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

Harlan Sur - Morgan Stanley Brett Hodess - Merrill Lynch Jim Covello - Goldman Sachs Vis Vellore - Credit Suisse Timothy Arcuri - Citi CJ Muse - Lehman Brothers Mark Fitzgerald - Banc of America Bin Pang - Caris Company Garry Hsueh - CIBC World Markets Steven Pelayo - HSBC Mahesh Sanganeria - RBC CapitalMarkets Suresh Balaraman - ThinkEquity David Egan - Lehman Brothers

Good afternoon. My name isMarvin, and I will be your conference operator today. At this time, I wouldlike to welcome everyone to the KLA-Tencor Corporations First Quarter Fiscal2008 Earning Conference Call. All lines have been placed onmute to prevent any background noise. After the speakers remarks, there will bea question-and-answer session. (Operator Instructions). Thank you. I would now like to turn theconference over to Mr. Jeff Hall, Chief Financial Officer. Please go ahead,sir.

Thank you, Marvin. Good afternoonand welcome to KLA-Tencor's first quarter fiscal year 2008 Earnings Call. I amJeff Hall, the Chief Financial Officer. Joining me today are Rick Wallace, ourCEO; and John Kispert, our President and COO. We are here today to discuss ourfirst quarter results for the period ended September 30, 2007. We releasedthese results this afternoon at 1:15 pm Pacific time. If you haven't seen therelease you can find it on our website at www.kla-tencor.com, or call408-875-3600 to request a copy. Rick will lead off today's callwith highlights from the Septemberquarter update on the current market environment and key product activity, andprovide guidance for the December quarter. Afterwards, I will review thepreliminary financial results for the quarter and then I'll open the call upfor questions. In the investor section of ourwebsite you’ll find the simulcast of this call, which will be accessible ondemand for 90 days. On the website you’ll also find a calendar for investorevents and presentation at investor conferences. You will also find links toKLA-Tencor's security filings. In those filings you will find descriptions ofrisk factors that can impact our future results. And as you know, our futureresults are subject to risks and any forward-looking statements we make,including those we’ll make on the call today are subject to those risks.KLA-Tencor cannot guarantee that those forward-looking comments will come true. Our actual results may differsignificantly from those projected in our forward-looking statements. Andalthough we take no obligation to update those forward-looking statements, youcan be assured that any update we do make will be broadly disseminated andavailable over the web. And with that, I will turn itover to Rick.

