AGILENT TECHNOLOGIES INC
10-Q, 2000-09-01
INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS
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<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

(Mark one)

    /X/        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934.

              For the quarterly period ended July 31, 2000

                                      OR

    /_/        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                    OF THE SECURITIES EXCHANGE ACT OF 1934.

       For the transition period from _______________ to_________________

                        Commission file number: 001-15405

                           AGILENT TECHNOLOGIES, INC.
          ------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

              Delaware                                       77-0518772
     ------------------------------                     -------------------
     (State or other jurisdiction of                       (IRS Employer
     incorporation or organization)                     Identification No.)

     395 Page Mill Road, Palo Alto, California                 94306
     ------------------------------------------              ------------
      (Address of principal executive offices)                (Zip Code)

     Registrant's telephone number, including area code        (650) 752-5000
                                                                --------------

  Former address: 3000 Hanover Street, Palo Alto, California 94304
  ------------------------------------------------------------------------------
                (Former name, former address and former fiscal year,
                           if changed since last report)

         Indicate by check mark whether the registrant (1) has filed all reports
         required to be filed by Section 13 or 15(d) of the Securities Exchange
         Act of 1934 during the preceding 12 months (or for such shorter period
         that the registrant was required to file such reports), and (2) has
         been subject to such filing requirements for the past 90 days.

                            Yes /X/         No / /

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

           Class                               Outstanding at July 31, 2000
-----------------------------                  -------------------------------
Common Stock, $0.01 par value                        453,014,579 shares


<PAGE>

                   AGILENT TECHNOLOGIES, INC. AND SUBSIDIARIES

                                      INDEX

<TABLE>
<CAPTION>
                                                                                         Page Number
                                                                                         -----------
<S>           <C>                                                                        <C>
Part I.       Financial Information                                                            3

Item 1.       Financial Statements                                                             3

              Condensed Consolidated Balance Sheets (Unaudited) as of July 31, 2000
                and October 31, 1999                                                           3

              Condensed Consolidated Statements of Earnings (Unaudited) for the
                Three and Nine Months Ended July 31, 2000 and July 31, 1999                    4

              Condensed Consolidated Statements of Cash Flows (Unaudited) for the
                Nine Months Ended July 31, 2000 and July 31, 1999                              5

              Notes to Condensed Consolidated Financial Statements
               (Unaudited)                                                                     6

Item 2.       Management's Discussion and Analysis of Financial
                Condition and Results of Operations                                           16

Item 3.       Quantitative and Qualitative Disclosures about
                Market Risk                                                                   39

Part II.      Other Information                                                               40

Item 1.       Legal Proceedings                                                               40

Item 6.       Exhibits and Reports on Form 8-K                                                41

              Signature                                                                       41

              Exhibit Index                                                                   42
</TABLE>


                                       2
<PAGE>

PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements

                        Agilent Technologies, Inc. and Subsidiaries
                           Condensed Consolidated Balance Sheets
                                        (Unaudited)
                     (in millions, except par value and share amounts)

<TABLE>
<CAPTION>
                                                                                  July 31,       Oct. 31,
                                                                                    2000           1999
                                                                                    ----           ----
<S>                                                                               <C>            <C>
     ASSETS
     Current assets:
        Cash and cash equivalents........................................           $703           $  -
        Accounts receivable..............................................          2,167          1,635
        Inventory........................................................          1,762          1,499
        Other current assets.............................................            712            404
                                                                                  ------         ------
           Total current assets..........................................          5,344          3,538
     Property, plant and equipment, net..................................          1,581          1,387
     Other assets........................................................            902            519
                                                                                  ------         ------
     Total assets........................................................         $7,827         $5,444
                                                                                  ======         ======
     LIABILITIES AND STOCKHOLDERS' EQUITY
     Current liabilities:
        Notes payable and short-term borrowings..........................         $  129         $    -
        Accounts payable.................................................            783            510
        Employee compensation and benefits...............................            600            550
        Deferred revenue.................................................            361            241
        Accrued income taxes.............................................            238              -
        Other accrued liabilities........................................            399            380
                                                                                  ------         ------
           Total current liabilities.....................................          2,510          1,681
     Other liabilities...................................................            415            381

     Commitments and contingencies

     Stockholders' equity:
        Preferred stock; $.01 par value; 125,000,000 shares
           authorized; none issued and outstanding.......................              -              -
        Common stock; $.01 par value; 2,000,000,000 shares
           authorized; 453,014,579 shares at July 31, 2000 and
           380,000,000 shares at October 31, 1999 issued and outstanding.              5              4
        Additional paid-in capital.......................................          4,451          3,378
        Retained earnings................................................            452              -
        Other comprehensive losses.......................................             (6)             -
                                                                                  ------         ------
           Total stockholders' equity....................................          4,902          3,382
                                                                                  ------         ------
     Total liabilities and stockholders' equity..........................         $7,827         $5,444
                                                                                  ======         ======
</TABLE>

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



                                       3
<PAGE>

                   Agilent Technologies, Inc. and Subsidiaries
                  Condensed Consolidated Statements of Earnings
                                   (Unaudited)
                     (in millions, except per share amounts)

<TABLE>
<CAPTION>
                                                                  Three Months Ended           Nine Months Ended
                                                                       July 31,                     July 31,
                                                                  2000          1999           2000         1999
                                                                 ------        ------         ------       ------
<S>                                                              <C>           <C>            <C>          <C>
     Net revenue:
        Products..............................................   $2,331        $1,788         $6,426       $5,005
        Services and other....................................      339           299            975          878
                                                                 ------        ------         ------       ------
           Total net revenue..................................    2,670         2,087          7,401        5,883
                                                                 ------        ------         ------       ------
     Costs and expenses:
        Cost of products......................................    1,186           926          3,214        2,581
        Cost of services and other............................      183           177            576          515
        Research and development..............................      318           242            904          705
        Selling, general and administrative...................      773           547          2,112        1,546
                                                                 ------        ------         ------       ------
           Total costs and expenses...........................    2,460         1,892          6,806        5,347
                                                                 ------        ------         ------       ------

     Earnings from operations.................................      210           195            595          536
     Other income (expense), net..............................       28            12            101           27
                                                                 ------        ------         ------       ------
     Earnings before taxes....................................      238           207            696          563
     Provision for taxes......................................       83            72            244          197
                                                                 ------        ------         ------       ------
     Net earnings.............................................    $ 155         $ 135          $ 452        $ 366
                                                                 ======        ======         ======       ======

     Basic net earnings per share.............................    $ .34         $ .36          $1.01        $ .96
     Diluted net earnings per share...........................    $ .34         $ .36          $1.00        $ .96

     Average shares used in computing net earnings per share:
        Basic.................................................      453           380            448          380
        Diluted...............................................      461           380            452          380

     Pro forma net earnings per share:
        Basic.................................................    $ .34                        $1.00
        Diluted...............................................    $ .33                        $ .97

     Average shares used in computing pro forma net earnings
      per share:
        Basic.................................................      453                          452
        Diluted...............................................      464                          464
</TABLE>


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



                                       4
<PAGE>

                        Agilent Technologies, Inc. and Subsidiaries
                      Condensed Consolidated Statements of Cash Flows
                                        (Unaudited)
                                       (in millions)

<TABLE>
<CAPTION>
                                                                                       Nine Months Ended
                                                                                            July 31,
                                                                                       2000          1999
                                                                                       -----         -----
<S>                                                                                    <C>           <C>
     Cash flows from operating activities:
        Net earnings................................................................   $ 452         $ 366
        Adjustments to reconcile net earnings to net cash provided by operating
         activities:
           Depreciation and amortization............................................     345           365
           Gain on sale of equity investments.......................................     (29)            -
           Deferred taxes on earnings...............................................     (19)           49
           Non-cash asset impairment charge.........................................       -            51
           Changes in assets and liabilities:
             Accounts receivable....................................................    (514)          (84)
             Inventory..............................................................    (254)         (113)
             Accounts payable.......................................................     282            (9)
             Accrued income taxes...................................................     238             -
             Other current assets and liabilities...................................     (52)         (147)
             Other, net.............................................................     (34)          (52)
                                                                                       -----         -----
     Net cash provided by operating activities......................................     415           426
                                                                                       -----         -----
     Cash flows from investing activities:
        Investments in property, plant and equipment................................    (448)         (336)
        Dispositions of property, plant and equipment...............................     101            71
        Sales of equity investments.................................................      60             -
        Purchases of equity investments.............................................     (22)            -
        Acquisitions, net of cash acquired..........................................    (667)          (28)
        Cash proceeds of divestitures...............................................       -            39
        Other, net..................................................................      10            (4)
                                                                                       -----         -----
     Net cash used in investing activities..........................................    (966)         (258)
                                                                                       -----         -----
     Cash flows from financing activities:
        Initial public offering proceeds............................................   2,068             -
        Initial public offering proceeds distributed to Hewlett-Packard.............  (2,068)            -
        Issuance of common stock under employee stock plans.........................      44             -
        Change in notes payable and short-term borrowings...........................     129             -
        Net funding from (to) Hewlett-Packard.......................................   1,081          (168)
                                                                                       -----         -----
     Net cash provided by (used in) financing activities............................   1,254          (168)
                                                                                       -----         -----
     Change in cash and cash equivalents............................................     703             -
     Cash and cash equivalents at beginning of period...............................       -             -
                                                                                       -----         -----
     Cash and cash equivalents at end of period.....................................   $ 703          $  -
                                                                                       =====         =====
</TABLE>


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



                                       5
<PAGE>




                   Agilent Technologies, Inc. and Subsidiaries
              Notes to Condensed Consolidated Financial Statements
                                   (Unaudited)

     1.  Overview and Basis of Presentation

         On March 2, 1999, Hewlett-Packard Company (HP) announced a plan to
         create a separate company, subsequently named Agilent Technologies,
         Inc. (Agilent), comprised of HP's test and measurement, semiconductor
         products, healthcare solutions and chemical analysis businesses,
         related portions of Hewlett-Packard Laboratories and associated
         infrastructure.

         Agilent was incorporated in Delaware in May 1999 as a wholly-owned
         subsidiary of HP with 125,000,000 shares of $.01 par value preferred
         stock and 2,000,000,000 shares of $.01 par value common stock
         authorized and 10,000,000 shares of common stock issued to HP.
         Effective October 21, 1999, Agilent's Board of Directors declared a
         38-for-one stock split in the form of a stock dividend. As a result of
         the stock split, common stock issued and outstanding increased to
         380,000,000 shares. On November 18, 1999, Agilent launched its initial
         public offering of 72,000,000 shares of common stock at $30 per share.
         The net proceeds of the offering of $2.1 billion were paid to HP as a
         dividend on November 23, 1999. On April 7, 2000, HP announced that its
         board of directors had declared a stock dividend of all of HP's shares
         in Agilent. The dividend was distributed on June 2, 2000 (the
         distribution date), to HP shareholders of record as of 5 p.m. Eastern
         Daylight Time on May 2, 2000. The distribution was on the basis of
         0.3814 of an Agilent share for each HP common share outstanding.

         The condensed consolidated 1999 financial information has been
         prepared using HP's historical bases in the assets and liabilities
         and the historical results of operations of Agilent. Agilent began
         accumulating retained earnings on November 1, 1999.

         The condensed consolidated 1999 financial information includes
         allocations of certain HP corporate expenses, including centralized
         research and development, legal, accounting, employee benefits, real
         estate, insurance services, information technology services,
         treasury and other HP corporate and infrastructure costs. The
         expense allocations were determined on bases that HP and Agilent
         considered to be a reasonable reflection of the utilization of
         services provided or the benefit received by Agilent. However, the
         1999 financial information included herein may not reflect the
         consolidated financial position, operating results, and cash flows
         of Agilent in the future or what they would have been had Agilent
         operated as a separate, stand-alone entity during 1999. In fiscal
         2000, Agilent entered into interim service level agreements with HP
         covering the provision of various services, including information
         technology, financial, accounting, building, legal and other
         services (Note 9).

         Effective November 1, 1999, Agilent began operating as a stand-alone
         company. In November 1999, HP transferred to Agilent a majority of the
         assets and liabilities relating to its businesses and also provided
         Agilent with cash funding of approximately $1.1 billion. HP retained
         some of Agilent's assets and liabilities, including some of its
         accounts receivable and accounts payable, accrued payroll and related
         items and taxes payable, except deferred taxes, and transferred to


                                       6
<PAGE>

         Agilent some of the assets and liabilities related to its business,
         including some of the accounts receivable, accounts payable and other
         liabilities of Agilent Technologies Japan, Ltd. (formerly called
         Hewlett-Packard Japan, Ltd.). In addition, HP transferred to Agilent
         $521 million to fund its acquisition of Yokogawa Electric Corporation's
         25% minority equity ownership of Agilent Technologies Japan, Ltd. (Note
         4). In December 1999, HP provided Agilent with additional cash funding
         of approximately $200 million based on its and HP's balance sheets as
         of October 31, 1999.

