Back to GetFilings.com

Table of Contents

Index to Financial Statements

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

For the fiscal year ended October 31, 2003

or

For the transition period from              to             

Commission File Number: 001-15405

Agilent Technologies, Inc.

(Exact name of registrant as specified in its charter)

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:

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

The aggregate market value of the registrant’s common equity held by non-affiliates as of April 30, 2003, was approximately $5.926 billion. The aggregate market value of the registrant’s common stock held by non-affiliates as of October 31, 2003 was approximately $9.217 billion. As of October 31, 2003, there were 476,149,083 outstanding shares of common stock, par value $0.01 per share. Shares of stock held by officers, directors and 5 percent or more stockholders have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

DOCUMENTS INCORPORATED BY REFERENCE

Table of Contents

Index to Financial Statements

TABLE OF CONTENTS

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. Affymetrix is a U.S. registered trademark of Affymetrix, Inc.

1

Table of Contents

Index to Financial Statements

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, cyclicality, seasonality and growth in the markets we sell into, our strategic direction, expenditures in research and development, contracts and remediation, our future effective tax rate, new product introductions, changes to our manufacturing processes, our liquidity position, our ability to generate cash from continuing operations, our expected growth, the potential impact of our adopting new accounting pronouncements, our financial results, the impact of our enterprise resource planning systems implementation, our obligations under our retirement and post-retirement benefit plans, savings from our restructuring programs and the existence or length of an economic recovery that involve risks and uncertainties. Our actual results could differ from the results contemplated by these forward-looking statements due to certain factors, including those discussed in Item 7 and elsewhere in this report.

PART I

Item 1.    Business

Overview

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

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

Our test and measurement, automated test and semiconductor businesses share focus on growth opportunities in the communications and electronics sector, while our life sciences and chemical analysis business focuses on growth opportunities in life sciences, as well as chemical analysis in the environmental, chemical, food and petrochemical markets.

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 $6.1 billion in the fiscal year ended October 31, 2003, we generated 36 percent in the United States (“U.S.”) and 64 percent internationally. As of October 31, 2003, we employed approximately 29,000 people worldwide. Our primary research and development (“R&D”) and manufacturing sites are in California, Colorado, Delaware and Washington in the U.S. and in China, Germany, Japan, Malaysia, Singapore and the United Kingdom.

2

Table of Contents

Index to Financial Statements

Our net revenue by business segment for each of the years ending October 31, 2003, 2002 and 2001 was:

More financial information about the business segments is contained in Note 20, “Segment Information,” of the consolidated financial statements included in Item 15 of this report. Hewlett-Packard accounted for approximately 5 percent of our total net revenue in the fiscal year ended October 31, 2003, 8 percent in fiscal year 2002 and 7 percent in fiscal year 2001. These figures include items sold to contract manufacturers who manufacture products on Hewlett-Packard’s behalf.

Test and Measurement

Our test and measurement business provides standard and customized solutions that are used in the design, development, manufacture, installation, deployment and operation of electronic equipment and systems and communications networks and services. These solutions include test and measurement instruments and systems, communications service and network monitoring, management, and optimization tools and software design tools and associated services.

Our test and measurement business employed approximately 11,900 people as of October 31, 2003. We serve customers in more than 110 countries and sell our products through our direct sales force, distributors, value-added resellers, manufacturer’s representatives, telesales and electronic commerce. Our hardware and software products and solutions are complemented by service and support offerings such as start-up assistance, instrument productivity and application services and instrument calibration and repair. We also offer customization, consulting and optimization services throughout the customer’s product lifecycle. Our test and measurement business generated $2.5 billion in revenue in fiscal 2003, $2.6 billion in revenue in fiscal 2002 and $4.5 billion in revenue in fiscal 2001.

Test and Measurement Markets

Our test and measurement products compete in two major markets:

Communications Test

The markets for Agilent’s communications industry products cover the breadth of communications test; starting with the design and development of network elements and devices, continuing through equipment manufacturing, to installation and maintenance, and finally to service and network management and optimization.

