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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number: 001-15405

Agilent Technologies, Inc.

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

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

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

      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 þ          No o

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

      The aggregate market value of the registrant’s common stock held by non-affiliates as of December 26, 2001 was approximately $10.54 billion. As of December 26, 2001, there were 463,695,160 outstanding shares of common stock, par value $0.01 per share. Shares of stock held by officers, directors and 5% or more shareholders have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

DOCUMENTS INCORPORATED BY REFERENCE

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Affymetrix is a U.S. registered trademark of Affymetrix Inc. Caliper is a U.S. registered trademark of Caliper Technologies Corp. LabChip is a registered trademark of Caliper Technologies Corp. in the U.S. and other countries. Microsoft is a U.S. registered trademark of Microsoft Corporation. Nortel Networks is a trademark of the Nortel Networks Corporation.

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Forward-Looking Statements

      The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. This report contains forward-looking statements including, without limitation, statements regarding trends and growth in the markets we sell into, our strategic direction, expenditures in research and development, anticipated completion of transactions, our liquidity position and our expected growth that involve risks and uncertainties. Our actual results could differ from the results contemplated by these forward-looking statements due to certain factors, including those discussed in Item 7 and elsewhere in this report.

PART I

Item 1.     Business

Overview

     Business

      Agilent Technologies, incorporated in Delaware in May 1999, is a global diversified technology company that provides enabling solutions to high growth markets within the communications, electronics and life sciences industries. We have three primary businesses:

	•	test and measurement, which provides test instruments, standard and customized test, measurement and monitoring instruments and systems for the design, manufacture and support of electronics and communications devices, and software for the design of high-frequency electronic and communications devices and networks;
	•	semiconductor products, which provides fiber optic communication devices and assemblies, components and integrated circuits for wireless, networking, computing and printing applications, image sensors and general-purpose opto-electronic components; and
	•	chemical analysis, which provides analytical instruments, systems and services for chromatography, spectroscopy and bio-instrumentation and consumables.

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

      Our test and measurement and semiconductor businesses share focus on growth opportunities in the communications and electronics sector, while our chemical analysis business focuses on growth opportunities in life sciences, as well as chemical analysis in the environmental, chemical, food and petrochemical markets. On August 1, 2001, Agilent completed the sale of its healthcare solutions business to Koninklijke Philips Electronics, N.V. pursuant to an Asset Purchase Agreement for a total purchase price of $1.7 billion, as more specifically discussed in Item 7 and Note 3, “Discontinued Operations,” to the consolidated financial statements included in Item 8 of this report.

      On January 5, 2001, we acquired Objective Systems Integrators, Inc. for approximately $716 million. OSI was a leading provider of next-generation operations-support-system software for communications service providers and has become part of the test and measurement business. In January 2000, April 2000 and January 2001, we acquired Yokogawa Electric Corporation’s 25 percent equity interest in Agilent Technologies Japan, Ltd. for approximately $521 million. In addition to the OSI and Yokogawa acquisitions, we acquired several other companies since our incorporation that were not material. More information about these acquisitions is contained in Item 7 and Note 4, “Acquisitions and Dispositions,” to the consolidated financial statements included in Item 8 of this report.

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      In the fourth quarter of 2000, we entered into an asset purchase agreement with Tyco Capital Corporation pursuant to which we have sold them substantially all of our leasing portfolio over the course of the last five quarters. We also entered into a vendor financing arrangement with Tyco Capital whereby Tyco Capital will provide equipment financing and leasing services to our customers on a global basis. More information about these agreements is contained in Item 7 and Note 4, “Acquisitions and Dispositions,” to the consolidated financial statements included in Item 8 of this report. In February 2001, we sold a parcel of surplus land in San Jose, California for $287 million in cash.

      We sell our products primarily through our direct sales force, but we also utilize distributors, resellers, telesales and electronic commerce. Of our total net revenue of $8.4 billion in the fiscal year ended October 31, 2001, we generated 40% in the United States and 60% internationally. As of October 31, 2001, we employed approximately 41,000 people worldwide. We have major research and development and manufacturing sites in California, Colorado, Delaware and Washington in the United States and in China, Germany, Japan, Malaysia, Singapore and the United Kingdom.

      Our net revenue by business segment for each of the years ending October 31, 2001, 2000 and 1999 was:

      More financial information about the business segments is contained in Note 18, “Segment Information,” of the consolidated financial statements included in Item 8 of this report. Hewlett-Packard accounted for 6.8% of our total net revenue in the fiscal year ended October 31, 2001, 6.5% in fiscal year 2000 and 10.0% in fiscal year 1999.

     Agilent Technologies Laboratories

      All of our businesses are supported by the technological expertise of Agilent Technologies Laboratories, one of the world’s foremost industrial research and development organizations. Agilent Technologies Laboratories works with our businesses in design, development and manufacturing engineering, and substantially all of its development staff are aligned with the research and development teams in our individual businesses.

