Jeff Hall - CFO Rick Wallace - CEO John Kispert - President and COO

Tim Arcuri - Citigroup A.J. Safalow - JPMorgan Satya Kumar - Credit Suisse Brett Hodess - Merrill Lynch Mark Fitzgerald - Banc of America Edward White - Lehman Brothers Gary Suing - CIBC World Markets Steven Ballero - HSBC Mahesh Sanganeria - RBC Capital Markets Peter Kim - Deutsche Bank Ben Pang - Caris Jagdish Iyer - UBS Mark Bachman - Pacific Crest Securities

Good afternoon. My name is Marvin and I will be your conference operator today. At this time, I would like to welcome everyone to the KLA-Tencor Corporation Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session (Operator Instructions). Thank you. I would now like to turn the call over to Mr. Jeff Hall, CFO. Sir you may begin.

Thank you, Marvin. Good afternoon and welcome to KLA-Tencor's third quarter fiscal year 2007 earnings conference call. I'm Jeff Hall, the Chief Financial Officer. Joining me on our call today are Rick Wallace, our CEO; and John Kispert, our President and COO. We're here today to discuss our third quarter results for the period ended March 31st, 2007. We released these results this afternoon at 1:15 pm Pacific Time. If you haven't seen the release, you can find it on our website at www.KLA-Tencor.com or call 408-875-3600 to request a copy. Rick will lead off today's call with a discussion of industry developments and KLA-Tencor's recent progress and strategy. Afterwards, I'll review the financial results for the third quarter and then I'll open the call up for questions until 3 o'clock Pacific Time. On the investors section of our website, you will find a simulcast of this call, which will be accessible on-demand for 90 days. On the website you will also find a calendar for investor events and presentation at investor conferences. You will also find links to KLA-Tencor's security filings. In those filings, you will find descriptions of risk factors that can impact our future results. And as you know, our future results are subject to risks and any forward-looking statements we make are subject to those risks. KLA-Tencor cannot guarantee that those forward-looking statements will come true. And although we take no obligation to update those forward-looking statements, you can be assured that any updates we do make will be broadly disseminated and available over the web. And with that, I'll turn it over to Rick.

Thank you, Jeff and thank you for joining our earnings call for the third quarter of fiscal year 2007. Today I'll be discussing highlights from the March quarter, updates on key product activity, and guidance for the June quarter. In the March quarter, KLA-Tencor continued to execute and deliver new products to market and producing solid financial results. I'll begin with a quick run down on the numbers and then I'll provide you my perspective. Orders for the March quarter were $689 million, down 5% from the December quarter, and at the mid point of our guidance. Revenue was strong at $716 million. Net income was $171 million or $0.84 per diluted share including stock-based compensation and excluding charges. KLA-Tencor's continued strong performance is the result of meeting our customer's needs with the right products and services to help them be successful. Memory was above 55% of orders, and again the strongest segment in the March quarter with significant D-RAM investment. As expected NAND bookings remained soft at only one-third of our memory bookings. Foundry was about 25% of bookings as a result of increased investment to build out 65-nanometer production capacity. Logic was lowest at around 17% of orders, as demand for 45-nanometer is not expected to pick up until later in 2007. In spite of softness in some specific markets, our outlook for CapEx to be flat to up 5% in calendar 2007 remains unchanged at this time. Let me now give you a couple of updates on our product activity as we continue to demonstrate our product leadership at the leading edge. In the quarter, we introduced our new TeraScan HR Reticle inspection product, which is already installed at several of the world's largest Reticle manufacturers. It is the industry's first 45-nanometer production capable photomask inspection system. The TeraScan HR extends the market proven TaraScan platform, adding auto focus, new database algorithms, accurate modeling of small low PC and advanced Reticles and wide spectrum extendibility to range from 130-nanometer to 45-nanometer nodes as well as 32-nanometer R&D. Our 2800 brightfield inspection systems won several head-to-heads at Asian foundry and memory customers ramping 65-nanometers. Customers are selecting the 2800 because it is the only optical inspection tool capable of detecting critical defects in line using broadband DUV illumination. Customer demand for our Puma system continued to be strong. A leading memory customer is migrating Puma from an incumbent for nine critical layers because the Puma combines the high throughput characteristics of darkfield inspection with the high sensitivity imaging necessary to capture defects on a small design. KLA-Tencor is the leading inspection and metrology company and our continued commitment to differentiated products was illustrated by KLA-Tencor's market share gain in the recently release State of Quest 2006 market share report. I'm proud of this achievement, which is a result of our employees' dedication to delivering the products and services our customers require to increase their yields and profitability. Across the industry, the problem and challenges of qualifying 45-nanometer are significant. We're actively working with customers on multiple aspects of 45-nanometer adoption. As always, we have a number of new products under development and plan several new product introductions over the next several months that are critical to 45-nanometer. We believe the company is strongly positioned to continue to outgrow the industry in 2007. Wrapping up, let me give you our guidance for June. Orders down 5% plus or minus 10% from our March quarter. Revenue between $700 million and $715 million and EPS of $0.84 to $0.86 including stock-based compensation and excluding charges. Now I will turn the call over to Jeff Hall.