Network equipment manufacturers provide products to facilitate the transmission of voice and data traffic, including network and subscriber equipment. This transmission may be in various

3

Table of Contents

Index to Financial Statements

forms, such as electronic signals over copper wire, optical signals over fiber cables and radio frequency (“RF”) or microwave signals. The network equipment manufacturers’ customers are the distributors of end-user subscriber devices, including cell phones and personal digital assistants (“PDAs”), as well as communications service providers that deploy and operate the networks and services. To meet their customers’ demands, network component and equipment manufacturers require test and measurement instruments, systems and solutions for the development, production and installation of each network technology.

Communications service providers require network equipment that enables their networks and services to operate at increasingly faster speeds while providing rapidly-expanding capacity, up-to-the-minute services, and superior reliability. They must do this in a fiercely competitive environment with drastically reduced operating and capital expenditures, and increased revenue demands. To achieve this, communications service providers require a range of sophisticated test instruments and systems to evaluate network performance and to identify any sources of communications failure.

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

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

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

In the last several years, producers of networking communications equipment have increased their use of contract manufacturers. Contract manufacturers require test solutions that are designed for faster production and flexible for use in different applications. Recently, mobile phone and appliance producers have also begun to increase their use of contract manufacturers, original design

4

Table of Contents

Index to Financial Statements

manufacturers and reference design platforms, including using contract manufacturers for functional test. This requires specialized test products and services to address the particular needs of these high-frequency products.

General Purpose Test

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

Electronics manufacturing 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 will continue to shift from specialized test equipment to Commercial Off-the-Shelf test products and systems and will continue to require solutions that optimize asset utilization and effective Technology Lifecycle Management.

Test and Measurement 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 test systems or OSS solutions priced at $1 million and higher.

Communications Test

We provide testing solutions for fiber optics, transport networks, broadband and data networks, wireless communications, microwave networks and products, installation and maintenance solutions and OSS, including monitoring and network management systems.

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

Transport Networks.    Our OmniBER OTN and the OmniBER XM network simulator provide leading edge capabilities for test next generation SONET/SDH network equipment.

Broadband and Data Networks.    Our Network Analyzer product line helps to troubleshoot high-speed local area networks, wide area networks, local area networks (“LAN”) and asynchronous transfer mode networks. Our Router Tester 900 is the industry leader in core edge router performance verification.

5

Table of Contents

Index to Financial Statements

Wireless Communications and Microwave.    Our RF and microwave test instruments and our Electronic Design Automation (“EDA”) software tools assist in the design and production of cellular handsets and base stations, as well as satellite and aerospace defense systems. Examples of our wireless communications products include specialized versions of RF and microwave network analyzers, spectrum analyzers and signal sources, mobile testers, circuit simulation tools, and system simulation tools. Agilent also offers solutions for centralized wireless LAN monitoring and network optimization. Our AiRMS solution provides remote monitoring of network performance using a series of remote probes deployed in service vehicles and taxicabs. The Agilent N5250A PNA series millimeter-wave network analyzer has frequency coverage from 10 MHz to 110 GHz in a single sweep, which is 44 times faster than the industry standard. This capability enables engineers and system integrators working at millimeter-wave frequencies to take advantage of the performance, connectivity and for ability to characterize 1.0 mm coaxial and on-wafer components, subsystems and systems.

Installation and Maintenance Solutions.    Our solutions for installation test enable service providers to install, commission, and activate networks and services more quickly. For example, our 10-Gigabit Field Transmission Test Set allows technicians to test 192 fiber optic channels simultaneously. Agilent has a breadth of solutions for troubleshooting and maintaining optical, wireless, wireline, and large-company networks. These solutions include Fiber Break Locator, Network Tester, Optical Time Domain Reflectometers (“OTDR”), Network Troubleshooting Center, and Framescope. We also market bench-top and handheld measurement devices such as lightwave multimeters, power meters and optical sources.

Operations Support Systems.    Our integrated OSS solutions reduce software integration costs and enable high-value service-level management functions not possible with stand-alone systems. We offer a number of industry-proven monitoring and management systems such as acceSS7 for Signaling System 7 networks; NETeXPERT for circuit, packet and hybrid networks; accessFIBER, for fiber optic networks; NgN Analysis System for next-generation telephony and Internet offload networks; Wireless Service Manager for wireless services and networks; and Wireless QoS Manager for mobile data services and networks.

