Welcome to the Dolby Laboratories conference call discussingfourth quarter and year-end fiscal 2007 financial results. (OperatorInstructions) I would now like to turnthe conference over to Kevin Yeaman, Chief Financial Officer for DolbyLaboratories.

Thank you. Good afternoon, everyone and welcome to DolbyLaboratories fourth quarter fiscal 2007 earnings conference call. Joining metoday’s are Bill Jasper, Dolby Laboratories President and CEO; in addition TimPartridge, EVP of Products and Technology, Ramzi Haidamus, EVP of Sales andMarketing are here to participate in today’s Q&A. On this conference call, we will be making forward-lookingstatements that include: projection of future operating results for our fiscalyear ending September 26, 2008; market trends for the industries in which wecompete and our expectations concerning how those trends will affect ouroperating results; the capabilities and market acceptance of our products andtechnologies; and our strategic and operational plans; as well as ourexpectations regarding the anticipated benefits of the planned acquisition ofCoding Technologies. Important factors could cause actual results to differmaterially from those in the forward-looking statements. These factors aredetailed under the section captioned risk factors and elsewhere in our mostrecent quarterly report on Form 10-Q available at www.SEC.govon our website at www.dolby.com under theinvestor relations section. Dolby disclaims any obligation to updateinformation contained in these forward looking statements, whether as a resultof new information, future events or otherwise. As for the structure of this call, Bill will begin with anoverview of the business and our recently announced agreement to acquire CodingTechnologies, and I will follow with a rundown of Dolby’s financialresults. Now with that introduction behind us, I will turn the callover to Bill.

Thank you, Kevin. Good afternoon, everybody. I am pleased toreport a strong fourth quarter and fiscal year. Throughout the year, and theperiod, we continue to benefit from Dolby’s strong position across a range ofentertainment markets including cinema, DVD, personal computer, broadcastgaming and automotive. With this strong base, we remain well-positioned for anumber of upgrade cycles including Digital Cinema and 3D, Digital Broadcast,next-generation DVD and next-generation gaming. In each of these markets, Dolby’s technologies help makeentertainment more real and immersive, and the Dolby brand has come tosymbolize a superior entertainment experience. True to our strong brand and industry-wide presence, we arewell-positioned at a time when digital content is proliferating and the demandfor entertainment is growing. Our fundamental opportunity is to extend ourbrand and technologies to the many new markets arising from this digitalproliferation. We believe our plannedacquisition of Coding Technologies is an important step towards addressing thisopportunity. On today’s call, I would like to provide an overview ofCoding Technologies, also known as CT, and discuss how we believe it positionsus better for longer-term opportunities emerging in a digital world. Andfinally, elaborate on the progress we are making with new initiatives inmobile, Digital Cinema, and video. I am very excited to announce that Dolby has entered into adefinitive agreement to acquire Coding Technologies for a purchase price ofapproximately $250 million net of cash. We expect the transaction to close verysoon, and the closing mechanics are already in process. I would like to spend the next few minutes discussing CT’sbusiness and technologies and articulating why we are very excited about thistransaction. First, a little bit about Coding Technologies. CT is alicensing company founded in 1997. For the past ten years, it has been focusingon developing and providing innovative audio compression technologies forlimited bandwidth platforms such as mobile and digital broadcasts. The companyhas approximately…

