The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and our Annual Report on Form 10-K. This report contains forward-looking statements that involve risks and uncertainties including, without limitation, statements regarding trends, seasonality, cyclicality and growth in the markets we sell into, our strategic direction, our future effective tax rate and tax valuation allowance, our expectations with respect to the outcome of our current tax audits, earnings from our foreign subsidiaries, remediation activities, new product and service introductions, changes to our manufacturing processes, the use of contract manufacturers, the impact of local government regulations on our ability to pay vendors or conduct operations, our liquidity position and level of debt, our ability to generate cash from operations, growth in our businesses, our investments, the potential impact of adopting new accounting pronouncements, our financial results, our purchase commitments, our contributions to our pension plans, the selection of discount rates and recognition of any gains or losses for our benefit plans, our cost-control activities, our stock repurchase program, our transition to lower-cost regions, our restructuring activities, including our current estimates of the scope, timing and cost of those activities, the acquisition of Varian, Inc. and the existence or length of an economic recovery. Our actual results could differ materially from the results contemplated by these forward-looking statements due to various factors, including those discussed below in "Risks, Uncertainties and Other Factors That May Affect Future Results" and elsewhere in this Form 10-Q.

Basis of Presentation

The financial information presented in this Form 10-Q is not audited and is not necessarily indicative of our future consolidated financial position, results of operations or cash flows. Our fiscal year-end is October 31, and our fiscal quarters end on January 31, April 30 and July 31. Unless otherwise stated, all dates refer to our fiscal year and fiscal periods.

Revisions to Financial Statement Presentation. We have revised our consolidated balance sheet as of October 31, 2008 to correct an error in the classification of deferred tax assets and liabilities. This revision does not impact the consolidated statement of operations or the consolidated statement of cash flows for any period. During the April 30, 2009 quarter-end process, we noted that the October 31, 2008 U.S. deferred tax valuation allowances and certain deferred tax assets/ deferred tax liabilities were misclassified on the balance sheet as a result of improperly applying the jurisdictional netting rules of SFAS No. 109. We have therefore revised our balance sheet as of October 31, 2008 by decreasing other long-term liabilities by $435 million and decreasing other long-term assets by $404 million, decreasing other current assets by $26 million and increasing other accrued liabilities by $5 million.

Executive Summary

Agilent Technologies, Inc. ("we", "Agilent" or the "company") is the world's premier measurement company, providing core bio-analytical and electronic measurement solutions to the communications, electronics, life sciences and chemical analysis industries. Agilent has three primary businesses that are focused on the bio-analytical measurement market, the electronic measurement market and the semiconductor and board test market.

We continued to experience overall weakness in the bio-analytical measurement business; however, the food safety market continued to show improvement and increased revenue in the three and nine months ended July 31, 2009 when compared to last year. For the three and nine months ended July 31, 2009 conditions in our electronic measurement and semiconductor and board test businesses remained depressed with continued weakness across all end markets and regions.

For the three and nine months ended July 31, 2009, total orders were $1,071 million and $3,212 million, respectively, a decrease of 23 percent and 26 percent in comparison to the same periods last year. For the three and nine months ended July 31, 2009, bio-analytical orders decreased 14 percent and 11 percent, respectively, electronic measurement orders decreased 26 percent and 31 percent, respectively, and semiconductor and board test orders decreased 56 percent and 66 percent, respectively, when compared to the same periods last year.

