Good day, ladies and gentlemen and welcome to the Q1 2006 Agilent Technology Incorporated Earnings Conference and Analyst Meeting. My name is Jessie and I will be your coordinator for today’s call. At this time, all participants are in a listen-only mode and we will be conducting a question and answer session towards the end of this conference. As at any time during the call you require assistance, please key “*” followed by “0” and coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Hilliard Terry, Investor Relations Manager. Please proceed sir.

Good morning, hopefully everyone on the line can hear me clearly, unfortunately due to some of the storm-related challenges today; we have half of our team here in New York and half of our team participating today remotely from Palo Alto. So with that, let me make a few introductions here in New York, I have Tom White President of our OSS business, Pat Byrne, President of our Electronic Measuring Group, Craig Nordlund, Senior Vice President and General counsel of Agilent Technologies. In Palo Alto, we have our CEO and President Bill Sullivan, our Executive Vice President and Chief Financial Officer Adrian Dillon, and also Chris Van Ingen President of our Bio-Analytical Group. So with that, let me start with our Safe Harbor. We may make some forward-looking statements today, and we ask that you take a look at our SEC filings to make sure that you understand the risks and uncertainties associated with those statements. Also in accordance with SEC regulation G, if during this call or meeting we make any non-GAAP financial measure references, you’ll find in your books, here in the room and also on our website, a reconciliation to the, most directly comparable GAAP financial measure. In addition, the forward-looking statements that we make today are only valid as of this date; the company assumes no obligation to update such statements as we move through the quarter. So as we proceed today, I ask for your patience, we are going to take questions from here in the room also on the line and as many of you in the room know that we’ve been having a few technical difficulties, which just means that there is a still use for Agilent’s test equipment, and as many of you know our name is Agilent and today we are being very agilent. So with that, let me turn it over to our President and CEO Bill Sullivan.

Thank you Hilliard, I’d like to welcome whoever seems to be here, either alive or virtually to welcome you to our 2006 analyst meeting as well as our Q1 conference call, related to our performance in Q1, 2006. Today, I would like to give a quick snapshot of where Agilent is today. On August 15th 2005, Agilent announced this strategic realignment of the company, the purpose was to provide more focus as the world’s largest measurement company and to create more value for our customers as well as our shareholders. We are very pleased today to during this update to report that we have made excellent progress since that announcement. Today, Agilent is more focused, we are 2 times larger than our nearest competitor as the largest measuring the company in the world. We have made substantial progress in meeting the commitment that we have made, we have a robust product line, product offerings, moving into the future, and excellence that was clearly demonstrated in our Q1 results, we are strong very financially strong, have an excellent operating model in which to leverage our performance moving forward. So what you are going to hear today as well as the update on our Q1 performance as Agilent essentially moving into the Phase II of its evolution, to really to be able to leverage our top-line growth in order to return superior shareholder returns based on the strong operating model we have created. Let me just give you a quick update on the actions we have taken since the August 15th announcement. First of all, in September of 2005, we did call our $1.1 billion convertible debentures and that has been completed. Likewise, in November, we sold our share of our Lumileds joint venture to sales for $1 billion. In December, we…

Thank you, Bill and good morning everyone. It is a pleasure to be with you even if virtually and we all wish we could be there in the 27 inches of snow with you. Let’s begin by talking about the first quarter performance and then we will transition to our longer term operating model. As Bill has already said, we believe we saw a solid performance in the first quarter while completing several major transactions. We did complete the $3.7 billion worth of semiconductor related divestures in the past three months for a gain of $2.74 billion. We’ve returned $3 billion to our owners through a very successful self-tender. The growth in orders which was, orders were up 15% in the first quarter from last year. The growth was driven by the rebound in semiconductor test. But New Agilent in other words, excluding semiconductor test orders were also up 8% from last year. Our revenue and operating earnings, a revenue of 1.34 billion was at the near the high-end of the guidance of $1.28 billion to $1.35 billion. And our earnings we are at the high end of expectations. We actually reported $0.32 per share, versus guidance of $0.25 to $0.30 per share at 512 million shares outstanding. In fact, because of the success of the tender offer we ended up having 483 million shares on average outstanding during the quarter. So that $0.32 equilibrates to $0.30 at 512 million shares. So we did achieve the top-end of revenues and earnings despite some customer acceptance delays due to the Chinese New Year holiday, as Bill has already mentioned. The focus of what we are continuing to perform on the top-line, we are also performing on the bottom-line. We are focused on operational discipline does continue. We saw the highest gross…

At this time, operator can you give instructions to the participants on the line for Q&A?

