			4
Curtailment loss (gain)		—			—			1			—			—			(1	)		—			—			(41	)
Settlement loss		—			—			5			—			4			7			—			—			—
Special termination benefits		—			—			—			—			1			1			—			—			—

Total net plan costs (income)	$	61		$	90		$	105		$	61		$	75		$	44		$	20		$	22		$	(37	)

Distribution of net plan costs (income):
Continuing operations	$	61		$	90		$	105		$	61		$	75		$	44		$	20		$	22		$	(27	)
Discontinued operations		—			—			—			—			—			—			—			—			(10	)

Total net plan costs (income)	$	61		$	90		$	105		$	61		$	75		$	44		$	20		$	22		$	(37	)


	U.S. Defined Benefit Plans						Non-U.S. Defined Benefit Plans						U.S. Post Retirement Benefit Plans
	2004			2003			2004			2003			2004			2003
	(in millions)
Change in fair value of plan assets:
Fair value — beginning of year	$	488		$	407		$	928		$	657		$	290		$	256
Actual return on plan assets		49			89			72			95			26			49
Employer contributions		63			91			83			127			—			—
Participants’ contributions		—			—			6			8			—			—
Benefits paid		(40	)		(100	)		(36	)		(35	)		(16	)		(15	)
Transfer from DPSP		4			1			—			—			—			—
Special termination benefits		—			—			—			1			—			—
Currency impact		—			—			56			83			—			—
Curtailment/settlement impact — restructuring		—			—			—			(8	)		—			—

Fair value — end of year	$	564		$	488		$	1,109		$	928		$	300		$	290

Change in benefit obligation:
Benefit obligation — beginning of year	$	660		$	761		$	1,095		$	957		$	539		$	437
Service cost		63			70			41			44			12			13
Interest cost		39			44			52			46			32			30
Participants’ contributions		—			—			6			8			—			—
Plan amendment		—			—			—			—			(123	)		(25	)
Actuarial (gain) loss		(9	)		(88	)		(37	)		(8	)		59			122
Benefits paid		(39	)		(100	)		(36	)		(35	)		(16	)		(14	)
Transfer from DPSP		4			1			—			—			—			—
Special termination benefits		—			—			—			1			—			—
Currency impact		—			—			68			102			—			—
Curtailment/settlement impact — restructuring		—			(28	)		—			(20	)		__—			(24	)

Benefit obligation — end of year	$	718		$	660		$	1,189		$	1,095		$	503		$	539

Plan assets less than benefit obligation	$	(154	)	$	(172	)	$	(80	)	$	(167	)	$	(203	)	$	(249	)
Unrecognized net actuarial loss		19			34			374			425			172			120
Unrecognized prior service cost (benefit) related to plan changes		2			3			(5	)		(5	)		(141	)		(23	)

Net (accrued) prepaid costs	$	(133	)	$	(135	)	$	289		$	253		$	(172	)	$	(152	)

Amounts recognized in the consolidated balance sheet consist of:
Prepaid defined benefit plan costs	$	—		$	—		$	290		$	253		$	—		$	—
Accrued defined benefit plan costs		(133	)		(135	)		(1	)		(136	)		—			—
Intangible assets		—			—			—			4			—			—
Additional minimum pension liability		—			—			—			132			—			—
Accrued post-retirement benefits costs		—			—			—			—			(172	)		(152	)

Net (accrued) prepaid costs	$	(133	)	$	(135	)	$	289		$	253		$	(172	)	$	(152	)