Net revenue of $1,057 million and $3,314 million for the three and nine months ended July 31, 2009, respectively, decreased 27 percent and 23 percent, respectively, from the same periods last year. Bio-analytical revenues decreased 8 percent and 5 percent in the three and nine months ended July 31, 2009, respectively, with foreign currency movements accounting for 4 and 5 percentage points of the revenue decline, respectively. Within bio-analytical measurement, chemical analysis was down 11 percent and 6 percent, in the three and nine months ended July 31, 2009 respectively, with food safety showing continued strength, but other markets down compared to last year. Also within bio-analytical measurement, life science was down 5 percent and 4 percent, in the three and nine months ended July 31, 2009, respectively, compared to the same periods last year with declines in both pharmaceutical and biotechnology markets. Electronic measurement revenues decreased 36 percent and 31 percent in the three and nine months ended July 31, 2009, respectively, when compared to last year. Within electronic measurement, revenues in general purpose test decreased

25 percent in both the three and nine months ended July 31, 2009 when compared to last year. There was some relative strength in the aerospace and defense market, but declines in computer and semiconductor markets. Also within electronic measurement, revenues in communications test decreased 48 percent and 37 percent in the three and nine months ended July 31, 2009, respectively, compared to the same period last year with weakness in all markets. Semiconductor and board test measurement revenues decreased 59 percent and 57 percent in the three and nine months ended July 31, 2009, respectively, with all markets down compared to the same periods last year.

Net loss for the three and nine months ended July 31, 2009 was $19 million and $56 million, respectively, as compared to net income of $169 million and $462 million for the corresponding periods last year. In the nine months ended July 31, 2009, we generated $195 million of cash from operations compared with $498 million generated in the nine months of last year.

We announced restructuring activities in December 2008, February 2009 and March 2009 in response to the deterioration of economic conditions. The restructuring activities were combined under a single restructuring plan and are part of a series of actions being taken by Agilent in response to the current economic situation. In connection with the combined restructuring plan, we expect to record in aggregate approximately $315 million in pre-tax restructuring and other charges related to business and infrastructure cost reduction. Total restructuring and other special charges of $210 million have been incurred in the nine months ended July 31, 2009 with respect to these actions. A significant proportion of these charges has resulted and will continue to result in cash expenditures. When completed, these actions together are expected to result in future annual operating savings of approximately $525 million and workforce reductions of approximately 3,800 regular positions. Of the expected 3,800 reduction in regular positions, approximately 2,000 employees have left Agilent as of July 31, 2009.

On July 26, 2009, Agilent, Varian, Inc. ("Varian"), and Cobalt Acquisition Corp., a direct, wholly-owned subsidiary of Agilent, entered into an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the terms of the Merger Agreement, Varian would become a wholly-owned subsidiary of Agilent. Varian is a leading worldwide supplier of scientific instrumentation and associated consumables for life science and applied market applications. The estimated $1.5 billion total purchase price of Varian includes $52 cash per share of Varian's common stock, the cashing out of in the money stock options (after acceleration) and assumed debt. The transaction is subject to approval by shareholders of Varian and will be completed after achieving customary closing conditions and regulatory approvals, which we expect before calendar year-end.

Looking forward, we face continued challenging business conditions as the global economic environment remains depressed, but we have seen signs that our businesses may have reached the bottom of the downturn. We remain committed to delivering performance consistent with Agilent's operating model. We have announced that in the beginning of the first quarter of 2010, we will report Agilent in three segments: electronic measurement, chemical analysis and life sciences.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with generally accepted accounting principles ("GAAP") in the U.S. The preparation of condensed consolidated financial statements in conformity with GAAP in the U.S. requires management to make estimates, judgments and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, inventory valuation, investment impairments, share-based compensation, retirement and post-retirement benefit plan assumptions, restructuring and asset impairment charges, valuation of long-lived assets and accounting for income taxes; certain of which are described below. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management's best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably likely to occur could materially change the financial statements.

Share-based compensation. The expected stock price volatility assumption is determined using the historical volatility for our stock. We estimate the stock price volatility using the historical volatility of Agilent's stock options over the most recent historical period equivalent to the expected life of stock options. In reaching the decision to move to historical volatility effective November 1, 2008, we considered many factors including the extent to which our options are currently traded and our ability to find traded options in the current market with similar terms and prices to the options we are valuing. A 10 percent increase in our estimated historical volatility from 36 percent to 46 percent would generally increase the value of an award and the associated compensation cost by approximately 23 percent if no other factors were changed.