Operator, we will take the first question from Auditorium and then we will move to questions from the line.

Excellent, standing by.

Why don’t we go ahead with Ed White from Lehman Brothers.

Thanks very much, this year, you are expecting to achieve higher growth in market average and Bio-Analytical measurement. But for our electronic measurement, it’s about inline with the market, even though you done a lot of new product introductions this year, is there a reason the why the higher growth for electronic measurement comes in 2007 rather than 2006?

Well I’m sure that, this is Bill speaking, I’m sure, Pat Byrne talks and you can also ask him the question, in terms of the growth, you are absolutely right Ed, we may have made a lot of investments in the joint venture in China, we’ve also increased our investments at a broad line of offerings on general instrumentation, I know Pat will go into a lot of details of other growth initiatives. And hopefully we are just being conservative, but, this year really is getting our new product families in place into really position ourselves to take market share.

Thank you, the next question will come from John Harmon of Needham & Company.

Hi good morning, my questions to drill down a bit, into general purpose, you’ve had nice positive year-over-year orders growth, whereas most of your competitors in general purpose tasks are really flat year-over-year, is there something different that you’re doing, or you just really leading the group by, by virtue of being bigger than your competitors?

Well I think we have a very strong position and I heard the best is that, Pat’s on the room, why not Pat answer the question very specifically on the progress we’ve made in general purpose desk.

Yes, so I think we are, given our global position, given the strength of our sales channel and the focus especially in Asia and in Japan, in the Asia-Pacific region that combines the strength of our new product introductions, especially in the Oscilloscope business, has led to strength of the general purpose and sales in the last several quarters.

Thank you and this time we will take a question from the phone line.

And Mr. Terry at this time there are no questions in the queue.

Okay we have ample questions here in the auditorium; the next question will come from Darrell Pardy of Merrill Lynch.

Thank you, Adrian could you segregate the factors in the model like the electronic measurement from a 11% operating margins in ’05 to 15% in ’07 and then do you similar exercise for Bio-Analytical?

Sure, I would tell you that if you look at our first quarter results in our EMS segment, we are already; virtually there. We will see an 11% operating margin in the first quarter. But first quarter is always our weakest quarter by a considerable margin. So in that sense it’s getting just a little bit of leverage on the higher growth that we are expect in the reminder of the year, plus the kind of discipline that we’ve seen, the four point improvement in gross margins year-to-year, continuing as we gain momentum through the year. On Bio-Analytical solutions, as Chris has emphasized repeatedly, we’ve been making significant investments in our integrated biological solutions business. It is not been profitable as we’ve been are making those investments and this is the year that that business turns around and becomes profitable, and that impact alone is worth 3 points in the operating margins hold, the Bio-Analytical systems business. And then of course we get the leverage of 13% top-line growth as well, so that’s actually fairly conservative incremental plus the turn around in the IBS business.

Thank you, the next question will come from Deane Dray of Goldman Sachs.

Thank you, two questions first one is for Pat, could you provide some additional color on the strength of this scopes market for Agilent? How much of your performance is coming from new product introductions, at what level, low, medium, and high. And how much might be coming from share gains?

Well Deane those are really combined, the share gains with the new products, with the new products with the things that are gaining the share. So the, but it is the new products that is driving the growth, the growth rate is more than 10% in the scope business and we are, we are taking market share from the, just by measuring that revenue growth from the other major players in the Oscilloscope business?

And where did particularly end-markets are strong, it looks like aerospace and defense?

I think, it’s the aerospace defense industry, it’s also the lower cost products that we’ve introduced which are very broad set of electronics markets. Again, in Asia Pacific and then also in some of these supply chain into the greatest testing, for example Deane, semiconductor devices to go into the IT industry, the computer industry, the wireline equipment industry at the high-end.

