Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Cogent Systems third quarter Earnings Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference call is being recorded Wednesday, November 5, 2008. I would now like to turn the conference over to Jill Isenstadt of The Blueshirt Group. Please go ahead, ma'am.

Good afternoon, and thank you for joining us on today's conference call to discuss Cogent's third quarter 2008 financial results. This call is also being broadcast live over the web and can be accessed in the Investor Relations section of Cogent's website, at www.cogentsystems.com, for 15 days. With me on today's call are Ming Hsieh, President and Chief Executive Officer; and Paul Kim, Chief Financial Officer. After the market closed today, Cogent issued a press release discussing the results for its third quarter ended on September 30, 2008. If you would like a copy of the release, you can access it online at the company's website, or you can call The Blueshirt Group at 415-217-7722, and we will fax or email you a copy. This conference call will include a discussion of non-GAAP financial measures, as that term is defined in Regulation G. The most direct comparable GAAP financial measures, and information in reconciling these non-GAAP financial measures to the company's financial results prepared in accordance with GAAP, are included in the earnings release, which is posted on the company's website, at www.cogentsystems.com. We would like to remind you that during the course of this conference call, Cogent's management may make forward-looking statements, including financial projections, statements as to the plans and objectives of management for future operations and statements as to the company's future economic performance, financial conditions, or results of operations. The company believes that its estimates and expectations are reasonable and are based on reasonable assumptions. However, risks and uncertainties relating to future events could cause the actual results to differ or differ materially from the expectations. For a full discussion of the risks and uncertainties, please refer to today's press release and our recent SEC filings including without limitation the company's Annual Report on Form 10-K for the year ended December 31, 2007. The company does not intend and assumes no obligation to update any forward-looking statements. With that said, I would now like to turn the call over to Cogent's President and CEO Ming Hsieh.

Thank you, Jill. And thank you everyone for being on the call. At the beginning of this year, we set three main goals for the company. Deliver more consistent results, solidify our customer base and diversify our revenue. I am pleased to report that we are making strong progress in achieving all these goals. As we've projected, we experienced a strong uptick in third quarter revenues and earning per share. Revenues grew by 35% sequentially and 6% year-over-year as we experienced strong demand from the Department of Homeland Security, Morocco and from a broader cross selection of other customers. This year has been notable from diversify our revenue stream outside of DHS with no other customer accounting for 10% of revenue to-date. Gross margin continued to be strong. Non-GAAP net income grew 180% year-over-year and we reported $0.14 non-GAAP earnings per share. While the microenvironment has created uncertainty in many companies, we believe our exposure to the current slowdown is minimum. Governments have counted for more than 95% of our revenue base. Also our traditional businesses strategy of generating cash from each contract and having tight control in operation expenses, continue to generate cash each period. We have no debt and we believe we'll soon to have $0.5 billion of cash on our balance sheet. We believe building and maintaining a strong cash balance puts us in inevitable position to potentially capitalize on the opportunities in the marketplace created by the current liquidity crunch and the tough economical environment. In the third quarter, we generated $34 million in cash from operations and ended the quarter with $456 million in cash and investments. This we will have to continue to execute extension plan, consider making target acquisitions and are making selective key hires. On this note, I am pleased to welcome…

Thank you, Ming. I should mention that unless specifically noted otherwise we're discussing all numbers on a pro forma or non-GAAP basis. Third quarter GAAP results included 903,000 in non-cash charges related to FAS 123R regarding the expensing of stock-based compensation. Third quarter revenues were $35 million, product revenue grew by 42% from the second quarter, while maintenance and service revenues increased sequentially by 20% due in part to the incorporation of SSD as well as maintenance revenues starting from the Morocco contract. Revenue contribution during the quarter came from customers such as the DHS, Morocco, Rwanda, Pennsylvania, Stanislaus County, Veterans of America, the State of Chihuahua and RCMP. Gross margins were at 71% in Q3 up from 65% last quarter. Looking ahead we expect gross margins to be higher than previously forecasted. We now believe gross margins to be between 65% to 70% for all of 2008, which is three points higher than the range previously stated on our last earnings call. Operating expenses as a percentage of revenue were at 26% this quarter. In actual dollars, operating expenses increased to $9.2 million from $8.4 million in the second quarter on higher revenues. Excluding stock based compensation and settlement income, we now project that 2008 operating expenses will be slightly higher than previously forecasted at approximately $35 million. Operating margins, excluding stock based compensation of 643,000 were at 45% in this third quarter. We recorded $4 million in interest income this quarter. Additionally, we received $1 million in settlement income from Holland related to our protest of a contract award. Our track record is clear that we can turn these protests into net income and cash flow for the company. We believe, we have the best technology in the marketplace and will continue to contest unfair competition for awards.…

Thank you, sir. (Operator Instructions) And our first question comes from the line of Brian Ruttenbur with Morgan Keegan. Please go ahead.