Goodwill and purchased intangible assets. Agilent reviews goodwill for impairment annually during our fourth fiscal quarter and whenever events or changes in circumstances indicate the carrying value may not be recoverable in accordance with SFAS No.142. As defined in SFAS No. 142, paragraph. 30, a reporting unit is an operating segment, or one level below an operating segment. In accordance with paragraph 30 of SFAS No. 142, we have aggregated components of an operating segment that have similar economic characteristics into our reporting units. We have three reporting units for goodwill impairment testing purposes: electronic measurement, bio-analytical measurement, and semiconductor and board test. We test goodwill for possible impairment by first determining the fair value of the related reporting unit and comparing this value to the recorded net assets of the reporting unit, including goodwill.

The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment, as our businesses operate in a number of markets and geographical regions. We determine the fair value of our reporting units based on an income approach, whereby we calculate the fair value of each reporting unit based on the present value of estimated future cash flows, which are formed by evaluating historical trends, current budgets, operating plans and industry data. We evaluate the reasonableness of the fair value calculations of our reporting units by reconciling the total of the fair values of all of our reporting units to our total market capitalization, taking into account an appropriate control premium. We then compare the carrying value of our reporting units to the fair value calculations based on the income approach. Estimates of the future cash flows associated with the businesses are critical to these assessments. The assumptions used in the fair value calculation change from year to year and include revenue growth rates, operating margins, risk adjusted discount rates and future economic and market conditions. Changes in these assumptions based on changed economic conditions or business strategies could result in material impairment charges in future periods.

The circumstances that could trigger a goodwill impairment could include, but are not limited to, the following items to the extent that management believes the occurrence of one or more would make it more likely than not that we would fail step 1 of the goodwill impairment test: significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of, a portion of a reporting unit's goodwill has been included in the carrying amounts of a business that will be disposed or if our market capitalization is below our net book value.

We have considered the negative effects of the current downturn in the business environment in evaluating whether we should perform interim goodwill impairment testing. Due to the significant business downturn in the semiconductor and board test reporting unit, we performed step 1 of the goodwill impairment test during the first quarter of 2009 and determined that there was no impairment at that time. The estimated fair value of our semiconductor and board test reporting unit exceeded its carrying value by a range of approximately $100 million. In order to evaluate the sensitivity of the fair value calculation on the goodwill impairment testing, we applied a hypothetical 10 percent decrease to the fair value of the semiconductor and board test reporting unit which we believe represented a reasonable possible change when we performed the test. This hypothetical 10 percent decrease did not change the results of our impairment testing. We continue to assess the overall environment to determine if we would trigger and fail step 1 of the goodwill impairment test. There was no impairment of goodwill during the nine months ended July 31, 2009.

Restructuring and asset impairment charges. The three main components of our restructuring plans are related to workforce reductions, the consolidation of excess facilities and asset impairments. Workforce reduction charges are accrued when it is determined that a liability has been incurred, which is generally after individuals have been notified of their termination dates and expected severance payments. Plans to consolidate excess facilities result in charges for lease termination fees and future commitments to pay lease charges, net of estimated future sublease income. We recognize charges for consolidation of excess facilities when we have vacated the premises. These estimates were derived using the guidance of SFAS No. 144, Staff Accounting Bulletin 100, "Restructuring and Impairment Charges" ("SAB 100") and SFAS No. 146 "Accounting for Exit or Disposal Activities" ("SFAS No. 146"). The charges related to inventory include estimated future inventory disposal payments that we are contractually obliged to make to our suppliers and reserves taken against inventory on hand. If the amounts and timing of cash flows from restructuring activities are significantly different from what we have estimated, the actual amount of restructuring and asset impairment charges could be materially different, either higher or lower, than those we have recorded.