Thank you, Rick. Let me start by going through the quarter in a little more detail. Net bookings for the March ending quarter were $689 million, which is roughly 5% lower than the December ending quarter. And 12% higher than the quarterly results from one year ago. Every quarter we review our backlog in detail and de-book in accordance with our booking policy that restricts actual become bookings to a set criteria. The set criteria mandate that technical specifications are signed off, valid terms and conditions are finalized and delivery is scheduled within 12 months. This quarter we de-booked $11.5 million of orders. Total backlog remained approximately flat quarter-over-quarter at $1.6 billion. Remember, we do not include any service bookings in this backlog number. Shipment backlog, tools for which we have taken orders but have not shipped, was at $1.05 billion, or approximately 5.5 months. Revenue backlog, tools that have shipped but have not yet been accepted for revenue, was $509 million or approximately three months. We remain confident that we have a strong backlog shippable over the next six to nine months. Our ability to maintain this significant level of both shipment and revenue backlog continues to help KLA-Tencor sustain profitability throughout any business cycles. The regional distribution of orders for the March quarter was as follows: The U.S. was 17%, lower than its historical average of 25%. Taiwan was 31%, higher than its historical average of 20%. Korea, China and Singapore combined were 16%, lower than their historical average of 20%. Europe was 8%, lower than its historical average of 10%. And Japan was 28%, higher than its historical average of 25%. The product distribution of orders was: Wafer inspection was approximately 48%; Reticle inspection was 16%; metrology was 18%; data storage was 2%, and service was 16%. Before I start with the income statement, let me summarize the special charges in the quarter. The charges fall into three buckets: First, we had $18 million of non-cash charges related to acquisition, primarily ADE. $10.5 million is included in cost of goods sold, $2 million is included in R&D, and $5.4 million is included in SG&A. In the June quarter, we expect charges related to acquisitions to decline by about $4 million. These estimates exclude potential charges for Therma-Wave. Second, we had $15.3 million of onetime charges related to our stock option investigations. $1.7 million is included in cost of goods sold, $2 million is included in R&D and $11.5 million is included in SG&A. These charges are for legal and investigative costs, costs related to the resolution of employee tax issues resulting from IRS Section 409A for non-executive employees. And compensating -- compensation expenses for -- compensating non-executive employees for lost benefits due to suspension of the employees' stock purchase plan. Finally, we had $5.4 million in onetime tax benefits resulting from the closure of several audits. Now, turning to the income statement, revenue for the quarter was $716 million, up about 10% quarter-to-quarter, and up 38% from the same quarter last year. GAAP gross margin for the quarter was 57.2%, this includes 10.5 million of charges for acquisition and deal related amortization and $1.7 million for stock option investigation related charges. Excluding theses items gross margins including stock option was 58.9%, up about 240 basis points from Q2 as inefficiencies and bubble costs related to the integration of acquisitions and the movement of operations to Asia were more than offset by reductions in cycle time and other operational improvements. GAAP operating expenses including both SG&A and R&D were $227 million, this number includes $7.5 million of charges for acquisitions and deal related amortization and 13.5 million for stock option investigated related charges. Excluding these items, operating expense was $205.8 million, down $2 million from the prior quarter. As efficiencies realized in the quarter, more than offset increases from the first full quarter of ADE and the addition of OnWafer and SensArray. For the quarter, other income was $20.8 million. The effective GAAP tax rate was 23.9%. This rate is lower than our ongoing tax rate of 28%, as a result of the one-time charges and the 5.4 million of discrete items discussed earlier. GAAP net income for the quarter was $154.8 million or $0.76 per fully diluted share. Excluding the one-time charges previously discussed, net income was $170.8 million or $0.84 per fully diluted share. This number includes share based compensation expenses of $0.10 per diluted share, and the approximate breakout is cost of goods sold, $0.03, R&D, $0.05, SG&A, $0.06, and a tax benefit of $0.05. In the June 2007 quarter, we expect expense for share-based compensation to be similar to March. Now turning to the balance sheet. Cash and investments ended the quarter of $1.6 billion, a decrease of $558 million quarter-to-quarter as a result of the previously announced $750 million accelerated share repurchase plan, which is expected to be complete by the end of the June quarter. Inventory decreased by $34 million to $530 million. Accounts receivable increased in the quarter by $51 million to $499 million principally as a result of the increase in tools awaiting acceptance in Japan. Capital additions related to fixed assets were approximately $24 million for the quarter, as we continue the construction of our new facility in Asia. Depreciation was 15 million. On a net basis, including retirements, fixed assets increased by $9 million over the quarter. Cash generated by operating activities was $198 million. We paid a dividend of $24 million and headcount ended the March quarter at approximately 6,000. Finally, to recap the guidance, Rick gave for June. And again, all excluding Therma Wave. Bookings was down 5%, plus or minus 10%, revenue between $700 million and $715 million, operating expenses approximately flat, interest income of approximately $16 million, shares outstanding of approximately $194 million, and EPS including share based compensation but excluding one time charges and deal related amortization of $0.84 to $0.86. This concludes our remarks on the quarter. We will now open the call for questions. Before I turn the call over to Marvin to give the polling instructions, let me request that you refrain from asking multi-part question to give others some time. As always we're all on a tight schedule. Marvin, can you begin the polling, please?