Thank you. In the fourth quarter do you anticipate generating similar levels of cash that you did in the third quarter, first of all?

Brian, we believe that it's certainly possible. We had very strong cash generation in the third quarter, but if you take a look at the accounts receivable at the end of Q3, its at $41.6 million. We believe a big chunk of that could be collected in Q4. Not to mention, invoices that we have issued for projects that we had occurring during the month of October.

Okay. Now, according to your guidance, fourth quarter should be stronger than third quarter is that correct?

Fourth quarter should be roughly equivalent. I mean, we have a range there.

Right.

I mean, there is certainly a possibility that it could be stronger than the third quarter, yes.

Okay. And I was just trying to figure out is this a backend weighted quarter or are they equal weighted throughout. If its equal weighted or should dollar be committed now, then your cash generation should be equivalent or better than last quarter. Is that right to think that way?

Yeah. I think, directionally it's correct, but please keep in mind as you already know that we have a number of very significant customers. And based on exactly when the payment is due and more importantly when they actually pay us it can really swing the cash-flow amount during the course of the quarter. Don't get us wrong. We anticipate a very good cash collection during the fourth quarter and we anticipate the fourth quarter to be possibly stronger than the third quarter in many aspects. So we're very optimistic, but at this point in time, if you have one particular customer, that issues us payment and says December and January it can impact the cash forecast.

Okay. And then the $10 million contract that you got from US Census, that doesn't start until the or the majority of that's going to get booked in 2009, correct?

Majority of those revenue will be in 2009. Yes. You are correct.

Okay. And the forecast for 2009, I know that you haven't come up with anything yet, but you should be getting certain payments. You don't anticipate. Let me just rephrase it. You don't anticipate 2009 being down from 2008. Do you expect it to be up?

Well, we do not give 2009 guidance until we close out 2008. I believe we stated previously that our intention has been to grow faster than our addressable market. We believe we certainly achieve that. Having said all of that, if you take a look at the levels of business right now and I will just use a couple parameters. Deferred revenues are near record levels. So, that is all future revenue. Now some of it is long-term, but a huge chunk of that is short-term. If you take a look at the number of contracts that are going to flow into the 2009 pipeline and revenues, we know that we are going to have a very strong showing from the Department of Homeland Security. We have announced a contract such as Egypt, which will likely be revenues in 2009. We also have contract such as Hong Kong. We anticipate additional business from LA County. We have one contract in Maryland. We know that there is going to be material revenues, both in the product as well as the service and the maintenance side for Morocco. We have our partnership with Northrop Grumman, which is going very well. We have other jobs such as Santa Cruz, Spain, Texas, New York, not to mention the background check programs in Georgia, Pennsylvania, Florida, and Tennessee. In addition to some credentialing work that we picked up from the DoD, as well as from the State of Alabama. And the handheld business that Ming talked about in his script. So we like the outlook that we're seeing for 2009.

Okay and is the FBI and UK business go on track for '09 awards?

It is correct those UK and there is various opportunities in UK for the post office, as well as they call the National Identity Scheme. So those programs still is on track.

Right. And there is, and no delay on the FBI?

I do not, Jim you probably could answer.

Essentially the award was always intended to be in the first quarter, towards the end of the first quarter of 2009 and that still remains to be the target.

Right. Thank you very much.

Thank you, our next question comes from the line of Nick Andrewes with Lazard. Please go ahead.

Hey, guys good quarter. Can you guys just talk a little bit about the new contract, that you guys talked about what the Fusion the DoD and how we should think about the Fusion product and shipments of it going into 2009?

Actually we expect the Fusion devices are not only ordered from the DoD we also expect the Fusion device to be ordered from the other federal agencies. So the revenue will flow in 2009.

If you can give us little more details about what other agencies outside of the DoD you guys expect to, that you guys are currently speaking with regarding the device?

Device we have our state local government and we also have other federal agencies.