Thank you, Bill. I would like to start by discussing Dolby’soverall financial performance, followed by highlighting some of the majordrivers of our P&L in the fourth quarter of 2007 and in fiscal 2008, andfinish by providing our guidance for fiscal 2008. We had a strong fourth quarter and fiscal year driven bystrong revenue growth, a significant increase to our licensing margins and adecline in our tax rate, each of which I will cover. Revenue for the fourth quarter was $129 million, up 26% year over year. On a fullyear basis, Dolby’s revenues was $482 million, up 23% from fiscal 2006. Fourthquarter licensing revenue was $103 million, an increase of 29% year over yearand 9% sequentially. Growth was primarily driven by strong results from our PCconsumer electronics and broadcast markets. In the fourth quarter, our CE market experienced growth yearover year and strong sequential growth on higher reported shipments of DVD, hometheater in a box and AVR products, due in part to our compliance efforts. The CE market madeup over 35% of our licensing revenues in fiscal 2007, compared to approximately45% in fiscal 2006 as strong growth from our PCM broadcast markets furtherdiversified our revenues. Our PC market experienced strong year over year growth inthe fourth quarter as many consumer PCs continuedto ship with Microsoft Vista Home Premium or Ultimate Editions as well as withthird party DVD playback software, each containing Dolby technologies. Our PCmarket also experience sequential growth, which we attribute to increased PCshipments and the continued strength of Microsoft Vista. The PC marketrepresented approximately 35% of our licensing revenue in fiscal 2007, comparedto just over 30% in fiscal 2006. Our broadcast market experienced strong growth year overyear in the fourth quarter on continued demand for digital televisions in North America, and was slightly down sequentially. The broadcast marketcomprised over…

(Operator Instructions) Your first question comes from RalphSchackart - William Blair.

Good afternoon, another great set of results, guys. Kevin, Iappreciate the color for ’08. First at a high level, Bill, can you help usunderstand how the Coding is complementary to what you are currently doing withDoCoMo?

DoCoMo is Dolby’s technology, we license Dolby’stechnologies which we have been putting into what we call the Dolby mobileprogram going ahead. I assume you say, this technology you are referring to isCoding Technologies, is that correct?

That’s right, Bill.

They have slightly different technologies which are veryuseful in very, very low bandwidth applications, but in this particular casewith NCC DoCoMo Dolby Digital makes a lot of sense. It is not actually pure Dolby Digital, it is a suite of products we have developed aroundDolby Digital and other technologies that we think will enhance the mobileexperience. Ramzi, would you like to add to that?

Just to add some color to what Bill said, the Dolby mobiletechnology is a post-processing audio technology meant to make the phone soundbetter for playback of media and the Coding Technologies technology, also knownas spectral band replication, it is really think of it as a turbo chargerattached to a codec such as AAC. So in the case of Dolby mobile with NCC, we are reallytalking about a post-process technology; in the case of CT technology, it is acodec which is going to be operating at a lower bandwidth and high quality.

In terms of the complementary nature of the businesses, inaddition to the technology aspects, I would just add that given CT’s presencein the handset market, the relationships they have built up and theirexpertise, we do think that it potentially accelerates our strategy of drivingDolby mobile across additional handset models.

Kevin, can you help us think about the earnings impact fromthe acquisition? I know you gave us some data points on the revenue andamortization. I was just curious if you could help us think about the earningsimpact and/or the OpEx of coding.

At the highest level, Ralph, Coding Technologies is alicensing business and has a very similar margin structure to Dolby’s licensingbusiness, so you can think of it as adding about $20 million in licensingrevenue and a similar margin structure. Now of course, there is as I mentioned about $8 million ofamortization for intangibles which is included in our GAAP guidance; roughlyhalf of it in cost of licensing, half of it in OpEx. At the outset, we willhave some integration costs and there are some purchase accounting adjustmentswhich affect us early on, and that is included in our GAAP guidance.

When you looked at this acquisition in terms of the internalROI metrics compared to some other deals that you have done, can you help usthink about the order of magnitude of what made this deal relevant today, andhelp us think about that? Thanks.

I think what makes us relevant for today, Ralph, is we’vealways said we would be focused on companies with strong IP portfolios which wecan combine with our expertise and realize complementary benefits. In thiscase, as we discussed earlier, it is very complementary to our mobile strategy.We think it potentially accelerates the mobile strategy that we already had inplace, and it is also very complementary to our broadcast business; we thinkthat as more and more digital media is available and broadcasters look to comeup with new applications to get that digital media out there, we think thatadding this technology to our portfolio allows us to meet even more of theneeds of our customers.

We think that the addition of the Dolby brand in thissituation will allow for further expansion of that business.

