Welcome to the Dolby Laboratories conference call discussing fiscal first quarter 2007 results. (Operator Instructions) I would now like to turn the conference over to Mr. Kevin Yeaman, Chief Financial Officer for Dolby Laboratories. Please go ahead, Mr. Yeaman.

Good afternoon. Welcome to Dolby Laboratories first quarter fiscal 2007 earnings conference call. Joining me today is Bill Jasper, Dolby Laboratories President and CEO. In addition, Tim Partridge, General Manager of Dolby's Professional Division; Ramzi Haidamus, General Manager of Dolby's Consumer Division and Marty Jaffe, Executive Vice President of Business Affairs are here to participate in today's Q&A. On this conference call, we will be making forward-looking statements that include projections of future operating results for our fiscal year ending September 28 2007; market trends for the industries in which we compete, and our expectations concerning how those trends will affect our operating results; our ability to expand our presence in existing markets and to penetrate new markets; the capabilities and market acceptance of our products and technologies; and our strategic and operational plan. Important factors that could cause the actual results to differ materially from those in the forward-looking statements are detailed under the section captioned Risk Factors in our most recent annual report on Form 10-K and any subsequently filed quarterly reports on Form 10-Q, available at www.sec.gov or on our website at www.dolby.com under the Investor Relations section. Dolby disclaims any obligation to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise. As for the structure of this call, Bill will begin with an overview of the quarter and I will follow with a rundown of Dolby's financial results. So with that introduction behind us, I will now turn the call over to Bill.Bill Jasper: Thank you, Kevin. Good afternoon, everybody. I'm very pleased to report a solid first quarter with net income of approximately $30 million on revenue of over $104 million. We entered 2007 with a solid proven business model, a globally recognized brand, a technology…

Thank you, Bill. Moving to our financial results, revenue for the first quarter was $104.4 million, up 15% year over year and up 2% sequentially. This was comprised of 79% licensing revenue and 21% product sales and services revenue. In the Technology Licensing segment, revenue increased 19% year over year and 2% sequentially. Keep in mind that last quarter included $6.7 million of back royalty and you may remember that we estimate approximately $5 million from one licensee pending resolution of certain contractual matters. We expect to record revenue from this in our second fiscal quarter. In the first quarter, year-over-year Technology Licensing growth was driven primarily by growth from our Consumer Electronics, Personal Computers and Broadcast markets. Year-over-year and sequential growth in the CE portion of our Licensing business was the result of strong demand for standard DVD players and portable DVD players. In our PC market, we experienced strong year-over-year licensing growth on sustained demand for notebook computers, which commonly included DVD playback software with Dolby Digital. Sequentially, PC-related licensing declined, which was mainly attributable to the $6.7 million payment we received in the fourth quarter for PC shipments in prior periods. In our Broadcast market, we experienced strong year over year and sequential licensing growth as we continued to benefit from the transition to high definition and digital television in North America. In our other markets, we experienced, we experienced overall year over year and sequential growth lead by our gaming market. In the Product and Services segment, revenue for the first quarter was flat year over year and slightly up sequentially with a year-over-year decline in products-related revenue offset by growth in services. Let me turn to the details of the P&L for the first quarter. Licensing gross margin was 91%, or flat sequentially. Products gross…

Yes, what we were referring to in terms of competitive disadvantages in digital cinema was that, as you know, we've been going through an upgrade process to bring all of our systems up to the level that is required by the studios. That is meant doing largely the JPEG and that was a hardware upgrade so that was the extra expense. We are almost there worldwide with all of systems. We completed that upgrade with all of our North American systems and then we've got the international ones to do. The systems that we are actually selling today are JPEG compliant. Over and above JPEG as I've been saying there's more than just that for the DTI System and there are a number of other small software upgrades that we are currently doing and we're almost through with that as well. Then as I've also mentioned in the past in terms of competition, there's a lot of price pressure in this market right now.