Thank you, Jeff, and thank youall for joining us for our Q1 earnings call this afternoon. Today I’ll bediscussing highlights from the September quarter updates on the current marketenvironment and update on our four strategic objectives and guidance for theDecember quarter. I am pleased to report that weonce again produce solid operating results. Revenue was $693 million at theupper-end of our range of guidance for the quarter. Net income excluding someone time charges was also at the upper-end of guidance and $146 million or$0.76 per diluted share. And we generated approximately $205 million in cashflow from operations in the quarter. Jeff Hall will provide additionaldetails on the company’s financial highlights later in the call. Orders for theSeptember quarter were $482 million down 32% from the June quarter. Again,September has historically been a difficult period for bookings of KLA-Tencorsince it is our first fiscal quarter. This first quarter seasonalitywas compounded by a general end market weakness, which resulted in timingdelays for some orders and certain logic and DRAM customers during the last fewweeks of the quarter. Some of these or those who currently shifted into nextyear. In addition during last week of September we found that we are not ableto reach final terms with a few customers, and as a result these orders did notclose in September and will be shifting to December. During the final weeks of thequarter, we also experienced a weakened demand in our other end marketsincluding Logic, Foundry, Reticle, Fair Way for end service. This softening in demand willlikely result in some orders that we are expected to book during September andDecember moving into calendar 2008. I would like to take a fewmoments to clarify the current bookings environment by commenting on ourcustomer base by customer segment. Memory was once again our largest segmentduring the first quarter, the current climate. The Memory customers are similarto what we've experienced over the past six months, i.e. the memory bip rategrowth continues to be strong, despite persistent unit price declines in bothDRAM and NAND Flash, and an unfavorable balance of supply and demand in DRAM.As memory and unit demand is expected to gain strength, due to seasonality inthe proliferation of new applications, our memory customers are continuing toinvest in advanced technologies and new materials to enable smaller designrules and higher density applications and to reduce cost which in turn leads toincreased adoption of process control to drive down the affectivity. Looking ahead, we expect overallmemory CapEx to be choppy. But have seen an increased interest in processcontrol as memory manufacturers struggle with the yield and metrologychallenges of advanced notes. Foundry orders in September were down following astrong June quarter as we expected. Historically, the level of adoption ofprocess control for Foundry customers has always been driven by the nature ofthe foundry business, faster learning cycles during development and theincreased mix of products inside the foundries and reduced time to market.These conditions make achieving targeted yields in a shorter period of timecritical to the success of the foundry segment. While some major foundries havereported reduced CapEx forecast, their increased need for process control dueto the nature of the Foundry business will continue to be a driver for ourbusiness. Logic orders in the Septemberquarter came in lower than expected, as upside from one MPU customer was offsetby the push out of the meaningful order from another U.S.-based customer, whohas recently scaled back its CapEx plans. We are forecasting higher orderlevels from the Logic segment in 2008, which will be driven by additionalinvestment in leading-edge technology by one of our MPU logic customers. To summarize, I'd like to notehere that although in the short-term we are experiencing the somewhat choppyorder market with some uncertainty as to the timing of some large projects, ourlong-term pipeline remains strong. Next, I'd like to discuss somerecent highlights for KLA-Tencor on our four strategic objectives: our customerfocus, growth, operational excellence and talent development. Customer focus isthe first of our four strategic objectives at KLA-Tencor. We work hard tounderstand our customers' requirements and to provide solutions in all themarkets that we serve. Our measure of success is our market share, and our goalis to have market leadership in all the markets that we serve. Today, we have market leadingpositions in 18 of 20 of the markets that we serve, and our key to success isto collaborate closely with our customers, innovate to bring creativedifferentiated solutions and then execute and bringing the new products tomarket and support them through their product life. In the September quarter, we weresuccessful in maintaining our market share in the markets where we have alreadyestablished the leadership position. In addition to that, we will able to gainshare in one significant market, where we currently do not enjoy marketleadership e-beam review. Our new electron-beam review andclassification tool, the eDR-5200, was recently declared the tool of record forthe 45-nanometer node at a European logic facility. The eDR-5200 is an e-beamreview solution that also enhances resolution, thus improving the productivityof our inspectors. Our customers needed todramatically reduce their SEM Non-Visual rates and improve performance ofdefect detection on 65-nanometer and 45-nanometer technology nodes. ATE'seDR-5200 solution provide a connectivity with inspectors to improve brightfieldrecipes or also delivering very high resolution in stage accuracy, allowingmaximum capture of defects on the review system. Another eDR-5200 was installed ata key U.S.development center to enable advanced process development after 32-nanometernode. Competing eDR solution cannot resolve the smallest defects at the32-nanometer node. We believe the eDR-500 provides a great solution andpositions us for growth in this new market. Now, I'll spend a few minutesgoing to our core markets of inspection of metrology. We have a broad portfolioof inspection products servicing the bare wafer Reticle manufacturers as wellas the semiconductor market, included in this are the Surfscan, brightfield,darkfield, E-Beam inspection and our Reticle Inspection products. Our market share performanceremained at historical levels in all the key markets and product lines that wehave, as in the past there was always a lot of hard work required to win thebusiness especially in environment when capital is tight and our customers haveto make sure that the premiums that we get on our products are worth theadditional investment. As in the past our teams did agood job of demonstrating our value and we are pleased with our market shareperformance across our inspection products. Let me give a couple of specificexamples. Our 2810 full-spectrumbrightfield tool introduced in July 2007 and designed specifically for memoryapplications on large capacity expansion order with a Taiwanese memorymanufacturer in the September quarter, demonstrating superior sensitivity,capture of key defect signatures and throughput and head-to-head competition. The 2810 features twice thecomputing speed of our earlier generation brightfield inspection tool, as wellas new optical merge that enables increase defect detection. The latestaddition to our Puma darkfield inspection platform, the Puma 9150, was chosenby logic customer to help it achieve improved device quality and zero effectproduct liability for specialized applications. After a rigorous six-monthevaluation against the competing products, KT received orders for a delivery ofmultiple Puma 9150 units. The Puma 9150 demonstrated superior throughputstability and reliability of the production proven systems against thecompetition. In Metrology, KLA-Tencorcontinues to be the market share leader, by offering a comprehensive suite ofmetrology analysis to process window optimization products, to give ourcustomers the ability to maintain tight control of their process windows. In the September quarter, we weresuccessful in winning new business and displacing several competitors' tools,by demonstrating superior performance in optical CD films overlaying metrologyfor advanced applications in memory, foundry and logic customers. Overall, our market share in theSeptember quarter met our expectations, with regard to the maintaining ourleadership positions in our core markets, in addition to picking up some nicegains in the e-beam review market. In addition to that, we are wellpositioned going forward, based upon our product pipeline fueled by our R&Dinvestments across our portfolio. These are just a few examples of recentsuccesses. KLA-Tencor achieved during the September quarter and solving theircustomers' mission critical production challenges and expanding our marketleadership. Across the industry the technicalchallenges our customers are facing are significant and we're working closelywith them to solve those problems. Our second strategic objective atKLA-Tencor is growth. Our goal is to continue to outgrow the industry. Ourgrowth prospects continue to look good based upon the market segments that weserve and increasing the need for inspection measurement as device makersaddress the increase challenges of next design-rules. The increased complexityour customers are facing, as they transition to the 45 nanometer node, whetherintroducing new manufacturing techniques such as Immersion lithography, doublepatterning, pitch splitting, or integrating new materials to improve deviceperformance such high-k/metal-gate is creating new yield and defectivelychallenges driving the need for more accurate inspection and measurementtechnology. This is helping to drive accelerated adoption of process controls,and in turn new revenue opportunities for KLA-Tencor. We estimate the increasedadoption of process control by chip manufactures of 45 nanometers translates toan incremental revenue opportunity for KLA-Tencor of 30% or more as comparedwith the 65 nanometer node. We see evidence of that growth potential in ourprojections for the calendar year '07 performance for KLA-Tencor relative tooverall CapEx market. Based upon our current estimatesKLA-Tencor will outgrow the market in calendar '07 as we’ll grow revenue in therange of 15% to 20% compared with an industry CapEx growth rate of around 5%.It looks very hard to predict calendar '08. We believe we are well-positionedto continue to outgrow the industry as a result of the increased challenges of45 nanometers and based upon new markets that we have entered during calendar'07. During calendar '07 we haveentered six new markets, both organically and through M&A activity whichincreases our potential available market by more than $700 million as sized byindustry analysts. That being said, we are veryselective about the growth prospects that we pursue. We will only enter amarket that presents growth prospects that will enable profitable growth. Whilewe are willing to be patient we have to make sure that we can differentiate andadd value and grow in each market that we enter. In addition to the six newmarkets that we entered during calendar '07, we have more growth initiatives inplace at KLA-Tencor and we will be providing updates as they materialize. Ourstrategy will be to continue our organic efforts as well as leveraging ourability to successfully use acquisitions as a way to enter new markets. Our third strategic objective atKLA-Tencor is operational excellence. Over a year ago we laid out a four yearplan to drive continued improvement in our business model by drivingoperational excellence throughout the company. We have made steady progress onour plans and have seen the results of our efforts. During his preparedremarks, Jeff will go thorough the details of our progress. Our fourth objective atKLA-Tencor is talent development. None of the success that KLA-Tencor enjoyswould be possible without our world class workforce. While historically we havedeveloped world class talent and achieved outstanding financial results throughthe cycles of the industry, we are increasing our efforts in talent developmentas we know that our people are the key to our success. In summary, KLA-Tencor continuesto be a company with an unparalleled portfolio of inspection measurementtechnologies. During relationships with every major IC manufacturers and greatpeople who are driven by an unwavering passion for innovation and commitment toensure our success. These unique attributes are what have sparked our marketleadership over the past 31 years and what fuels our strong financialperformance, providing the resources for continued innovation and a strongfoundation for growth. We believe these attributes help to position KLA-Tencorto continue to outgrow the industry in 2008 and beyond. I would like to wrap up mycomments now by giving you our guidance for the December quarter. Orders areexpected to be up 20% plus or minus 10% from the September quarter. Revenuesare expected to be between $625 million and $640 million and EPS in the rangeof $0.68 to $0.73 including stock based compensation and excluding one timecharges. Thank you for your attention thisafternoon. I will now turn the call back over to Jeff Hall.