(Operator Instructions) Our first question comes from the line of Tim Arcuri with Citigroup. Tim Arcuri - Citigroup: Hi, guys. Two things. First of all, Jeff, obviously the EPS guidance here is very strong. When you look at your cost structure relative to the financial model that you put up at Semicon West last year. Where do you think you are right now relative to that model? Are you almost of to it? Are you at it?

Yes, thanks, Tim. The way we look at it is, obviously, we've made some progress but we're about where we want to be to slightly ahead of the model at this point, but still a lot of hard work to do from here. Tim Arcuri - Citigroup: Okay, okay. So, actually relative to that model, if there are incremental expense steps taken from here going forward that's going to put you even above that model, right?

Our plan is to continue marching to the model that we laid out about a year ago. Tim Arcuri - Citigroup: Okay and then last thing from me. Have you seen any push outs recently; there's been a couple. I think there was one in memory, and there's been a couple foundry related. Have you seen any push outs lately. So, is your guidance meaning fully different in terms of orders today, then it would have been say a month to six weeks ago?

Hey, Tim, it's John. I think, there's two things we've seen over the last 30 days. One is in the microprocessor logic space, where you've seen some changes in strategy. It was a handful of customers, European customers, Japanese customers, and we've seen some orders that would have expected not only in the March quarter, but some in the June quarter, probably sitting now in firmly in the second half of the calendar year. Not a big number but certainly some movement and that's really folks changing where they want to get things built or changing fact maybe they're not going to do R&D in one particular facility and do it in a different way. I think the other change across the industry has been and to your point in the last 30 days and that's been in the memory space. I think that one as is more focused, it hasn't been huge to this point. The orders are still within the calendar year. It looks like, if I were to characterize it stuff that we'd expect to kind of in this timeframe, in this June ending quarter is moved out to more into the September, October, November timeframe. Again, not a big number and very isolated to one or two customers. Tim Arcuri - Citigroup: Okay, John. Thanks a lot.

Our next question comes from the line of A.J. Safalow with JPMorgan. A.J. Safalow - JPMorgan: Hello, good afternoon. John, just a follow-up on that particular question. Are you seeing any foundry push-outs? And do you expect the foundry demand to trend higher from here?

