Welcome to the Nanometrics Incorporated Fourth Quarter and Fiscal Year 2007 Financial Results Conference Call. The speakers today include Tim Stultz, President and CEO and Gray Schaefer, Chief Financial Officer of Nanometrics. (Operator Instructions) Before we get started, I would like to call your attention to the Safe Harbor statement. This conference call contains certain forward-looking statements within the meaning of Federal Securities Laws. These statements are based on management’s current expectations and involve risks and uncertainties that may cause actual results to differ materially from those described in the forward-looking statements. Factors that could cause such differences include, but are not limited to changes in demand for the company’s products, changes in the company’s ability to ship its products in a timely manner, changes in business or economic conditions and the additional factors and cautionary statements set forth in the company’s Form 10-K for the year ending December 30, 2006 and in the other reports which the company filed with the Securities and Exchange Commission and incorporates by reference. I will now turn over the call to Dr. Tim Stultz, please proceed sir.

I appreciate your calling in today; with me is our Chief Financial Officer, Gary Schaefer who will go through the details of our financial results at the end of my prepared remarks. First of all, I am very pleased to be announcing our record revenue year for Nanometrics. In 2007, our company went from being a relatively small process control company to being one of the major providers of metrology equipment to the global semiconductor industry. This was accomplished through a combination of organic growth and strategic acquisitions. In 2007, we also made significant progress towards our stated goals of improved profitability, predictability and cash flow. We achieved above industry revenue growth, gross margin improvement and profitability from operations. That being said, the last quarter of 2007 was challenging as many of our customers faced price erosion for their products primarily in the memory sector. We in turn experienced some late quarter push outs of planned shipments which resulted in a sequential decline in our quarterly revenues in the fourth quarter. We fully expect to recognize these revenues in the first half of 2008. In spite of these decline in revenues however, we approved our product gross margin that generate $2 million in cash in its operating income and we continue to make progress towards our business model. A few highlights from our fourth quarter include a 2% improvement in product gross margin compared to the third quarter. Our second consecutive quarter of positive gross margin in service and our third consecutive quarter of generating operating profit on a cash basis. Also a highlight of the quarter was a significant strategic customer lend in the data storage sector with head to head competition with our competitor. On a year-to-year basis, revenues increased 52% to $146 million. Those margins improved by…

Thank you, Tim. Earlier today, we released our Fourth Quarter and Full Year 2007 Financial Results. If you have not yet received them, you may find them on our website at nanometrics.com. I will now address some financial aspects of the announcement. For the full year 2007, we achieved record revenue of $146 million, an increase of 52% over the prior year at of $96 million achieved in 2006. For the fourth quarter, total revenues of $33.2 million represented a 14% decrease from our record prior quarter and a 33% increase over the fourth quarter of 2006 which was the first full quarter reflecting the combined results of both the Accent Optical and Solaris acquisitions. Revenues for the quarter declined sequentially primarily as a result of our customers cautious outlook on the macro economic climate as we witnessed our customers actually under spending their 2007 budgets deferring some Q4 shipments in 2008. Despite the lower revenue volume, our product gross margins increased to 51.6% versus 49.6% in the third quarter and 36.2% in the fourth quarter of 2006. Product gross margins improved primarily as a result of our completing the integration of our mergers which included the consolidation of our manufacturing facilities as well as our shift to a less vertical manufacturing model which further reduced our fixed cost. Our service gross profit declined by $100,000.00 in the fourth quarter equating to a service gross margin of 7.9% compared to the 10.3% margin achieved in the third quarter of 2007. We remain confident in our efforts to improve our service gross margin as the fourth quarter represented more than a 10% improvement versus our negative 2.4% service gross margin in the year ago period. Our service gross margins have improved year-over-year primarily as a result of our focus on reducing…

(Operator Instructions) Your first question comes from the Mr. Gary Hsueh of Oppenheimer, please proceed sir. Gary Hsueh - Oppenheimer & Co.: A quick question here, exactly how much push out from the December quarter in terms shipments into the second of 2008, are we talking something like $10 million, can you try and help give us a sense of the magnitude of these push outs?

The push outs will go into Q1 and Q2, Gary and I really cannot comment exactly as to the amount at this point in time, but these push outs are going into Q1 and Q2. Gary Hsueh - Oppenheimer & Co.: Okay, I just noted that the North America book to bill data suggests that bookings are actually up sequentially in the December quarter versus the September quarter by the tune of 5% to 10%, let us call it 7%. You know, if that were to apply to you guys, I think the shipments that you would recognize would be somewhere in the single digit range, I mean, I am just wondering if that is the kind of a right ballpark or December is a lot bigger than I am thinking.