Thanks, Rick. As Rick said,KLA-Tencor had a solid operational execution in the September quarter, asshipments, revenue and EPS all came in at or above guidance. Operating marginwas also above expectations as some of the operational improvements we havebeen making began to show off, despite the drag of recent acquisitions and costof transitions to Singapore.Cash from operations was $205 million. We also ramp production of oursecond product in Singaporeand made significant progress towards integrating our recent acquisitions. Ourgoal with these transitions is to get them seamlessly integrated with the restof KLA-Tencor and began recognizing the synergy as quickly as possible. This means converting systems andprocesses, engineering products on the common platform, taking pre-acquisitions,bookings and commitments to the P&L, consolidating distributors, sales andservice efforts into our channels, and of course eliminating a lot of duplicateactivities. It takes a considerable amount of effort and expense to executethese integration efforts while continuing to serve our customers well. In the September quarter, theseactivities were approximately 1.6 points, diluted to gross margin and 2.4 pointor approximately $15 million dilutive to operating margins. We expect thisdilution to be reduced in the December quarter and eliminated by the end of theMarch quarter. Overall, our integration efforts are continuing to meet ourexpectations and we are on-track to achieve our margin improvement target. Now let me spend a minute goingthrough the quarter in more detail. September is always a challenging bookingsquarter for us, as it is our first fiscal quarter. In the last few weeks ofthis quarter timing of some orders for logic and DRAM customers became lessclear and some orders moved into the next calendar year. In the final few daysof the quarter, we were unable to agree on final terms for the few customers,and as a result didn't close on these orders by September 30. We did close onthese orders in early October. While we expected some weaknessin memory in the second half, it turned out to be more widespread than weanticipated as end markets were foundry, logic, reticle and bare wafer were allimpacted. As a result of this, we now don't expect to close on the commercialterms of several orders until early 2008. Net bookings for the quarter were$482 million, which is roughly 32% lower than the June ending quarter. This netbookings number includes $32 million of de-bookings. Every quarter, we closeour bookings backlog line-by-line and de-book any order we do not expect toshift in the next 12 months. The product distribution oforders for wafer inspection was approximately 40, reticle inspection wasapproximately 13%, metrology was 23% and service was 24%. We ended the quarter withapproximately $1.3 billion of backlogs, $835 million of shipment backlog ororders that have not yet shipped and $485 million of revenue backlog orproducts that have been shipped but have not yet been signed off by customers. Remember, we do not include anyservice bookings or revenue in this backlog. We remain confident that we havestrong backlog shippable over the next six to nine months, and our ability tomaintain this significant level of both shipments and revenue backlog continuesto help KLA-Tencor sustain profitability throughout any business cycle. Now turning to the incomestatement; revenue for the quarter was $693 million, down about 6% comparedwith the previous quarter. At the midpoint of our guidance for the Decemberquarter, we expect revenue growth for calendar year to be approximately 17%compared to about 10% for total process control and about 6% for wafer fabequipment. We attribute this out-performanceto new products and increasing adoption of process control as the industrymoves to 45-nanometer design rules and below. Gross margin for the quarter was55.9%. This includes $10.7 million of charges for deal-related amortization andreductions in force. Excluding these items, gross margin including stockoptions was 57.4%, down about 1.8 point from Q4. Our recent acquisitions for 1.6point dilutive to margin, as we took several pre-acquisition commitments to theP&L and continue to consolidate and integrate the manufacturing operations. Operating expenses, including bothSG&A and R&D were $210 million. This number includes $6 million ofcharges for deal-related amortization, reduction in force and legal feesrelated to the stock-options investigations. Excluding these items, operatingexpenses were $204 million, down $8 million quarter-to-quarter, as we continueto focus on driving down the breakeven point of the company. Breaking downoperating expenses, R&D expenses were flat quarter-to-quarter, as wecontinue to ramp development programs and customer collaborations at 45nanometers and below. And SG&A expenses were down approximately $8 millionquarter-to-quarter despite the addition of cost in the first four quarter of'08. As a result of our continuingefforts to stream line the business and reduce the breakeven points, we expectthe operating expenses in the December quarter to be down another $8 million asa result of lower SG&A spending to approximately $196 million slightlybelow the levels of operating expense we had before the addition of over $25million of quarterly expenses from the recent acquisitions. Operating margins for the quarterexcluding one-time charges were 28%, down 2.4 points from the prior quarter.This decline was a result of the integration of the recent acquisitions. Weexpect the margin pressure of these acquisitions to be reduced in December andexpect them to be at company average margins in the March quarter. For the quarter, other income was$17.5 million. In the December quarter, we expect other income to beapproximately $14 million. The tax rate was 57.4% in the quarter. This rate washigher than our estimate of 28% as a result of an upfront tax payment relatedto the Singaporetransition. In addition to the cost savingsexpected as part of our ongoing globalization strategy, we also expectsignificant tax savings. In order to maximize these savings, we moved therelated intellectual property to a non-US legal entity, resulting in a one-timetax expense of $47 million. In the December quarter, weexpect the tax rate of approximately 28%. Net income for the quarter was $88.2million or $0.46 per fully diluted share. Excluding the charges discussedearlier, net income was $146 million or $0.76 per fully diluted share. This number includes theshare-based compensation expenses of $28 million or $0.10 per diluted share. Inthe December quarter, we expect expenses for share-based compensation to beapproximately the same. Turning to the balance sheet;cash and investments end of the quarter were 1.3 billion, a decrease of $428 millionquarter-to-quarter. In the quarter, we spent $683 million to repurchaseapproximately 12 million shares and paid a dividend of $28 million. After theseshare repurchases approximately 11 million shares remain authorized forrepurchase under our existing program. Inventory decreased by $35 million to$500 million. Accounts receivables finished the quarter at $619 million up $37million from the prior quarter as a result of higher shipment levels andincreased sales to Japan.Cash from operations was $205 million in the quarter and capital expenditureswere approximately $11.6 million while depreciation was $14.6 million. So, on anet basis including retirement fixed assets decreased by $3 millionquarter-over-quarter. Fully diluted shares ended the quarter at $193 millionand headcount was about 6000. Finally, as Rick commentedearlier, we were in a choppy CapEx environment and so we continue to run ourcompany in a way that will allow us to maintain high levels of investment innext generation technology and in collaborations with our customers, whilemaintaining our high levels of profitability and cash flow. With that ourguidance for the quarter is bookings up 20% plus or minus 10 points. Revenuebetween $625 million and $640 million. Operating expenses down an additional $8million to approximately $196 million and EPS including share basedcompensation but excluding one time charges and amortization of $0.68 to $0.73. This concludes our remarks on thequarter. We will now open the call for questions. Before I turn the call overto Marvin to give the polling instructions, let me request that you refrainfrom asking multipart questions to give others some time. As always, we are allon a tight schedule. Marvin can you begin the polling please.