A.J., the foundry numbers you hopefully can tell with the numbers that, Jeff gave you we saw a nice uptick in foundry in the March ending quarter. I think if anything, the number will be about the same in the June quarter, if not some upside to it. And I think the thing, it looks strong into the second half of the year. The thing we're trying to figure out here is, as you see changes with other folk strategies how will that show up in the foundry, spanning through the second half of this calendar year. And that's something that I wouldn't be able to answer right now, but we're certainly looking at it. A.J. Safalow - JPMorgan: So, basically no recent weakness in foundries, correct?

Not, on the order front, or the shipment front, no. A.J. Safalow - JPMorgan: Okay, good. Then my second question is, is the difficulty in technology transitions to either 65-nanometer for foundry or 17-nanometer for DRAM, is it causing or is it likely to cause any sort of non-demand related slowdowns in the capacity rounds?

A.J., you're talking about memory? A.J. Safalow - JPMorgan: Yes. I'm talking about both memory and DRAM. In the case of foundry going to 65-nanometer and in the case of DRAM going to 17-nanometer. Do you see people having technical problems in bringing the yields up that you think might cause them to push out their plans, which has nothing to do with the end demand?

Hi, A.J., it's Rick, great question. In fact, what we do see is people very concerned about their yield challenges at the two notes you talked about, and that has really got us engaged with a number of customers, trying to help them work through that. Certainly nobody wants to slip out their production because they struggle with yield and that's really caused us to get very involved and has driven demand for some of our leading edge products to help them do that. We don't see a push-out as a result but we do see it as one of the drivers for increased investment in process control as a result. A.J. Safalow - JPMorgan: Just a quick follow-up to that question, sort of a different take on the same thing, if we see DRAM prices and/or demand start to rebound. Do you think some of the second tier DRAM makers would actually do more at 19-nanometers, rather than scramble to accelerate the 17-nanometer.

When we talk with customers what we find is they all of them; figure particularly in the memory space think the advantages are pretty compelling on the leading edge. So they're pushing really hard to meet the demands and the demands continue to be strong on the leading edge; I think there's more capacity in place for the 90-nanometer note as you know. So, really we don't see that trend to be backing off, I think what people are trying to figure out. Get the new process up and ramped and win design ends, so we haven't seen that trend you're talking about, not saying that it's not there.

Thank you. Marvin, who is next?

Our next question comes from the line of Satya Kumar with Credit Suisse. Satya Kumar - Credit Suisse: Yeah, hi thanks for talking my question. John three months ago you were talking about orders being flat to up in June. Clearly, you've talked about seeing some microprocessor and memory push outs, the fundamentals for your customers has gotten significantly worse in the last three months. And June is your seasonally strong quarter; how does the order look in the back half of the year? Particularly as you look at September is there a possibility that you could see more than a double-digit decline in orders?

Yes Satya, that's the key question; certainly we're focused on it. It is those two buckets if you will the logic microprocessor thing that we're watching; I think that one will play itself out really well, I think the key things you look for are pricing an inventory. I think those are all healthy, it's just a matter of decisions being made and investments being made. So the second bucket that's probably more concerning, and one that we're going to just stay focused on we've been focused on it for many years. And clearly declining returns for our customers, are going to eventually lead to lower capital investments, the feeling we get talking to our customers is that, the investments they're making are strategic, they see the demand at the leading edge as Rick was saying. We don't see people blinking or pulling back I think that's evident in our ship rates. And in our guidance that on the memory side that they are pushing forward, but we're going to keep our eyes on it for obvious reasons. Satya Kumar - Credit Suisse: And then a quick follow-up to that, typically when you see the possibility of the customers particularly the memory bucket weaken as much as it has. You start to see them cut CapEx or ask for better pricing, and there's a couple memory companies that are talking about getting better equipment pricing from Japan and Korea. And talking about getting volume discounts, are you seeing any changes in your pricing environment that out of the realm of normal course of action over the last three months?

No real changes, you've changed jobs you're now in procurement sounds like. No we're forever dealing with delivery and pricing and economic terms and conditions that we're forever trying to increase the value that we create in fabs, I think very key as Rick said in the opening comment is for us to keep coming out with newer products. The more unique defects that cost our customers lots of dollars, we're excited by things like immersion and double patterning, and certainly the issues that still surround high K materials, and changes there and different architecture changes, I think the value that is represented in tracking these things and measuring them is continuously increasing, we probably see less pressures than other folks in the equipment industry Satya Kumar - Credit Suisse: Thanks a lot.