Accounting for income taxes. We must make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits and deductions, and in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as interest and penalties related to uncertain tax positions. Significant changes to these estimates may result in an increase or decrease to our tax provision in a subsequent period.

Significant management judgment is also required in determining whether deferred tax assets will be realized in full or in part. When it is more likely than not that all or some portion of specific deferred tax assets such as net operating losses or foreign tax credit carryforwards will not be realized, a valuation allowance must be established for the amount of the deferred tax assets that cannot be

realized. We consider all available positive and negative evidence on a jurisdiction-by-jurisdiction basis when assessing whether it is more likely than not that deferred tax assets are recoverable. We consider evidence such as our past operating results, the existence of cumulative losses in recent years and our forecast of future taxable income. At July 31, 2009, we provided partial valuation allowances for our U.S. deferred tax assets and full or partial valuation allowances for certain foreign deferred tax assets. We intend to maintain partial or full valuation allowances until sufficient positive evidence exists to support reversal of a valuation allowance in a given taxing jurisdiction.

We have not provided for all U.S. federal income and foreign withholding taxes on the undistributed earnings of some of our foreign subsidiaries because we intend to reinvest such earnings indefinitely. Should we decide to remit this income to the U.S. in a future period, our provision for income taxes may increase materially in that period.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax law and regulations in a multitude of jurisdictions. Although FASB Interpretation No. 48 provides further clarification on the accounting for uncertainty in income taxes, the threshold and measurement attributes prescribed by the pronouncement will continue to require significant judgment by management. If the ultimate resolution of tax uncertainties is different from what is currently estimated, a material impact on income tax expense could result.

Adoption of New Pronouncements

See Note 2, "New Accounting Pronouncements," to the condensed consolidated financial statements for a description of new accounting pronouncements.

Restructuring Costs, Asset Impairments and Other Charges

In December 2008, we announced the FY 2009 Plan. Initially, we expected to reduce our annual operating expenses by reducing approximately 500 positions of the global workforce of regular employees. In February 2009, we announced we had expanded the FY 2009 Plan to include actions to exit the inspection businesses in our semiconductor and board test segment and to restructure our global infrastructure organization. In March 2009, we announced that the FY 2009 Plan had been expanded further to restructure our electronic measurement and semiconductor and board test segments in response to the continuing deterioration of economic conditions. Under the FY 2009 Plan, we expect to record in aggregate approximately $315 million in pre-tax restructuring and other charges related to business and infrastructure cost reduction. We expect that a significant proportion of these charges will result in cash expenditures. When completed, these actions together are expected to result in annual operating savings of approximately $525 million and workforce reductions of approximately 3,800 regular positions.

Total restructuring and other special charges of $210 million have been incurred in the nine months ended July 31, 2009 with respect to these actions. Of the $210 million, $24 million related to asset impairments and $22 million related to special charges for excess inventory as a result of exiting the inspection businesses in our semiconductor and board test segment. Of the 3,800 reduction in regular positions under the FY 2009 Plan, approximately 2,000 employees have left Agilent as of July 31, 2009. We expect to complete the majority of these activities related to the FY 2009 Plan by October 31, 2009 with the remainder expected to be completed by the end of the second quarter of fiscal 2010. As a result of these actions, the average future working lifetime of the employees remaining in our U.S post retirement benefit plan decreased, and accordingly, we recorded a $13 million net curtailment gain in the three months ended July 31, 2009.

Foreign Currency

Our revenues, costs and expenses, and monetary assets and liabilities are exposed to changes in foreign currency exchange rates as a result of our global operating and financing activities. We hedge revenues, expenses and balance sheet exposures that are not denominated in the functional currencies of our subsidiaries on a short term and anticipated basis. We do experience some fluctuations within individual lines of the condensed consolidated statement of operations and balance sheet because our hedging program is not designed to offset the currency movements in each category of revenues, expenses, monetary assets and liabilities. Our hedging program is designed to hedge currency movements on a relatively short-term basis (rolling twelve month period). Therefore, we are exposed to currency fluctuations over the longer term.