(Operator Instructions). Ourfirst question comes from the line of Harlan Sur with Morgan Stanley. Harlan Sur - Morgan Stanley: Thank you. Good afternoon. Yieldissues are clearly a pressure point for the industry here as you know clearlyguys struggling on 50 nanometer NAND, we’ve got the foundry sort of strugglingwith 65 nanometers. I know that there are some people today concerned aboutTSMC's comments about CapEx being down next year. Take all of these into account,I would assume though that even in a down CapEx environment, for foundries, andeven for memory, that the spend for KLA solutions will be up. Is that a fairassumption?

Yeah, Harlan, I think it’s a goodpoint. Obviously we are seeing various concerns from different customers abouttheir yield challenges and that's actually heighten recently. John and I wereboth in Asia last week meeting with customersand an increased level of interest particularly in driving the latesttechnologies forward, so as we look forward we see process control continuingto out perform the overall industry. However, its hard to say when we get intoa calendar '08 what it will overall look like, but we think we are going to outperform as a result of the challenges associated with the advance nodes andboth the logic and DRAM and also the foundries basis. Harlan Sur - Morgan Stanley: Okay, great and then given thesort of large revision down in bookings in September from your expectationsentering the quarter, I am just wondering what your confidence level is here inthe December quarter about delivering on the up 20% in orders?