         Of the total $1.8 billion of funding received from HP in the nine
         months ended July 31, 2000, $1.1 billion was classified as net cash
         provided by financing activities and $0.7 billion was classified among
         several categories as net cash provided by operating activities in the
         condensed consolidated statement of cash flows for the nine months
         ended July 31, 2000.

     2.  Summary of Significant Accounting Policies

         In the opinion of Agilent's management, the accompanying condensed
         consolidated financial statements contain all adjustments (which
         comprise only normal and recurring accruals) necessary to present
         fairly its consolidated financial position as of July 31, 2000 and its
         consolidated results of operations and cash flows for the three and
         nine months ended July 31, 2000 and 1999.

         Certain amounts in the condensed consolidated statements of operations
         for the three and nine months ended July 31, 1999 have been
         reclassified to conform to the current period's presentation.

         The preparation of financial statements in accordance with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the amounts reported in the condensed
         consolidated financial statements and accompanying notes. Actual
         results could differ from those estimates.

         The results of operations for the three and nine months ended July 31,
         2000 are not necessarily indicative of the results to be expected for
         the full year. The information included in this Form 10-Q should be
         read in conjunction with Management's Discussion and Analysis of
         Financial Condition and Results of Operations as well as the
         consolidated financial statements and notes thereto included in
         Agilent's 1999 Annual Report on Form 10-K.

     3.  Accounting Pronouncements

         In accordance with Statement of Financial Accounting Standards No. 115,
         "Accounting for Certain Investments in Debt and Equity Securities,"
         Agilent recorded $6 million of accumulated other comprehensive losses
         to stockholders' equity in the nine months ended July 31, 2000. Prior
         period financial statements were not materially impacted by the
         statement.

         In June 1998, the Financial Accounting Standards Board issued Statement
         of Financial Accounting Standards No. 133, "Accounting for Derivative
         Instruments and Hedging Activities." This statement establishes
         accounting and reporting standards for derivative instruments and
         requires recognition of all derivatives as assets or liabilities in the
         balance sheet and measurement of those instruments at fair value. The
         statement is effective for years beginning after June 15, 2000. Agilent
         will adopt the standard no later than the first




                                       7
<PAGE>

         quarter of its fiscal year 2001 and is in the process of determining
         the impact that adoption will have on its consolidated financial
         statements.

         In December 1999, the Securities and Exchange Commission (SEC)
         issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
         Financial Statements." In June 2000, the SEC delayed the
         implementation date of this Staff Accounting Bulletin. This Staff
         Accounting Bulletin is effective no later than the fourth quarter of
         Agilent's fiscal year 2001. Agilent is in the process of determining
         the impact that adoption will have on its consolidated financial
         statements.

     4.  Acquisitions

         In July 2000, Agilent acquired all of the outstanding stock of SAFCO
         Technologies, Inc. for approximately $120 million in cash. During
         fiscal 2000, Agilent acquired several additional companies for
         approximately $140 million. All of these acquisitions were accounted
         for under the purchase method. Under the purchase method, 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 and identifiable intangible
         assets and liabilities based on fair market values at the date of
         acquisition. Residual amounts were recorded as goodwill. Goodwill is
         amortized on a straight-line basis over its estimated economic life,
         generally three to five years. The net book value of goodwill
         associated with all of these acquisitions was approximately $224
         million as of July 31, 2000.

         On July 6, 1999, HP entered into an agreement with Yokogawa Electric
         Corporation (Yokogawa) of Japan to acquire Yokogawa's 25% minority
         equity ownership of Agilent Technologies Japan, Ltd. for
         approximately $521 million. Under the terms of the agreement which
         were assigned to Agilent, Agilent will acquire Yokogawa's shares
         through a series of purchase transactions. In the initial step,
         which occurred in January 2000, Agilent purchased approximately
         10.4% of Agilent Technologies Japan, Ltd. shares from Yokogawa for
         approximately $206 million. In the second step, which occurred in
         April 2000, Agilent purchased approximately 10.4% of additional
         Agilent Technologies Japan, Ltd. shares from Yokogawa for
         approximately $216 million. Agilent will purchase the remaining 4.2%
         of Agilent Technologies Japan, Ltd. shares owned by Yokogawa prior
         to March 31, 2003. HP has provided the funding for all steps of this
         transaction.

         An independent valuation has been performed to determine the portion
         of the Yokogawa purchase price attributable to Agilent's business
         and the remaining HP business and to allocate the purchase price to
         identifiable assets and liabilities. Of the total purchase price,
         $391 million is attributable to Agilent's business, of which
         approximately $278 million will be recorded as goodwill and
         amortized over 10 years. The net book value of goodwill associated
         with the two payments for the purchase of approximately 20.8% of HPJ
         shares from Yokogawa was approximately $226 million at July 31,
         2000. The remainder of the purchase price was allocated to tangible
         assets.

                                       8
<PAGE>

     5.  Earnings Per Share

         Basic net earnings per share is computed by dividing net earnings
         (numerator) by the weighted average number of common shares
         outstanding (denominator) during the period excluding the dilutive
         effect of stock options and other employee stock plans. Diluted net
         earnings per share gives effect to all potentially dilutive common
         shares outstanding during the period. In computing diluted net
         earnings 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.

         Pro forma basic net earnings per share has been computed by dividing
         net earnings by the weighted average shares outstanding for the
         period including the 72,000,000 shares issued in Agilent's initial
         public offering and assuming they were outstanding for the entire
         period, as the proceeds of the offering were distributed to HP. Pro
         forma diluted net earnings per share has been computed by dividing
         net earnings by the weighted average shares outstanding for the
         period including the 72,000,000 shares issued in Agilent's initial
         public offering and assuming they were outstanding for the entire
         period plus the dilutive impact of outstanding stock options and
         other employee stock plans. It also assumes that HP stock and
         options converted to Agilent stock and options on the distribution
         date were outstanding for the entire period.

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

<TABLE>
<CAPTION>
                                                                            Three Months Ended   Nine Months Ended
                                                                                 July 31,             July 31,
                                                                              2000      1999      2000      1999
                                                                              ----      ----      ----      ----
                                                                              (in millions, except per share data)
         <S>                                                                 <C>       <C>       <C>       <C>
         Numerators:
             Net earnings ...............................................     $ 155     $ 135     $ 452     $ 366

         Denominators:
             Basic weighted average shares ..............................       453       380       448       380
             Potentially dilutive common shares - stock options and other
                   employee stock plans..................................         8        --         4        --
                                                                              -----     -----     -----     -----
         Diluted weighted average shares ................................       461       380       452       380

         Net earnings per share:
             Basic ......................................................     $0.34     $0.36     $1.01     $0.96
             Diluted ....................................................     $0.34     $0.36     $1.00     $0.96

         Pro forma denominators:
             Basic pro forma shares .....................................       453                 452
             Potentially dilutive pro forma common shares - stock options
                   and other employee stock plans .......................        11                  12
                                                                              -----               -----
         Diluted pro forma shares .......................................       464                 464

         Pro forma net earnings per share:
             Basic ......................................................     $0.34               $1.00
             Diluted ....................................................     $0.33               $0.97
</TABLE>


     6.  Inventory

<TABLE>
<CAPTION>
                                                                           July 31,     Oct. 31,
                                                                             2000         1999
                                                                           --------     --------
                                                                              (in millions)

<S>                                                                          <C>        <C>
         Finished goods .................................................    $  521     $  639
         Purchased parts and fabricated assemblies ......................     1,241        860
                                                                             ------     ------
                                                                             $1,762     $1,499
                                                                             ======     ======
</TABLE>



                                       9
<PAGE>

     7.  Comprehensive Earnings

         For the three months ended July 31, 2000, Agilent recorded an
         unrealized loss, net of tax, of $2 million relating to investments
         in equity securities, which was subtracted from net earnings of $155
         million to compute comprehensive earnings of $153 million. For the
         nine months ended July 31, 2000, Agilent recorded an unrealized loss,
         net of tax, of $6 million relating to investments in equity securities,
         which was subtracted from net earnings of $452 million to compute
         comprehensive earnings of $446 million. Prior to November 1, 1999,
         Agilent had no material components of comprehensive earnings or losses.

     8.  Supplemental Cash Flow Information

         The condensed consolidated statement of cash flows for the nine months
         ended July 31, 2000 excludes a net asset transfer of $14 million to
         Agilent from HP. This non-cash event was accounted for as a change in
         paid-in capital. Agilent paid approximately $67 million in cash to
         Hewlett-Packard in July 2000 concerning Agilent's estimated tax
         liability from November 1, 1999 through June 2, 2000.

     9.  Related Party Transactions

         On June 2, 2000, all Agilent shares owned by Hewlett-Packard were
         distributed as a stock dividend to HP shareholders of record as of 5
         p.m. Eastern Daylight time on May 2, 2000. As a result of this
         action, HP is no longer a related party to Agilent as of June 2,
         2000.

         Agilent's net revenue from sales of products to HP was $44 million and
         $341 million for the periods from May 1, 2000 through June 2, 2000 and
         November 1, 1999 through June 2, 2000, respectively. Agilent's net
         revenue from sales of products to HP was $212 million and $590 million
         for the three and nine months ended July 31, 1999.

         In 1999 and 2000, Agilent purchased certain products from HP. These
         products were purchased for inclusion in Agilent products sold to
         third parties and for internal use. In 2000, Agilent purchased
         products from HP at prices that management believes approximate the
         prices an unrelated party would pay. These purchases from HP amount
         to approximately $18 million and $122 million in the period from May 1,
         2000 through June 2, 2000 and November 1, 1999 through June 2, 2000,
         respectively. In 1999, Agilent purchased products from HP for the
         amount of $47 million and $108 million in the three and nine months
         ended July 31, 1999. Purchases from HP at cost for internal use totaled
         $29 million and $63 million in the three and nine months ended July 31,
         1999.

         Agilent's costs and expenses during the three and nine months ended
         July 31, 1999 included allocations from HP for centralized research
         and development, legal, accounting, employee benefits, real estate,
         insurance services, information technology services, treasury and
         other HP corporate and infrastructure costs. These allocations were
         determined on bases that HP and Agilent considered to be a
         reasonable reflection of the utilization of services provided or the
         benefit received by Agilent. The allocation methods included
         relative sales, headcount, square footage, transaction processing
         costs, adjusted operating expenses and others. Allocated costs
         included in the accompanying condensed consolidated statements of
         earnings for the three and nine months ended July 31, 1999 follow.

<TABLE>
<CAPTION>
                                                        Three Months       Nine Months
                                                       Ended July 31,     Ended July 31,
                                                            1999             1999
                                                       -------------      -------------
                                                                (in millions)

<S>                                                    <C>                <C>
         Costs of products and services.............       $ 52              $ 147
         Research and development...................         37                108
         Selling, general and administrative........        112                324
</TABLE>

         Agilent has entered into interim service level agreements with HP
         covering the provision of various services, including information
         technology, financial, accounting, building, legal and other services
         by HP to Agilent or, in some circumstances, vice versa. These services
         are generally being provided for fees equal to the actual direct and
         indirect costs of providing the services plus 5%. The interim service
         level agreements generally have a term of two years or less from the
         date of separation from HP. However, some interim service level
         agreements, including those for building services and information
         technology services, may be extended beyond the initial two-year
         period. If these agreements are extended, their terms will change so
         that the lessor will receive fair market rental value for the rental
         component of the building services and the cost plus 10% for
         information technology and other services and non-rental components of
         building services. The total cost of services Agilent received from HP
         was approximately $41 million and




                                       10
<PAGE>

         $267 million in the periods from May 1, 2000 through June 2, 2000 and
         November 1, 1999 through June 2, 2000, respectively. The total cost
         of services HP received from Agilent was approximately $9 million
         and $95 million in the same periods, respectively.

         For purposes of governing certain of the ongoing relationships between
         Agilent and HP at and after November 1, 1999 (the separation date) and
         to provide for an orderly transition, Agilent and HP have entered into
         various agreements. A brief description of each of the agreements
         follows. Each of these agreements were filed as exhibits to Agilent's
         Registration Statement on Form S-1.

         MASTER SEPARATION AND DISTRIBUTION AGREEMENT. The separation agreement
         contains the key provisions relating to the separation, Agilent's
         initial funding, initial public offering and the distribution. The
         agreement lists the documents and items that the parties had to deliver
         in order to accomplish the transfer of assets and liabilities from HP
         to Agilent, effective on the separation date. The agreement also
         contains conditions that had to occur prior to the initial public
         offering and the distribution. The parties also entered into ongoing
         covenants that survive the transactions, including covenants to
         establish interim service level agreements, exchange information,
         notify each other of changes in accounting principles and resolve
         disputes in particular ways.

         GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT. The General Assignment and
         Assumption Agreement identifies the assets that HP transferred to
         Agilent and the liabilities that Agilent assumed from HP in the
         separation. In general, the assets that were transferred and the
         liabilities that were assumed are those that appear on the condensed
         consolidated balance sheet at October 31, 1999, after adjustment for
         certain assets and liabilities that were retained by HP.

         INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT. Effective as of the
         separation date, Agilent and HP each released the other from any
         liabilities arising from events occurring on or before the
         separation date. The agreement also contains provisions governing
         indemnification. In general, Agilent and HP will each indemnify the
         other from all liabilities arising from its business, any of its
         liabilities, any of its contracts or a breach of the

                                       11
<PAGE>

         separation agreement. In addition, HP and Agilent will each indemnify
         the other against liability for specified environmental matters.
         Agilent reimbursed HP for the cost of any insurance coverage from the
         separation date to the distribution date.

         EMPLOYEE MATTERS AGREEMENT. The Employee Matters Agreement allocates
         responsibility for, and liability related to, the employment of those
         employees of HP who have become Agilent employees. The agreement also
         contains provisions describing Agilent's benefit and equity plans.
         Agilent established employee benefit plans comparable to those of HP
         for its active, inactive and former employees. However, in certain
         cases, certain of its employees will continue to participate in the HP
         benefit plans. The transfer to Agilent of employees at certain of HP's
         international operations, and of certain pension and employee benefit
         plans, may not take place until Agilent receives consents or approvals
         or has satisfied other applicable requirements.

         TAX SHARING AGREEMENT. The tax sharing agreement provides for HP's and
         Agilent's obligations concerning various tax liabilities. The tax
         sharing agreement provides that HP generally will pay, and indemnify
         Agilent if necessary, for all federal, state, local and foreign taxes
         relating to Agilent's business for any taxable period ending prior to
         November 1, 1999. In addition, the tax sharing agreement provides that
         HP and Agilent will make payments between them such that the amount of
         taxes to be paid by HP and Agilent will be determined, subject to
         specified adjustments, as if HP and Agilent and each of their
         subsidiaries included in HP's consolidated tax returns had filed their
         own consolidated, combined or unitary tax return for that period. For
         U.S. federal income tax purposes, such consolidated return period is
         November 1, 1999 through June 2, 2000.

         The tax sharing agreement allocates responsibility for various taxes
         arising from restructurings related to the spinoff between HP and
         Agilent. In addition, Agilent will bear 18% of unanticipated taxes
         related to the distribution where neither party is at fault.

         In addition, the tax sharing agreement provides that Agilent will
         indemnify HP for any taxes arising out of the failure of the
         distribution or certain of the transactions related to it to qualify as
         tax free as a result of actions taken, or the failure to take required
         actions, by Agilent. Specifically, Agilent is required under the tax
         sharing agreement to comply with the representations made to the
         Internal Revenue Service, or the IRS, in connection with the private
         letter ruling that has been issued to HP from the IRS regarding the
         tax-free nature of the distribution of Agilent's stock by HP to HP's
         stockholders.

         The tax sharing agreement further provides for cooperation with respect
         to certain tax matters, the exchange of information and the retention
         of records which may affect the income tax liability of either party.

         REAL ESTATE MATTERS AGREEMENT. The Real Estate Matters Agreement
         addresses real estate matters relating to the HP leased and owned
         properties that HP transferred to or shares with Agilent. The agreement
         describes the manner in which HP transferred to or shares with Agilent
         various leased and owned properties. The Real Estate Matters Agreement
         also provided that all costs required to effect the transfers,
         including landlord consent fees, landlord attorneys' fees, title
         insurance fees and transfer taxes, were paid by HP.



                                       12
<PAGE>

         MASTER IT SERVICE LEVEL AGREEMENT. The Master IT Service Level
         Agreement governs the provision of information technology services
         by HP and Agilent to each other, on an interim basis, until November
         1, 2001, unless extended for specific services or otherwise
         indicated in the agreement. The services include data processing and
         telecommunications services, such as voice telecommunications and
         data transmission. Specified charges for such services are generally
         intended to allow the providing company to recover the direct and
         indirect costs of providing the services, plus 5% until November 1,
         2001, and such costs plus 10% thereafter. The Master IT Service
         Level Agreement also covers the provision of certain additional
         information technology services identified from time to time after
         the separation date that were inadvertently or unintentionally
         omitted from the specified services, or that are essential to
         effectuate an orderly transition under the separation agreement, so
         long as the provision of such services would not significantly
         disrupt the providing company's operations or significantly increase
         the scope of the agreement.

         In addition, the Master IT Service Level Agreement provides for the
         replication of some computer systems, including hardware, software,
         data storage or maintenance and support components. Generally, the
         party needing the replicated system bears the costs and expenses of
         replication. Generally, the party purchasing new hardware or licensing
         new software bears the costs and expenses of purchasing the new
         hardware or obtaining the new software licenses.

         INTELLECTUAL PROPERTY AGREEMENTS. The Master Technology Ownership
         and License Agreement, the Master Patent Ownership and License
         Agreement, the Master Trademark Ownership and License Agreement and
         the ICBD Technology Ownership and License Agreement together are
         referred to as the Intellectual Property Agreements. Under the
         Intellectual Property Agreements, HP transferred to Agilent its
         rights in specified patents, specified trademarks and other
         intellectual property related to Agilent's current business and
         research and development efforts. HP and Agilent each are licensed
         under the other's patents issued on patent applications with
         effective filing dates before November 1, 2004, subject to field of
         use restrictions. HP and Agilent are also licensed to use technology
         that has been disclosed to such licensed company or that is in the
         licensed company's possession as of the separation date, with
         certain limitations. The agreements include certain rights to
         sublicense for both parties. Agilent is licensed to use some HP
         trademarks, and this license is royalty-bearing after five years.

         ENVIRONMENTAL MATTERS AGREEMENT. HP has agreed to retain and indemnify
         Agilent for liabilities associated with properties transferred to
         Agilent which are undergoing environmental investigation and
         remediation and for which HP has accrued a reserve as of the separation
         date. The purpose of the Environmental Matters Agreement is to address,
         in a general way, HP's and Agilent's rights and obligations with
         respect to that investigation and remediation.

     10. Restructuring, Asset Impairment and Other Charges

         Subsequent to July 31, 2000, Agilent announced a reorganization of its
         healthcare solutions business. The reorganization will involve a
         workforce reduction of approximately 650 employees (including
         approximately 450 regular and 200 temporary employees) located in
         the United States, Asia Pacific

                                       13
<PAGE>

         and Europe.

         During the three months ended July 31, 1999, Agilent recognized an
         impairment loss of $51 million related to a building that was under
         construction for the intended purpose of housing manufacturing
         operations for eight-inch CMOS semiconductor wafers. Agilent has an
         active plan to sell the building.

         During 1998, management committed to transfer the production of
         eight-inch semiconductor wafers to a third-party contractor. The
         restructuring costs included $85 million related to non-cash asset
         impairments primarily for equipment. Of the equipment impairment
         charge, $39 million was attributable to equipment abandoned at the time
         of the charge and written down to its net realizable value. An
         additional $46 million was attributable to equipment that remained in
         service for a transition period. Agilent has sold all of this equipment
         as of July 31, 2000.

     11. Segment Information

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

         <TABLE>
         <CAPTION>
                                                    Test and      Semiconductor    Healthcare     Chemical      Total
                                                   Measurement       Products       Solutions     Analysis     Segments
                                                   -----------       --------       ---------     --------     --------
                                                                      (in millions)
         <S>                                       <C>            <C>              <C>            <C>            <C>
         Three months ended July 31, 2000:
         External revenue ................            $1,514            $591          $319         $246       $2,670
         Internal revenue ................                --              13            --           --           13
                                                      ------            ----          ----         ----       ------
         Total net revenue ...............            $1,514            $604          $319         $246       $2,683
                                                      ======            ====          ====         ====       ======
         Earnings(loss) from operations ..            $  162            $ 99          ($40)        ($ 8)      $  213
                                                      ======            ====          ====         ====       ======

         Three months ended July 31, 1999:

         External revenue ................            $1,003            $457          $372         $255       $2,087
         Internal revenue ................                 1              14             1           --           16
                                                      ------            ----          ----         ----       ------
         Total net revenue ...............            $1,004            $471          $373         $255       $2,103
                                                      ======            ====          ====         ====       ======
         Earnings from operations ........            $  122            $ 16          $ 41         $ 36       $  215
                                                      ======            ====          ====         ====       ======
         </TABLE>


         THE FOLLOWING TABLE RECONCILES THE SEGMENT INFORMATION ABOVE TO
         AGILENT, AS REPORTED

<TABLE>
<CAPTION>
                                                                                             Three Months Ended
                                                                                                   July 31,
                                                                                             2000            1999
                                                                                             ----            ----
                                                                                                (in millions)
<S>                                                                                          <C>            <C>
         Net revenue:
            Total reportable segments' net revenue.......................................... $2,683         $2,103
            Elimination of internal revenue.................................................    (13)           (16)
                                                                                             ------         ------
               Total net revenue, as reported............................................... $2,670         $2,087
                                                                                             ======         ======

         Earnings before taxes:
            Total reportable segments' earnings from operations.............................   $213           $215
            Corporate and unallocated.......................................................     (3)           (20)
            Other income (expense), net.....................................................     28             12
                                                                                             ------         ------
               Total earnings before taxes, as reported.....................................   $238           $207
                                                                                             ======         ======
</TABLE>




                                       14

<PAGE>

<TABLE>
<CAPTION>
                                                      Test and      Semiconductor     Healthcare      Chemical          Total
                                                    Measurement       Products        Solutions       Analysis         Segments
                                                    -----------       --------        ---------       --------         --------
                                                                                (in millions)
<S>                                                  <C>             <C>               <C>            <C>             <C>
         Nine months ended July 31, 2000:
         External revenue ...............            $4,060            $1,535         $1,057             $749            $7,401
         Internal revenue ...............                --                33             --               --                33
                                                      ------            ------         ------             ----            ------
         Total net revenue ..............            $4,060            $1,568         $1,057             $749            $7,434
                                                     ======            ======         ======             ====            ======
         Earnings(loss) from operations .            $  479            $  188         $  (53)            $  6            $  620
                                                     ======            ======         ======             ====            ======

         Nine months ended July 31, 1999:
         External revenue ...............            $2,856            $1,230         $1,043             $754            $5,883
         Internal revenue ...............                 4                26              1               --                31
                                                     ------            ------         ------             ----            ------
         Total net revenue ..............            $2,860            $1,256         $1,044             $754            $5,914
                                                     ======            ======         ======             ====            ======
         Earnings from operations .......            $  273            $   81            $86             $ 99            $  539
                                                     ======            ======         ======             ====            ======
</TABLE>


         THE FOLLOWING TABLE RECONCILES THE SEGMENT INFORMATION ABOVE TO
         AGILENT, AS REPORTED

<TABLE>
<CAPTION>
                                                                                                  Nine Months Ended
                                                                                                       July 31,
                                                                                                  2000           1999
                                                                                                  ----           ----
                                                                                                   (in millions)
<S>                                                                                               <C>            <C>
         Net revenue:
            Total reportable segments' net revenue.........................................       $7,434         $5,914
            Elimination of internal
                  revenue..................................................................          (33)           (31)
                                                                                                  ------         ------
               Total net revenue, as reported..............................................       $7,401         $5,883
                                                                                                  ======         ======

         Earnings before taxes:

            Total reportable segments' earnings from operations............................         $620           $539
            Corporate and unallocated......................................................          (25)            (3)
            Other income (expense), net....................................................          101             27
                                                                                                  ------         ------
               Total earnings before taxes, as reported....................................         $696           $563
                                                                                                  ======         ======
</TABLE>

         Corporate and unallocated expenses primarily relate to employee related
         benefit programs. The expenses for these programs are recorded by the
         segments at a pre-determined rate and are adjusted at the corporate
         level to reflect the actual rate. This adjustment is not allocated to
         the segments. Corporate and unallocated expenses also include certain
         unallocated depreciation and goodwill amortization.



                                       15
<PAGE>

         Item 2. Management's Discussion and Analysis of Financial Condition and
         Results of Operations

         THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
         CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED
         ELSEWHERE IN THIS FORM 10-Q. THE FOLLOWING DISCUSSION CONTAINS
         FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. WE USE
         WORDS SUCH AS "ANTICIPATES," "BELIEVES," "PLANS," "EXPECTS," "FUTURE,"
         "INTENDS," "MAY," "WILL," "SHOULD," "ESTIMATES," "PREDICTS,"
         "PROJECTS," "POTENTIAL," "CONTINUE" AND SIMILAR EXPRESSIONS TO IDENTIFY
         FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY
         FROM THE RESULTS CONTEMPLATED BY THESE FORWARD-LOOKING STATEMENTS DUE
         TO CERTAIN FACTORS, INCLUDING THOSE DISCUSSED BELOW IN "FACTORS THAT
         MAY AFFECT FUTURE RESULTS" IN THIS FORM 10-Q.

         Overview

         On March 2, 1999, Hewlett-Packard announced a plan to create a separate
         company, subsequently named Agilent Technologies, Inc. (Agilent), that
         comprised Hewlett-Packard's test and measurement, semiconductor
         products, healthcare solutions and chemical analysis businesses,
         related portions of Hewlett-Packard Laboratories, and associated
         infrastructure.