That is not a bad assumption. I think if you look, we had our business in North America regions, quarterly were normally flat and you will see that some of the areas in Asia Pacific where some of the push outs that we experienced occurred are where the adjustments were in the actual revenues. Gary Hsueh - Oppenheimer & Co.: And just, kind of a bigger picture, the stock is already kind of traded down to $5.00 range. Clearly we are already discounting at a significant kind of capex correction year in 2008, so I think we have got that part figured out. What I am trying to understand here is just your material characterization business for the full year in 2007 and how you think the different buckets within your material characterization business could grow in 2008, booking the trend in semis. I just want to start off if we can kind of get material characterization is broken out by solar, high-brightness LED and maybe flatters in 2007 and how that might trend in 2008?

We do not provide that much granularity on the material of characterization. We have experienced a nice increase in the number of inquiries and in the actual sum of the sales are particularly with solar photovoltaic. The materials characterization represents somewhere between 20% or 25% of our business and continues to be somewhat insulated as I said against the pricing swings that the chip industry have seen particularly in the memory market. Gary Hsueh - Oppenheimer & Co.: Okay, and one last question, I might just re-queue, in terms of your movement to a distributor in Japan, how would that impact margins in your materials characterization business in 2008 compared to 2007?

Actually, we were thinking of considering the selling costs, our margins will hold well, in particular, our net margins that distributors also have been our outsource manufacturer and then so the relationship with them is actually along in the status quo that we have.

Your next question comes from the line of Mr. Weston Twigg of Pacific Quest. Weston Twigg – Pacific Quest.: I just wanted to follow up real quickly on the materials characterization piece, unless I missed it, kind of like there was only around $4.8 million this quarter or 14% of revenues that would actually be down from last quarter, but you are talking about it sort of being less cyclical in the semis in an area of strength for the company.

Could you just speak up a little bit, you are barely coming through. Weston Twigg – Pacific Quest.: I just wanted to go back to the materials characterization piece, it looks like if I heard it correctly, it was around 14% of revenue this quarter down from around 25% last quarter, which would have been around, I guess $5 million in this quarter, I am just wondering why the materials characterization is down when you are talking about sort of being more of a non-cyclical or non-semi related business that is showing strength right now?

Just a moment, we are trying to sort out the question, in terms of total revenues, the materials characterization, as a percentage of revenues; we went from 25% to 20% in materials characterization. Weston Twigg – Pacific Quest.: About 20%, maybe I misheard.

Against total product revenues as opposed to total revenues. Weston Twigg – Pacific Quest.: But that would still be down quarter-over-quarter right?

I think the point there is, there are two things that occurred, one is that, it is still a relatively small number, so one system, one to two systems of our iron systems can cause a pretty significant swing in that number because of the granularity and we actually do have one supply issue because to shift one of the two from Q4 into Q1 that was more of our ability to deliver than it was for the customer to get the receipt of it. Weston Twigg – Pacific Quest.: Okay, looking ahead into Q2, do you expect the materials characterization business to be at the same level as Q4 or come back to maybe in more of the Q3 level?

I expect some growth in materials characterization in Q1 over Q4. Weston Twigg – Pacific Quest.: Also, I was just looking at the other income and I think maybe this time there is a little bit, but it was down pretty substantially from the last quarter and I am just wondering why that was and maybe how we should look at other income moving forward?

I have got other income that ended up at $38,000.00 in Q3. We had other incomes at $395,000.00 and that was down and that was primarily down because of the foreign exchange loss that we saw and foreign exchange gain that was there and that has now been reduced in Q4. Weston Twigg – Pacific Quest.: Okay, just another question this time here, on the service organization, just trying to reconcile how you can increase revenue on the service organization, but lower your service margins. What happened during the quarter that would account for a lower service gross margin?

It is more of the story of what happened in Q3 and in Q3 we have an upgrades part of our business that is attributed to service revenues and we had some nice upgrade business in Q3, which represents very high margin business for us, and we did have quite the same level of upgrades in Q4 and so the margins are more reflective of straight service than the post upgrade supported service.

(Operator Instructions) Your next question comes from the line of Michael Amari of M. Amari Co. Incorporated. Michael Amari – M. Amari Co. Incorporated.: Could you please tell me, could the update me on the buyback, are you still authorized to buy back and did you buyback anything in the first quarter?

We are authorized to continue buying back stocks of up to $4 million during open trading windows. We have bought back about $750,000.00 worth of stocks so far and we have not been buying back in Q1 to date because it is in our black out period. Michael Amari – M. Amari Co. Incorporated.: Yes, but basically, you think the price of the stock is quite low or quite adequate to stock buying around $5.50. I have another comment, on January 10 you came out with that announcement to cut 7% of the jobs. You left the announcement so vague that because we did not have any guidance for the fourth quarter, the stock market thought that you are just going to derail bad because of the change and the softness that you refer to. It feels to me, it seems like, if you were to give a guidance, it would be lot better than leave the market uncertain in such a way with stock market to cut the stock price in half, because of that four-line statement saying, ‘it is prudent to cut 7% because of the softness.’ It left us in such a way where we did not know how bad the situation is, so it seems like if you would spend a little bit more time in giving guidance or giving announcement that is clear that you would not have such a debacle for people that own the stock. That is very hurtful. We are not talking here about analysts, we are talking about investors that is either started from $9.00 to $5.00 in a day that because of a very vague announcement. I feel that area should be addressed.