      Agilent Technologies Laboratories employs approximately 400 people. Approximately half of the research and technical professionals in Agilent Technologies Laboratories have doctoral degrees.

Test and Measurement

      Our test and measurement business is a leader in providing test and measurement solutions to companies in the communications, electronics, semiconductor and related industries. We provide standard and customized solutions that are used in the design, development, manufacture, installation, deployment and operation of electronic equipment and systems and communications networks and services. These solutions include test and measurement instruments and systems, automated test equipment, communications network monitoring, management, and optimization tools and software design tools and associated services. Our solutions are employed by a wide range of industries, including:

	•	communications and network equipment designers and manufacturers, including providers of fiber optic, wireless and wireline components, products and systems;

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	•	providers of communications services, including telecommunications, Internet and cellular service providers;
	•	designers and manufacturers of semiconductor products, including microprocessors, memory devices, Application Specific Integrated Circuits (ASICs), system-on-a-chip (SOC) devices, radio frequency and microwave integrated circuits and other types of integrated circuits; and
	•	designers and manufacturers of electronic equipment, including printed circuit board assemblies and electronic equipment, such as cellular handsets, personal digital assistants (PDAs), personal computers and avionics equipment.

      Our test and measurement business employed approximately 21,000 people as of October 31, 2001. We serve customers in more than 110 countries and sell our products primarily through our direct sales force, as well as through resellers, distributors, telesales and electronic commerce. Our products are complemented by service and support offerings such as consulting, training, local solutions integration, and instrument calibration and repair. Our test and measurement business generated $5.4 billion in revenue in fiscal 2001, $6.1 billion in revenue in fiscal 2000 and $4.1 billion in revenue in fiscal 1999.

     Markets

      The market for our test and measurement products comprises three major customer groups:

	•	communications network equipment designers, manufacturers and service providers;
	•	electronic component and equipment designers and manufacturers; and
	•	semiconductor manufacturers and purchasers of semiconductors.

      Network equipment manufacturers provide products to facilitate the transmission of voice and data traffic. This transmission may be in various forms, such as electronic signals over copper wire, optical signals over fiber cables, and radio frequency or microwave signals. The customers of the network equipment manufacturers are the communications service providers that deploy and operate the networks and services. These service providers require network equipment that enables their networks and services to operate at increasingly faster speeds while providing rapidly expanding capacity and superior reliability. To meet these demands, network component and equipment manufacturers require test and measurement instruments, systems and solutions for the development, production and installation of each new network technology.

      Communications and Internet service providers also require a range of sophisticated test instruments and systems to evaluate network performance and to identify any sources of communications failure. Additionally, these customers require advanced software and systems, known as operations support systems, to monitor and manage the network infrastructure and services on a continuous, proactive basis to achieve either regulated or customer-specified service levels. Real-time monitoring of the network infrastructure also enables the implementation of additional services, such as fraud detection, which customers increasingly require of service providers. In addition, accurate monitoring enables service providers to bill more precisely for different types of network traffic.

      The market for cellular telephony has increased in recent years, as the levels of wireless penetration in developed countries have grown rapidly. Many lesser-developed countries have decided to build wireless communications infrastructure to meet their nations’ needs for telephony, rather than invest in expensive wire-based infrastructure. To develop cellular telephone equipment, manufacturers require electronic design software and test instruments and systems for the development of high-frequency communications circuits, devices and systems. Cellular equipment manufacturers also require advanced, high-frequency test instruments and systems to develop, manufacture

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      We believe that in the last several years, producers of networking communications equipment have increased their use of contract manufacturers. Contract manufacturers require test solutions that are particularly well-suited for faster production and flexible for use in different applications. Recently, mobile phone and appliance producers have also begun to increase their use of contract manufacturers, including using contract manufacturers for functional test. This requires specialized test products and services to address the particular needs of these high-frequency products.

      The electronics industry designs, develops and manufactures a wide range of products, including products produced in high volumes, such as computers, computer peripherals, communications devices such as wireless handsets and personal digital assistants, electronic components, printed circuit assemblies and consumer electronics. These components and printed circuit assemblies may be designed, developed and manufactured by electronic components companies, by original equipment manufacturers or by third-party contract manufacturers. For the development and timely commercialization of new technologies, original equipment manufacturers require state-of-the-art test instruments, systems and software design tools in order to design the products for efficient and cost-effective manufacturing and validate product performance in a variety of configurations and environments.

      High volume manufacturers of electronics products, such as printed circuit board assemblies, require sophisticated automated test equipment to operate and perform highly accurate tests at speeds and volumes matching those of the production line. This equipment includes in-circuit testing systems, automated x-ray inspection systems and automated optical inspection systems, all of which examine the printed circuit assemblies for manufacturing defects. Manufacturers are also beginning to demand automated functional test systems, which test an electronic device as if it were in its final environment.

      Electronics manufacturing also requires standardized test instruments, system components and complete solutions. Aerospace and defense are important markets for standardized electronic equipment because of the high electronic content of advanced defense systems and defense-related communications and surveillance equipment. We believe that defense purchasers are shifting from specialized test equipment to off-the-shelf test products and systems.