         We were incorporated in Delaware in May 1999 as a wholly-owned
         subsidiary of Hewlett-Packard. Our businesses historically were
         operated as internal units of Hewlett-Packard. In November 1999,
         Hewlett-Packard transferred to us a majority of the assets and
         liabilities relating to our businesses and also provided us with
         cash funding of approximately $1.1 billion. Hewlett-Packard retained
         some of our assets and liabilities including some of our accounts
         receivable and accounts payable, accrued payroll and related items
         and taxes payable, except deferred taxes, and transferred to us some
         of the assets and liabilities related to its business, including
         some of the accounts receivable, accounts payable and other
         liabilities of Agilent Technologies Japan, Ltd. (formerly called
         Hewlett-Packard Japan, Ltd.). In addition, Hewlett-Packard
         transferred to us $521 million to fund our acquisition of Yokogawa
         Electric Corporation's 25% minority equity ownership of Agilent
         Technologies Japan, Ltd. In December 1999, Hewlett-Packard provided
         us with cash funding of approximately $200 million based on our and
         Hewlett-Packard's balance sheets as of October 31, 1999.

         After the completion of our initial public offering in November 1999,
         Hewlett-Packard owned approximately 84.1% of our outstanding common
         stock. On April 7, 2000, Hewlett-Packard announced that its board of
         directors had declared a stock dividend of all of Hewlett-Packard's
         shares in Agilent. The dividend was distributed on June 2, 2000, to
         Hewlett-Packard shareholders of record as of 5 p.m. Eastern Daylight
         Time on May 2, 2000. The distribution was on the basis of 0.3814 of an
         Agilent share for each Hewlett-Packard common share outstanding.
         Hewlett-Packard and we have entered into various agreements related to
         certain ongoing relationships between the companies. For a brief
         description of these agreements, see Note 9 of Item 1. In addition, we
         have entered into agreements with Hewlett-Packard under which
         Hewlett-Packard will provide services to us during a transition period
         which began November 1, 1999. The agreements relate primarily to
         information technology, finance, accounting, legal and building
         services. Under these agreements, we generally reimburse
         Hewlett-Packard for its cost of the

                                       16
<PAGE>

         service plus 5%. The transition period varies depending on the
         agreement but is generally less than two years. Some of the agreements,
         including those for building services and information technology
         services, may be extended beyond the initial transition period. If
         these agreements are extended, we will reimburse Hewlett-Packard at its
         cost plus 10% for information technology services and most other
         services and at negotiated market rates for building services. The
         agreements do not necessarily reflect the costs of obtaining the
         services from unrelated third parties or of our providing the
         applicable services ourselves. However, we believe that purchasing
         these services from Hewlett-Packard provides us with an effective means
         of obtaining these services during the transition period. In addition,
         we provide some transition services to Hewlett-Packard, for which we
         are reimbursed at our cost plus 5%.

         Basis of Presentation

         The financial information presented in this Form 10-Q is not indicative
         of our consolidated financial position, results of operations or cash
         flows in the future nor is it necessarily indicative of what our
         consolidated financial position, results of operations or cash flows
         would have been had we been a separate, stand-alone entity for the 1999
         periods presented. The 1999 financial information presented in this
         Form 10-Q does not reflect the many significant changes that occurred
         in our funding and operations as a result of our becoming a stand-alone
         entity and our initial public offering.

         Cyclical Business

         Several significant industries and markets into which we sell our
         products and services are cyclical, causing a corresponding impact on
         our financial results. Shifts in the semiconductor market, electronics
         industry and computer industry, as well as rapidly shifting global
         economic conditions, have had significant impacts on our businesses.
         Our revenue and operating results for the three and nine months ended
         July 31, 2000 compared to the corresponding periods in 1999 have
         improved as a result of an upturn in the semiconductor industry.
         Additionally, as a capital equipment provider, our revenue is driven by
         the capital expenditure budgets and spending patterns of our customers
         who often delay or accelerate purchases in reaction to variations in
         their business. For instance, increasing pressure on hospitals from the
         balanced-budget amendment in the United States has slowed capital
         purchasing of our hospital customers. We expect some portions of our
         businesses to remain cyclical in the future. Given that a high
         proportion of our costs are fixed, variability in revenue as a result
         of these business cycles could disproportionately affect our quarterly
         and annual operating results.

         Economic Conditions in Asia

         Our revenue and operating results for the three months and nine months
         ended July 31, 2000 compared to the corresponding periods in 1999 have
         improved in part as a result of the upturn in Asian economies.

         Impact of Foreign Currencies

         We sell our products in many countries and a substantial portion of
         our sales and a portion of our costs and expenses are denominated in
         foreign currencies, particularly the Japanese yen and the Euro which
         was introduced on January 1, 1999 to replace 11 European national
         currencies. In 1999, our currency exposures were hedged as part of

                                       17
<PAGE>

         Hewlett-Packard's global hedging program, which was designed to
         minimize exposure to foreign currency fluctuations. We implemented a
         similar hedging program upon our separation from Hewlett-Packard in
         November 1999.

         Recent Accounting Pronouncements

         In accordance with Statement of Financial Accounting Standards No. 115,
         "Accounting for Certain Investments in Debt and Equity Securities," we
         recorded $6 million of accumulated other comprehensive losses to
         stockholders' equity in the nine months ended July 31, 2000. Prior
         period financial statements were not materially impacted by the
         statement.

         In June 1998, the Financial Accounting Standards Board issued Statement
         of Financial Accounting Standards No. 133, "Accounting for Derivative
         Instruments and Hedging Activities." This statement establishes
         accounting and reporting standards for derivative instruments and
         requires recognition of all derivatives as assets or liabilities in our
         balance sheet and measurement of those instruments at fair value. The
         statement is effective for years beginning after June 15, 2000. We will
         adopt the standard no later than the first quarter of our fiscal year
         2001 and we are in the process of determining the impact that adoption
         will have on our consolidated financial statements.

         In December 1999, the Securities and Exchange Commission (SEC)
         issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
         Financial Statements." In June 2000, SEC delayed the implementation
         date of this Staff Accounting Bulletin. This Staff Accounting Bulletin
         is effective no later than the fourth quarter of our fiscal year 2001.
         We are in the process of determining the impact that adoption will
         have on our consolidated financial statements.

         Results of Operations

         Our results of operations for the three and nine months ended July 31,
         2000 and 1999 in dollars and as a percentage of total net revenue
         follow.

<TABLE>
<CAPTION>
                                                                        Three Months Ended July 31,
                                                            ------------------------------------------------------
                                                                                             As a Percentage of
                                                                                         Total Net Revenue Dollars
                                                                                         -------------------------
                                                               2000       1999                 2000      1999
                                                               ----       ----                 ----      ----
                                                               (in millions)
<S>                                                            <C>        <C>             <C>            <C>
           Net revenue:
             Products......................................     $2,331     $1,788                87.3      85.7
             Services and other............................        339        299                12.7      14.3
                                                                ------     ------               -----     -----
                Total net revenue..........................      2,670      2,087               100.0     100.0
                                                                ------     ------               -----     -----
           Costs and expenses:
             Cost of products..............................      1,186        926                44.4      44.4
             Cost of services and other....................        183        177                 6.8       8.5
             Research and development......................        318        242                11.9      11.6
             Selling, general and administrative...........        773        547                29.0      26.2
                                                                ------     ------               -----     -----
              Total costs and expenses.....................      2,460      1,892                92.1      90.7
                                                                ------     ------               -----     -----
           Earnings from operations........................        210        195                 7.9       9.3
           Other income (expense), net.....................         28         12                 1.0       0.6
                                                                ------     ------               -----     -----
           Earnings before taxes...........................        238        207                 8.9       9.9
           Provision for taxes.............................         83         72                 3.1       3.4
                                                                ------     ------               -----     -----
           Net earnings....................................       $155       $135                 5.8       6.5
                                                                ======     ======               =====     =====

           Cost of products as a percentage of products
              revenue......................................                                      50.9      51.8
           Cost of services and other as a percentage of
              services and other revenue...................                                      54.0      59.2
</TABLE>


                                       18
<PAGE>

<TABLE>
<CAPTION>
                                                                         Nine Months Ended July 31,
                                                            ------------------------------------------------------
                                                                                            As a Percentage of
                                                                                         Total Net Revenue Dollars
                                                                                         -------------------------
                                                                 2000       1999                2000      1999
                                                                 ----       ----                ----      ----
                                                               (in millions)
<S>                                                             <C>        <C>           <C>              <C>
           Net revenue:
              Products.....................................     $6,426     $5,005                86.8      85.1
              Services and other...........................        975        878                13.2      14.9
                                                                ------     ------               -----     -----
                 Total net revenue.........................      7,401      5,883               100.0     100.0
                                                                ------     ------               -----     -----
           Costs and expenses:
              Cost of products.............................      3,214      2,581                43.4      43.9
              Cost of services and other...................        576        515                 7.8       8.7
              Research and development.....................        904        705                12.2      12.0
              Selling, general and administrative..........      2,112      1,546                28.6      26.3
                                                                ------     ------               -----     -----
                 Total costs and expenses..................      6,806      5,347                92.0      90.9
                                                                ------     ------               -----     -----
           Earnings from operations........................        595        536                 8.0       9.1
           Other income (expense), net.....................        101         27                 1.4       0.5
                                                                ------     ------               -----     -----
           Earnings before taxes...........................        696        563                 9.4       9.6
           Provision for taxes.............................        244        197                 3.3       3.4
                                                                ------     ------               -----     -----
           Net earnings....................................       $452       $366                 6.1       6.2
                                                                ======     ======               =====     =====

           Cost of products as a percentage of products
              revenue......................................                                      50.0      51.6
           Cost of services and other as a percentage of
              services and other revenue...................                                      59.1      58.7
</TABLE>

         Certain amounts in the condensed consolidated statements of earnings
         for the three and nine months ended July 31, 1999 have been
         reclassified to conform to the current period's presentation.

         NET REVENUE

         Total net revenue increased 27.9 percent to $2.7 billion and 25.8
         percent to $7.4 billion in the three and nine months ended July 31,
         2000, respectively, compared to $2.1 billion and $5.9 billion in the
         same periods in 1999. The increases were the result of a number of
         factors, including continued growth in revenue from the
         communications and electronics markets. This was especially evident
         with the robust demand in our test and measurement and semiconductor
         products businesses. In addition, increased demand in Asia continued
         to contribute to overall revenue growth. In the three months ended
         July 31, 2000, the increase was partially offset by declines in
         revenue in our healthcare solutions and our chemical analysis
         businesses.

         United States revenue increased 19.0 percent to $1.2 billion and 19.7
         percent to $3.2 billion in the three and nine months ended July 31,
         2000, respectively, compared to $1.0 billion and $2.7 billion in the
         same periods in 1999. International revenue increased




                                       19
<PAGE>

         35.9 percent to $1.5 billion and 30.8 percent to $4.2 billion in the
         three and nine months ended July 31, 2000, respectively, compared to
         $1.1 billion and $3.2 billion in the same periods in 1999. The
         higher net revenue growth abroad was primarily attributable to
         increased demand in Asia, particularly Taiwan, Korea and Japan.
         There was minimal currency impact on net revenue growth in the three
         and nine months ended July 31, 2000.

         In the three months ended July 31, 2000, revenue from products
         increased 30.4 percent while revenue from services and other
         increased 13.4 percent, compared to the same period in 1999. In the
         first nine months of 2000, revenue from products increased 28.4
         percent while revenue from services and other increased 11.0
         percent, compared to the same period in 1999. The higher product
         revenue growth was primarily due to the growing communications and
         electronics markets, a strengthening of the semiconductor industry
         and increased demand in Asia. Generally, service revenue growth
         follows behind product revenue as our installed base of products
         increases and warranty periods expire. Additionally, there is no
         service revenue associated with our semiconductor products business.

         Demand for our products and services in the communications and
         electronics markets has continued to be strong in the three months
         ended July 31, 2000. This increase in demand has continued to put
         pressure on our manufacturing capacity, particularly on products for
         the wireless and fiber optic markets. We are continuing to work on
         increasing capacity to meet this demand but we may experience
         additional capacity constraints or parts shortages in the future.

         EARNINGS FROM OPERATIONS

         Earnings from operations increased 7.7 percent to $210 million and 11.0
         percent to $595 million in the three and nine months ended July 31,
         2000, respectively, compared to $195 million and $536 million in the
         same periods in 1999. The increases were primarily due to strong
         results in the test and measurement and semiconductor businesses,
         partially offset by weak performance in our healthcare solutions and
         chemical analysis businesses, which included the on-going costs
         associated with operating on our own as well as planned investments
         in life sciences.