Your next question comes from Ingrid Chung – JP Morgan. Ingrid Chung – JPMorgan: Good afternoon, congratulations on your results. My questionis just about the three buckets that you have talked about previously, and whatdo those buckets look like for ’08? And then also, it sounds like you are juststarting to recognize some revenue from mobile. Does that go up several times?How much of CT’s revenue do you think will be for the mobile market? Lastly, in terms of the Internet market, who would youlicense technology to? Would it be a third party vendor or an OEM? Who would itbe?

Why don’t I start off with the guidance question, and I willturn the Internet question over to Ramzi when I am done. So I assume, Ingrid,that you are referring to how we are thinking about each of our licensingmarkets? Ingrid Chung – JPMorgan: Correct, yes.

So as you know, we separatelyreport on CE, which is where the majority of DVD players are reported for us;PC, and broadcast. Then our other category includes gaming, automotive, VIA,and now mobile. So if I focus for themoment on organic growth, since I told you that $20 million of the revenue wasa result, is what we are expecting from the acquisition, the guidance rangecame out to roughly 12% to just under 20% growth from licensing. We areexpecting CE to be flat to slightly up, that is what we are hearing fromindustry analysts and expecting for that market. We therefore expect most of our growth tocome in percentage terms from PC, broadcast and the other market. So we are expecting close to 20%growth, at least, from each of those markets and we are actually expecting alittle more than that out of our broadcast market. Now when we layer in themobile market in particular, the combination with Coding Technologies, theother market category does grow faster because most of the $20 million dropsinto that category.

On the Internet applications, there's severalapplications we believe will benefit from the efficiency of spectral bandreplications that apply in HEAAC, starting with streaming application such asradio on the Internet, TV on the Internet, IT TV, even video on demand on theInternet as well as of course, the large market of music delivery, can allbenefit from a lower bandwidth, high quality technology such as CT's. Target companies, as wasmentioned earlier, could be Apple, Real Networks, and the type of companieswhich provide music players, radio players, all can benefit from technologieswhich CT offers.

Your next question comes from StevenFrankel - Canaccord Adams.

Obviously, very impressiveresults. Just to dig into Digital Cinema for a little bit, how many servers doyou have installed in the field today, and is there a ramp between now andBeowulf on the server side as well as the 3D equipment side?

Servers today, we're incommercial theaters about 550 and another 50 in the studios in their special screening rooms. Sothat's where we are today. In terms of Beowulf, it opens next week actually,although we are installing as we speak, we're expecting to do between 75 and 803D screens for Beowulf by the time it opens. Yes a certain number of those havegone is with new servers as well as obviously putting 3D into existing ones. Sothat's the kind of ramping we're expecting, but it is all happening within thenext week. Does that answer your questions?

Does the 550 place you number 2 in the server market? What do youthink your market share is?

Obviously, what I see roll out over the pastcouple of years has placed a large number of servers out there, so we'reclearly behind on market share. But as Kevin mentioned, we do believe that thiswill be a transitional year for Digital Cinema, which on the one hand makes itvery hard to predict, but we do believe we're well positioned if it doeshappen, which we expect it to. With our server obviously, we've got a number ofproducts that are in this market. We've got the server as you know. Weannounced at the last trade show, and we'll shortly be introducing an audioprocessor, a Digital Cinema only version of our flagship, CP650. We also have a couple ofintegration products aimed at Digital Cinema, and of course, the 3D as well. Sowe have a whole suite of products, and the expectation is that Digital Cinema startsramping this year, we do feel we're well positioned.

Looking at the format war in BlueLaser DVDs, do you think the logjam is getting worse or better in the last 90days?

Could you just add some more color what youmean by logjam?

In other words, we have a format war and is itgetting any closer to getting resolved, or do you think that the situation isgetting more clouded given what's going on in the HD DVD camp lately?

Well every time it seems thatsomething is going to let up, somebody drops their price and the market becomeseven more competitive and we are in a situation where we're seeing veryaggressive pricing from both sides, continual generation of content for bothformats. Of course as you know, we're in both formats, so we're just kind ofsitting back and watching, but at this point we really don't see any letup.