Our next question comes from the line of Brett Hodess with Merrill Lynch. Brett Hodess - Merrill Lynch: I was wondering, if you could take a shot at sort of sizing, in the past. You've given us what the opportunity for fab is, as you move down the technology curve and now that you're getting more insight into the 65-nanometer and 45-nanometers nodes. How those compare to what your sales opportunity is per fab, or as you move down to those areas.

Hey Brad it's Rick. I'll start that, and let Jeff come back with some numbers, I think in general I would say that it tends to be playing out pretty much as we anticipated, with the focus being very heavily on trying to get quick yield ramps for our customers; but we're clearly seeing the increased number of places that people want to measure and inspect. And particularly, people are very concerned about the yieldability of the 45-nanometer node; 65 people had more progress on that. So we're clear on the profile, 45 is a bit less clear because as you know they're really earlier in that development, but we're seeing it play out pretty much as we thought. And we're getting a lot of traction with our advanced customers as they struggle with some of the challenges. And obviously you know Immersion is a great example, where I think there are lot of defectivity challenges around Immersion petrography, and that's playing out as we anticipated. Jeff you want to...

Yes, so you know Brett we look at these, and obviously there's no standard average fab. But as we try to look at what an average fab would do. The way we look at it is going from 90 to 65; our opportunity grew about 20% plus or minus. And from 65 to 45 we think our opportunity grows 30% plus. Brett Hodess - Merrill Lynch: So a little bit bigger leverage than what you've seen in the past. Given some of the new issues that Rick was just mentioning?

Absolutely, 65 to 45 looks better than 90 to 65.

Yes I agree with that. There has you know Brett as we thought as for while there are nodes in the past that were particularly challenging, everybody I talked to that's been around it a while, it feels that 45 is as tough as any have been. Brett Hodess - Merrill Lynch: Great, thank you.

Our next question comes from the line of Mark Fitzgerald with Banc of America. Mark Fitzgerald - Banc of America: Two quick questions, the memory guys are all advertising their CapEx as front end loaded, do you guys see that in your own business at this point; is it a factor. How they announce their CapEx not material to where you guys book business and ship?

You know Mark; it's something that we've wrestled with for years as you know. As I look out over, let me just say the next six months. Memory looks to continue to be roughly 50% of our business it's not 60, but 50%. Mark Fitzgerald - Banc of America: 50% lower levels?

It's lower levels, but still very healthy. Mark Fitzgerald - Banc of America: Okay, so, the way they're advertising they're forecasting. You are expecting to see that in your own business in the second half.

I think in the second half memory orders will probably be lighter than they were in the first half; I think foundry will probably be picking up, certainly that's the communication we're having. Mark Fitzgerald - Banc of America: And then just one quick question on the share count Jeff that you gave the guidance, it was 194 million, and is that based on the buyback that's been completed as of the quarter you just reported and doesn't account for anything that might be done this quarter?

Well, that's correct, it just accounts for the buyback that's currently in progress. Mark Fitzgerald - Banc of America: Okay. Thank you.

Our next question comes from the line of Edward White with Lehman Brothers. Edward White - Lehman Brothers: Thanks. You were talking about the than NAND flash area being relatively weak in the quarter, how do you see that as you look to the second half of the year; is that your opinion that, that comes back as far as your business is concerned or not?

Let me start out Ed, it was about 30% or so of memory this last quarter. Edward White - Lehman Brothers: Yeah.

And then, my best guess right now would be maybe 40% in the June quarter, so I think it's probably a little bit stronger. And as we look out into the second half of the year it gets pretty foggy, I think as you know that major customers can move it kind of back and forward relatively quickly. Edward White - Lehman Brothers: Yeah.

It's a difficult thing to call maybe, further than 90 days out, but right now I'd say it's probably stronger than say 90 days ago. Edward White - Lehman Brothers: Okay, and then a question for Jeff, any way to think about how to model the impact of Therma-Wave I had realize that may not all be figured out yet; but any way to look at that?

You know we said, it's going to be a little bit dilutive for a couple of quarters. There's some pretty big integration to do there, it certainly could bring gross margin down a tiny little bit, in the beginning as we move through the integration, but as you saw with ADE. We think we're work it through pretty quickly. Edward White - Lehman Brothers: Okay, great, thanks.