I understand your comment. We are absolutely focused on doing what we believe is right for the business over the long term and we believe that the steps we took are correct and because we do not give guidance, we could not make that change in that press release, in a way along the lines that you suggested, but I do understand your thoughts and it is something that we continue to consider as we focus on our operations. Michael Amari – M. Amari Co. Incorporated: That is great, I appreciate that. But you feel that this coming year, you should do better generally? I mean, you are not giving guidance, but are you positive for 2008?

I think the way that we look at it, we feel very good about our current position, our market position and as we look back last year, we outperformed our sector, both on a full year basis, first half to second half and we expect to equal or outperform the sector average revenue guidance that our peers are currently providing. Michael Amari – M. Amari Co. Incorporated: Well actually, the fourth quarter was not bad at all, I mean, when you wrote that announcement that you were experiencing softness et cetera, one would have thought that you were going to be having a terrible loss, actually you had a positive cash flow and you did well. I mean, you had $1.3 million loss, but that was non-cash basically, so I do not see why this announcement has killed the stock internally. I do not know if the impact of that announcement was really very negative, maybe the market, but I am not sure. I would appreciate if you can put more thought before you put announcements like that in the future.

I will take your comment seriously. Thank you.

Your next question comes from the line of Mr. Westin Twigg with a re-prompt from Pacific Crest, please proceed sir.

Hey guys, I did not mean to jump in front of anybody in the queue hopefully, but I did have a few more questions. Just wondering if you could break down for me your end-market in terms of DRAM, Nano, Logic and foundry customers last quarter?

Yes, our memory business represents about 55% of our total revenues with somewhere 55% to 60% of that being in the Nano section, foundry and logic represented about 25% and the balance was in the materials characterizations.

And just kind of wondering also if I look at your earnings this quarter, strip out the amortization of intangibles which treats the same for TenCORE, it looks like you broke even this quarter at around $0.00 EPS, just wondering, once you complete your workforce reduction and restructuring, where would you expect that new break even point to be? I know you said $25 million, but would you expect a drop right down to $25 million or would it be somewhere between looking ahead maybe the next quarter?

We believe we are going to reach that $25 million cash flow break even and as you know, when you look at the non-tax items, the major ones, we have about $1.3 million in amortization of intangibles. We have about a million dollars in the quarter in the stock-based comp and we are about a million dollars of depreciation.

You talked about previously, at one point, talking about getting to below 50% gross margin or 53% gross margin and getting to that this year, what type of revenue level do you think you need to achieve that gross margin of 53%?

Unless there are some huge swings in revenue, it certainly would impact our ability to hit all of our margins, but if you look at our performance over this quarter, we actually had down revenues and up gross margins, so we are pretty confident we can achieve the goal. Our quarterly gross margin did increase like 2% in the quarter and we did generate the profits from our service business where there are still upside and opportunities to improve those gross margins specifically, so I think that it is going to take a lot of work. It is not going to be an easy task, but I think we understand how to do that. We are pretty excited about the products that we will be introducing which will have value based pricing which will also help us in our margin build.

Actually, I just had a couple more quick questions, your top customers; three greater than 10% customers, do you expect those to remain the same this quarter?

Obviously, we do not speak specifically of any customers. We feel pretty comfortable with the ones that have been consistently above 10%. With the newest ones in the WD that is a pretty new win and a new embrace of this technology, so we would have to see whether or not there is a long-term trend on that one.

I was just wondering, can you just give us a little bit sort of your view on the current market conditions and how you see it playing out through 2008?

You want my flavor compared to everyone else’s list?

Yes.

Clearly, when we meet with our customers as you do when you do your own channel check, there is continuing demand for more chips. When we meet with fab managers, they are chopping it to bit to expand production. When we meet with the process developers, we push them really hard to get them to the next technology node which is necessary to increase the chip density on the wafers. And then when we talk to the economists, they are holding the purse strings pretty tight, so my feeling is that when there is a little more comfort in the kind of a global kind economic environment and a little stabilization on the memory pricing, I think that some of those budgets that were not spent in 2007 are being held up in 2008 will start to be released.

There are no further questions in the queue at this time.

Okay, well thank you for joining us today. We look forward to updating you on our Q1 results at our next conference call in Dubai.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.