Your next question comes from Ralph Schackart - William Blair. Ralph Schackart - William Blair : Good afternoon. Now that you've had some time to digest what you've learned from the Consumer Electronics Show, can you give us some perspective of whether you think one format will prevail or if the market will move to a dual format for the cycle? And what sort of implications that would have on your business over the longer term? Ramzi Haidamus: We are definitely seeing a significant approach on both around all geographies, we haven't seen a let up in either camp, so I would qualify the war is still going on, if you will. However, there are some indications that some parties are taking some activities to try to accelerate the resolution of the war, as you've probably heard and as Bill mentioned earlier, the LG Dual Player; it remains to be seen if it is a feasible solution for the marketplace to adopt to a format player. Another potential solution has been with one of the content companies potentially offering a dual format disk which could play both. So we've seen some movement in order to try to get the two camps together but so far we haven't seen a resolution yet. Ralph Schackart - William Blair : Thanks. And then in terms of the mounting cash on the balance sheet and clearly the high margin business model generating a lot of free cash flow, can you give us some perspective strategically, your thoughts on the uses of cash? Kevin Yeaman: We don't have any change in our position on that. We continue to look to grow in a number of areas including video, it's an area that we've been focused on as we've discussed in the past. So we continue to look for opportunities to deploy our cash to our new initiatives but we don't have any plans other than that. Bill Jasper : I would just like to stress as Kevin said that video is a key area and we're looking very strongly at our entry in that market and see some possibilities. Ralph Schackart - William Blair : Great, thanks.

Your next question comes from Daniel Ernst – Hudson Square Research. Daniel Ernst – Hudson Square Research : Yes, good evening. Thanks for taking the call. Two questions if I might. First on the International Broadcast, looking at the consumer side of that, the set top boxes, can you talk about what the growth of that has been year on year, and is that an area that's now a meaningful share of revenues? Can you maybe break it out? Secondly, your comments on working on broadening your role in the handheld market, we saw so many demos at CES. Is that an opportunity that's within the medium time frame, calendar '07, or is that more of a calendar '08/'09 opportunity when you might be able to break into that side of the market? Kevin Yeaman: I am sorry, can you repeat the first part of your question? I didn't catch it. Daniel Ernst – Hudson Square Research : The first part of the question was on the international side of consumer broadcasts, so set top boxes, and TV sets in international. In North America, we know it's quite strong with the ATSC mandate, but internationally you're the de facto standard on some networks and you said over a hundred channels. Is that now a meaningful share of revenue where you're in set top boxes or TV sets internationally? Kevin Yeaman: So we did see good growth in our broadcast licensing group, both year over year and sequentially. Most of the data we have is from our licensees which can ship products to North America or internationally, so we don't have perfect data on penetration. We look to industry data on that, which would indicate that Europe is still at an earlier stage than North America, but that we're beginning to get some penetration there. Tim Partridge : The largest signs, positive sign I would say is what Bill mentioned earlier in terms of the adoption of broadcasters in Europe, specifically, and elsewhere. We have a significant uptake on broadcasters having offered broadcasting in Dolby Digital. Add to that, we have our IPTV push with Dolby Digital Plus. We had a couple of showcases of Dolby Digital set top boxes at CES, which is the beginning of a new cycle for that technology. Daniel Ernst – Hudson Square Research : The second question was on your opportunity in the handheld market, moving beyond the Avia licensing using Dolby Headphone and other technologies.

We do have a few initiatives in terms of pushing our technologies into the handheld market. As you said, there's Dolby Headphone, which is very much appropriate to the movie playback, and as we see more and more phone/media players as we observed at CES, those are a prime target for our Dolby Headphone technology when somebody’s watching a movie or short clip or even a short TV series that's broadcasted in Dolby surround mode. Another type of personal audio technology we're pushing is Audistry. To answer your question is yes, we are aiming at having some design wins in 2007, but to be clear, design win and revenue in our product life cycle can be a bit far apart. Daniel Ernst – Hudson Square Research : So just to summarize, maybe not until calendar '08 where we see an expansion of the opportunity on the handheld side?

From a revenue perspective, correct. Daniel Ernst – Hudson Square Research : Okay, fair enough. Thank you.

Your next question comes from Ingrid Chung - Goldman Sachs. Ingrid Chung - Goldman Sachs: Hi good afternoon. You'd cited that consumer electronics was helped by growing DVD unit sales. That actually does follow what we've been seeing with CEA data. I was just wondering how you'd explain the accelerating growth in the US? Kevin Yeaman: Well we probably see the same data that you do in that regard. As you know, we came into the year building our guidance based on flat performance in our CE markets, so we're pleased to see Q1 get out of the gate with some growth. I don't know that we have any answers to what's causing that growth other than what you read in other reports. Ingrid Chung - Goldman Sachs: Thanks. On SG&A, it seemed like your growth on the SG&A line had come down quite a bit and you'd cited that part of it was due to bonus payments. Should we expect SG&A growth to accelerate throughout the rest of the year? Kevin Yeaman: As we think about spending for the rest of the year I'd think about a couple of things. There are some things that tend to cause growth toward the latter part of the year such as our raise program, our trade shows tend to be in the last three quarters of the year, the calendar fourth quarter is not a big trade show quarter for us, and then also we do have hiring plans. We do intend to continue to invest, as I said, in a number of our new initiatives and our sales and marketing abilities, and so we do have hiring plans for the rest of the year that would effect the SG&A line. Ingrid Chung - Goldman Sachs: Thanks.