Our next question comes from the line of Gary Suing with CIBC world markets. Gary Suing - CIBC World Markets: Hey, thanks for taking my question; instead of kind of slicing and dicing fundamentals by memory foundry logic buckets. Thought, I'd look at wafer inspection metrology and Reticle inspection, specifically Reticle inspection. We saw a little bit of an up tick here in terms of Reticle inspection orders in the March quarter, and if I look historically; Retical inspection orders are nice kind of leading indicator for inspection and metrology orders. So, I am just trying to gauge a sense of directionally where are Reticle inspection orders going in June, and given the kind of long lead times there in that business. Do we have sort of visibility on what the ultimate key could be in the back half of this year? Just remember that the last time I think if I got these numbers right you peaked in terms of Reticle inspection orders they peaked at roughly 150 million. Do we have visibility on a ramp in Reticle inspection to that kind of prior peak level?

Hey Gary it's Rick. Great question. There are some obviously some positive signs we see in our Reticle world based on all the work that's going on with the advanced designer roles. As you know it's a relatively small number of key customers and we work very closely with them. That being said, from our vantage right now, it looks to be pretty flat going forward which is healthy, and as you know because of our lead times, we're working very closely with customers to map out their needs and our capacity. So, we don't see and particular there is a lot of a particularly change coming up. We also see that there's a lot of work going on at the advanced nodes and that's really driving customers to the TeraScanHR, which I talked about earlier so we're seeing a lot of the new product activity. At the same time, Reticle also goes in the fab-line and we've had some pretty healthy performance there as well. But, flat is kind of how we see it. Gary Suing - CIBC World Markets: I mean, thanks for the answer. Is there any kind of mix shift going on I mean any kind of volatility kind of making that flat in the back half and just given sort of the ramp and the foundries at 65-nanometer the 70-nanometer ramp and DRAM 56-nanometer NAND flash. So, it just seems like, there's a hell of a lot of design transitions going on. I would have thought that number could have moved up throughout the rest of this year. I mean, any other kind of mix changes that might be kind of offsetting any kind of benefits in the back half?

Gary, we don't see a particular shift, other than the traditional shift as people are bringing in their newer designs as you mentioned and so that's really leading customers towards the latest generation product, but not anything that would substantially move the overall level of the business. Gary Suing - CIBC World Markets: Okay. Perfect. Thank you.

Thank you.

Our next question comes from the line of Steven Ballero with HSBC. Steven Ballero - HSBC: Yeah Jeff, first some housekeeping questions here. Does the ongoing EPS of $0.84 for March, is that based on a normal tax rate or is that including the benefit there? And then what's your tax rate assumption for June?

The guidance is assuming a 28% tax rate, which is my assumption. Steven Ballero - HSBC: And the just reported $0.84 ongoing.

Also 28%. Steven Ballero - HSBC: That was all 28. And then I don't know if this is more for John or you Jeff. Shipments in March and June, what are your thoughts there. And lastly specifically for you Jeff, would you just remind you of your model and your margin outlook. Let's just say if you held 700 million in revenue for the next four quarters. What kind of gross on operating margins could you do?

Okay. So, shipments about 670 in the March quarter, June quarter 670 to 700 in that range. Growth margin, we keep working on it here. We're in transition on a bunch of things, so we'll see it at about these levels if revenue holds. Steven Ballero - HSBC: Okay. And maybe I'll just..

Revenue goes up and it goes up 60 to 70%. Steven Ballero - HSBC: Okay. I'll just sneak in one more. You guys generated 200 million in operating cash flow you are buying back 750 million in stock. That kind of cash flow generation, you're really not putting a dent in your large treasure chest of cashier. Any plans beyond the 750 and maybe plans for a dividend increase any thoughts there?

Certainly it's getting a lot of discussion here internally. Obviously we've done a lot here recently, over 500 million of good accretive deals here recently we did the 750 million buy back in February, we've still got another 13.5 million shares authorized past that. So certainly gets active discussion here, but nothing that we're talking about announcing on this call. Steven Ballero - HSBC: All right. Fair enough, thanks, guys.