On the PC market as you probablynow get a little bit of view of what customers are gong to do post-Christmas,do you think the dual installs of being in Vista and in the third-party softwareDVD players is going to continue post-Christmas season?

That is our feel as well. It is reallydifficult to predict what that trend is going to look like, but at least for thefirst half of FY '08 we agree that there doesn't seem to be a letup of thattrend. Past the first half of FY '08, it's difficult to predict so we're justgong to wait and see how that market plays out.

Your next question comes from BrianThackray - Deutsche Bank.

On the broadcast market, you talkabout growth next year being north of 20%; can you talk within that a littlebit about your expectations around government subsidies around set-top box,what you're expecting there?

We think the big drivers for us next year willbe the option of digital television is probably the highest growth areas withinour broadcast licensing; set-top boxes is another category for us, we expect todo well there. I think you're referring toprobably the potential for converter boxes as we get closer to FCC mandate. Weare not expecting that to be a big driver for us in the 2008 timeframe; wethink that's a dynamic that will probably come very close to the mandate in2009.

And don't forget we have the three-monthlag.

In the PC market, can you guysmaybe give a little more insight into what you saw from Vistain terms of the incremental contribution in this quarter and where you expectthat to go over the next few quarters? Also from Acer and Toshiba deals interms of how much momentum or contribution you're seeing from those deals?

So in terms of Vista,the sequential growth that we saw was driven primarily by increased PC salesand a continued strong attach rate of the Vista Premium Editions in which we'reincluded. As Ramzi said earlier, we do see that continuing at least through theholiday season. Our guidance actually assumesthat there is some lesser incidents of third-party DVD attachments when PremiumVista is sold, so we're leaving a little bit of room there in the second halfin our guidance, although as Ramzi said, we don't have any specific evidence ofthat one way or the other. In terms of your question aboutAcer and other manufacturers that have adopted some of our premium PCentertainment experience, we garnered a number of design wins last year, as youknow. There was not much revenue last year, it was mostly design win stage, butwe do believe that that program will begin contributing revenue in 2008.

Last question with regard to CT,can you talk about the revenue run rate, what it's doing today or where it hasbeen in the last 12 months?

It's been growing at about, as I told youwe're expecting about $20 million in our fiscal year. They are on a calendaryear. Their last full reported period was calendar '06, which was about $16million. It's been growing since then at about 20% a year. Of course, as wegive our guidance, we factor in purchase accounting adjustments and those sortsof things which affect you in the early stages.

Your next question comes from PaulCoster - JP Morgan.

Kevin, I may not have completelyunderstood your statement about licensing, the upward adjustments to the grossmargin expectations. Does that mean that the licensing dispute is resolved, ordoes it mean that you are just confident it will be?

What we said is that wedetermined that there was no need to continue accruing any additional expense,and that was what we said. Is that clear?

So there's no residual conflict with the thirdparty there?

Well as you know, we've been accruing someexpenses over the last year. We have an accrual on the books and we thinkthat's sufficient to cover any outcome of the matter.

In terms of the cinema business,what should we be thinking about in terms of long-term gross margin targets,please?

Sorry, I missed the beginning. Did you saycinema in particular?

Yes.

Obviously it's the early stage of the productcycle, and we've been focused on the quality of the product and customizing itto what we think the market needs. So the early sales are at relatively lowmargins. I said we expect that our overall product margins this year willprobably be in the range of 35% to 40%.

And longer term, what should we be thinkingabout?

Over the longer term, once we're talking aboutat volume, and if we're fully considered I would expect them to get back intothe 40s again.

You were looking forward to someacquisitions this year, and you started off in a correct manner, but I wasexpecting it to be video-related; it's video still strategic for the company ona go-forward basis.