General Purpose Test Solutions

General Purpose Instruments.    General purpose instruments are used principally by engineers in R&D laboratories, manufacturing, calibration and service for measuring voltage, current, frequency, signal pulse width and other standard electronics measurements. Examples of our general purpose instruments include spectrum analyzers, network analyzers, signal generators, 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. Agilent’s new Test Automation Kit N1908A enables engineers developing test systems for low-frequency applications to automatically load drivers, activate, configure and verify test and measurement instruments. This is the industry’s first personal computer (“PC”) standards-based test kit that dramatically shortens test-system set-up and coding, allowing engineers to conduct the first test in one hour or less, where typically it would take several days or weeks.

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 high performance oscilloscopes, logic analyzers, logic-signal sources and data generators. Agilent’s 2.5 to 6 GHz real-time oscilloscopes are the only models in the industry that

6

Table of Contents

Index to Financial Statements

offer four full-bandwidth, 20 GSa/s per channel. When these new scopes are paired with the Agilent InfiniiMax active probes at 3.5 to 7 GHz, the new system delivers industry-leading performance, accuracy and probing connectivity. This is used by R&D engineers in the computer, communications and semiconductor industries for validating and verifying the performance of new high-speed digital product designs

High-Frequency Electronic Design Tools.    Our high-frequency electronic design automation software tools are used by RF integrated circuit design engineers to model, simulate and analyze communications product designs at the circuit and system levels. Our alliance with Cadence Design Systems extended this core technology to a much larger base of customers.

Test and Measurement Customers

We market our test and measurement solutions to customers across a broad array of industries. Agilent’s customers include the network equipment manufacturers who design, develop, manufacture and install network equipment, and the service providers who implement, maintain and manage communication networks and services. Many of our customers purchase solutions across several of our major product lines for their different business units. No single customer is material for the test and measurement business.

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

Test and Measurement 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, services, systems and capabilities. Some members of our direct sales force focus on global accounts, providing uniform services on a worldwide basis. Others focus on our more complex products such as our communications OSS monitoring systems, where customers require intensive strategic consultation. Our sales force also specifically targets the contract manufacturer market by collaborating with original equipment manufacturers to specify that contract manufacturers use our test equipment, as well as marketing to contract manufacturers directly.

Our direct sales force consists of field engineers and systems engineers who 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.

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

7

Table of Contents

Index to Financial Statements

Test and Measurement 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, in our own fabrication facilities for competitive advantage.

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

Test and Measurement 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 the general purpose electronic test market, we compete against companies such as Fluke Corporation (a subsidiary of Danaher Corporation), Keithley Instruments, Inc., LeCroy Corporation, National Instruments Corporation and Tektronix, Inc.. In communications test, our primary competitors are Acterna, Aeroflex Incorporated, Anritsu, IXIA, Marconi Communications Ltd., Network Associates, Inc., Rohde & Schwartz, Spirent, Tektronix, Inc., as well as INET Technologies, Inc. and Micromuse Inc. in the communications network monitoring market. Our EDA business also has several software competitors, including Ansoft Corporation, Aplac, Applied Wave Research, Eagleware, and Xpedion.

In many of our test and measurement businesses, especially those affected by the telecommunications market downturn, we have seen increasing pricing pressure. However, we compete primarily on the basis of performance or differentiated capabilities and our equipment is not subject to severe discounting.

Automated Test

Our automated test business provides test system solutions that are used in the manufacture of semiconductor devices and printed circuit assemblies. Our test solutions enable electronics designers and manufacturers to reduce the design to production cycle, lower manufacturing cost of test, confirm the functional quality of their devices and of their manufacturing processes, and accelerate the high-volume delivery of their products.

Our automated test business employed approximately 2,300 people as of October 31, 2003. We sell our products through our direct sales force. Our products are complemented by consulting, service and support offerings such as start-up assistance, application services and system calibration and repair. Our automated test business generated $0.8 billion in revenue in fiscal 2003, $0.7 billion in revenue in fiscal 2002 and $0.9 billion in revenue in fiscal 2001.

Automated Test Markets

Agilent supplies a broad range of automated test equipment to both the semiconductor manufacturing markets and the electronic manufacturing markets. Our test systems are used for several different purposes, including wafer-level parametric testing, wafer-sort for memory test, package-level functional test, and structural and electrical test and inspection for printed circuit board assemblies.