Our next question comes from the line of Mahesh Sanganeria with RBC Capital Markets. Mahesh Sanganeria - RBC Capital Markets: Yes, I just want to build a little bit more on the second half. If you look at the foundry, the PSMs is already pretty strong in terms of ordering the order close to a billion dollars in Q1 and so about to order about 7, 800 million in Q2. Well, UMC and Charter being weak, I don't understand how foundry's can provide upside and on the logic side, we have just the Intel and EMD and EMD being weak and Intel being usually flattish. I can't come up with any larger customers, who can give the upside. So I'm having difficulty in figuring out what's going to fill in the gap wholesome memory in the second half?

I think Mahesh it's really -- I'm not going to talk about specific customers. It's difficult to answer the question without talking about specific customers, but the drivers are very consistent in that 65-nanometer capacity and 45-nanometer. In some case pilot and other cases ramping. It's those orders that we're talking about across a multitude of customers. Mahesh Sanganeria - RBC Capital Markets: Okay. Okay. Thank you.

Our next question comes from the line of Peter Kim with Deutsche Bank. Peter Kim - Deutsche Bank: Hi. Thanks for taking my question. First, I wanted to just cover the shipments it looks like your shipments fell a little shy of what you had expected. Could you characterize that for us?

Sure. I missed the name. Peter Kim - Deutsche Bank: Peter Kim. Covering a shipment around.

Okay. Hey it's John Kispert. It's really shipments were, number were a little bit lighter by 30 million or so the March quarter and it was really two things. One was a fab that wasn't ready. It wasn't fit. So we actually have shipped it already here in the -- this month. It just didn't get shipped last month. It's a set of products going to a fab that just wasn't like frankly electrically ready to handle wherever we're going to shipments, so we held onto the inventory. The other half of the 30 million or so was in the Reticle business and it was a product that wasn't signed off and got signed off the first week of this quarter and so we'll count it this quarter. As far as the guidance that Jeff, just gave you for shipments or what we're kind of shooting for it's a number about that 700 million range because that's kind of where the business is running right now. And that's a capacity we have in place and I would assume it's going to be a number somewhere around there depending upon delivery times for our customers. Peter Kim - Deutsche Bank: Great. Thank you, if I could just follow up with a quick follow-up question regarding your Reticle inspection. In the past you talked about Reticle inspection penetrating the fab as the geometries get smaller. How do you see the fab penetration of your Reticle inspection tools at that time 45-nanometer versus 65?

Peter, great question. I think at 65, we definitely saw adoption. Remember what's driving that is the concerns about the crystal and defects continuing to go through the process and the most customers that have experienced that. So we have two kinds of customers, the ones that know that ahead of time and the ones that suffer through that and try to get tools to deal with it. At 45 everybody is pretty educated on the challenges, so we expect to see earlier demand for that as people start working through their plans and that's, but the timing for 45 production becomes much later. So, we think that's something that's ongoing, will build the business going forward. But the Reticle and fab has been part of the story for Reticle inspection. Peter Kim - Deutsche Bank: Great. Thank you.

Our next question comes from the line of Ben Pang with Caris. Ben Pang - Caris: Yes, quick question in terms of our per fab opportunity 30% that you commented on 45-nanometer to 65-nanometer. How much of that is due to more tools and how much of that is due to higher prices for your tools? How should we think about that?

Yes, Ben, Rick again. I think we thing about it 50/50. I think on the one hand there's more tools because there's more capability required. Some people are running them at higher sensitivity. Which means they need more capability and there are more place that's they want to run them. Additionally, the mix toward the higher end tool increases, and so that of course drives newer technology and the ASPs that go along with that. So those are the two factors that have been driving us as we look forward and similar factors that have driven us in the past. Ben Pang - Caris: And when you mentioned like the higher capability tools. Is that in any specific area between metrology and inspection?

No, it's really in all of them I mean if you look at our product life cycle, the company we develop maybe 10 or 12 new products a year. And what they typically are as the latest generation tool, which builds on the existing. Usually by adding throughput or new algorithms or new sensitivity, so what happens over time is the customers upgrade to the mix, it's more biased toward the latest tool. So it really is across our product line. Ben Pang - Caris: Thank you very much.

Our next question comes from the line of Stephen Chin with UBS. Jagdish Iyer - UBS: Hi. This is Jagdish Iyer on behalf of Stephen Chin. I have two quick questions. My first question is, Rick you had mentioned that NAND flash was softener the March quarter, given that a lot of announcements by some of these memory customers to migrate toward NAND flash in the second half of '07. And, do you see any challenges? Do you see in terms of opportunity being increased given that some of the NAND customers are facing challenges in terms of improving yield? That is my first question, and my second question I have a quick follow-up, please.