Yes Paul, video is extremely strategic. Wejust could not pass up the opportunity to bring Coding Technologies on boardbecause it complements everything we're doing, especially giving someadditional inroads into the broadcast market, as well as supporting the mobilemarket. We continue to focus on video; we're investing the infrastructure tobring products to the market, to take those technologies out to license, andvideo is a very key strategy for the future.

As we think about fiscal year'08, should we expect tuck-in acquisitions, or something more transformationalin nature?

You mean transformational in termof products or technologies?

That plus scale of the acquisition.

Well we're just starting to, we think, takeadvantage of the acquisition of BrightSide last spring, working very closely tobring their technologies to market and complement with some other technologieswe've been developing for the last couple of years at our Imaging Group. Wefully expect to start seeing some technologies and products out in themarketplace, as well as some license products in FY '08.

You haven't bought your way into video codectechnology, so is that likely to figure in your strategy going forward?

Well, as you probably know, the video codecswhich are out there; H.264 is pretty much one of the standards being used. Wehave technologies which we can wrap around that which we think will enhance theexperience, so that is the approach we're following. You said, “bought into”the video technologies; I'm not sure what you mean there, but our approach isto take the standardized options which are available and build on them.

Your next question comes from AndyHargreaves - Pacific Crest Securities.

Another question about newproducts, on Dolby Volume, have you had any traction there, and does thatcontribute to your CE, your broadcast growth in '08?

We've had a very positive response from ourlicensees in terms of demand for the technology. They continue to be excitedabout it; the demand is there. We do foresee having some prototype product ondisplay at the upcoming CES. In terms of revenue growth, wehaven't really built much for FY '08.

Broadcast in the quarter, youpointed out TV growth as being a primary driver. Did I hear you right there, orwas set-top box really strong as well? Can you give us any sense of what themix within that broadcast business is of U.S.versus international?

To your first question, I wascommenting earlier on reflecting on fiscal 2007 growth, the drivers beingdigital TV growth as well as set-top box growth. Those are the two maindrivers. But we haven't provided any geographic information by segment andtypically we're getting reported to by our licensees and we don't always haveperfect information on end user.

Lastly, you mentioned, I think Iheard you right, that there's a potential for increased competition in DigitalCinema on the audio side if it gains traction? Can you just explain thedynamics there?

Yes that's correct, to the extent that theindustry does transition to Digital Cinema and away from traditional film productsthan our current CP650 of course has technology in it that takes us to thetraditional film, 35mm film. So to the extent that we transition to DigitalCinema, there could be a decrease in demand for traditional film products,which is why I mentioned we have recently shown and will soon introduce a DigitalCinema only version of our CP650. But of course, with that not having the DolbyDigital proprietary technology in there, we do anticipate increased competitionfor that product.

Your next question comes from HunterDuBose - Morgan Stanley.

Could you tell us what theeconomics of the 3D deployments for Beowulf look like in terms of revenue andgross margin? Just coming back to the grossmargins on the licensing business, I wanted to clarify whether the 96% grossmargins you're guiding towards for 2008 are representative of the gross marginsbeyond that period or simply for 2008? Beyond that period, could yougive us just a bit more color why they stepped up quite meaningfully from thelow-90% level they've been at since 2002 on a pro forma basis? Thank you.

Hunter, on the 3D deployment theequipment that we supply for 3D is some hardware, some software and the colorwheels that Bill referred to in his opening remarks. That whole package isapproximately $15,000 and of course, we also supply many pairs of glasses foreach screen and they are a little bit under $50. Margin-wise, the margins on the3D products which go into the projector, are typically of our regular productmargins. However, on the glasses, Kevin referred to in his remarks, that'sclearly almost a consumable item and therefore much lower margins on that.

In terms of the licensing gross margins, I'msure you remember that over the past several quarters, we had been accruingroyalty expense related to an ongoing dispute with an unrelated patentlicensor, and so our licensing margins have stayed at their historic levels ofabout 91%. This quarter, or the fiscal fourthquarter of 2007, we determined that it was appropriate to cease accruing thoseadditional royalty expenses. That's what resulted in the 98% licensing marginsfor the quarter. As we look to 2008, the changefrom 98% to 96% is really due to amortization of intangibles for acquisitions,so that was our guidance for 2008 and we don't have any guidance beyond that.