         Cost of products and services, as a percentage of net revenue,
         decreased 1.6 percentage points, to 51.3 percent, in the three
         months ended July 31, 2000, compared to 52.9 percent in the same
         period in 1999. Cost of products and services, as a percentage of
         net revenue, decreased 1.4 percentage points, to 51.2 percent, in
         the nine months ended July 31, 2000, compared to 52.6 percent in the
         same period in 1999. Adjusted for the 1999 impairment loss of $51
         million related to a building under construction for the
         manufacturing of eight-inch CMOS semiconductor wafers, cost of
         products and services as a percentage of net revenue increased 0.9
         percentage points and decreased 0.6 percentage points in the three
         and nine months ended July 31, 2000, respectively. When adjusted for
         the 1999 impairment loss, the increase in cost of products and
         services, as a percentage of revenue, in the three months ended July
         31, 2000 resulted from higher costs as a percentage of revenue in
         our healthcare solutions and chemical analysis businesses partially
         offset by lower costs as a percentage of revenue in our
         semiconductor products business. When adjusted for the 1999
         impairment loss, the decrease in the nine months


                                       20
<PAGE>

         ended July 31, 2000 was primarily attributable to higher volumes in
         the test and measurement and semiconductor products businesses as
         well as a more profitable product mix within the semiconductor
         products business.

         Operating expenses as a percentage of net revenue increased 3.1
         percentage points to 40.9 percent and 2.5 percentage points to 40.8
         percent in the three and nine months ended July 31, 2000, respectively,
         compared to 37.8 percent and 38.3 percent in the same periods in 1999.
         The increases were primarily due to higher infrastructure costs related
         to operating on our own as well as higher marketing costs, including
         branding expenses. These increases were partially offset in the
         three months ended July 31, 2000 by reduced costs associated with
         stock appreciation rights.

         Research and development expenses increased 31.4 percent and 28.2
         percent in the three and nine months ended July 31, 2000,
         respectively, compared to the same periods in 1999. The increases
         reflect ongoing investments in developing new products and new
         technologies in the areas of wireless, networking and the life
         sciences. Selling, general and administrative expenses increased
         41.3 percent and 36.6 percent in the three and nine months ended
         July 31, 2000, respectively, compared to the same periods in 1999.
         The increases were primarily due to higher infrastructure costs
         related to operating on our own as well as higher marketing costs,
         including branding expenses. These increases were partially offset
         by reduced costs associated with stock appreciation rights.

         Costs related to our operating as a separate, stand-alone entity
         include significant incremental expenditures. We expect operating
         expenses for the remainder of 2000 compared to 1999, primarily
         infrastructure costs and branding expenses, to be higher as a result
         of our stand-alone operations.

         OTHER INCOME (EXPENSE), NET

         Other income (expense), net increased $16 million to income of $28
         million and increased $74 million to income of $101 million in the
         three and nine months ended July 31, 2000, respectively. The increases
         were primarily due to approximately $4 million and $29 million of gains
         on sales of equity investments that no longer supported our business
         strategies for the three and nine months ended July 31, 2000,
         respectively, and interest income earned on the initial cash funding
         received from Hewlett-Packard.

         PROVISION FOR TAXES

         Our effective tax rate was 35.0 percent in the three and nine months
         ended July 31, 2000 and 1999. The rate is based on estimates of our
         earnings before taxes in the various jurisdictions in which we
         operate throughout the world and the amount of acquisition-related
         charges. While changes in our mix of earnings before taxes in these
         tax jurisdictions and balances of acquisition-related charges can
         cause our effective tax rate to fluctuate, we currently expect our
         effective tax rate to remain at 35.0 percent throughout the
         remainder of 2000.

                                       21
<PAGE>

         TEST AND MEASUREMENT

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED JULY 31,
                                                                ---------------------------
                                                                    2000         1999
                                                                    ----         ----
                                                                  (dollars in millions)
<S>                                                             <C>           <C>
          Net revenue..........................................   $1,514       $1,003
          Earnings from operations.............................      162          122
              As a percentage of net revenue...................     10.7%        12.2%
</TABLE>

<TABLE>
<CAPTION>
                                                                NINE MONTHS ENDED JULY 31,
                                                                --------------------------
                                                                    2000         1999
                                                                    ----         ----
                                                                  (dollars in millions)
<S>                                                             <C>           <C>
          Net revenue...........................................  $4,060       $2,856
          Earnings from operations..............................     479          273
              As a percentage of net revenue....................    11.8%         9.6%
</TABLE>

         NET REVENUE

         Net revenue from our test and measurement business increased 50.9
         percent to $1.5 billion and 42.2 percent to $4.1 billion in the
         three and nine months ended July 31, 2000, respectively, compared to
         $1.0 billion and $2.9 billion in the same periods in 1999. The
         increases were attributable to very strong growth in the markets
         served by our fast-growing optical, wireless and data-networking
         products. Revenue growth was extremely strong in our semiconductor
         test system business as well as for our products that test printed
         circuit board assemblies as contract manufacturing customers added
         capacity to meet demand and new technologies and capabilities were
         introduced. The growth rate for the nine months ended July 31, 2000
         was affected in part by a comparison with the comparable year-ago
         period that was negatively impacted by weakness in the semiconductor
         industry and the decreased demand in Asia.

         In the three months ended July 31, 2000, our net revenue from products
         increased 56.7 percent while our net revenue from services increased
         22.9 percent, compared to the same period in 1999. In the nine months
         ended July 31, 2000, our net revenue from products increased 47.6
         percent while our net revenue from services increased 16.2 percent,
         compared to the same period in 1999. The higher product revenue growth
         was primarily due to the growing communications market and the
         increased demand in Asia. Generally, service revenue growth follows
         product revenue as our installed base of products increases and
         warranty periods expire.

         EARNINGS FROM OPERATIONS

         Earnings from operations from our test and measurement business
         increased 32.8 percent to $162 million and 75.5 percent to $479 million
         in the three and nine months ended July 31, 2000, respectively,
         compared to $122 million and $273 million in the same periods in 1999.
         The increase for the three months ended July 31, 2000 resulted from
         increased revenue, partially offset by higher cost of products and
         services as a percentage of revenue. The increase for the nine months
         ended July 31, 2000 resulted from higher revenue and lower operating
         expenses as a percentage of revenue.

         Cost of products and services as a percentage of net revenue increased
         1.6 percentage points and decreased 0.7 percentage points in the three
         and nine months ended July 31, 2000, respectively, as compared to the
         same periods in 1999. The increase in the three months ended July 31,
         2000 was substantially attributable to manufacturing inefficiencies
         incurred in our efforts to meet customer demands, including the use of
         other equipment manufacturers' products as well as premium prices for
         scarce components. The slight decrease for the nine months ended
         July 31, 2000 is primarily due to higher revenue.

         Operating expenses as a percentage of net revenue decreased 0.2
         percentage points and 1.5 percentage points in the three and nine
         months




                                       22
<PAGE>

         ended July 31, 2000, respectively, compared to the same periods of
         1999. The decreases were due to higher net revenue partially offset by
         higher expenses.

         Research and development expense increased 34.8 percent and 26.5
         percent in the three and nine months ended July 31, 2000,
         respectively, compared to the same periods in 1999. The increases
         reflect our continuing investments in new product development.
         Selling, general and administrative expense increased 57.1 percent
         and 42.2 percent in the three and nine months ended July 31, 2000,
         respectively, compared to the same periods in 1999. The increases
         were primarily due to higher infrastructure costs related to
         operating on our own as well as higher selling and marketing costs
         including branding expenses.

         SEMICONDUCTOR PRODUCTS

<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED JULY 31,
                                                                ---------------------------
                                                                    2000         1999
                                                                    ----         ----
                                                                  (dollars in millions)
<S>                                                             <C>           <C>
          Net revenue...........................................    $591         $457
          Earnings from operations..............................      99           16
              As a percentage of net revenue....................    16.8%         3.5%
</TABLE>

<TABLE>
<CAPTION>
                                                                NINE MONTHS ENDED JULY 31,
                                                                --------------------------
                                                                    2000         1999
                                                                    ----         ----
                                                                  (dollars in millions)

<S>                                                             <C>           <C>
          Net revenue...........................................  $1,535       $1,230
          Earnings from operations..............................     188           81
              As a percentage of net revenue....................    12.2%         6.6%
</TABLE>

         NET REVENUE

         Net revenue from our semiconductor products business increased 29.3
         percent to $591 million and 24.8 percent to $1.5 billion in the
         three and nine months ended July 31, 2000, respectively, compared to
         $457 million and $1.2 billion in the same periods in 1999. In the
         three months ended January 31, 2000 net revenue growth was driven by
         strong growth in all semiconductor products except ASICs, where
         growth was affected by the planned phaseout of microprocessor sales
         and temporary supply chain adjustments by Hewlett-Packard. Wireless
         and networking components achieved excellent growth in the three
         months ended July 31, 2000. Networking component growth was driven
         by fiber-optic transceivers and high-speed integrated circuits
         tailored for Metro Area Network (MAN) and Gigabit Ethernet Local
         Area Network (LAN) applications. Imaging products for digital
         cameras and optical mice also achieved particularly strong growth in
         the three months ended July 31, 2000. Similarly, wireless, networking
         and imaging components led the strong net revenue growth for the
         nine months ended July 31, 2000. As a percentage of net revenue for
         the semiconductor products business, revenue from sales to Hewlett-
         Packard, consisting primarily of ASICs and motion control products,
         was 24.5 percent and 27.3 percent for the three and nine months ended
         July 31, 2000, respectively, compared to 37.4 percent and 37.1 percent
         for the same periods in 1999.

         In the nine months ended July 31, 2000, we expanded our existing joint
         venture relationship with Royal Philips Electronics, N.V. and
         transferred a portion of our light-emitting diode (LED) business into
         the joint venture. LEDs are used for various lighting and display
         purposes. Since we do not have a majority ownership interest in the




                                       23
<PAGE>

         joint venture, the revenue, costs and expenses of the business
         transferred to the joint venture are no longer consolidated in our
         results. Instead, we record our portion of the joint venture's net
         earnings or loss in other income (expense), net, which in the first
         nine months of 2000, was minimal. Adjusting the 1999 base for revenues
         relating to the LED business, net revenue growth would be 36.2 percent
         and 30.5 percent for the three and nine months ended July 31, 2000,
         respectively.

         EARNINGS FROM OPERATIONS

         Earnings from operations from our semiconductor products business,
         adjusted for the 1999 impairment loss of $51 million, increased 47.8
         percent to $99 million and 42.4 percent to $188 million in the three
         and nine months ended July 31, 2000, respectively. The increases
         resulted from higher net revenue and lower cost of products as a
         percentage of net revenue, partially offset by higher operating
         expenses.

         Cost of products as a percentage of net revenue, adjusted for the
         1999 impairment loss of $51 million, decreased 6.7 percentage points
         and 5.2 percentage points in the three and nine months ended July
         31, 2000, respectively. The decreases were primarily driven by
         increased volumes and a more favorable product mix. In addition, the
         transfer of a portion of our LED business to the joint venture
         contributed to the decrease.

         Operating expenses as a percentage of net revenue increased 4.6
         percentage points and 3.8 percentage points in the three and nine
         months ended July 31, 2000, respectively, compared to the same periods
         in 1999. The increases were primarily due to infrastructure costs
         related to operating on our own and increased research and development
         investments.

         Research and development expense increased 51.0 percent and 37.4
         percent in the three and nine months ended July 31, 2000,
         respectively, compared to the same periods in 1999. The increases
         reflect increased investments in the fast-growing fiber optics,
         high-speed networking, and the imaging businesses. Selling, general
         and administrative expenses increased 62.0 percent and 50.7 percent
         in the three and nine months ended July 31, 2000, respectively,
         compared to the same periods in 1999. The increases were primarily
         due to higher infrastructure costs related to operating on our own
         as well as higher selling and marketing costs, including branding
         expenses.

         HEALTHCARE SOLUTIONS

<TABLE>
<CAPTION>
                                                                 THREE MONTHS ENDED JULY 31,
                                                                 ---------------------------
                                                                      2000         1999
                                                                      ----         ----
                                                                    (DOLLARS IN MILLIONS)
<S>                                                              <C>             <C>
         Net revenue..........................................        $319         $372
         Earnings (loss)  from operations.....................         (40)          41
              As a percentage of net revenue..................       (12.5)%       11.0%
</TABLE>



                                       24
<PAGE>

<TABLE>
<CAPTION>
                                                                  NINE MONTHS ENDED JULY 31,
                                                                  --------------------------
                                                                      2000         1999
                                                                      ----         ----
                                                                    (dollars in millions)
<S>                                                               <C>           <C>
         Net revenue..........................................      $1,057       $1,043
         Earnings (loss)  from operations.....................         (53)          86
              As a percentage of net revenue..................        (5.0)%        8.2%
</TABLE>

         NET REVENUE

         Net revenue from our healthcare solutions business decreased 14.2
         percent to $319 million and increased 1.3 percent to $1.1 billion in
         the three and nine months ended July 31, 2000, respectively,
         compared to $372 million and $1.0 billion in the same periods in
         1999. The decrease in net revenue in the three months ended July 31,
         2000 was primarily due to a slow-down in capital expenditure by U.S.
         hospitals, as hospitals felt continued financial pressure to control
         costs. In addition, customers had pulled purchases into 1999 and
         into the three months ended January 31, 2000 to avoid potential Year
         2000 issues. In the three months ended July 31, 2000, our net revenue
         from products decreased 18.0 percent while our net revenue from
         services increased 3.0 percent compared to the same period in 1999.
         In the nine months ended July 31, 2000, our net revenue from
         products decreased 0.5 percent while our net revenue from services
         increased 9.1 percent, compared to the same period in 1999. Service
         revenue growth generally follows product revenue based on our
         installed base of products. The service revenue increases are due to
         the strong product installations through the first quarter of 2000.