      Semiconductor test systems are used by semiconductor designers, semiconductor manufacturers and electronic component manufacturers in the design, manufacture and testing of a wide variety of semiconductor products, including logic, memory, mixed analog and digital signal, and system-on-a-chip integrated circuits. Semiconductor test systems are sold to semiconductor manufacturers and assembly and test subcontractors to the semiconductor industry.

      Demand for automated test equipment is driven primarily by the increased volume of semiconductor devices produced. Advances in semiconductor technology are also increasing demand for semiconductor test equipment. The development of increasingly faster and more complex semiconductor devices stimulates demand for testers capable of evaluating these high-speed devices. In addition, the continuing integration of functions, such as microprocessor, logic and memory, on a single integrated circuit has created a new category of device called system-on-a-chip. These devices require a new category of sophisticated and flexible automated test equipment.

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     Strategy

      Our test and measurement business pursues the following strategies to extend our global leadership position as the communications and electronics industries shift to new business models and value chains.

      Our greatest focus is on providing product leadership and application-focused solutions to markets where wireless, Internet and computing technologies are converging. We have targeted our test and measurement products and services to enable our customers in this segment to bring their new technologies to market.

      Agilent addresses the business and technology needs of players across the wireless and Internet communications value chain, from component manufacturers, network equipment manufacturers, and contract and design manufacturers to content providers, operators and service providers. A key success factor for this strategy is development of technologies and platforms that are reusable and leverageable, enabling us to deploy new solutions and systems faster.

      Agilent’s product strategy is to introduce products and technologies that meet the business needs of our customers. Such products could give Agilent a market advantage by placing Agilent in the next generation of technology beyond what our competitors can offer.

      A key component of our strategy is to make the customer experience a competitive advantage by achieving operational excellence in three areas: sales and support experience, whether contact is via the web, email, by telephone or in person; global manufacturing and supply chain management so that customers will receive high-quality products, when they need them; and product generation.

      By engaging in collaborative, co-development relationships with wireless and Internet communications leaders such as Nokia, Ericsson and Motorola, component manufacturers such as Murata, contract manufacturers such as Solectron Corp., Flextronics International and SCI and service providers such as AT&T Wireless, Verizon Wireless, China Unicom and Vodafone, we are developing solutions that support next generation technologies and enable these leaders to maximize their performance and continue to lead their industry.

      Our strategy is to leverage the technologies, platforms and knowledge we acquire from growing our core product categories into application-focused solutions, world-class systems and high-value services. These programs should dramatically increase our growth potential by building on and strengthening our customer relationships as we move up the value chain; and by creating a services-based annuity stream that offsets capital equipment cycles.

     Products

      Our test and measurement business designs, develops and manufactures test and design products that range from single-unit electronic measurement devices priced under $1,000 to large scale integrated-circuit test solutions priced at $1 million and higher.

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      We provide test solutions for fiber optic, broadband wire-based, radio frequency and microwave communications networks and products.

      Fiber Optics. Our products include optical signal and spectrum analysis instruments used by the industry’s leading equipment manufacturers to develop and manufacture reliable optical components. Our products also include network analyzers and high-speed bit-error rate testers that measure key transmission properties of high-speed optical and electrical signals.

      Broadband and Data Networks. Our Internet Advisor product line helps to troubleshoot high-speed local area networks, wide area networks and asynchronous transfer mode networks. We also provide cable television test equipment.

      Wireless Communications and Microwave. Our radio frequency and microwave test instruments assist in the design and production of cellular handsets and base stations, as well as satellite and aerospace defense systems. Examples of our radio frequency and microwave products include network analyzers, spectrum analyzers and signal sources.

      Agilent’s solutions for installation test enable service providers to install, commission, and activate networks and services more quickly. For example, Agilent’s 10-Gigabit Field Transmission Test Set enables technicians to test 192 fiber optic channels simultaneously. Also, our standards-based unification platform allows simplification of operation support and systems by reducing the software integration costs of such systems.

      Agilent offers a number of industry-proven monitoring systems such as AcceSS7 for Signaling System 7 (SS7) networks, AccessFIBRE, for fiber optic networks, NGN Analysis System for next-generation, mixed circuit- and packet-switched networks, and Firehunter for monitoring service level agreements by Internet service providers. We also market benchtop and handheld measurement devices such as lightwave multimeters, power meters and optical sources.

      General Purpose Instrument. General purpose instruments are used principally by engineers in research and development laboratories, manufacturing, calibration and service for measuring voltage, current, frequency, signal pulse width and other standard electronics measurements. Examples of general purpose instruments include digitizing oscilloscopes, voltmeters and multimeters, frequency counters, bench and system power supplies, and function generators and waveform synthesizers.

      Modular Instruments and Test Software. Our modular instruments and test software, including instruments incorporating the VXI bus and modular measurement system software, is used to dynamically configure and reconfigure test systems for designers and manufacturers of electronic devices.