Results from Operations



Orders and Net Revenue



                       Three Months Ended       Nine Months Ended      Year over Year Change
                            July 31,                July 31,            Three         Nine
                        2009         2008        2009        2008      Months        Months
                                     (in millions)
Orders               $    1,071    $  1,387   $    3,212    $ 4,312         (23 )%        (26 )%
Net revenue:
Products             $      835    $  1,195   $    2,636    $ 3,570         (30 )%        (26 )%
Services and other          222         249          678        723         (11 )%         (6 )%
Total net revenue    $    1,057    $  1,444   $    3,314    $ 4,293         (27 )%        (23 )%

Agilent orders decreased 23 percent and 26 percent for the three and nine months ended July 31, 2009, respectively, compared to the same periods last year. Our bio-analytical measurement business experienced weakening market activity and recorded an order decrease of 14 percent and 11 percent for the three and nine months ended July 31, 2009, respectively. In comparison with the same periods last year, electronic measurement orders decreased 26 percent and 31 percent for the three and nine months ended July 31, 2009, respectively, with weakness in both general purpose and communications test markets. Semiconductor and board test orders decreased 56 percent and 66 percent for the three and nine months ended July 31, 2009, respectively, with all markets down in comparison with the same periods last year.

Agilent net revenue decreased 27 percent and 23 percent for the three and nine months ended July 31, 2009, respectively, compared to the same periods last year. The bio-analytical measurement business revenues decreased 8 percent and 5 percent for the three and nine months ended July 31, 2009, respectively. Chemical analysis reported a decrease of 11 percent and 6 percent for the three and nine months ended July 31, 2009, respectively. Food safety remained robust while weakness was widespread across other applied markets. Life sciences reported a decrease of 5 percent and 4 percent for the three and nine months ended July 31, 2009, respectively, compared to the same periods last year. Within life sciences, the pharmaceutical and biotechnology market was down compared to last year as activity continued to be constrained by the economy and academic and government markets were also down compared to last year with no impact from the U.S. government stimulus package. Electronic measurement business revenues decreased 36 percent and 31percent for the three and nine months ended July 31, 2009, respectively, compared to last year. General purpose test revenues decreased 25 percent in both the three and nine months ended July 31, 2009 as market decline was widespread and manufacturing, computer and semiconductor product demand was under pressure, but there was relative strength in aerospace and defense in the U.S., Japan and China even as Europe remained weak. Communications test end market revenues decreased 48 percent and 37 percent for the three and nine months ended July 31, 2009 with weakness in each of the markets. Semiconductor and board test measurement revenues decreased 59 percent and 57 percent for the three and nine months ended July 31, 2009, respectively, when compared to the same periods last year with all markets down.

Services and other revenue include revenue generated from servicing our installed base of products, warranty extensions and consulting. Services and other revenue for the three and nine months ended July 31, 2009 decreased 11 percent and 6 percent, respectively when compared to the same periods last year. Service revenue trends tend to lag product revenue due to the deferral of service revenue, most of which is recognized over extended time periods.

Operating Results



                           Three Months Ended        Nine Months Ended       Year over Year Change
                                July 31,                  July 31,           Three            Nine
                          2009           2008         2009         2008      Months          Months
Total gross margin           51.0 %         55.6 %       50.0 %      55.1 %       (5 )ppts       (5 )ppts
Operating margin             (0.1 )%        15.1 %       (0.7 )%     12.6 %      (15 )ppts      (13 )ppts

(in millions)
Research and
development             $     153      $     170   $      492    $    534        (10 )%          (8 )%
Selling, general and
administrative          $     387      $     415   $    1,190    $  1,289         (7 )%          (8 )%

Total gross margins for the three and nine months ended July 31, 2009 showed a 5 percentage point decrease compared to the same periods last year. The majority . . .