         EARNINGS (LOSS) FROM OPERATIONS

         The loss from operations from our healthcare solutions business was $40
         million and $53 million in the three and nine months ended July 31,
         2000, respectively, compared to earnings from operations of $41 million
         and $86 million in the same periods in 1999. The decline in earnings
         from operations in the three months ended July 31, 2000 was due to
         disappointing net revenue as well as higher costs and expenses. The
         decline in earnings from operations in the nine months ended July 31,
         2000 was primarily due to higher costs and expenses.

         Cost of products and services as a percentage of net revenue
         increased by 9.5 percentage points and 5.5 percentage points in the
         three and nine months ended July 31, 2000, respectively, compared to
         the same periods in 1999. The increase in the three months ended
         July 31, 2000 was primarily attributable to lower net revenue
         resulting from lower volumes and higher discounts. The increase in
         the nine months ended July 31, 2000 was primarily due to an
         unfavorable product mix and higher discounts.

                                       25
<PAGE>

         Operating expenses as a percentage of net revenue increased 14.1
         percentage points and 7.8 percentage points in the three and nine
         months ended July 31, 2000, respectively, compared to the same
         periods in 1999. The increases were primarily due to lower revenues
         and higher infrastructure costs and branding expenses related to
         operating on our own.

         Research and development expense decreased 8.1 percent and increased
         10.7 percent in the three and nine months ended July 31, 2000,
         respectively, compared to the same periods in 1999. The decrease in
         the three months ended July 31, 2000 is due to recently completed
         product introductions and an emphasis on reducing discretionary
         costs. The increase for the nine months ended July 31, 2000 is
         largely a result of our on-going development projects including the
         new automatic external defibrillator, ultrasound imaging, and
         web-enabled wireless patient monitoring devices. Selling, general
         and administrative expenses increased 27.2 percent and 25.6 percent
         in the three and nine months ended July 31, 2000, respectively,
         compared to the same periods in 1999. The increases were primarily
         due to higher infrastructure costs and branding expenses related to
         operating on our own.

         Subsequent to July 31, 2000, Agilent announced a reorganization of its
         healthcare solutions business. The reorganization will involve a
         regular workforce reduction of approximately 650 employees
         (including approximately 450 regular and 200 temporary employees)
         located in the United States, Asia Pacific and Europe. Agilent
         expects to incur a one-time charge of approximately $25 million in
         the fourth quarter of 2000. Agilent expects its workforce reduction
         and other programs to result in annual savings of approximately $80
         million starting in 2001. Based on the current market environment
         and the anticipated restructuring, we anticipate an operating loss
         for our healthcare solutions business for the remainder of 2000.

         CHEMICAL ANALYSIS

<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED JULY 31,
                                                                  ---------------------------
                                                                       2000         1999
                                                                       ----         ----
                                                                     (DOLLARS IN MILLIONS)
<S>                                                               <C>             <C>
           Net revenue..........................................       $246         $255
           Earnings (loss) from operations......................         (8)          36
              As a percentage of net revenue....................       (3.3)%       14.1%
</TABLE>

<TABLE>
                                                                  NINE MONTHS ENDED JULY 31,
                                                                  --------------------------
                                                                       2000         1999
                                                                       ----         ----
                                                                     (DOLLARS IN MILLIONS)
<S>                                                               <C>            <C>
           Net revenue...........................................      $749         $754
           Earnings from operations..............................         6           99
              As a percentage of net revenue.....................       0.8%        13.1%
</TABLE>

         NET REVENUE

         Net revenue from our chemical analysis business decreased 3.5
         percent to $246 million and decreased 0.7 percent to $749 million in
         the three and nine months ended July 31, 2000, respectively,
         compared to $255 million and $754 million in the same periods in
         1999. The decreases in net revenue were due to decreased sales in
         the chemical, environmental and petrochemical markets partially
         offset by increased sales in bioscience products. Service revenue
         decreased 4 percent and 1 percent in the three and nine months ended
         July 31, 2000, compared to the same periods in 1999.

         EARNINGS (LOSS) FROM OPERATIONS

         Our chemical analysis business generated a loss from operations of
         $8 million in the three months ended July 31, 2000 compared to
         earnings from operations of $36 million in the same period in 1999.
         Earnings from operations decreased to $6 million in the nine months
         ended July 31, 2000 compared to $99 million in the same period in
         1999. The decreases were primarily due to lower revenue, higher
         infrastructure costs and branding expenses related to the costs of
         operating on our own as well as planned investments in life sciences
         to launch new products.

         Cost of products and services as a percentage of net revenue increased
         by 5.5 percentage points and 1.9 percentage points for the three and
         nine months ended July 31, 2000, respectively, compared to the same
         periods in 1999. The increases




                                       26
<PAGE>

         were primarily due to lower volumes and start-up investments for
         bioscience products.

         Operating expenses as a percentage of net revenue increased 11.9
         percentage points and 10.4 percentage points in the three and nine
         months ended July 31, 2000, respectively, compared to the same periods
         of 1999. The increases resulted primarily from increased life science
         investments and higher infrastructure costs and branding expenses
         related to operating on our own.

         Research and development expense increased 31.8 percent and 34.9
         percent in the three and nine months ended July 31, 2000, respectively,
         compared to the same periods in 1999. The increases reflect increased
         new product development programs in life science products. Selling,
         general and administrative expense increased 27.9 percent and 26.9
         percent in the three and nine months ended July 31, 2000, respectively,
         compared to the same periods in 1999. The increases were primarily due
         to higher infrastructure costs and branding expenses related to
         operating on our own.

         FINANCIAL CONDITION

         LIQUIDITY AND CAPITAL RESOURCES  We believe that the Company's
         financial position remains strong, with cash and cash equivalents
         and short-term investments of $703 million at July 31, 2000.

         Prior to November 1, 1999, cash receipts associated with our
         businesses were transferred to Hewlett-Packard on a daily basis and
         Hewlett-Packard provided funds to cover our disbursements. Accordingly,
         we reported no cash or cash equivalents at October 31, 1999. In
         accordance with our separation agreement with Hewlett-Packard, as of
         November 1, 1999, Hewlett-Packard retained some of our assets and
         liabilities and Hewlett-Packard transferred to us some of the assets
         and liabilities related to its business. In November and December 1999,
         Hewlett-Packard made cash payments to us totaling $1.3 billion to fund
         our working capital and other needs of our operations as a separate,
         stand-alone entity. In addition, Hewlett-Packard transferred
         approximately $0.5 billion to fund our acquisition of Yokogawa Electric
         Corporation's 25% minority equity ownership of Agilent Technologies
         Japan, Ltd. The net proceeds of our initial public offering of $2.1
         billion were received in November 1999 and immediately distributed to
         Hewlett-Packard as a dividend.

         Of the total $1.8 billion received from Hewlett-Packard, $1.1 billion
         was classified as net cash provided by financing activities and $0.7
         billion was classified among several categories as net cash provided by
         operating activities in the condensed consolidated statement of cash
         flows for the nine months ended July 31, 2000.

         We generated cash flows from operations of $415 million during the
         nine months ended July 31, 2000, compared to $426 million for the
         corresponding period of 1999. The decrease in cash flows from
         operating activities in the nine months ended July 31, 2000 was
         mainly attributed to an increase in accounts receivable and inventory
         balances offset by increases in net earnings, accounts payable and
         accrued tax balances.

                                       27
<PAGE>

         Net cash used for investing activities in the nine months ended
         July 31, 2000 was $966 million, compared to $258 million for the
         corresponding period of 1999. The increase in investing activity was
         primarily due to our first and second payments for the acquisition
         of Yokogawa's 25% minority equity ownership of Agilent Technologies
         Japan, Ltd., our acquisition of SAFCO Technologies, Inc. and an
         increase in investments in property, plant and equipment to expand
         our manufacturing capacity to meet customer demands.

         Our liquidity is affected by many factors, some of which are based on
         the normal ongoing operations of our businesses and some of which arise
         from uncertainties related to global economies. We believe that the
         cash funding we received from Hewlett-Packard together with cash
         generated from operations and our unused lines of credit will be
         sufficient to satisfy our working capital, capital expenditure and
         research and development requirements for the foreseeable future.
         However, we may require or choose to obtain additional debt or equity
         financing in the future. We cannot be assured that additional
         financing, if needed, will be available on favorable terms.

         FACTORS THAT MAY AFFECT FUTURE RESULTS

         IF WE DO NOT INTRODUCE NEW PRODUCTS AND SERVICES IN A TIMELY MANNER,
         OUR PRODUCTS AND SERVICES WILL BECOME OBSOLETE, AND OUR OPERATING
         RESULTS WILL SUFFER.

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

              -        properly identify customer needs;

              -        price our products competitively;

              -        innovate and develop new technologies and
                       applications;

              -        successfully commercialize new technologies in a
                       timely manner;

              -        manufacture and deliver our products in sufficient
                       volumes on time; and

              -        differentiate our offerings from our competitors'
                       offerings.

         Many of our products are used by our customers to develop, test and
         manufacture their new products. We therefore must anticipate industry
         trends and develop products in advance of the commercialization of our
         customers' products. Development of new products generally requires a
         substantial investment before we can determine the commercial viability
         of these innovations. Our other businesses will encounter similar
         challenges. In our healthcare business, new technologies that we
         develop may not be quickly accepted because of industry-specific
         factors such as the need for




                                       28
<PAGE>

         regulatory clearance, entrenched patterns of clinical practice,
         uncertainty over third-party reimbursement and clinicians' fears of
         malpractice suits. We would suffer competitive harm if we dedicate a
         significant amount of resources to the development of products and
         technologies that do not achieve broad market acceptance.

         IF DEMAND FOR OUR PRODUCTS EXCEEDS OUR MANUFACTURING CAPACITY, OUR
         REVENUES AND EARNINGS MAY SUFFER.

         Demand for our products has put increased pressure on our
         manufacturing capacity, especially in the wireless and fiber optic
         areas. If we are not able to increase our manufacturing capacity in
         the time necessary to meet demand, or if demand exceeds our
         expectations, we may experience insufficient manufacturing capacity.
         If our manufacturing capacity does not keep pace with product
         demand, we will not be able to fulfill orders in a timely manner
         which in turn may have a negative effect on our revenues and
         earnings and overall business.

         FAILURE OF SUPPLIERS TO DELIVER SUFFICIENT QUANTITIES OF PARTS IN A
         TIMELY MANNER COULD ADVERSELY IMPACT OUR OPERATIONS.

         Certain parts may be available only from a single supplier or a
         limited number of suppliers. In addition, suppliers may cease
         manufacturing certain components that are difficult to replace
         without significant reengineering of our products. Suppliers may
         also extend lead times, limit supplies or increase prices due to
         capacity constraints or other factors. Our results may be materially
         and adversely impacted if we do not receive sufficient parts to meet
         our requirements in a timely manner.

         ECONOMIC, POLITICAL AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES
         AND OPERATIONS, PARTICULARLY IN KOREA AND JAPAN, COULD ADVERSELY AFFECT
         OUR SALES.

         Since we sell our products worldwide, our businesses are subject to
         risks associated with doing business internationally. We anticipate
         that revenue from international operations will continue to represent a
         substantial portion of our total revenue. In addition, many of our
         manufacturing facilities and suppliers are located outside the United
         States. Accordingly, our future results could be harmed by a variety of
         factors, including:

              -        changes in foreign currency exchange rates;

              -        changes in a specific country's or region's political
                       or economic conditions, particularly in emerging markets;

              -        trade protection measures and import or export
                       licensing requirements;

              -        potentially negative consequences from changes in tax
                       laws;

              -        difficulty in staffing and managing widespread
                       operations;

              -        differing labor regulations;

              -        differing protection of intellectual property; and

              -        unexpected changes in regulatory requirements.

         We do a substantial portion of our businesses in Korea and Japan, which
         have been subject to increased economic instability in recent years.
         Our businesses declined in 1998 when Korea and Japan experienced
         economic difficulties. The recurrence of weakness in these economies or
         weakness in other international economies could have a significant
         negative effect on our future operating results.



                                       29
<PAGE>

         FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE OUR STOCK
         PRICE TO DECLINE.

         Given the nature of the markets in which we participate, we cannot
         reliably predict future revenue and profitability, and unexpected
         changes may cause us to adjust our operations. A high proportion of our
         costs are fixed, due in part to our significant sales, research and
         development and manufacturing costs. Thus, relatively small declines in
         revenue could disproportionately affect our operating results in a
         quarter. For example, when our revenue declined in the second half of
         1998 as a result of the financial crisis in Asia, it caused significant
         negative fluctuations in our operating results.