Hey, Harlan, this is JohnKispert. One of the things that happened in the September quarter is we saw agood chunk of the originally forecasted orders kind of move into the first weekof October. So we are fortunate in the guidance that we just gave you for theDecember quarter, we are up to real fast start in that we already have a bunchof that already booked. So the linearity of the quarter will be far differentas far as the order outlook and then say the September quarter was? Harlan Sur - Morgan Stanley: Got it. And then one lastquestion for Jeff, what do you expect shipments to be like here in the Decemberquarter?

Right now we are running at about575 to 600. Harlan Sur - Morgan Stanley: Okay. Great, thank you very much.

Our next question comes from theline of Brett Hodess with Merrill Lynch. Brett Hodess - Merrill Lynch: Hi, good afternoon. A couple ofitems, I am wondering if you can talk about, if the environment stage is sortof flattish like this, let's say the orders bounced back up after the big dropoff, but generally sort of staying in this range. Can you give us some moreinside now that you are moving the second product line into Asiaabout what kind of margin we should see over the next couple of quarters if youare in sort of a flattish revenue and shipping environment? And what kind ofexpansion we can see?

Hi Brett, it's John Kispert. Ithink the way to think about it for us right now given our backlog position,what we see on front of us is if you average over the last couple of quarters,we kind of have been running about $700 million with lots of ups and downs. Itsalways a chunky business, but roughly $700 million run-rate for the company.Right now it looks to us kind of run-rate for the next couple of quarterscloser to 625 or so. There will be some quarters, where we ship a little bitless and some quarters we ship a little bit more, but we'll manage throughthat. That's kind of our bottoms up analysis of that. Now, the delayer in Singapore,which is as we've told you in the past is kind of that 5% of its capacity rightnow, and is relatively large overhang of excess capacity for us. They areramping very nicely I would think coming out of this quarter to the Decemberearning quarter, we are closer to maybe 25%, 30% of their capacity, but stillonly about 5% to 10% of our shipments. But we will begin to absorb more andmore of that overhead. And that will add at that 600, 625 run rate for us abouta point of gross margin which should be helpful. Brett Hodess - Merrill Lynch: Okay. So, just to be clear thatthat's a point of gross margin in the coming quarter over the next fewquarters, does that 625 the standard run rate?

Yeah, over the next few quarter,take a couple of quarters to get Singapore ramped up and also a fast start butthe plan was over the next three to four quarters just start to see it ramp. Brett Hodess - Merrill Lynch: Got it. Very good thank you.

Our next question comes from theline of Jim Covello with Goldman Sachs. Jim Covello - Goldman Sachs: Good afternoon guys. Thanks somuch. My question, just I'll keep with the one question is, when I think backto semicon watch and what the application was for orders at that time for thesecond half for the year versus -- total second half versus what we are lookingat today? What do you think it is innutshell changed the most and then why do you think that you have a handle onsome of the environments going forward, given the delta between than and now?How do you get comfortable your view on the environment over the next couple ofquarters is good given all the CapEx forecast declines that we're getting fromthe customers right now?

Yeah, Jim, it's John Kispert,COO. You are talking back to July, I guess. Jim Covello - Goldman Sachs: Yeah. At some time, I think youguys add as much more optimistic outlook scenario for the total second half forthe year at that time.

Yeah. As Rick said in hisprepared statements that I'd say the big change has been really over the last30 days. And it came kind of in two flavors at least my perception of it. Inthe last 30 days, we've seen the larger capacity adds that have been plannedover the next six to nine months become smaller. I mean in another ways, youare going to still add some capacity to the smaller chunks or smaller bites inour case smaller orders. That happen about 30 days ago and as you would imagebecause it's built out 50% of our businesses, it's now a little bit more andmost of it's in memory. And I think the other piece thathappened, kind of, in the last couple of weeks is definitely a movement out ofsome of the capacity like ads, where folks would plan on purchasing stuff maybein the December ending quarter and strongly then ramping in March timeframe andnow taking more like the late spring summertime. And so you see this kind ofmoment out or to the right as we say. When you combine those twotogether for us and I think you guys will do all the math here, it was kind ofmoment of maybe a half a quarter of orders and our run rate back then, it'skind of moved out into 2008. And, as Jeff said, our position is as usual, we'regoing to be very cautious from here on in. And we're running the business thatway. The Brett's earlier question was sizing the company, low 600s right nowfor next couple of quarters. And we'll wait and see. And as you know, we workclosely with our customer so we'll be on top of it. Jim Covello - Goldman Sachs: Thank you.

Jim, have a good weekend. Jim Covello - Goldman Sachs: Thank you.

Our next question comes from theline of Satya Kumar with Credit Suisse.

Satya, are you there? Vis Vellore- Credit Suisse: Yeah. Hi. This is [Vis Vellore]on behalf of Satya Kumar.

Okay. How are you? Vis Vellore- Credit Suisse: Yeah, doing good. One quickquestion, so now that like a major foundry talked about slowing spending in2008. So what is your outlook for CapEx for 2008 and just want to get yourthoughts on why foundry should be slow, it would be lowered in CapEx whenutilization rates are so high?