Your next question comes from Sam Doctor - JP Morgan. Sam Doctor - JP Morgan: Could you give us a sense of the deployment in Digital Cinema and how you see that going for the industry over the next year or two?

Yes, Sam, well currently, as Bill said, we've got about 280 systems out there and I think if you looked at various reports that are published worldwide there are around about 3,000 systems total deployed. So that's where it is right now. There's certainly lots of talk about that deployment continuing over the next couple of years. We're very encouraged by exhibitors supporting ours and several of them asking specifically for Dolby equipment from the various systems integrators that are moving ahead with that deployment. It's quite difficult to actually put a number on it right now. Sam Doctor - JP Morgan: Secondly, I have a question on gaming and specifically on the HD DVD attachment for the Xbox 360. Does it actually increase your revenue opportunity when you get the royalty for the 360 and then for the add-on? How is that performing in the market? Bill Jasper : The HD DVD does constitute an additional royalty when purchased on top of the Xbox, and in terms of the results on that, we don't have the data on that upsell from Microsoft yet. Sam Doctor - JP Morgan: The HD DVD add-on will be Gaming and not CE revenue? Is that right? Kevin Yeaman: How would we account for it, you mean? Sam Doctor - JP Morgan: Yes. Bill Jasper : Well I mean that attachment can play movies and it could also potentially play high-def DVDs. In terms of how to account for it, I'll have Kevin answer that question.

In terms of how we break down our segment data for you, we would track that in our gaming segment. Sam Doctor - JP Morgan: The $5 million in back licensing, did you collect that in the first quarter or is that the second quarter? I'm sorry I missed that. Kevin Yeaman: We did not collect that in the first quarter and we are expecting to collect in the second quarter. Sam Doctor - JP Morgan: Thank you.

Your next question comes from David Biederman - Pacific Crest Securities. David Biederman - Pacific Crest Securities: A couple of quick questions. First off, looking at the Apple ITV device at Macworld, talking with people there it looks like it was going to be two-channel only. Are you in talks to make that to support multi-channel audio going forward? Bill Jasper : We don’t have any information on that right now. David Biederman - Pacific Crest Securities: Looking at the video initiatives that you spoke about earlier can you talk a little bit how you view the competitive landscape for that with some pretty well-established video CODEC drivers out there? How do you see that shaking out in the mid-term? Thank you. Bill Jasper : Well overall we think that we are well-positioned to come up with some viable technology offerings in the video imaging space. We've obviously learned quite a bit from our work in Digital Cinema working on JPEG 2000 and enhancements to JPEG 2000, working the area of 3D. It is a very competitive landscape. There's some big players out there. On the other hand, we have quite a few years of experience in this regard. We brought in a company called Demographics about five years ago who were some very, very talented people in video signal processing. We've added to some people on the East Coast in our office in Pennsylvania, some former people from the consumer electronics industry back there. And we think we have some very, very viable technologies to take to market both in the professional field as well as in the consumer field. I think this again ties back in with our contacts in the content side in terms of our business model of getting content created and then distributed and played back. We think we can compete quite well in the imaging and video space moving forward.

I just wanted to go back to your question earlier about the Apple TV. The output is true that it's two channel but to the extent that it's Dolby surround encoded as is the case with all of Apple's movies, any consumer can connect that LTRT output to their surround system at home and enjoy 5.1 channel surround playback. David Biederman - Pacific Crest Securities: So you receive a royalty on the devices when they will be sold? Tim Partridge: The decoder is not in the device. The royalty would come from those receivers that are in the homes. Bill Jasper : No. But our Avia subsidiary will receive a royalty on the AACD coding in those once those start selling in the summer. David Biederman - Pacific Crest Securities: Great thank you.

It appears we have no further questions at this time.

I want to thank everybody for joining us on today's call. We think we've had a very, very good quarter. We've had a great CES, we have great technology for the future. We're looking forward to finishing off fiscal year in the style to which I think our investors and customers have come to expect. We're very, very happy with our results and we look forward to talking to you next quarter. Thank you very much for joining us.

Thank you Mr. Jasper. That does conclude today's conference call.