      Data Acquisition Devices. Data acquisition and control products include digital-to-analog converters that are attached to sensors to measure a wide range of physical data such as temperature, airplane wing strain and vibrations in cars, jet engines and power generation equipment.

      Digital Design Products. These systems range from simple digital control circuits to complex, high-speed servers incorporating the latest microprocessor technology. Our digital design products include logic analyzers, logic-signal sources and data generators.

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

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

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

      Intelligent Test. Our AwareTest software enables customers to design test processes that avoid unnecessary test duplication. For example, an in-circuit test system will receive information about the faults that have already been detected by an x-ray inspection system and not repeat the test of that circuit.

      We produce semiconductor test equipment to perform electrical functional testing of the operation of memory, logic, mixed signal, system-on-a-chip, and radio frequency integrated circuits. Our parametric test instruments and systems combine hardware technology and customizable system software, and are used to examine semiconductor wafers during the semiconductor manufacturing process. Our product development efforts are targeted at leading edge technologies, such as system-on-a-chip high-speed flash memory products and 300mm parametric inspection.

      Our semiconductor test products test a variety of different circuit types. These devices are usually tested after final assembly, but the testing of some devices is most effective immediately after the production of the silicon wafer, when the wafers are sorted. We believe we are the industry leader in wafer-sort test solutions for flash memory devices, which retain data even when the power is turned off and that are critical for use in digital cameras, cellular phones, personal digital assistants and storage of portable digital audio files. Our flash memory test products can test as many as 36 devices in parallel, greatly improving test throughput and lowering test costs for our customers. Our system-on a chip can test not only multiple devices at a time, but also multiple functional elements on a given device at the same time.

      Our high-frequency electronic design automation software tools are used by radio frequency integrated circuit design engineers to model, simulate and analyze communications product designs at the circuit and system levels.

     Customers

      We market our test and measurement solutions to customers across a broad array of industries. Several of our customers purchase products across several of our major product lines for their different business units.

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      A representative list of the customers of our test and measurement business follows:

     Sales, Marketing and Support

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

      Our direct sales force consists of field engineers and systems engineers who often hold advanced degrees and who have in-depth knowledge of the customers’ business and technology needs. Some of our field engineers are account managers for our large accounts, and enhance our understanding of the future needs of these customers. Our systems engineers provide a combination of consulting, systems integration and application and software engineering services, and are instrumental in all stages of the sale, implementation and support of our complex systems and solutions. We also use value-added resellers to address specific market segments.

     Manufacturing

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

     Competition

      The market for test and measurement equipment is highly competitive, and we expect this competition to increase. Our test and measurement business competes with a number of significant competitors in all our major product categories and across our targeted industries. In communications test, our primary competitors are Acterna, Anritsu, IFR Systems, Inc./ Marconi Communications Ltd., IXIA, Network Associates, Inc., Rhode & Schwartz, Spirent, Tektronix, Inc. and as well as INET Technologies, Inc. and Micromuse Inc. in the communications network monitoring market. In the semiconductor test market, we compete primarily against Advantest Corporation, Schlumberger Limited, Keithley Instruments and Teradyne. In the printed circuit board test market, a segment of

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Semiconductor Products

      Our semiconductor products business is a leading supplier of semiconductor components, modules and assemblies for high performance communications systems. We design, develop and manufacture products for the networking, wireless, computing and printing markets.

      We believe we are the leading provider of:

	•	fiber optic communications transceiver (transmitter/receiver) modules used for high speed data communications;
	•	controller integrated circuits for Fibre Channel (storage networking) applications
	•	infrared transceivers for mobile communications (IrDA);
	•	light-emitting diodes (LEDs) and displays;
	•	application specific integrated circuits (ASICs) to Hewlett-Packard for its scanners and printers; and
	•	CMOS image sensors used to capture images in Web cameras and as position sensors in computer mice.

      As of October 31, 2001, our semiconductor products business had approximately 9,000 employees worldwide. Our semiconductor products business generated revenue of $1.9 billion in fiscal year 2001, $2.2 billion in fiscal year 2000 and $1.7 billion in fiscal year 1999.

     Markets

      Our semiconductor products business serves the following markets:

	•	Networking
	•	Mobile Communication
	•	Computing and Printing

      We also provide general-purpose optoelectronic products such as LEDs and optocouplers that serve multiple markets including factory automation and transportation.

      There is a continued evolution of networks both private (Local Area and Storage Area Networks) and public (Metro Area and Wide Area Networks) to higher speeds and greater bandwidth driven by the ongoing growth of data traffic. Business-to-consumer and business-to-business e-commerce, the ever expanding World Wide Web, the growing volume of e-mail traffic, the growth of streaming video and audio, the delivery of on-line services, and peer-to-peer communications are all generating ever greater volumes of electronic data that must be processed, moved and stored. As a result, both private and public network managers drive a continual process of upgrading their networks to higher speeds and increased scalability. Fiber optic transceivers and high-speed digital integrated circuits are the semiconductor technologies that help enable higher speed, higher performance networks.