Yeah, it's a confusing time. Whenwe look at the forecast from folks like yourself and lots of other folkslistening in where we see there is a wide range of 2008 CapEx being anywherefrom flat to down 15%. We tend to look at it on the lower half when we do anykind of bottoms-up conversations with our customers. So we take again to the earlierquestions, we are taking a cautious stance there. The drivers underneath thatare certainly fall off in DRAM spending. I think NAND will continue to bestronger. I think when we look at the foundry business, the timing of any sortof capacity as in foundry I think of very much in question right now. We see alot of technical upgrading that we can do in the foundry businesses. But it's asmaller piece of the entire pie. So it's either going to be flat,maybe slightly down. And as Rick said earlier, we think we can do well on thatspace. It's just that we don't see a lot of spending today through 2008, a biguptake in other words. And that leaves Logic which to us right now looks to bedown on 2008 as far as CapEx is concerned. We think we cannot perform there andgiven the 45-nanometer challenges and the things that we can do there. Soprobably we at KLA-Tencor will be flat to up in Logic, but the industry trendlooks like it's always probably down. Vis Vellore- Credit Suisse: Okay. Thank you.

Our next question comes from theline of Timothy Arcuri with Citi. Timothy Arcuri - Citi: Hi guys. Couple of things: Firstof all, John if you look at the bookings in the second half of the year versusthe first half of the year. As you compare that to some of the other OEMs, it'sin the [growth of] the suppliers and most of the other OEMs are down about 15%half-over-half and you are down like 2x of that. I mean there is obviously differencesin timing of your tools versus their tools, but what do you think the reasonis? Is it specific customers where you have big exposure that are cutting backor is it maybe that people kind of over bought inspection equipment early on,what do you think the dealt is there?

Yeah, Tim, that's news to me, butI'll tell you that we have like nine months lead times generally across ourproduct line, I think the folk you are comparing us to probably much shorterlead times. In fact I know they do, but I deal with this continuously with ourcustomer base. So, our lead time in our orders tend to be further out in timeas far as been able to install and turn into capacity. Timothy Arcuri - Citi: Sure, okay. Well, I understand.So then John I guess last question, it looks like shipments were about 710 inSeptember is that about right?

Yeah, about 700. Timothy Arcuri - Citi: 700, okay, thanks guys.

Our next question comes from theline of CJ Muse with Lehman Brothers. CJ Muse - Lehman Brothers: Yeah, good afternoon, thank youfor taking my call, quick question here. If you look at the dealt of yourbookings guide at the midpoint or I guess the lower end and then the actuallydown 32%, so just roughly I guess $100 million being pushed to December whichwould suggest pulling that out at roughly $500 million bookings run-rate, whichcompares to kind of mid 600 revenue guide. How should we think about thismismatch and the implications to your revenues in the quarters ahead?

Yeah, CJ, there was a priorquestion on that and I tried to answer that question. We have a bunch ofbacklog that will tapers in and I also think in as we said in the guidance ourorders are going to be up in December. CJ Muse - Lehman Brothers: I guess, that was going to leadmy second question, just its seems like two months ago, you guys were talking alot more bullishly about foundry and logic spending and now pulling back there,what gives you the confidence that your backlog is secured today?

Our backlog is generallytechnology buys for the work that they are doing in pilot lines strategic. Weactively beat the books CJ where we don't think were there were capacity buysthat we think are in danger is not actually happening. We are focused with ourbacklog and keeping it in the strategic aims of our customers and we will meetthe tools, so they can push their business in line.

I think if you look at our trackrecord rarely do you see we have to de-book a large part of our backlog in anykind of the environment. CJ Muse - Lehman Brothers: Sounds good. I appreciate it.

Our next question comes from theline of Mark Fitzgerald with Banc of America. Mark Fitzgerald - Banc of America: Rick, in the delay in some ofthese bookings and stuff that’s going to push down to the first calendarquarter here when you have these conversations with your customers are theywaiting to see how market conditions unfold is that what this issue that sayingin this company, these orders are?

Well I think there was a coupleof issues: One is a lot of them based their investment plans based on overallmarket conditions and as those are soft and I think people will slowdown someof those overall. And I think we saw early signs of some of the recentannouncement that have been made. We saw that at the end of September thethings that have just been made in the last few days. And so I think they are gettingdown, they have reset their base line about what do they think they need toinvest. As counter balancing that is concerned that they don't want to getbehind in particularly our new technologies and so that's where we see a lotof, why we have more confidence as John was saying in our backlog and then someof these orders coming in. So John also said they tend to overall get a littlebit smaller and they get a little bit further out. Mark Fitzgerald - Banc of America: And just a follow on here is, Imean dealing on price approach and lot of peoples cash cost is that an issue interms of any these orders get pushed out that in terms of your conversation?

Certainly, that’s part of thefactor into. But as, you know, for many of these customers if they want to stayin the market they have to keep investing and so that’s a counter balance forthat. Now you can make a pretty good case, but over the next 12 months, theremight not be as many players 12 months from now as there are right now. And,we’ll wait that’s why John was saying, we think from overall market for '08we’re probably more cautions than last. Mark Fitzgerald - Banc of America: And just one final question if Imight: On the logic side of the business, when you look post 2000 you reallyhaven’t seen this part of the business coming back in a big way? And I amcurious if these technology notes ships on the logic side of the business arejust slowing down from your guys manage point?