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

8

Table of Contents

Index to Financial Statements

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

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

Automated Test Products

Our automated test business designs, develops and manufactures both semiconductor test equipment and electronics manufacturing test equipment. We develop test solutions on a single system architecture and then deliver, over time, enhancements to that architecture that extend its test capabilities. For instance, in 2003 Agilent expanded the capabilities of our 93000 SOC system by increasing its high-speed performance to address new Peripheral Component Interconnect (“PCI”) Express technology, at the same time introducing a low-cost design-for-test series, all on the same platform. Our customers can adapt their 93000 according to their needs without having to buy multiple unique testers.

Semiconductor Test Equipment

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

Our semiconductor test products test a variety of different circuit types. We test both at the wafer level and at final assembly. We are an industry leader in wafer-sort test solutions for flash memory devices, which retain data even when the power is turned off and that are critical for use in digital cameras, cellular phones, PDAs and storage of portable digital audio files. Our flash memory test products can test as many as 144 “sites” of multiple devices in parallel, greatly improving test throughput and lowering test costs for our customers. Our SOC test system can test not only multiple devices at a time, but also multiple functional elements on a given device at the same time. As a result of its scalable platform architecture, this system can be field-upgraded to the latest technology without the customer needing to buy a new system or shut down the production line for an extended time.

Our software solutions speed our customers’ time to market, enable their ability to work with new technologies and lower their cost of test. For instance, in 2003 we introduced the Agilent SmarTest Program Generator CTL Browser. This is the industry’s first test program generator to support IEEE P1450.6 Core Test Language (“CTL”), the emerging open standard language for design-for-test. CTL provides a standard means to describe design-for-test structures in SOCs and Intellectual Property Cores. Intellectual Property Cores are wrapped using standards-based

9

Table of Contents

Index to Financial Statements

design-for-test structures, then stitched together into a testable SOC by the electronic design automation system. CTL describes how to test the SOC, while the Agilent SmarTest PG CTL Browser makes it readable by humans.

Electronics Manufacturing Test Equipment

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.

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 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.

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

Automated Test Customers

We market our automated test solutions to customers across a broad array of industries. Many of our customers purchase solutions across several of our major product lines for their different business units. Generally, our customers are involved in producing digital consumer and wireless products, computation, PC and PC peripherals, wireline communications, and/or enterprise networking/storage. Revenue generated by the automated test business is primarily dependent on two customers. These customers are not material to the company as a whole.

By engaging in collaborative, co-development relationships with electronics industry leaders and contract manufacturers, we develop solutions that support next generation technologies and enable these leaders to maximize their performance and continue to lead their industries.

The holiday season impacts our automated test business to the extent that we are subject to the cycles of consumer electronics manufacturing. Our customers include manufacturers who produce a wide range of consumer electronics equipment requiring the test of semiconductors and board assemblies.

Automated Test Sales, Marketing and Support

Our products are distributed using a direct sales force. Some portions of the direct sales force provide general services around the world, while others provide specialized consultation services for particular segments of the automated test business. The members of our direct sales force often have advanced engineering degrees, enabling them to more easily understand our customers’ current and future needs. Manfacturers’ representatives address specific geographic markets. They provide the same level of service and support to Agilent’s customers as is expected from our direct channel.

10

Table of Contents

Index to Financial Statements

Automated Test Manufacturing

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

Automated Test Competition

The market for automated test equipment is highly competitive, and we expect this competition to increase. Our automated test business competes with a number of significant competitors in all our major product categories and across our targeted industries. In the semiconductor test market, we compete primarily against Advantest Corporation and Teradyne. In the electronics manufacturing test market, we compete primarily against Teradyne.

In many of our automated test businesses, especially those affected by the telecommunications market downturn, we have seen increasing pricing pressure during the past year. However most of our equipment competes primarily on performance or differentiated capabilities. Other contributing factors include cost of test, system scalability and flexibility, reliability and yield.

Semiconductor Products

Our semiconductor products business is a leading supplier of semiconductor components, modules and assemblies for high performance electronic and communications systems. We design, develop and manufacture products for the networking and personal systems markets. Our networking products include fiber optic transceivers for sending and receiving data over high-speed networks and ICs for enterprise storage and networking. In 2003 and 2002, about two-thirds of the semiconductor products business came from customers in consumer electronics markets.