Okay, and you said that should be a significant contributor to revenues. Should we interpret that to be a 10% revenue contributor in 2009?

We're still feeling that's backlog till now and at the present time and we believe this is the current order we have is in a multi-million dollars range has not gotten into the seven digits yet.

Okay.

Haven't got into eight digits, we have multi-billion dollar order for the Fusion device at present time.

Okay. So you said multi-million dollars right, right now for Fusion and you expect to have maybe some eight digit orders in the future?

That's kind of common digit whether they include decimal or not. Whether we expect more other will come in and remember we have just introduced a device about a month ago.

Okay, great. Paul, could you talk a little bit about the, it looks like R&D ticked up in the quarter sequentially and then G&A costs came down significantly in the quarter. Can you talk a little bit about what is supposed to be going on there?

We continue to develop new products. We are building the wares of the handled products, we are building our own LiveScan product lines, as well as the whether new match or technology.

As far as the fluctuations and the G&A in Q1 and Q2 that is largely related to our yearend and our 10-K and our annual filings, and their costs largely related to the auditors that we soak up in the first couple of quarters. So that kind of went away in the third quarter.

Okay. So we should expect, the sort of the operating expense we should think about when we start modeling out for the rest of the year and going forward into 2009?

Yes. I mean we will have additional expenses in the first two quarters as we have our annual audits done, but it should normalize in Q3 and Q4. That's the same as we keep the headcount the same.

Okay, great. And just on the DoD, the BOSS programs can you give us some updates in there?

We have (inaudible) the program for both as a prime for the BOSS-U and as a subcontractor for the BOSS-R. So that contract could be awarded this year.

Okay. They are still on track sir, so the end of November timeframe possibly?

Yes.

Okay, great. Thanks guys.

Thank you.

Thank you. Our next question comes from the line of Paul Coster with JPMorgan. Please go ahead.

Yes, hi. It's actually [Martin Strauss], on behalf of Paul. Thanks for taking our questions. Most of our questions have been answered, but can you just give us you know, what you guys are thinking how the competitive landscape is expected to change given the recent combination between two of your competitors?

I think, definitely we are looking up as for this is upcoming years. Definitely now we have little less people to deal with now, less competitor there we believe the weaker companies that continue to be consolidated with the technology [coding] we have, and with the cash position we have, and with the customer base we have, with the market position we continue penetrates to our competitors territory. We are very optimistic with Cogent's position, and we are looking to continue to expand our business.

Okay. That's all we have. Thank you.

Thank you.

Thank you. Our next question comes from the line of Jeremy Grant with Stanford Group. Please go ahead.

Hey thanks guys, and congrats on a solid quarter. Wanted to dig in a little bit to the deferred revenue number, obviously this is really sky rocketing quiet a bit. I think last quarter when you mentioned it, it was going up, you said none of it was coming from DHS, it was all coming from other projects. Is that still the case here or is there any DHS revenue contributing this quarter?

Yes, Jeremy, this is Paul. So, this quarter we do have a portion of deferred revenues that's being driven up by DHS. We also have a number of other contracts. About $20 million of the $72 million of deferred revenue is for various smaller contracts. Many which you probably haven't heard off, in addition to our unrecognized portion are growing maintenance base. If you take a look at our maintenance and service revenues for this quarter, you can see that that's been trending up nicely as well. I think that this is the first time in the company's history when our maintenance and service revenue were at a levels that we just posted.

Okay, and so, should we assume that some of those number sort of continue forward and continue to build as you get product base out there?

Yes, absolutely.

Okay, and can you give a little color about DHS. I mean, I would ask you for a percentage and sometimes you tell me and sometimes I got to wait till the Q comes out. One, can you talk about that and two, can you sort of talk abut the pace you are seeing now. The information we are getting around Washington is, with the end of the administration coming up, big pushes in DHS to get certain millstones met in the VISIT program. And sort of, I wonder if you talk about the pace of spending in the second half and whether you are seeing that uptick from the first, as well as sort of how the '09 picture looks around that. But that's a lot of course, to throw out at you but I will leave it to you there?

Jim, do you want to take that one.

Sure, I think that we continue to see the numbers of users, the size of the database and number of transactions to continuously grow and the success of the system, the identifications that are being made and the response times are still unparalleled in the industry and DHS recognizes that, its very pleased with the performance of the system. We've the transition going from the 2 to 10 and that's will take place during 2009, which is part of what their goal was before the administration ended. So I don't think that there has been any issues or challenges that are indicating any threats to the progress of the system or as continued to growth the system.