      We are a major supplier of fiber optic transceivers, which convert digital data into light signals for transmission, and convert light signals back into digital form on the receiving end of the communication. We market fiber optic transceivers for both short-range, local area and storage area

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      In high-speed digital integrated circuits we are the leading supplier of controller ICs for Fibre Channel. The Fibre Channel interconnect protocol, a standard for the transfer of information between computers and storage devices defined by the American National Standards Institute, is the leading technology for building storage area networks (SANs). In addition, we are a leading supplier of physical layer ICs which connect processing ICs, such as our Fibre Channel controllers, to fiber optic transceivers for data transmission. Finally, we are providing state-of-the-art ASICs and networking ICs for use in next-generation network switches.

      As in networking, the driving trend in mobile communications is for higher speed, higher bandwidth connections to offer subscribers more digital services through their mobile phones. Already, products which realize the convergence of palm-top computing and mobile telephony are appearing on the market. We offer innovative wireless products such as our FBAR duplexers and E-pHEMT power amplifiers which are helping enable smaller, more functionally rich mobile telephones. In addition, we supply a wide range of radio frequency and microwave integrated circuits for use in both mobile telephones and mobile telephone infrastructure. We are developing digital camera solutions to be embedded in next-generation mobile phones and information appliances. Finally, we are the leading supplier of infrared transceiver products for short-range, point-to-point wireless communications to manufacturers of computers, printers, mobile telephones, digital cameras, personal digital assistants and pagers.

      We are the leading supplier to Hewlett-Packard of ASICs for printers, workstations and servers. We provide precision motion control devices for inkjet-based printers and all-in-one products to both Hewlett-Packard and other printer manufacturers. In addition, we provide optical image sensor products and optical mice for leading PC peripheral manufacturers.

     Strategy

      To service the needs of our customers in the communications and computer industries, the semiconductor products business pursues the following strategies:

      We intend to continue to offer high-speed communications solutions that incorporate analog (optoelectronic or wireless), mixed-signal and digital integrated circuit technologies for next-generation network infrastructure and mobile communications systems.

      We are focused on reducing the costs and improving the performance of the ASICs we provide to Hewlett-Packard by pursuing higher levels of device integration and employing advanced process technology.

      We intend to continue to enter into strategic technology partnerships to gain access to intellectual property and advanced semiconductor manufacturing process technology.

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     Products

      Our major product areas include:

      We market optical transceivers, transmitters and receivers for high-speed data communications for Fast, Gigabit and 10-Gigabit Ethernet, Fibre Channel, and ATM/ SONET applications up to 2.5 gigabits per second (OC-48). In addition, we are developing transmission and switching products for dense wave division multiplexing (DWDM) optical transport applications.

      We produce physical layer integrated circuits for high speed network switches and routers, devices that direct network traffic. We produce Fibre Channel protocol-based integrated circuits and subsystems for storage area networks. We are developing customer-specific ASIC solutions for next-generation data switching products.

      We produce a broad family of radio frequency and microwave communications products, primarily integrated circuits for wireless communications products and infrastructure. Our latest products are the FBAR duplexer, a semiconductor based filter product, and E-pHEMT power amplifiers, a high power-added efficiency wireless transmitter solution. Both FBAR and E-pHEMT are targeted for current and future generation mobile phones.

      We produce a full line of infrared products that enable short range, point-to-point wireless communication between portable and stationary devices, including notebook personal computers, cellular phones, personal digital assistants and digital cameras.

      We provide core electronics chipsets that support central processing units for selected Hewlett-Packard workstations and servers. We provide printing ASICs which are the central processing ICs for Hewlett-Packard laser printers, inkjet printers and all-in-one products.

      Our sensor products include color and monochrome still and video camera image capture solutions and intelligent optical sensors. Applications include webcams and optical mice for personal computers, and in the future, embedded cameras for next-generation mobile phones. We also produce optical motion control products used primarily for precision paper handling in inkjet printers and all-in-one products.

      We manufacture and sell a broad range of LEDs, alphanumeric displays and optocouplers. LEDs are semiconductor devices that emit light when an electrical signal is applied. Optocoupler products are devices that provide both electrical insulation, for protection, and signal isolation, to prevent distortion of data, between differing electrical environments.

      We are engaged in a global joint venture (Lumileds) with Philips Electronics. Lumileds develops, manufactures and sells LEDs, modules, products and systems for a broad spectrum of lighting

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     Customers

      We sell to a broad array of customers in the communications and computing industries. We sell to original equipment manufacturers directly, as well as contract manufacturers including Celestica, Flextronics, Jabil Circuit, Sanmina/SCI Systems and Solectron. Our top customers by market area, including customers purchasing through contract manufacturers and distributors, include the following:

      Our semiconductor technology licensing and supply arrangements with Hewlett-Packard limit our ability to sell certain products to other companies. Through sales of ASICs, storage area networking components, and motion-control products, Hewlett-Packard accounted for approximately 31% of our semiconductor products revenue in fiscal year 2001, approximately 30% in fiscal year 2000, and approximately 37% in fiscal year 1999.