We believe we are a leading provider of:

As of October 31, 2003, our semiconductor products business had approximately 6,800 employees worldwide. Our semiconductor products business generated revenue of $1.6 billion in fiscal year 2003, $1.6 billion in fiscal year 2002 and $1.9 billion in fiscal year 2001.

Semiconductor Markets

Our semiconductor products business serves the following markets:

Networking

There is a continued evolution of networks both private (Local Area and Storage Area Networks) and public (metro and wide area networks) to higher speeds and greater bandwidth

11

Table of Contents

Index to Financial Statements

driven by the ongoing growth of data traffic. Business-to-consumer and business-to-business e-commerce, the internet, the growing volume of e-mail traffic, the growth of streaming video and audio, the delivery of online services, and peer-to-peer communications are all generating ever greater volumes of electronic data that must be processed, moved and stored. As a result, both private and public network managers drive a continual process of upgrading their networks to higher speeds and increased scalability, albeit at a slower rate than in recent years. Fiber optic transceivers and high-speed digital ICs are the semiconductor technologies that help enable higher speed, higher performance networks.

We are the leading supplier of fiber optic transceivers, which convert electronic digital data into light signals for transmission, and convert light signals back into electronic digital form on the receiving end of the communication. We market fiber optic transceivers for both short-range, local area and storage area network applications and long-range, metro and wide area network applications to major data networking and telecommunication vendors.

In high-speed digital ICs, 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 offer 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.

Personal Systems

Products in our Personal Systems business are targeted for use in applications including mobile phones, printers, PC peripherals, and consumer electronics.

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. Consumer products that realize the convergence of palm-top computing, mobile telephony, and digital imaging are increasingly appearing on the market. We offer innovative wireless products such as our FBAR duplexers and E-pHEMT power amplifiers, which are helping to enable smaller, more functionally rich mobile telephones. In addition, we supply a wide range of RF and microwave ICs for use in both mobile telephones and mobile telephone infrastructure. We deliver digital camera solutions embedded in next-generation mobile phones and information appliances. We are experiencing rapid growth in our embedded camera module business, and we continue to be the leader in the optical navigation market. Finally, we are a leading supplier of infrared transceiver products for short-range, point-to-point wireless communications to manufacturers of mobile phones, computers, printers, digital cameras, personal digital assistants and pagers.

We are a 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 navigation sensors for optical mice to leading PC peripheral manufacturers.

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

12

Table of Contents

Index to Financial Statements

Semiconductor Products

Our major product areas include:

Networking

Fiber Optics.    We market optical transceivers, transmitters and receivers for high-speed data communications for Fast, Gigabit and 10-Gigabit Ethernet, Fibre Channel, and Asynchronous Transfer Mode/Synchronous Optical Network (“ATM/SONET”) applications up to 2.5 gigabits per second (OC-48). In addition, we are developing products for dense wave division multiplexing (“DWDM”) optical transport applications.

High-Speed Digital Integrated Circuits.    We produce physical layer ICs for high speed network switches and routers, devices that direct network traffic. We produce Fibre Channel protocol-based ICs and subsystems for SANs. We provide core electronics chipsets that support central processing units for selected Hewlett-Packard workstations and servers. We are developing customer-specific ASIC solutions for next-generation data switching products.

Personal Systems

Radio Frequency and Microwave Communications Devices.    We produce a broad family of RF and microwave communications products, primarily integrated circuits for wireless communications products and infrastructure. Our latest products are the FBAR duplexer, a semiconductor based filter product, and E-pHEMT power amplifiers, a high power-added efficient wireless transmitter solution. Both FBAR and E-pHEMT are targeted for current and future generation mobile phones. We began increasing the production of these two products towards the end of 2003, and we anticipate that they will be among the top growth areas for our semiconductor products business in 2004.

Infrared Emitters, Detectors and Transceiver Modules.    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. In 2003, we delivered the industry’s first infrared transceiver with remote control functionality for consumer electronics devices such as TVs and VCRs. The semiconductor products business also introduced a solution, known as the Ambient Light Photo Sensor, that senses available light and signals whether backlighting for displays and/or keypads is required. By not turning on backlighting when it is not needed, mobile systems can save significant battery life.