Okay, and I guess if I can shift little bit to the FBI. There was a question asked about whether the time line is on track. We were hearing that the bake off that was supposed to start in early October was postponed at least temporarily. Is that still on hold?

No the bake off is, they are proceeding with the bake off.

Okay. I wonder if you could talk a little bit about the protest in Holland and you know really I guess I'm trying to get an idea how is that recognized in the quarter, is it considered product revenue, is it where is it showing up on the income statement?

I will answer that question and then I'll turn it over to Ming who can comment on that. So it's not showing up in the revenues, it's recorded in interest and other income.

Okay. So was it something that drove the gross margin at all this quarter?

No.

Because it's down there.

It's below operating income its where--

Right. Okay, now that makes sense.

Yeah, for (inaudible) Jeremy for where is the government procurement programs. We to are seeing, the cases, the competition is not fair. In those cases at Cogent it is definitely is going and try to filed the protest, so we're not going ahead to file the protest but could don't do find, find answer competition, when we filed a protest we get our money back.

Only this is I mean you had the (inaudible) with Northrop, you had the US Army a couple of years ago, you probably had a record of winning these things.

Well, definitely this another of our business, try to file the protest--

Sure.

(inaudible) We will spend to those procurements and showing our case and we do get the result from those protests and with a winning record.

Okay. So as I am just, back to Paul as I am looking on the income statement he said it was about a $1 million, other net line associated to 376,000. So that was taking out some foreign currency adjustments and things like that.

Yes.

Okay. And other question I had was on the census and first of all congratulations on that. I know there's been a couple of parts, one has been to build the infrastructure to fingerprint all these temporary employees. The second part has been the actual enrollment services. If I am understanding right you guys sort of got the first part, but they are still sorting how to do enrollment? Or is more to the setup that I am seeing?

I think you're correct. Jim could add little more for Jeremy.

Yes. We're primarily functioning in the backend process for the systems integration and support for the service that will provide the criminal check.

Okay. So this can be product sales or just really more services.

Its probably, it's a combination of both.

Okay. And census there has been a lot of talk about I mean the latest things constitutionally mandated to happen in 2010, but there's been a lot of obviously IT problems that have been in the news. And there's been some question on fingerprints. We need to fingerprint half million temporary employees. Are we actually going to have the time to do it? Can you talk a little bit how the contract set up, so, god forbid you are not able to actually go forward with actually taking prints from everybody. Are you still getting paid in this or is there something that could be susceptible on this occasion?

Because of both products and service we'll get paid for the complying with the terms and conditions of the contract. We are very confident so that we will be able to represent completely.

Okay. That's all very good. And I guess, any other question I had, Paul could you just give a little more color on the gross margins, obviously coming in really high this quarter, which is certainly nice to see. What is it that's driving the higher gross margins?

I think it's largely due to the introduction of enhanced technology across our product line. That in addition to getting efficiency with the larger workforce that we have deploying ourselves that the growing number of contracts.

Okay. And last question I had was just talking about the Fusion fixture. I know one of your competitors in this space just announced what was a pretty significant deal in a foreign market in the Middle East. Wanted to know if you guys are spending time trying to market this abroad as well, one of the key themes talking to DoD seems to be interest in having allies collect fingerprints as well on other biometrics and what is that opportunity as you see it?

Jim, could you answer first for the DoD and over the overseas markets.

Sure, the Fusion is a part of the overall system that we see DoD being able to deploy for biometrics fingerprints, facial, iris. The Fusion opportunity is significant within DoD itself. There are many commands, many organizations, but it goes beyond just simply DoD, it also goes to the civil agencies where we see a similar type of demand for that product. Which gives the ability to do the searching both locally and also through a network. So, you look at federal sector, you got DoD and the federal agencies, then you go on there and look at the state and local governments and which we have been talking to with the same product, because it is a ruggedized version that has certain advantages over other parts in the line and it all depends on how the customer is setting up his database. And then internationally of course we are looking at the same setup of customers, both civil and military customers, because while the technology has been developed here in the United States, its applications are fairly well worldwide.

Okay

Yeah, in general the response for our products both from the customers and in the visitors, in domestically and internationally was very, very positive. So, we are looking to build the programs, not only in the domestic, here for the DoD, but also international market.

Okay, that's all I have for now, thanks.