         Other factors that could affect our quarterly operating results
         include:

              -        demand for and market acceptance of our products;

              -        competitive pressures resulting in lower selling
                       prices;

              -        adverse changes in the level of economic activity in
                       the United States and other major regions in which we do
                       business;

              -        adverse changes in industries, such as semiconductors
                       and electronics, on which we are particularly dependent;

              -        changes in the relative portion of our revenue
                       represented by our various products and customers;

              -        unanticipated delays or problems in the introduction
                       of new products;

              -        our competitors' announcements of new products,
                       services or technological innovations;

              -        increased costs of raw materials or supplies;

              -        changes in the timing of product orders; and

              -        our inability to forecast revenue in a given quarter
                       from large system sales.

         THE CURRENT TECHNOLOGY LABOR MARKET IS VERY COMPETITIVE, AND OUR
         BUSINESSES WILL SUFFER IF WE ARE NOT ABLE TO HIRE AND RETAIN SUFFICIENT
         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 and expand
         our businesses. Competition for qualified personnel in the technology
         area is intense, and we operate in several geographic locations where
         labor markets are particularly competitive, including the Silicon
         Valley region of Northern California where our headquarters and central
         research and development laboratories are located. Although we believe
         we offer competitive salaries and benefits, certain of our businesses
         have had to increase spending in order to retain personnel. We also
         believe we have benefited from Hewlett-Packard's name and reputation as
         an employer in the past. To the extent we do not obtain similar popular
         recognition, our ability to attract and retain personnel could be
         harmed.



                                       30
<PAGE>

         OUR OPERATING RESULTS COULD BE HARMED IF THE INDUSTRIES INTO WHICH WE
         SELL OUR PRODUCTS ARE IN DOWNWARD CYCLES.

         Several significant industries and markets into which we sell our
         products are cyclical. For example, in 1998 the operating results of
         our test and measurement and semiconductor products businesses were
         harmed by downturns in the semiconductor market. From time to time, the
         electronics industry has also experienced significant downturns, often
         in connection with, or in anticipation of, maturing product cycles and
         declines in general economic conditions. In addition, the computer
         industry is subject to seasonal and cyclical fluctuations in demand for
         its products. These industry downturns have been characterized by
         diminished product demand, excess manufacturing capacity and the
         subsequent accelerated erosion of average selling prices. In addition,
         the healthcare industry has experienced a significant increase in cost
         pressures resulting from hospital consolidation and the trend by
         insurance companies to reduce payments to healthcare providers. Any
         significant downturn in our customers' markets or in general economic
         conditions would likely result in a reduction in demand for our
         products and services and could harm our businesses.

         OUR SEMICONDUCTOR TECHNOLOGY LICENSING AND SUPPLY ARRANGEMENTS WITH
         HEWLETT-PACKARD LIMIT OUR ABILITY TO SELL TO OTHER COMPANIES AND COULD
         RESTRICT OUR ABILITY TO EXPAND OUR BUSINESSES.

         We do not have a license under Hewlett-Packard's patents, patent
         applications and invention disclosures for, with some exceptions,
         inkjet products, printer products (including printer supplies,
         accessories and components), document scanners and computing products.
         In addition, our ICBD Technology Ownership and License Agreement, which
         generally covers integrated circuit technology that is used in
         integrated circuits for Hewlett-Packard's printers, scanners and
         computers, provides that for a period of three years in some cases and
         10 years in other cases we are prohibited, with some exceptions, from
         using this integrated circuit technology for the development and sale
         of integrated circuits for use in inkjet products, printer products
         (including printer supplies, accessories and components), document
         scanners and computing products to third parties other than
         Hewlett-Packard.

         Although we have entered into a supply agreement for the sale to
         Hewlett-Packard of these kinds of integrated circuits, the supply
         agreement does not require Hewlett-Packard to purchase a minimum amount
         of product from us. In the event that Hewlett-Packard reduces its
         purchase of our integrated circuits, we would be unable to address this
         reduction through sales of these kinds of integrated circuits for these
         types of products to other customers.



                                       31
<PAGE>

         IF DEMAND FOR HEWLETT-PACKARD'S PRINTER, WORKSTATION AND SERVER
         PRODUCTS DECLINES, OR IF HEWLETT-PACKARD CHOOSES A DIFFERENT SUPPLIER,
         OUR SEMICONDUCTOR PRODUCTS BUSINESS REVENUE WILL DECLINE SIGNIFICANTLY.

         Historically, our semiconductor products business has sold products
         to Hewlett-Packard and has engaged in product development efforts
         with divisions of Hewlett-Packard. For the three and nine months
         ended July 31, 2000, Hewlett-Packard accounted for 5.6% and 6.0%,
         respectively, of our total net revenue and 24.5% and 27.3%,
         respectively, of our semiconductor products business' net revenue.
         In comparison, for the three and nine months ended July 31, 1999,
         Hewlett-Packard accounted for 10.2% and 10.0%, respectively, of our
         total net revenue and 37.4% and 37.1%, respectively, of our
         semiconductor products business' net revenue.

         OUR ABILITY TO COMPETE FOR HEWLETT-PACKARD'S BUSINESS MAY SUFFER AS A
         RESULT OF OUR SEPARATION DUE TO DECREASED ACCESS TO HEWLETT-PACKARD'S
         RESEARCH AND DEVELOPMENT STRATEGY, TECHNOLOGY PLANS, FUTURE PRODUCT
         FEATURES AND PRODUCT SUPPLY NEEDS.

         In the past, we have benefited from our access to Hewlett-Packard's
         research and development strategy, technology plans, future product
         features and product supply needs in competing for Hewlett-Packard's
         business. If our competitors gain better access to Hewlett-Packard
         as a result of our separation, our competitors may be able to
         develop products that better meet the future needs of
         Hewlett-Packard, decreasing the competitiveness of our products. In
         addition, we have taken advantage of collaborative relationships
         with some of Hewlett-Packard's businesses and we may not continue to
         enjoy all of the benefits of these collaborative relationships.

         WE MAY FACE SIGNIFICANT COSTS IN ORDER TO COMPLY WITH LAWS AND
         REGULATIONS IN THE MANUFACTURE, PROCESSING AND DISTRIBUTION OF
         CHEMICALS, AND, IF WE FAIL TO COMPLY, WE COULD BE SUBJECT TO CIVIL OR
         CRIMINAL PENALTIES OR BE PROHIBITED FROM DISTRIBUTING OUR PRODUCTS.

         Some of our chemical analysis business' products are used in
         conjunction with chemicals whose manufacture, processing and
         distribution are regulated by the United States 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 and
         distribution of these chemicals to these laws, and adapt to regulatory
         requirements in all countries as these requirements change. If we fail




                                       32
<PAGE>

         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.

         IF WE FAIL TO MAINTAIN SATISFACTORY COMPLIANCE WITH THE FOOD AND DRUG
         ADMINISTRATION'S REGULATIONS, WE MAY BE FORCED TO RECALL PRODUCTS AND
         CEASE THEIR MANUFACTURE AND DISTRIBUTION, AND WE COULD BE SUBJECT TO
         CIVIL OR CRIMINAL PENALTIES.

         The medical device products produced by our healthcare solutions
         business are subject to regulation by the United States Food and Drug
         Administration (FDA) and similar international agencies. Their
         regulations govern a wide variety of product activities from design and
         development to labeling, manufacturing, promotion, sales and
         distribution. For example, we received a warning letter from the FDA in
         1996 alleging non-compliance with the FDA's quality system regulations
         at one of our facilities. The FDA's quality systems regulation includes
         elaborate design, testing, control, documentation and other quality
         assurance requirements. We had to apply considerable resources to
         address the FDA's concerns. We believe we have resolved the issues
         identified in the FDA's letter and the FDA has concurred with our
         assessment, but we cannot assure you that the FDA will not identify
         other areas of noncompliance. If we fail to maintain satisfactory
         compliance with the FDA's quality system and other regulations, we may
         have to recall products and cease their manufacture and distribution.
         In addition, we could be subject to fines or criminal prosecution.

         In addition, our chemical analysis products are used in the drug design
         and production processes to test compliance with the Toxic Substances
         Control Act, the Federal Food, Drug and Cosmetic Act and similar
         regulations. Therefore, we must continually adapt our chemical analysis
         products to changing regulations.

         COST CONTAINMENT MEASURES IN THE HEALTHCARE INDUSTRY AND THE EFFECT OF
         ANY HEALTHCARE REFORM COULD HARM OUR PROFITABILITY.

         Our healthcare customers rely on third-party payors, such as government
         programs and private health insurance plans, to reimburse some or all
         of the cost of the procedures in which our products are used. The
         continuing efforts of government, insurance companies and other payors
         of healthcare costs to contain or reduce those costs could lead our
         customers to reduce or eliminate purchases of our products. Likewise,
         legislative proposals to reform healthcare or reduce government
         programs could result in lower prices for or rejection of our products.
         The cost containment measures that healthcare providers are instituting
         and the effects of any healthcare reform, both in the United States and
         internationally, could harm our ability to operate profitably.

         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.

         Some of our properties are undergoing remediation by Hewlett-Packard
         for known subsurface contamination. Hewlett-Packard has agreed to
         retain the liability for all known 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,




                                       33
<PAGE>

         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 assure you that Hewlett-Packard will fulfill its
         indemnification or remediation obligations.

         We are indemnifying 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 existing 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.

         ENVIRONMENTAL CONTAMINATION CAUSED BY ONGOING OPERATIONS COULD SUBJECT
         US TO SUBSTANTIAL LIABILITIES IN THE FUTURE.

         We are responsible for any contamination to our properties arising out
         of our operations following the separation. 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 United States, even if not subject to
         regulations imposed by foreign governments, we may not be aware of all
         conditions that could subject us to liability.

         WE ARE SUBJECT TO LAWS AND REGULATIONS GOVERNING GOVERNMENT CONTRACTS,
         AND OUR FAILURE TO ADDRESS THESE LAWS AND REGULATIONS OR COMPLY WITH
         GOVERNMENT CONTRACTS COULD HARM OUR BUSINESSES.

         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
         terms of government contracts. We have received and are complying with
         formal requests for information by the government regarding our sales
         of products to some of the government agencies with which we have
         contracted. Based on our review to date, we have not found that there
         are any violations of the pertinent laws or regulations relating to
         these contracts. However, these requests may result in legal
         proceedings against us or liability.

         WE AND OUR CUSTOMERS ARE SUBJECT TO VARIOUS OTHER GOVERNMENTAL
         REGULATIONS, AND WE MAY INCUR SIGNIFICANT EXPENSES TO COMPLY WITH THESE
         REGULATIONS AND DEVELOP OUR PRODUCTS TO BE COMPATIBLE WITH THESE
         REGULATIONS.

         Several of our product lines are subject to other significant
         international, federal, state and local, health and safety, packaging,
         product content and labor 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 remedy past violations of these regulations. Any failure




                                       34
<PAGE>

         by us to comply with applicable government regulations could also
         result in cessation of portions or all of our operations, 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 of other agencies such as the
         United States Federal Communications Commission. We also must comply
         with work safety rules. If we fail to adequately address any of these
         regulations, our businesses will be harmed.

         THIRD PARTIES MAY CLAIM WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY,
         AND WE COULD SUFFER SIGNIFICANT LITIGATION OR LICENSING EXPENSES OR BE
         PREVENTED FROM SELLING PRODUCTS.

         Third parties may claim that we are infringing their intellectual
         property rights, and we may be found to infringe those intellectual
         property rights. 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 and services. Moreover, in connection
         with future intellectual property infringement claims, we will only
         have the benefit of asserting counterclaims based on Hewlett-Packard's
         intellectual property portfolio in limited circumstances, and we will
         only be able to offer licenses to Hewlett-Packard's intellectual
         property in order to resolve claims in limited circumstances.

         Any litigation regarding patents or other intellectual property could
         be costly and time-consuming, and divert our management and key
         personnel from our business operations. The complexity of the
         technology involved and the uncertainty of intellectual property
         litigation increases these risks. Claims of intellectual property
         infringement might also require us to enter into costly royalty or
         license agreements. However, we may not be able to obtain royalty or
         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 assure you that these licenses will be available
         in the future on favorable terms or at all. In addition, our position
         with respect to the negotiation of licenses may change as a result of
         our separation from Hewlett-Packard. Our patent cross-license agreement
         with Hewlett-Packard gives us a conditional right to sublicense only a
         portion of Hewlett-Packard's intellectual property portfolio. As a
         result, in negotiating patent cross-license agreements with third
         parties, we may be unable to obtain agreements on terms as favorable as
         we may have been able to obtain if we could sublicense
         Hewlett-Packard's entire intellectual property portfolio.

         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 and trade
         secrets, confidentiality provisions and licensing arrangements to
         establish and protect our proprietary rights. If we fail to




                                       35
<PAGE>

         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 these
         patents or trademark registrations. 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 may lose competitive position in the market before we
         do so. In addition, competitors may design around our technology or
         develop competing technologies. Intellectual property rights may also
         be unavailable or limited in some foreign countries, which could make
         it easier for competitors to capture market share.

         IF OUR FACTORIES OR FACILITIES WERE TO EXPERIENCE CATASTROPHIC LOSS DUE
         TO AN EARTHQUAKE, OUR OPERATIONS WOULD BE SERIOUSLY HARMED.