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

Optical Image Sensors and Processors, and Optical Position Sensors.    Our sensor products include embedded camera modules for mobile phones and navigation sensors for optical mice. We also produce optical motion control products used primarily for precision paper handling and positioning in inkjet printers and all-in-one products.

LEDs and Optocouplers.    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.

13

Table of Contents

Index to Financial Statements

Lighting Joint Venture.    We are engaged in a global joint venture, Lumileds, with Philips Electronics. Lumileds develops, manufactures and sells LEDs, modules, products and systems for a broad spectrum of lighting applications, including automotive lighting, high-brightness traffic signals, contour lighting and signs, outdoor illumination and white LEDs for both indoor and outdoor applications.

Semiconductor Customers

We sell to a broad array of customers in networking and personal systems. We sell to original equipment manufacturers directly, as well as contract manufacturers.

Our semiconductor technology licensing and supply arrangements with Hewlett-Packard limit our ability to sell products to other companies, subject to restrictions contained in the exhibits to our Master Patent Ownership and License Agreement with Hewlett-Packard and our ICBD Technology Ownership and License Agreement with Hewlett-Packard, which are exhibits to this Annual Report on Form 10-K. Through sales of ASICs, storage area networking components and motion-control products, Hewlett-Packard accounted for approximately 20 percent of our semiconductor products revenue in fiscal year 2003, 33 percent of our semiconductor products revenue in fiscal year 2002 and approximately 31 percent in fiscal year 2001.

Historically, we have not seen seasonality in our business. However, as we move toward more consumer-centric products, most specifically solutions for mobile phones, we expect to see an increase in the seasonality of our business.

Semiconductor Sales, Marketing and Support

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

Semiconductor Manufacturing

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

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

For selected customers, we maintain finished goods inventory near or at customer manufacturing sites to support their just-in-time production. In 2003, we negotiated extended payment terms for most of the materials that we purchased.

14

Table of Contents

Index to Financial Statements

Semiconductor 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:

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

Life Sciences and Chemical Analysis

Our life sciences and chemical analysis business provides application-focused solutions that include instruments, software, consumables and services that enable customers to identify, quantify and analyze the physical and biological properties of substances and products. Our seven key product categories include: microarrays, microfluidics, gas chromatography, liquid chromatography, mass spectrometry, software and informatics and related consumables, reagents and services.

We employed approximately 3,700 people as of October 31, 2003 in our life sciences and chemical analysis business. This business generated revenue of $1.2 billion in fiscal 2003, $1.1 billion in fiscal 2002 and $1.1 billion in fiscal 2001.

Life Sciences and Chemical Analysis Markets

We estimate that the markets that we serve represent approximately 25 percent of the total available life sciences and analytical instrumentation market. Primarily, our life sciences and chemical analysis business serves the following markets:

Life Sciences

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

Gene Expression.    Biological researchers today can study organisms and diseases based on genetic material. Gene expression researchers use devices called microarrays to measure the activity

15

Table of Contents

Index to Financial Statements

levels of many genes in a cell simultaneously for the purpose of understanding and characterizing disease, identifying drug targets and identifying patterns of gene activity that correlate to the potential toxicity or effectiveness of a drug. This is a double-digit growth market in which both our microarray and microfluidics solutions are sold.

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

Pharmaceutical Analysis.    Pharmaceutical and biopharmaceutical companies develop and manufacture drugs under strict regulatory guidelines intended to ensure the quality of products developed and given to patients, and to ensure the security and quality of information given to regulatory agencies. We provide liquid chromatography, gas chromatography and mass spectrometry solutions for the analysis of chemicals, and provide compliance services and data systems designed to further enable compliance with relevant regulations of the Food and Drug Administration (“FDA”) and other regulatory agencies.

Chemical Analysis

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

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

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

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

16

Table of Contents

Index to Financial Statements

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

Life Sciences and Chemical Analysis Products

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

Microarrays

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

In 2003, we introduced new 60-mer oligonucleotide microarray kits for Rat, Rice/Rice Blast, Human 1B, and Mouse. We also shipped a Whole Human Genome microarray to our customers for testing and evaluation. The intent is to sell this product commercially in January 2004. This new microarray is based on a new double-density format, which can acc