Is there any reason to believe that it wouldstay at the higher level versus reverting to the historic lower level of around90%?

All else held equal, it would stay at the 96%level. The only changes would be if we entered into any sort of additionallicensing agreements as we introduce new technologies, new products, so allelse held equal, that is what we're guiding for, 96% in 2008.

Your next question comes from MikeOlson - Piper Jaffray.

On the DCI spec, I know this issomewhat out of your hands but is there a risk that this looks beyond secondhalf '08 and what could cause that to be delayed or lead to it gettingcompleted on time? The root of my question is whatreally needs to be done here to get that done, and do you feel that the timingof when you've assumed you'll be able to recognize Digital Cinema revenuesconservative or more aggressive? Thanks.

As you said Mike, it is a little out of ourhands. Specifically, what needs to be done is we need the industry standardsbodies to agree upon a standard or some elements that are written into the DCIspec. So specifically we're waiting for the SMPCE body to publish a spec, andas soon as they do so, we'll start writing the code to implement that spec. So we have an anticipated publishdate but standard bodies and publishing standards sometimes takes longer thanyou require. But we're expecting to be able to do all the work that's necessaryand be able to recognize in the second half of the year.

Your next question comes from AlanDavis - DA Davidson.

Kevin, are you willing to sharefor the impact of CT next year, the bottom line and net impact excluding theamortization of intangible increase?

Like I said, it's about $20million of revenue. If you exclude the amortization of intangibles and again thereare some early effects of integration costs and purchase accounting itbasically looks like the same type of margin structure as Dolby's licensingbusiness.

Do your underlining assumptionsfor the number of Digital Cinema screens getting rolled out globally in yourfiscal '08?

Alan, we're looking to the deployment agenciesthat are talking about deploying this year, and a number of them are talkingabout deploying in the March timeframe. As we've seen in the past, noteverything that is anticipated comes to pass and there are many issues, the DCIone that we just mentioned being one of them. That could slow that down, but wedo anticipate that people will start moving this year and as for the actualnumbers, it's very dependent on whether these things come to pass or not.

Fair to say you're taking a conservativeapproach with your assumptions?

I think we're taking a realistic approach,yes.

On the M&A side, jus curioushow you might characterize your activity there? I know you just obviouslyacquired CT but looking forward, couldyou characterize the size of future deals, how big are you willing to go,depending on the technology you're acquiring and is there a minimum cashbalance that you would like to have on the balance sheet that you wouldn't gobelow? Just trying to get a characterization of maybe the size of the deals inthe pipeline.

Well, any potential acquisitions obviouslyhave to fit into what we're doing from a technology standpoint whether they bein the audio field or video field or other. Coding Technologies was obviouslyour biggest acquisition to date, but we did acquire BrightSide earlier thisyear, as you well know, which was much smaller. We don't have any specificparameters in terms of acquisitions and don't comment upon anything we may belooking at. But suffice it to say we will go after any acquisition which webelieve we can absorb financially. We don't have any set fixednumber for cash on the balance sheet, but we obviously believe that cash is animportant asset and we will make sure that if and when we find any proposedacquisitions which fit from a technological standpoint that we would makecertain that transaction fits in with our overall financials.

For fiscal '08, what's theprojected amortization on intangibles and then the total D&A?

The projected amortization ofintangibles is about $13 million, and that's the estimate as it relates to theCoding Technologies acquisition. It is preliminary at this stage, but ourcurrent estimate is $13 million. I haven't given a total D&A estimate yet,but we expect that to be in the neighborhood of just over $25 million.

We have no further questions atthis time. Mr. Jasper, I would like to turn the conference back over to you forclosing remarks.

We feel we've had an excellentyear and we look forward to talking to you next quarter at the end of ourDecember quarter, first quarter fiscal 2008. We appreciate your interest, andagain thank you very much.