Great and then second question would be for Adrian, you had, you drive some additional color on the geographic performance in the quarter, you said Americas orders up 6% Asia did I hear correctly is 35%, just drive some additional color what is driving that?

Yes. You did hear correctly 35% year-to-year and Pat was alluding to some of that we have been really focusing on Asia in both segments of the business whether it’s below cost instrumentation that’s gaining so much momentum in the Chinese and Asian markets or the strength if the Bio-Analytical systems because of the infrastructure, just huge infrastructure requirements and demand in China, in India and in both of those areas are orders and revenues are up strong double digit. So, it really is secular demand as those world economies are beginning to become developed economies. And I have 200 million populations of middle class citizens that are insisting on better food quality, air quality, water quality. And as well generics, the demand for generic pharmaceuticals or from generic pharmaceuticals is very strong. Again in India, our demand is up very strong if I’m sure Chris will emphasize later.

Thank you, Adrian. The next question will come from Richard Chu of SG Cowen.

Thank you, Adrian I’ve got a couple questions. First of all, on the continuing operations, operating expenses for the quarter, about 540 million that looks like it is up sequentially from Q4, if I, or its been if its correct? Could you comment on that side, anything we should understand?

Richard if you look at Page 3 of my presentation, you will see that R&D is up 3 million, but SG&A is down 3 million, so I think we are flat sequentially.

Okay, now why should, that not be countered down, and given the seasonal declines, as you look in Q4 to Q1?

Our structure doesn’t flex quite that much, that is going to adjust for a seasonal pop, we also will have a variances in our cost structure, because the beginning of the year, you have wage increases, you have hike or you have other cost that happen at the beginning of the year, whereas in the fourth quarter, many of those compensation cost sales hit their limits. So, it’s essentially seasonal, and I really focused on the 2.5% increase year-to-year in operating cost, in the phase of a 10% increase in revenues, that’s being more indicative of the kind of discipline. But I would also remind you one other thing, and this is, if you will, the negative side of it putting a variable cost structure in. The variable pay that has been accrued in the first quarter of this year, will be significantly higher than it was a quarter ago, because we hit our 21% return on invested capital and that’s the target for 10% variable pay versus last year at this time but the 10% return on invested capital of the variable pay was down in the 5% range.

That’s helpful, if I can pursue the question of the global infrastructure we have seen, you’ve said earlier that you would expect to be, at your target level by the middle of the fiscal year, so let’s assume that’s the end of Q2. And thinking about Q2 versus Q1, cost structures, does that mean that your biggest cost structure somehow will be better sequentially, can we see any improvements?

In fact, it will be Richard, because we are continuing rapidly to get headcount out to consolidated sites. But we are also, you have to remember is that during the fourth quarter and the first quarter, we were providing a lot of services to semiconductor products, through that same global infrastructure and that was offsetting. Some of that overhang that we’ve otherwise would have recognized, in the first quarter in fact, we were able to absorb 100% of that overhang, because we are having the extra month of semiconductor products in the business, because they didn’t complete the divestures until December 1, rather than the original intention of November 1. So we had the windfall from an extra month of providing services at our 2 of our goal, in the second 2 months of the quarter, we did have a little bit of an overhang, but on balance we were able to absorb it. And the really good news is that we believe, we’ve made enough progress that we will have essentially, be able to essentially absorb it again in the second quarter.

So that, it should be flattish is what you are saying.

Other than the normal seasonal increase and expenses for things like trade shows, et cetera, yes we would expect to see a continued secular decline in our global infrastructure cost through the remainder of this year and into early 2007.

Okay, thank you.

Operator do we have any questions on the line?

Yes sir, we have a question from Richard Eastman from Robert W. Baird, you may proceed sir.

Just a question regarding the electronic measurement business, could you add some color to the 2 segments the wireless segment, obviously strengthened in the quarter and I know we’ve been working for backlogs there, at least on the handset side but do you give us a sense of how you would expect that, those 2 pieces of the business, the wireless and the wireline to play out for the balance of the year and consolidated into your 5% growth expectations.

Pat, I want you to go ahead and answer that.