Yeah. I think the ramping of themhas Mark, that this big spending to your point, but as you know we’reconstantly collaborating with them on next generation technologies and so fromthat manage point we don’t feel like it slowed down at all. Mark Fitzgerald - Banc of America: Well, you look at that is kind ofover a long-term still a growth business were you in the logic part of it?

Yes, sure, not like it has beenin the past but certainly, great opportunities particularly with our nextgeneration technology. I mean that’s where we can get a lot of learning earlyon as they move forward with their next-gen. We have our entire suite of toolsthat has to be coupled with them.

I think some of what happen iswell Mark, is some of that logic overtime is turning to foundry standard andsome of these guys have stopped making some of their own devices. Mark Fitzgerald - Banc of America: But foundry spending, thatlooking great item for 2000 year.

Post 2000. Mark Fitzgerald - Banc of America: I mean as you look at the -- yourrecovery post 2000 are all memory driven at this point though.

From an overall industry there isno question that NAND, for example, you can even get more specific and lot ofit has been about NAND, NAND investment and DRAM has been a little morecyclical and now we’re seeing some correction in NAND. Those, I think that’strue, I think for us that we still see our penetration in the logic and in thefoundries being pretty strong relative to overall CapEx, now whether theoverall CapEx is at the similar levels to what it has been historically, Ithink that maybe more of the point. The big CapEx spend is to be memory now. Mark Fitzgerald - Banc of America: Thank you.

Our next question comes from theline of Bin Pang with Caris Company. Bin Pang - Caris Company: Thanks for taking my question. Ijust want to get a clarification on a couple of your comments regarding 2008spending. You mentioned for logic you expect the industry to be down but KLAsor spending on PDC will be flat to up. Correct?

I think flat that will be theright way to term it. Bin Pang - Caris Company: Okay. When you talk about logicare you including foundry in that?

No. Bin Pang - Caris Company: Okay. So that’s IDM spending.

Yes. Bin Pang - Caris Company: And your comments regarding thefoundry itself, could you, just repeat that again, you still expect PDC to beup for foundry in 2008.

No. I think and by the way 2008we’re rarely right in predicting this. And we are just talking to a lot of folksand trying to anticipate how we should size the company to anticipate thesequestions. Right now foundry does look like it’s up marginally year-to-year,and that’s based on the plans we’re getting from our foundry customers. But asyou know it’s a -- and we typically are well adopted in the foundry model. So,we would expect to do well there. But foundry as a percentage of the total piefor CapEx is as today is a smaller percentage but we would expect it to behigher in 2008. Bin Pang - Caris Company: Okay, and the last question forme regarding memory spending. You commented that your orders for the 1Q weredown because it primarily was memory driven, is that correct?

Yes. Bin Pang - Caris Company: And when those companies comeback in the 2Q, is that on the technology or is it capacity?

A little bit of both. Primarilywhat you see moving on is capacity. We talk about memory often it is the samething than as you know. They will be pushing the envelope and adding capacityat the next technology node. So to answer your question, I would say it's aprobably 50:50. Bin Pang - Caris Company: Okay. Thank you very much.

Yeah.

Our next question comes from theline of Garry Hsueh with CIBC World Markets. Garry Hsueh - CIBC World Markets: Thanks for taking my question. IfI take the low end of the range for September and I take the midpoint of yourorder guidance for December. It looks like you are basically missing $75million out of orders post in the second half. So my question is, basically, isthere a reasonable expectation for orders in the first half of '08 now tosomehow get to a $650 million to $700 million per quarter run-rate or has that$75 million just permanently flew the coup?

No, right now it definitelysitting in Q1, Gary. Garry Hsueh - CIBC World Markets: Okay. So John, I mean there is apossibility here we could start to book somewhere between $650 million to $700million per quarter here in March?

I think our bottoms-up would putus somewhere down there right now. Garry Hsueh - CIBC World Markets: Okay, so we didn't permanentlylose that business?

No, there is no share loss here.In fact, we did really well with share. Garry Hsueh - CIBC World Markets: Okay, so we've got a pretty nicerunning start here in March on the order basis and we have got pretty strongbacklog.

As looks today, it's moving, it'svery fluid environment we are operating in. Garry Hsueh - CIBC World Markets: Okay, I appreciate the honesty.And can you just give me a quick comment here on pricing? I know there is a lotof concern about DRAM and how that might be transferring over to tool pricing?

Oh, I don't price DRAMs. Ourprice is hanging in their really well. The next-generation tools have donereally well with cost of ownership, sensitivity improvements, for ever battlingpricing and trying to come up with the lowest cost of ownership with ourcustomers. But the technology needs are such I think it's a fair battle. So ourpricing is no change say the rest of this year has been. Garry Hsueh - CIBC World Markets: Okay, John, can sneak one morequestion for Jeff, here?

Absolutely. Garry Hsueh - CIBC World Markets: Jeff, what's going on here withunearned revenue, I see that for the first time, there is a slog of unearnedrevenue now moving to the long-term liability line, is there anything going onthere?

Yeah, there is actually nothinggoing on, what happened is we implemented what's called FIN 48 a new accountingrule in the quarter, first quarter of the new year for us and as we did that,it changed how we bucketed some of our tax line and we bucketed, that resultedin us having some, taking some short-term tax liabilities and moving them tolong-term tax liabilities. Previously, the unearned revenue had all been rolledup in the short-term, but when we created the long-term liabilities section ofour balance sheet, we then move the unearned revenue from short-term to long-term. Garry Hsueh - CIBC World Markets: Okay, perfect. Thanks.