     Sales, Marketing and Support

      Our semiconductor sales organization consists of nearly 400 technical sales professionals that have responsibility for large, global accounts in three regional areas: the Americas, Europe and Asia Pacific. Our sales force has specialized product and service knowledge that enables it to sell specific offerings at key levels throughout a customer’s organization. In addition to our direct sales force, we generate approximately 25% of our revenue through our relationships with key electronic distributors, such as Arrow Electronics, Inc. and Avnet, Inc. on a worldwide basis, Future Electronics, Inc. in Europe and North America, Ryoyo Electro Singapore PTE, Ltd. and Tokyo Electric Power Company in Japan and SECOM Telecom for China. We also have a direct sales team which focuses on supporting the major contract manufacturers such as Celestica, Flextronics, Jabil Circuit, Sanmina/SCI and Solectron.

      We also provide a broad range of products and applications-related information to customers and channel partners via the Internet.

     Manufacturing

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

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

     Competition

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

	•	product reliability and performance in operation;
	•	price;
	•	power consumption;
	•	compliance with standards;
	•	product size and integration; and
	•	time to market.

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

Chemical Analysis

      Our chemical analysis business provides instrument solutions, consumables and services that enable customers to identify, quantify, analyze and test the atomic, molecular, physical and biological properties of substances and products. Our chemical analysis products and services are used by scientists, engineers and technicians working in disease and drug discovery, research and development, quality assurance, quality control and manufacturing.

      Our six main product lines are chromatography, spectrometry, ICP-MS, bioresearch solutions and related consumables and services.

      We employed approximately 3,500 people as of October 31, 2001 in our chemical analysis business. Our chemical analysis business generated revenue of $1.1 billion in fiscal year 2001, $1.0 billion in fiscal year 2000, and $1.0 billion in fiscal year 1999.

     Markets

      We estimate that the market niches that we serve represent approximately 30% of the total available analytical instrumentation market. Primarily, our chemical analysis business serves the following markets:

	•	chemical;
	•	environmental;
	•	pharmaceutical and biopharmaceutical; and
	•	bioagriculture and foods.

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      Our chemical analysis business encompasses the natural gas, petroleum refining, petrochemical and chemical markets. We sell gas and liquid chromatographs and gas and liquid chromatography-mass spectrometry products and solutions into these markets. Petroleum refiners use our measurement solutions to analyze crude oil composition and perform other raw material analysis, verify and improve refining processes, and ensure the overall quality of gasoline, fuels, lubricants and other products. Our gas chromatographs are used to monitor consistent quality in the natural gas delivered to consumers and industry. Petrochemical and chemical producers use our gas and liquid chromatography products to measure and control the quality of their finished products and to verify the environmental safety of their operations.

      We develop and market analytical instrumentation for the environmental market for applications such as laboratory and field analysis and characterization of chemical pollutants in air, water, soils, solid waste, agriculture and food products. Environmental industry customers include all levels of government, the industrial and manufacturing sectors, engineering and consulting companies, commercial testing laboratories, colleges and universities. We believe there will be more demand for environmental instrumentation in the Asia-Pacific, Latin America and Eastern Europe regions, as these regions implement new and stricter environmental regulations.

      Our analytical and life sciences-instrument solutions are used by pharmaceutical and biopharmaceutical companies in every phase of the drug development process. This includes research into the basic causes and understanding of disease, identification and development of new drugs, obtaining regulatory approval, manufacturing and distribution.

     Strategy

      In order to maintain our leading position in the instrumentation solutions market, our strategy is as follows:

      We will continue to focus resources on the development and growth of bio-instrumentation, consumables and services solutions that increase understanding of the genetic cause of diseases in order to speed the development and increase the efficacy of new drugs.

      To address emerging markets in the Asia-Pacific, Latin America and Eastern Europe regions, we are broadening our worldwide distribution capabilities and developing less complex instrumentation with lower prices. Finally, we continue to develop gas and liquid chromatography and mass spectrometry products that are smaller and more portable to meet increasing demand for use of these instruments outside of centralized laboratories.

      We seek to bring new products and technologies to market both through internal development and the strategic acquisition of technologies from third parties. We are expanding our programs to offer customers early access to products under development to ensure that these products are meeting customer needs. In addition, our development of modular hardware and software platforms allows us to bring new generations of products to market faster.

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      In addition to our internal efforts, we consider acquisitions to complement our current products, solutions and technologies and to accelerate our entry into strategic markets.

      We intend to build strategic relationships to enable us to develop products and services that complement existing technologies and products in our target markets. For example, through our relationship with Caliper® Technologies Corporation, we are conducting joint research and development in microfluidics.

      In addition, through our strategic alliances, we develop instruments that work with our partners’ products, enabling us to offer our customers a broader range of products and solutions.