Right. Yeah, the wireless business is that really driven by 2 major factors, the first one is continued growth in the cell phone testing business, cell phone testing business is driven by 3 major factors, capacity expansion, share shifts and new technologies. And so, last year was a strong year in cell phone growth, 800 million phones shipped last year. So I would expect that this year will be another strong year of cell phone testers, we have a strong quarter in Q1. The second major factor driving the wireless market is the, is the new technologies that are coming online this year related to 3G and 3G plus, we have strategically and are recovering this little bit later, starting to focus more on R&D solutions, it’s a large market, split gross margins and so we are, we should continue to see growth there as well. So that, I would expect to be one of the main growth drivers for the communication test business, it’s the largest part and should see strong growth throughout the year. Wireline is, is sort of been a positive of our top customers we have, have put limits on the capital spending, I would expect that to recover moving forward that not to be as higher growth as the wireless test business.

And were you able to build some backlog in OSS in the quarter, with the order stronger than the sales there?

Well let Tom to, Tom will answer that question.

Backlog in OSS, we did build backlog that is from Q1 to Q2 primarily because of some of they acceptance enlighten as Bill alluded to, earlier in the presentation.

Okay thank you.

Okay we will take; operator is there another question from the phone line.

No sir at this time there are no questions in the queue.

Okay we will go back to the auditorium, Ajit Pai from Thomas Weisel Partners.

Yeah first question is for Adrian, Adrian at the end of your October quarter you had about 1.37 billion that you took as a tax federation allowance. Once you’ve, sort of, have any of those been lost when you digested SPG and over the next couple of years do you, what percentage of that do you expect to use up and will be accretive to cash flows?

Ajit that’s a very good question, part of the reason why we had essentially on a GAAP basis, no taxes on the lowest divestitures and part of the strategic reason for doing divestitures in the first place rather than spin-offs was because of our tax loss, carry forwards and we did consume, a bit of them, the tax base of SPG was about $1 billion. So we did consume some of the differed tax assets that are no longer on our books. We believe that with the state of the business and the, the fundamental turn around that we seen in the operating structure of the US based business that we will be consistently profitable and increasingly, so going forward, our best guess is that we will take another roughly 2 to 4 years to a totally absorb the remaining differed tax assets. And at some point, perhaps in a year or so, PWC will come to us and say, “Hey! Put those differed tax assets back on the books”. And so will get another giant game just like we took the giant loss a couple of years ago. But for the moment, that’s the reason why and for a pro forma basis, we say, we have a 25% tax rate which we’re very proud off. But on a GAAP basis, we have something like a 16% tax rate and the entire difference is the fact that and as since anything we earned in the US is tax free for, at least the next 2 to 4 years.

Right. Second question is on your client test business, I think I just heard Pat, just talk about the mix between wireless and wireline, but the wireline spending after about 4 years of decline has been coming back in a number of testing measurement players within that space is enjoying, showing some rapid growth, is it that your quality of portfolio or your exposure to wireline test, you still have exposure to wireline, what percentage of your electronic test business today is wireline and why and you not as optimistic as the growth rate some of your piers are showing right now in that space?

I will take first part of that, but then I guess, I’ll turn it over to, to Pat as well. I would say we are probably being deliberately conservative, perhaps, its been down for so long and then you see a little bit of interruption that because as Pat said, some of our major customers have clearly put capital spending freezes on, as they address their, the structures and some of the major service providers are also going to consolidations and are really clamping down at the moment on CapEx. But I would agree that we could be being, a bit conservation about wireline, it is about one third of our communications test which is about two thirds of the EMS segment. So that’s the size of total wireline these days including OSS, is a much, much smaller business than it use to be.

Thank you.

Any Additional comment?

There is no additional comments at the, it split wireless to wireline is as per Adrian’s comment, I think both in the instrumentation side of the business and the OSS part of the business. But we are saying researches of expenditure from the operators particularly is triple-play, I’m starting to kick in obviously a lot of the triple-play, that you have about right now either that’s kind of pilot stage, but those pilot are not growing. So, I think there’s a certain amount of optimism around the test requirements, test requirements is triple-play and the quad-play over the next 1 to 5 years.

Any more questions from the audience, we’d circle back to them and see that far back, but please state your name and company name also.

Its David Weinstock (ph) from HSBC, a question for Adrian, given the new order momentum in Asia at about 35% will they require any supply chain adjustments in order to optimize the business delivery in the region and will that have any in turn, knock on effects on working capital management measures?