         Several of our facilities could be subject to a catastrophic loss
         caused by an earthquake due to their location. We have significant
         facilities in areas with above average seismic activity, such as our
         production facilities, headquarters and Agilent Laboratories in
         California and our production facilities in Washington and Japan. 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. Agilent
         self-insures against such losses and does not carry catastrophic
         insurance policies to cover potential losses resulting from
         earthquakes.

         OUR NEW NAME IS NOT YET WIDELY RECOGNIZED AS A BRAND IN THE
         MARKETPLACE, AND AS A RESULT OUR PRODUCT SALES COULD SUFFER.

         The loss of the "Hewlett-Packard" brand name may hinder our ability
         to establish new relationships. Our new brand "Agilent" is not as
         widely recognized, so we may not have the ability to attract some
         customers who would have purchased our products if they had recognized
         that Agilent Technologies, Inc. is the successor company to
         Hewlett-Packard in certain industry segments. The new name "Agilent
         Technologies, Inc." may also hinder our ability to recruit employees
         in certain countries.

         WE CURRENTLY STILL USE SOME OF HEWLETT-PACKARD'S INFORMATION
         SYSTEMS, AND WE ARE IN THE PROCESS OF DEVELOPING OUR OWN INFORMATION
         SYSTEMS.

         We currently use Hewlett-Packard's systems to support a portion of our
         operations, mainly customer support and networks. We have an agreement
         with Hewlett-Packard for Hewlett-Packard to continue to provide these
         information services to us for the next fourteen months. During
         this time period, while we are developing our own systems, we will be
         dependent on Hewlett-Packard for the provision of these information
         technology services that are critical to running our businesses. Many
         of the systems we currently use are proprietary to Hewlett-Packard and
         are very complex.

         We are in the process of creating our own information systems to




                                       36
<PAGE>

         eventually replace Hewlett-Packard's systems. We may not be
         successful in implementing these systems and transitioning data from
         Hewlett-Packard's systems to ours. We are implementing new enterprise
         resource planning software applications to manage some of our
         information systems.

         THE TRANSITIONAL SERVICES BEING PROVIDED TO US BY HEWLETT-PACKARD MAY
         NOT BE SUFFICIENT TO MEET OUR NEEDS, AND WE MAY PAY INCREASED COSTS TO
         REPLACE THESE SERVICES AFTER OUR AGREEMENTS WITH HEWLETT-PACKARD
         EXPIRE.

         Hewlett-Packard continues to provide certain transitional services to
         us, including services related to:

                  -        information technology systems;

                  -        buildings and facilities; and

                  -        finance and accounting.

         These services may not continue to be provided at the same level as
         when we were part of Hewlett-Packard, and we may not be able to
         obtain the same benefits. We also lease and sublease certain office
         and manufacturing facilities from Hewlett-Packard. These
         transitional service and leasing arrangements generally have a term
         of less than two years following the separation. After the
         expiration of these various arrangements, we may not be able to
         replace the transitional services or enter into appropriate leases
         in a timely manner or on terms and conditions, including cost, as
         favorable as those we receive from Hewlett-Packard.

         These agreements were made in the context of a parent-subsidiary
         relationship and were negotiated in the overall context of our
         separation from Hewlett-Packard. As a result, some of these agreements
         may have terms and conditions that are less specific than some
         agreements that are negotiated at arms-length. The prices charged to us
         under these agreements may be different from the prices that we may be
         required to pay third parties for similar services or the costs of
         similar services if we undertake them ourselves.

         OUR HISTORICAL 1999 FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF
         OUR RESULTS AS A SEPARATE COMPANY.

         The historical 1999 financial information we have included has been
         carved out from Hewlett-Packard's consolidated financial statements and
         does not reflect what our financial position, results of operations and
         cash flows would have been, had we been a separate, stand-alone entity
         during the periods presented. Hewlett-Packard did not account for us
         as, and we were not operated as, a single stand-alone entity for the
         1999 periods presented. In addition, the historical information is not
         necessarily indicative of what our




                                       37
<PAGE>

         results of operations, financial position and cash flows will be in
         the future. We did not make adjustments to reflect the many
         significant changes that occurred in our cost structure, funding and
         operations as a result of our separation from Hewlett-Packard,
         including changes in our employee base, changes in our tax
         structure, increased costs associated with reduced economies of
         scale, increased marketing expenses related to establishing a new
         brand identity and increased costs associated with being a public,
         stand-alone company.

         WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH
         HEWLETT-PACKARD WITH RESPECT TO OUR PAST AND ONGOING RELATIONSHIPS THAT
         COULD HARM OUR BUSINESS OPERATIONS.

         Conflicts of interest may arise between Hewlett-Packard and us in a
         number of areas relating to our past and ongoing relationships,
         including:

              -      labor, tax, employee benefit, indemnification and other
                     matters arising from our separation from Hewlett-Packard;

              -      intellectual property matters;

              -      employee retention and recruiting;

              -      major business combinations involving us;

              -      the nature, quality and pricing of transitional services
                     Hewlett-Packard has agreed to provide us; and

              -      business opportunities that may be attractive to both
                     Hewlett-Packard and us.

         Nothing restricts Hewlett-Packard from competing with us other than
         some restrictions on the use of patents licensed to Hewlett-Packard by
         us.



                                       38
<PAGE>


         Item 3. Quantitative and Qualitative Disclosures about Market Risk

         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 United States dollar. Prior to
         fiscal 2000, our exposure to exchange rate risks had been managed on an
         enterprise-wide basis as part of Hewlett-Packard's risk management
         strategy. This strategy utilized derivative financial instruments,
         including forwards, swaps and purchased options, to hedge certain
         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 implemented a similar hedging
         program upon our separation from Hewlett-Packard in November 1999. We
         do not currently and do not intend to utilize derivative financial
         instruments for trading purposes.

         We performed a sensitivity analysis assuming a hypothetical 10% adverse
         movement in foreign exchange rates to the hedging contracts and the
         underlying exposures described above. As of July 31, 2000, 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.


                                       39
<PAGE>

PART II - OTHER INFORMATION

Item 1.        Legal Proceedings

We are involved in lawsuits, claims, investigations and proceedings, including
patent, commercial and environmental matters, which arise in the ordinary
course of business. 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. There have been no material developments in
the litigation previously reported in our Form 10-K for the period ended
October 31, 1999.



                                       40

<PAGE>

Item 6.        Exhibits and Reports on Form 8-K

(a)            A list of exhibits is set forth in the Exhibit Index found on
               page 45 of this report.

(b)            Reports on Form 8-K:

               (i)  Form 8-K dated June 5, 2000 reporting under Item 5 "Other
Events" the completion by Hewlett-Packard of the distribution of shares it
owned in Agilent Technologies, Inc.


                   AGILENT TECHNOLOGIES, INC. AND SUBSIDIARIES

                                   SIGNATURE

Pursuant to the requirements 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.
                                       (Registrant)



Dated: September 1, 2000               By: /s/ Robert R. Walker
                                           -----------------------------
                                               Robert R. Walker
                                               Executive Vice President and
                                               Chief Financial Officer



                                       41

<PAGE><PAGE>

                   AGILENT TECHNOLOGIES, INC. AND SUBSIDIARIES

                                  EXHIBIT INDEX

Exhibit Number:                             Description:
--------------                              -----------
      1.         Not applicable.

      2.1        Master Separation and Distribution Agreement between
                 Hewlett-Packard and the Company effective as of August 12,
                 1999. Incorporated by reference from Exhibit 2.1 of the
                 Company's Registration Statement on Form S-1 (Registration
                 No. 333-85249).

      2.2        General Assignment and Assumption Agreement between
                 Hewlett-Packard and the Company. Incorporated by reference
                 from Exhibit 2.2 of the Company's Registration Statement on
                 Form S-1 (Registration No. 333-85249).

      2.3        Master Technology Ownership and License Agreement between
                 Hewlett-Packard and the Company. Incorporated by reference
                 from Exhibit 2.3 of the Company's Registration Statement on
                 Form S-1 (Registration No. 333-85249).

      2.4        Master Patent Ownership and License Agreement between
                 Hewlett-Packard and the Company. Incorporated by reference
                 from Exhibit 2.4 of the Company's Registration Statement on
                 Form S-1 (Registration No. 333-85249).

      2.5        Master Trademark Ownership and License Agreement between
                 Hewlett-Packard and the Company. Incorporated by reference
                 from Exhibit 2.5 of the Company's Registration Statement on
                 Form S-1 (Registration No. 333-85249).

      2.6        ICBD Technology Ownership and License Agreement between
                 Hewlett-Packard and the Company. Incorporated by reference
                 from Exhibit 2.6 of the Company's Registration Statement on
                 Form S-1 (Registration No. 333-85249).

      2.7        Employee Matters Agreement between Hewlett-Packard and the
                 Company. Incorporated by reference from Exhibit 2.7 of the
                 Company's Registration Statement on Form S-1 (Registration
                 No. 333-85249).

      2.8        Tax Sharing Agreement between Hewlett-Packard and the
                 Company. Incorporated by reference from Exhibit 2.8 of the
                 Company's Registration Statement on Form S-1 (Registration
                 No. 333-85249).

      2.9        Master IT Service Level Agreement between Hewlett-Packard
                 and the Company. Incorporated by reference from Exhibit 2.9
                 of the Company's Registration Statement on Form S-1
                 (Registration No. 333-85249).

      2.10       Real Estate Matters Agreement between Hewlett-Packard and
                 the Company. Incorporated by reference from Exhibit 2.10
                 of the Company's Registration Statement on Form S-1
                 (Registration No. 333-85249).

      2.11       Environmental Matters Agreement between Hewlett-Packard and
                 the Company. Incorporated by reference from Exhibit 2.11 of
                 the Company's Registration Statement on Form S-1
                 (Registration No. 333-85249).

      2.12       Master Confidential Disclosure Agreement between
                 Hewlett-Packard and the Company. Incorporated by reference
                 from Exhibit 2.12 of the Company's Registration Statement on
                 Form S-1 (Registration No. 333-85249).

      2.13       Indemnification and Insurance Matters Agreement between
                 Hewlett-Packard and the Company. Incorporated by reference
                 from Exhibit 2.13 of the Company's Registration Statement on
                 Form S-1 (Registration No. 333-85249).

      2.14       Non U.S. Plan. Incorporated by reference from Exhibit 2.14
                 of the Company's Registration Statement on Form S-1
                 (Registration No. 333-85249).

      2.15       Five Year Credit Agreement as dated November 5, 1999.
                 Incorporated by reference from Exhibit 2.15 of the Company's
                 Registration Statement on Form S-1 (Registration No.
                 333-85249).

      2.16       364-Day Credit Arrangement dated as of November 5, 1999.
                 Incorporated by reference from Exhibit 2.16 of the Company's
                 Registration Statement on Form S-1 (Registration No.
                 333-85249).

      3.1        Amended and Restated Certificate of Incorporation.
                 Incorporated by reference from Exhibit 3.1 of the Company's
                 Registration Statement on Form S-1 (Registration No.
                 333-85249).

      3.2        Bylaws. Incorporated by reference from Exhibit 3.2 of the
                 Company's Registration Statement on Form S-1 (Registration No.
                 333-85249).

      4.         None.

      5-9.       Not applicable.

      10.1       Employee Stock Purchase Plan. Incorporated by reference from
                 Exhibit 10.1 of the Company's Registration Statement on Form
                 S-1 (Registration No. 333-85249).*

      10.2       1999 Stock Plan. Incorporated by reference from Exhibit 10.2
                 of the Company's Registration Statement on Form S-1
                 (Registration No. 333-85249).*

      10.3       1999 Non-Employee Director Stock Plan. Incorporated by
                 reference from Exhibit 10.3 of the Company's Registration
                 Statement on Form S-1 (Registration No. 333-85249).*

      10.4       Yokogawa Electric Corporation and Hewlett-Packard Company
                 Agreement for the Redemption and Sale of Shares and
                 Termination of Joint Venture Relationship. Incorporated by
                 reference from Exhibit 10.4 of the Company's Registration
                 Statement on Form S-1 (Registration No. 333-85249).

      10.5       Form of Indemnification Agreement entered into by the
                 Company with each of its directors and executive officers.
                 Incorporated by reference from Exhibit 10.5 of the Company's
                 Registration Statement on Form S-1 (Registration No.
                 333-85249).*

      10.6       Executive Deferred Compensation Plan. Incorporated by
                 reference from Exhibit 10.6 of the Company's Form 10-K for
                 the period ended October 31, 1999.*

      11.        See Item 4 in Notes to Condensed Consolidated Financial
                 Statements on Page 9.

      12-14.     Not applicable.

      15.        None.

      16-17.     Not applicable.

      18-19.     None.

      20-21.     Not applicable.

      22-24.     None.

      25-26.     Not applicable.

      27.1       Financial Data Schedule.

      28.        Not applicable.

      99.        None.
-----------------------------------------------
      * Indicates management contract or compensatory plan, contract or
arrangement.


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