Our next question comes from theline of Steven Pelayo with HSBC. Steven Pelayo - HSBC: John, this is like the second orthird quarter, I think our bookings are little bit of a surprise, KLA hasstarted with them pretty good forecasting especially in the technology focus,nine months lead times and bookings guidance with the plus or minus 10% band.Is there any kind of secular change going on as a consist with reliability orforecast ability kind of deteriorated, what should I be thinking especiallygiven your comment, I guess you just suggested that [by the time] you arelooking at first quarter bookings to potential be up again from the 600 levelmaybe 650 to 700ish.

For the first half, I think itjust a math it is bottoms-up but definitely looks that way to us and the firstpart, I'm scratching my head Steve, I don't know that we've particularly beatthe order guidance a number of quarters in a row and as you know we follow thecompany for a long time and the September quarter is typically a more difficultquarter and hopefully I have characterized pretty well for you was backendloaded with generally memory orders that either slid out of the Septemberquarter into the December quarter and we closed those. But I think since thenwhat you've seen across the industry is folks really looking at their plans andkind of moving around at the beginning of 2008 when they are going to startadding something and that's what we are in the midst of right now and we aregiving you our best view of what we have right now. Steven Pelayo - HSBC: You are doing good on the costside, John. You just talked about OpEx being down again in December, if you dostate the revenue run-rate of 625 range, can OpEx had even lower?

The plan is for R&D to keepchugging along here, particularly with our -- what we call n plus two kind oftwo generations out, we are going to keep plenty of opportunities. Rickhighlighted a bunch of in his prepared remarks. I think SG&A, there wasroom for us to continuously consolidate something. So at around $600 million,$625 million run-rate, we think an operating profit line, we can be at high 20sas a percent 28%, 29%, 27% and that's how we think we can run in at that level. Steven Pelayo - HSBC: And Jeff at that level are yousustaining the kind of 30% of revenue in cash flow from operations? That lookspretty good.

Yes, absolutely. I think whatyou'll see is that if things level out, cash flow actually goes up. We had astrong cash flow this quarter, buffer some big tax payments. Next quarter,we're going to have another really big cash flow quarter, next quarter. Sowe're now starting to work down the working capital. Steven Pelayo - HSBC: Hey, guys thanks.

Our next question comes from theline of Mahesh Sanganeria with RBC Capital Markets. Mahesh Sanganeria - RBC Capital Markets: Thank you. Quick question on thewafer market, I know you guys did really well this year. Can you talk aboutlittle bit what's the size of the wafer market and how does that look in 2008?

Hi, Mahesh, it's Rick. As youknow, we don't break out the market segments, you're right we've done well inwafer. I think that overall demand for 300-nanometer had been building. But wecertainly see that there just like everything else I think probably a softeningenvironment overall for wafer manufacturers as well in terms of additionalspend on CapEx. But that being said, we are wellpositioned within them, and we have some new products in the pipeline to beable to do better than the overall CapEx, based on our ability to bring out newtechnologies and new tools which will drive some ASP growth. Mahesh Sanganeria - RBC Capital Markets: Okay. And then a quick questionfor Jeff, does that amortization of intangibles does that go mostly in COGS orthey're distributed along all three lines?

The way it works in anacquisition is typically the first couple of quarters, it's heavier in COGS andthat's start to go down as we realize the revenue on some of the tools and thenthe tail is in SG&A. Mahesh Sanganeria - RBC Capital Markets: Okay, so should we put that mostof $12 million or whatever you said?

Yes, the bulk of that is in SG&Agoing forward. Mahesh Sanganeria - RBC Capital Markets: Okay. All right. Thank you verymuch.

Our next question comes from theline of Suresh Balaraman with ThinkEquity. Suresh Balaraman - ThinkEquity: Thanks. Regarding Japan,whether any specific product groups say a reticle inspection or CD SEM thatdrove the orders or it is just normal lumpiness. The 20 percentage point abovehistorical is unusual, isn't it?

It is above normal andunfortunately it was based on the fact that we have more softness in the otherregions. So the percentage goes up, you might imagine. Its panel doing therepretty well, most of our softness was in other regions and so as a percent itgoes up. Does that make sense? Suresh Balaraman - ThinkEquity: Okay. And also can you breakoutthe thing that you usually do DRM foundries, NAND flash as the percentage ofDRAM, do they missed up data?

(inaudible). Suresh Balaraman – ThinkEquity: You guys used to give breakdownof DRAM, NAND flash foundries and Logic?

For the September quarter? Suresh Balaraman – ThinkEquity: Yeah.

Yeah. So for the Septemberquarter, memory was about 55% of the total, about half of that was NAND, logicwas 25 and foundry was 20. Suresh Balaraman – ThinkEquity: Okay. Thanks.

Our next question comes from theline of David Egan with Lehman Brothers. David Egan - Lehman Brothers: Hi, guys. See you already got it.

I think we are out of timeanyway. I would like to thank you all for participating in our conference calltoday. And we look forward to speaking with you again next quarter. Thank you.

This concludes today's conferencecall. You may now disconnect.