     Products

      A key factor in our target markets is the need for new products that increase productivity of the end customer. Our chemical analysis products, systems, consumables and services enable our customers to research the genetic bases of disease and enable the development, testing and use of new drugs and to analyze water, air and soil for monitoring and remediation; and to understand the properties of natural and man-made gases, liquids and chemically-based products. Our six main product lines, chromatography, spectrometry, ICP-MS, bio-instrumentation including microarrays and related consumables and services, are described below.

      We produce gas chromatography systems, both portable and otherwise. Gas chromatographs are used to separate molecules of a gaseous mixture to determine the quantity and identity of the molecules present. A gas chromatograph can analyze gas samples as well as solids and liquids that can be converted to a gaseous state. Most gas chromatographs have the approximate size and appearance of a large microwave oven.

      Our instruments are used in laboratories involved in research and development, quality assurance, quality control and routine testing. Our products are used to test the quality and safety of food, air and water; to develop cleaner-burning fuels and more effective pharmaceuticals; and to test for alcohol in blood, drugs in urine or explosive residues in crime scene evidence.

      Liquid chromatographs are used to separate molecules of a liquid mixture to determine the quantity and identity of the molecules present. These instruments are modular in construction and can be configured to form instruments that perform specific analyses. Each module is about the size of a home videocassette recorder.

      High-performance liquid chromatographs are an essential tool in the pharmaceutical industry for basic research, drug discovery, drug development and quality control of new drugs. Other industry groups that utilize high-performance liquid chromatographs include: life science research, chemical development and manufacturing, industry and government testing laboratories for safety, quality and nutritional content of foods and beverages, athlete monitoring for illegal drug use and environmental monitoring.

      Mass spectrometers identify chemicals based on a chemical’s molecular mass and, in many cases, on characteristic patterns of fragment masses that result when a molecule is broken apart. Mass spectrometers can also be used to determine how much of a known chemical is present in a particular sample.

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      Mass spectrometer systems are typically used in combination with gas or liquid chromatographs in the pharmaceutical, life science, semiconductor and environmental industries. The combined instruments are used to study and refine the chemical structure of proteins and other biological molecules as well as new drug candidates, to determine the presence of impurities in semiconductors as they are manufactured, or to identify heavy metals and other pollutants in soil and water.

      In December 1999 we announced the launch of a DNA microarray program for the life sciences that incorporates technologies from both Rosetta Inpharmatics (subsequently acquired by Merck) and Oxford Gene Technology, among others. This program is intended to enable researchers to access gene expression information.

      Using our highly flexible inkjet manufacturing process, Agilent makes both oligonucleotide and cDNA microarrays. This inkjet process allows us to deposit very small volumes per spot without stopping or making contact with the slide, resulting in high-density arrays with highly uniform spot shape in a very short period of time.

      In addition, our GeneArray microarray scanner allows a researcher to use GeneChip arrays designed by Affymetrix® to enable high-speed detection and characterization of large amounts of genetic information. More recently, Agilent introduced its next generation scanner designed for use with its own microarrays, as well as others. Consistent with Agilent’s standards-based platform approach, this scanner can image up to 48 industry standard 1” x 3” glass microarray slides, and have the data automatically exported in a text, tab-delimited, or XML-based GEML format.

      The Agilent 2100 bioanalyzer instrument systems that we have developed through our relationship with Caliper® Technologies is the first integrated solution based on microfluidics and Caliper LabChip® technology for the analysis of a wide range of biological molecules including: DNA, RNA, proteins, and cells. Using miniature, integrated biochemical-processing systems etched into glass, the microchip allows the steps customarily performed in conventional instruments to be done using minute quantities of costly reagents in a fraction of the usual time.

      We also offer a broad range of consumable products, which support our top ranked Liquid Chromatography (LC), Gas Chromatography (GC) and Mass Spectrometry (MS) and bioinstrumentation platforms. These consumable products include chemical and biological reagents, instrument replacement parts, brand specific chromatography columns, and consumable supplies to meet our customer’s analysis needs.

      All of our products were designed to work together, and so customers can leverage their Agilent technology investment with precisely matched equipment, parts and supplies. Our offerings include both generic supplies, where we seek to distinguish our products on price, selection and customer loyalty, and proprietary parts developed by us, where we offer exclusive technology, optimal performance and functionality.

      Agilent support services cover all of Agilent’s chemical and bioinstrumentation analysis hardware and software maintenance, troubleshooting, repair and compliance needs. Special services bundles have also been designed to meet the specific analysis instrument needs of various industries.

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     Customers

      We sell our products and services to a broad array of customers in each of the markets we serve. Our top customers by market segment are the following:

     Sales, Marketing and Support

      Our sales and support delivery channels are aligned by our key markets to maximize market coverage and to optimize selling and support delivery efficiency. We market our products to our customers through our direct sales force, an inside-sales force, e-commerce, value-added resellers, manufacturers’ representatives and distributors.

