4. SHARE-BASED COMPENSATION

Agilent accounts for share-based awards in accordance with the provisions of the revised accounting guidance which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors including employee stock option awards, restricted stock units, employee stock purchases made under our employee stock purchase plan (ESPP) and performance share awards granted to selected members of our senior management under the long-term performance plan (LTPP) based on estimated fair values.

The impact on our results for share-based compensation was as follows:

	Three Months Ended				Nine Months Ended
	July 31,				July 31,
	2011		2010		2011		2010
	(in millions)
Cost of products and services	$	3	$	3	$	13	$	11
Research and development		2		2		8		8
Selling, general and administrative		11		8		39		32
Total share-based compensation expense	$	16	$	13	$	60	$	51

At July 31, 2011 there was no share-based compensation capitalized within inventory. The windfall tax benefit realized from exercised stock options and similar awards was not material for the three and nine months ended July 31, 2011 and 2010. During the nine months ended July 31, 2010, we reversed approximately $3 million of expense for the cancellation of non-vested awards related to the separation of a senior executive.

The following assumptions were used to estimate the fair value of the options and LTPP grants. We had no LTPP and employee stock options granted during the three months ended July 31, 2011.

	Three Months Ended					Nine Months Ended
	July 31,					July 31,
	2011		2010			2011			2010

Stock Option Plans:
Weighted average risk-free interest rate		-		2.1	%		1.5	%		2.2	%
Dividend yield		-		0	%		0	%		0	%
Weighted average volatility		-		36	%		35	%		37	%
Expected life		-	4.4 yrs			5.8 yrs			4.4 yrs

LTPP:
Volatility of Agilent shares		-		39	%		40	%		39	%
Volatility of selected peer-company shares		-		20%-80	%		20%-76	%		20%-80	%
Price-wise correlation with selected peers		-		53	%		55	%		53	%

The fair value of share-based awards for employee stock option awards was estimated using the Black-Scholes option pricing model. Shares granted under the LTPP were valued using a Monte Carlo simulation model. Both the Black-Scholes and Monte Carlo simulation fair value models require the use of highly subjective and complex assumptions, including the option's expected life and the price volatility of the underlying stock. The estimated fair value of restricted stock unit awards is determined based on the market price of Agilent's common stock on the date of grant. The ESPP allows eligible employees to purchase shares of our common stock at 85 percent of the purchase price and uses the purchase date to establish the fair market value.

We use historical volatility to estimate the expected stock price volatility assumption for employee stock option awards. In reaching the conclusion, we have considered many factors including the extent to which our options are currently traded and our ability to find traded options in the current market with similar terms and prices to the options we are valuing. For the grants awarded under the 2009 stock plan after November 1, 2010, we increased the period available to retirement eligible employees to exercise their options from three years at retirement date to the full contractual term of ten years. In developing our estimated life of our employee stock options of 5.8 years, we considered the historical option exercise behavior of our executive employees who were granted the majority of the options in the annual grants made during the first quarter of 2011, which we believe is representative of future behavior.