No we have done a, I think a pretty done a good job of keeping our operating facilities close to the customers. We have order of magnitude 60% of total Agilent production facilities today in Asia. So obviously we need to be able to quickly flexibly expand capacity as appropriate, but we feel pretty good that we have the supply chain that’s in very good order particularly out of Malaysia and increasingly in China deserved that raising Asian demand.

Okay thank you Adrian, just to come back to your comment that you would be revisiting your capital structure at the end of fiscal ’06. At this stage, at this run rate what would you expect the net cash per share to end up in fiscal ’06? And then give us the sense of what your options are in terms of the, the use of cash, additional buybacks and how you thinking about the dividend at this stage?

Sure, I think if you take a look at that slide 15, I believe it showed that we have something like $2.3 billion of, if you will surplus cash that free cash on the balance sheet or roughly something like 550 per share and obviously that goes of the bunch in 2007. So I think priorities for what we do with that on the slide 16, I believe that we won over earlier, which is again we want to continue to do that kind of fold in acquisitions but on the margin, are easy to fold into the business to run through our great sales channel that reinforce and extend our capability in the measurement arena and where we are quite confident that we’ve been able to demonstrate that we do generate 20% returns on that incremental investment. Next is, to offset the dilution from options exercises and then I think we will be talking about either additional share repurchase programs and/or our dividend and though, probably wants to jump in here, but we’ve been clear that when we have confidence that this really isn’t enduring cash flow positive company that we are clearly gaining and when all of these transactions are over including the share repurchases that we’re obliged to view how best to return that capital to the owners.

And we have been very consistent on three options as Adrian has outlined and we will continue to work with, the Board of Directors to come up with the best decision we believe of the owners.

Thank you Bill. Operator, I will go back to the line and check to see if there are any questions in them.

At this time, we will go back to Richard Chu of SG Cowen & Co.

Thank you. Bill what are the initial slides you talked about, your goal being, to increase gross margins by 3 points through M&A. And then you talked about the fact that you really added a couple of points respectively from what you‘ve done. Does the, does the illustrated picture for ’06, ‘07 includes fully the, those 3 points is that somehow in addition to what you have made out for us?

Yes. Richard, just to make clear, that’s the target growth, these acquisitions are 2 points, in other words, we had maybe 6 acquisitions over the last 5 quarters and of course to justify it in addition to it having a greater than 20% return on investment capital on year 3 is the growth numbers putting in. So, if you look at this overall market growth, which Agilent went through, we are targeting to have 3 point additional growth inside of that M&A. And so, we are going to sort of a cascading effect but we will continue to look for acquisition opportunities as we move forward and typically the growth number that we would get is in that year 3.

Okay, and in unrelated spend, Adrian can you help us understand how the, assuming of that you don’t make any share purchases in Q2, how we should think about the other incremental lines which is roughly $40 million in Q1, are there major consequence from we should be cautious of it as we look at that?

No, this is, you can see the cash and please look at both the restricted cash and the cash in short-term investments line when you are thinking about what are we multiplying the interest rate against. But this is all invested in short-term very marketable securities and nothing exotic, and I think if we were to assume, I don’t think it’s a correct assumption, but you were to assume that we didn’t do any share repurchases in the second quarter, then you’ve to assume that it would be cash flow positive in the quarter, and that would add to the cash balance that we have at the end of the first quarter.

Okay, and there are no other meaning non-operating items and disappearance of gains et cetera that was like that one?

No, again into the first quarter, we had 2.7 billion of cash and equivalents and we’ve had 1.6 billion of restricted cash. And of course, we would also pay interest at about LIBOR plus 50 on the long-term debt, 1.5 billion, but that would be the basis. The second quarter is traditionally, fairly, significantly cash flow positive. So, I think, you can add a little bit to there.

Thank you.

Thank you. Next question will come from Ed White of Lehman Brothers.

Hi, Adrian just a small question on guidance looking forward, how would you expect the equity-based compensation expense to go through the year, I know it was $0.07 in the first quarter, you talked about $0.18 for the year, but would you expect that to be pretty evenly distributed till the rest of the quarters, or might it be different pattern from that?