Thank you. Your next question comes from the line of Brian Gesuale with Raymond James. Please go ahead.

Hey guys, great job on the quarter here. A lot of the questions have been asked and you guys answered them quite well. I just want to talk about the buyback, you guys are generating pretty gaudy levels of operating cash flow, looks like close to $55 million year-to-date, stocks have been depressed. You are sitting on a load of cash. Should we look for perhaps a more aggressive buyback to ensue once your window opens up again?

Well, we did, a process, a pretty aggressive buyback programs, but from my point of view there is no way of success to continue this buyback of the stock to get the stock price a little higher. Our strategy we have got to build a business, we believe that the only way to get the stock back on track is how do we grow our business, how do we continue to make the money and we're slightly [differ] the acquisition targets.

Okay, terrific and then you know Paul you kind of alluded to the fact that you are gaining visibility into the business is that maintenance line and service line kind of grows overtime and as your install base grows. At this mix of business shifts, should we look at that business being perhaps even more than 20%, 22% of revenue is this something that can be 25%, 30% of revenue overtime and really pad visibility for you as you put together your bottoms up forecast.

I think, percentage wise we like it at the low percent just because that probably means that we have a target of growing our product revenues. We certainly don't anticipate our product revenues to slowdown. We wanted to grow as fast as we can. But in absolute dollars, we believe that the maintenance and service revenues will continue to grow as we get beyond this year looking out into the future. This was the first quarter where maintenance and service revenues for quarter was above $10 million and we believe that it's likely that it will, continue to be at over $10 million and it will continue to grow. The other thing that you know we like about our business is the product lines, continue to diversify. Ming in his script talked about our handheld devices for both fusion as well as BlueCheck. As those devices get deployed as those units get out to the various people that are wanting them. We believe that will produce another line of product stream as well and the line up product stream for that as well as maintenance and services and other things that we're working on that we have ready to be deployed might not be as lumpy as how you have typically seen the AFIS contracts in the past.

That's very helpful. I think you guys have done a very nice job expanding the products and customer base and visibility seems to just be improving right along with that. That was all my questions. Thank you.

Thank you. (Operator Instructions) Your next question comes from the line of Jeffrey Kessler with Imperial Capital. Please go ahead.

Thank you. Thank you very much for taking my question. With your increase in deferred revenue and your probably fairly good view of what of the margin in that deferred revenue is and with the increase in your product business relative to revenues overall. Could you talk a little bit about how product mix shift and the increase in deferred revenue what you've got back there, could impact your gross margin going forward positively or negatively. I know you don't make estimates, but if you could give us some guidance on the gross margin impacts of these two factors.

Jeff, when we went public over four years ago, right around four years ago, our gross margin target was at 55 to 60 points. We have consistently tried to strive to have our gross margins be 60 points or higher. This year is coming out much higher than that. Based on what we see in our deferred revenue the product mix, the introduction of new technology, as well as the product streams that we see going forward. We don't see any indication that will change our gross margin target or even the gross margin that we will end up achieving this year. We don't see any factors that will impact our gross margin going back below 60 points based on the business that we currently and based on the business that we currently see.

Okay. So even as your mix shift slowly turns towards maintenance and service, you are confident enough in the margins, that that's going to keep that margin mix shift will maintain itself where you're talking out as well?

Based on everything that we see absolutely, I mean, an example as the incorporation of SSD business. We bought that as you know over a quarter ago, this was the first quarter where we incorporated that business. And that business when we bought it was largely a service organization. Since buying that business we sized it up appropriately, we've merged a lot of the employees that we had from that business into our own in terms of introducing technologies and products that we had to offer to their customer base. And within a record amount of time, this is the first full quarter that we incorporated our business. Our gross margins are above 70 points. So we through the use of our technology through use of the efficiency and cost sizing, as well as other efficiencies that we have here at the company have shown that we can achieve superior gross margins even when we takeover businesses, when the products as our company might have not been able to achieve those gross margins. So we feel confident in our ability to achieve superior gross margin based on everything that we see.

Okay. Good stuff. Thank you very much.

Thank you and management I showing that there are no further questions, we'll turn it back to you for closing comments.

Again, thank you for being on the call today and I really appreciate your support. We look forward to updating you on our progress in the coming months. Thank you very much.

Thank you. Ladies and gentlemen that will conclude today's teleconference. We do thank you again for your participation. Now at this time, you may disconnect. Have a nice day.