      We use our direct sales force to market our solutions to all of our pharmaceutical and biopharmaceutical accounts, large and medium-sized chemical customers and environmental accounts. We supplement our direct sales force with an inside-sales force and sales agents to provide broader geographic coverage and to cover smaller accounts. We also have an active value-added reseller program to augment our ability to provide more complete solutions to our customers. We sell our consumable products through distributors, telesales and electronic commerce.

      We offer a wide range of startup, operational, educational and compliance support services for our chemical analysis measurement and data handling systems. We deliver our support services to customers in a variety of ways, including on-site assistance, return to us for repair or exchange, telephone support and self-diagnostic services provided over the Internet. Our support services limit the amount of time an instrument is out of service, provide increased system productivity, extend the instrument life and offer fast problem resolution. We also offer special industry-focused service bundles that are designed to meet the specific needs of hydrocarbon processing, environmental, pharmaceutical and biopharmaceutical customers to keep instruments fully operational and compliant with the respective industry requirements.

     Manufacturing

      Our manufacturing strategy supports our diverse product range and customer-centric focus. We assemble highly configurable products to individual customer orders and make standard products to stock. We employ advanced manufacturing techniques and supply chain management systems to reduce costs and manufacturing cycle times. We selectively use partners to provide manufacturing capabilities outside our core competencies, such as the manufacture of printed circuit assemblies and the delivery of shipment logistics. We have manufacturing facilities in California and Delaware in the United States, China, Germany and Japan.

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     Competition

      The markets for analytical instruments in which we compete are characterized by evolving industry standards and intense competition. Our principal competitors include Perkin Elmer Corp., Applied Biosystems, Inc., Affymetrix, Shimadzu Corporation, Thermo Electron, Inc. and Waters.

     Government Regulation

      The analysis products and related consumables marketed by our chemical analysis business are subject to regulation in the United States by the Environmental Protection Agency under the Toxic Substances Control Act, and by government agencies in other countries under similar laws. The Toxic Substances Control Act regulations govern, among other things, the testing, manufacture, processing and distribution of chemicals, the testing of regulated chemicals for their effects on human health and safety and import and export of chemicals. The act prohibits persons from manufacturing any chemical in the United States that has not been reviewed by Environmental Protection Agency for its effect on health and safety, and placed on an Environmental Protection Agency inventory of chemical substances. Therefore, we must continually adapt our chemical analysis products to changing regulations. If we fail to comply with the notification, record-keeping and other requirements in the manufacture or distribution of our products, the Environmental Protection Agency can obtain an order from a court that would prohibit the further distribution or marketing of a product that does not comply or we could face fines, civil penalties or criminal prosecution.

Backlog

      Agilent believes that backlog is not a meaningful indicator of future business prospects due to the large volume of products delivered from our inventories, the shortening of product life cycles and the relative portion of net revenue related to our service and support businesses. Therefore, we believe that backlog information is not material to an understanding of our business.

Research and Development

      Research and development expenditures were $1,349 million in 2001, $1,259 million in fiscal year 2000 and $879 million in fiscal year 1999, the vast majority of which was company-sponsored. We anticipate that we will continue to have significant research and development expenditures in order to maintain our competitive position with a continuing flow of innovative, high-quality products and services.

Intellectual Property

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

International Operations

      Our net revenue originating outside the United States, as a percentage of our total net revenue, was approximately 59.8% in fiscal year 2001, 57.4% in fiscal year 2000 and 57.4% in fiscal year 1999, the majority of which was from customers other than foreign governments. Approximately 20% of our international revenue in the last three years was derived from Japan. Long-lived assets located outside of the United States, as a percentage of our total long-lived assets, was approximately 43.7% in fiscal year 2001, 49.3% in fiscal year 2000 and 49.2% in fiscal 1999. Approximately 16.9% of our long-lived assets were located in Japan in fiscal year 2001 and approximately 13.7% in fiscal years 2000 and 1999.

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      Most of our sales in international markets are made by foreign sales subsidiaries. In countries with low sales volumes, sales are made through various representatives and distributors. However, we make certain sales in international markets directly from the United States.

      Our international business is subject to risks customarily encountered in foreign operations, including interruption to transportation flows for delivery of parts to us and finished goods to our customers, changes in a specific country’s or region’s political or economic conditions, trade protection measures, import or export licensing requirements, unexpected changes in tax laws and regulatory requirements, difficulty in staffing and managing widespread operations, differing labor regulations and differing protection of intellectual property. We are also exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales and assets and liabilities denominated in currencies other than the United States dollar and may also become subject to interest rate risk inherent in any debt, investment and finance receivable portfolios we incur. The terrorist attacks on September 11, 2001 and the U.S. and international response could exacerbate these risks. For example, there may be an increased risk of political unrest in regions where we have significant manufacturing operations such as Southeast Asia.

      However, we believe that our international diversification provides stability to our worldwide operations and reduces the impact on us of adverse economic changes in any single country. Financial information about our international operations is contained in Note 18, “Segment Information,” of the consolidated financial statements included in Item 8 of this report.