$0.04 to $0.05 per quarter and slightly lower towards the end of the year.

We will go back to Ajit Pai

And Adrian what is the share count at the end of the quarter on a fully diluted basis?

444.

Operator, I will go back to the phone line, are there any questions in the phone line?

At this time sir, there are no questions in the queue.

We will go to Jack Murphy; they will be able to hear you on the line Jack.

2 questions. One, are you guys willing to lever the balance sheet at all, or you’ll take on net debt, is supposed to net cash, being a more predictable company going forward?

I’ll begin that, and I’m sure Bill can jump in too. At least theoretically, we now have a company that is cash flow positive under any normal economic circumstances and so modern capital turn would tell you that ought to have a little bit of net debt on the balance sheet. Cannot argue with that, we are just so far away from that right now, that it just seems pretty hypothetical and right now we are trying to make sure we understand what the options are for getting the surplus cash back to the owners.

But Adrian and his team have done a good job of evaluating other companies that has similar business models. We continue as I mentioned before on previous question, continued to work with the board to make sure that this full agreement and what our core capital structure is and what’s the best way for us to return value to our shareholders.

But I’ve got a couple of more, and I think in the last year, you’ve paid most, or some of our variable comp was based on ROIC calculation. And you obviously did well there, are you going to change the metric to include top-line growth anytime in the future?

No. Right now our focus is still continuing to be 100% on return on invested capital. And as you know, the growth is the big component on that, but we have worked so hard to get a very strong operating model that we want to make sure that is absolutely built into our DNA, that we will return greater than 20% return on invested capital and as you probably know many studies have been done, companies that consistently return greater than the cost to capital, their stock outperforms their competitors in the market.

And then the last question I had was, if you look at your theoretical ’07 over ’06 forecast, the income statement forecast, incremental margins in the test and measurement business were about 40%, the incremental margins in the Life Sciences business is about 44%, and 45% I think, is that the, are those metrics we should use going forward, if you exceed or fall short of your top-line growth, by, X?

Yeah, those are pretty good incremental, decrementals, earlier on in the cycle as we were the getting full benefits that the transformation and higher volumes we were talking about the need to get 60% to 65% incremental, if we were going to achieve that operating model over there. And now, on the increment now, especially with the variable pay, kicking in as well, I think that something in the 40% range for the continuing business is about the right kind of incremental, decremental. Do remember that if we had acquisitions, perhaps, in the first year that will affect the incremental one way or the other, but yeah that’s a pretty good guess.

Thank you, are there additional questions here in auditorium, back to John Harmon.

Hi, thank you. I was just curious, what’s your general attitude is regarding our acquisitions, you gave us the financial hurdles but, there are a couple of obvious candidates in the electronic measurement, by there would be good strategic set and several on the Bio-Analytical side. Are these things you’re more likely to look at it seems, more things are on the table these issue that or comment it used to be?

Sure. We do internally to the company through our corporate development organization working with the businesses, have a very robust process of evaluating all alternatives, and so we will not shy away for making large acquisitions that we think is a good benefit of our shareholders, 70% of these large acquisitions fail. We are very much aware that but we do have the process, we do have the analysis and have our look out for synergistic opportunities that may arise.

And I think one of things you can have more confidence about today than perhaps in the past, is that through all of this work and transforming the company, we have build a capability to do the kind of consolidation and integration of acquisitions that really does eliminate duplicative cost really does leverage the strengths of what you are buying but put it into a system in a channel that and eliminating cost that really can create the kind of cost synergies that all of those studies will show are the source of the value creation.

Thank you, are there any more questions in the auditorium. Operator, are there additional question on the line?

And at this time sir, there are no questions in the queue.

Okay, we are at a point where we can actually break at this point. Let me just stop and review the agenda for the rest of the morning. We are going to shorten the break given that we have people on the line to 15 minutes instead of the half hour. So we will reconvene at 10.00 AM, in about 15 minutes. After which Chris Van Ingen, President of our Bio-Analytical measurement business, will present after that, Tom White, I’m sorry Pat Byrne, Electronic Measurement and then Tom White of the Operation Support Business and then lastly Bill Sullivan our CEO will come back with closing thoughts. Thank you and I’ll see you in 15 minutes.