Yes, sure. There's no question that NAND in particular is driving people from a yield and defectivity standpoint because they tend to drive more advanced design rules even to satisfy consumer market. So, that presents opportunities. That being said, DRAM has not been an easy transition either. So, people have been going to invest you pretty heavily there. So, I don't know that the switch to NAND particularly drives our business more. But, I know the focus on yield management has been steadily increasing. Jagdish Iyer - UBS: I have a quick one on metrology. I just was wondering why March was a little bit lighter than the usual. Is there anything or is it just a seasonal thing that we should be looking not more than in?

It tends to be a lumpier business for us but with larger capacity buys. So, It's really timing on particular orders, nothing that abnormal. Jagdish Iyer - UBS: Okay. Thank you.

Our next question comes from the line of Mark Bachman with Pacific Crest. Mark Bachman - Pacific Crest Securities: Hi. I was to begin here I am Mark. I was wondering if you could give me a little bit more color on your progress I guess on your overseas expansion plans?

Hey, that's one more time. I'm sorry. Mark Bachman - Pacific Crest Securities: I was wondering if you could give us an update on your overseas expansion plans?

Sure. I think for everybody else, Wes, I'm going to say this so we're all on the same page. The company has been focused I'd say over the last year on expanding and refining our worldwide footprint. So, we can focus on being closer to our customers, working closer with them. Obviously, tapped into technologies and talents throughout the world and I think thirdly manage our costs now and into the future. We've done a bunch of things, one of which is to open up a new training and manufacturing and service facility in Singapore. Very aggressive schedule on the facility itself. We now are about two months away from actually opening the facility. So, later on this quarter we'll announce the opening of it. We plan to be shipping product out of it within the following quarter and ramping steadily. We have a list of products that we'll begin to move out of different parts of KLA-Tencor around the world into the Singapore facility and we're very focused on the efficiency, productivity of that organization and think it will add not only to the career paths at KLA-Tencor and the capabilities of KLA-Tencor, but the cost structure of KLA-Tencor. Mark Bachman - Pacific Crest Securities: Okay, great. And how about on India, I guess, is there a, I don't know if you've talked about a facility in India for engineering.

Yes, we have about 450 folks in India have for a while. It's a combination of engineering and what's called applications engineer at KLA-Tencor. Those are the folks that really work with our products, our tools and help our customers with yield. And of course a lot of back office kind of support, tremendous amount has happened at KLA over the last year or so in that regard. It's going very well. At this point don't think we'll be adding a tremendous amount more to it. We've done a lot of that. I think, Jeff mentioned earlier that we right now we're suffering through some, what we call bubble costs in that the inefficiencies of having organizations getting moved over time, there are inefficiencies. But we're getting through that and that gives us confidence in the management team in the entire company that we're going in the right direction because we see steady improvements and improved productivity and efficiency. Mark Bachman - Pacific Crest Securities: Okay. Thanks.

(Operator Instructions) Our next question comes from the line of Timothy Arcuri with Citigroup. Tim Arcuri - Citigroup: Hi, guys. Just on, there was a recap announced in the semi space. You look at what Linear Tech did. They issued a pretty significant amount of debt and they used it to basically buy back their stock. I know that, if you actually run the numbers, you know you have a much greater capacity to even do something like that than even they do. So, with the stock where it is, there's a lot of reasons of believe that it's pretty attractively valued down here. So, I'm wondering how you think about all the different option that's you have, be it a straight buy back, be it a leveraged recap or be it a higher dividend. How do you think about those different options? Thanks.

Thanks, Tim. Yes, we spend a fair amount of time talking about various alternatives here, both internally and of course with our board. Conference call is probably not the most appropriate time to air out all of our thinking on that. But, you can rest assured we keep thinking about it. If we think that and our board think that there's a good move for our shareholders we'll execute like we have in the past. Tim Arcuri - Citigroup: But I guess more specifically, was that specific deal, was that surprising to you that it was that big?

Tim, I don't follow linear so it's hard for me to comment. All right, thanks.

And there seem to be no further questions.

Thank you, Marvin. Thank you, everyone for joining the call today. And we look forward to talking to you again next quarter.

This concludes today's conference call. You may now disconnect.