Good morning, everyone, and welcome to IPG Photonics first quarter 2008 conference call. (Operator Instructions) At this time I'd like to turn the call over to Angelo Lopresti, IPG's Vice President, General Counsel and Secretary, for introductions.

Thank you and good morning everyone. With us today is IPG Photonics [Chairman] and Chief Executive Officer, Dr. Valentin Gapontsev, and Vice President and Chief Financial Officer, Tim Mammen. Statements made during the course of this conference call that discuss management's or the company's intentions, expectations or predictions of the future are forward-looking statements. These forward-looking statements are subject to known and unknown risks and uncertainties that could cause the company's actual results to differ materially from those projected in such forward-looking statements. These risks and uncertainties include those detailed in IPG Photonics Form 10-Q for the year ended December 31, 2007 and other reports on file with the Securities and Exchange Commission. Copies of these filings may be obtained by visiting the Investor Relations section of IPG's website at www.IPGPhotonics.com or by contacting the company directly. Any forward-looking statements made on this call are the expectations or predictions only as of today, May 6, 2008. The company assumes no obligation to publicly release any updates or revisions to any such statements. We will post these prepared remarks on our website after the completion of the call. Please go to www.IPGPhotonics.com to view these remarks. I'll now turn the call over to Dr. Gapontsev.

Good morning and thank you for joining us today. I'm pleased to report that once again IPG posted strong first quarter results [break in audio] of our product offerings across a variety of applications and our expanding presence in the world's major markets for industrial laser systems. In building IPG's business, we were quite conscious that not every market or every application area would perform consistently over time. But with the geographic and application diversity that we built, IPG has been able to generate superior results despite downturns or softness -

Excuse the interruption. This is the operator. Dr. Gapontsev, we are not able to hear you clearly at this time.

Oh, sorry.

Can you speak up a little bit more?

Okay. Can you start from beginning?

Can you hear him yet?

Just vaguely. Dr. Gapontsev?

Yes?

Still not particularly clear at the moment.

Is that better?

Now that's better?

Not quite yet, sir. Still a little difficult to hear you. Please stand by, everybody.

And now?

I believe that's better.

Hello? Can you start from beginning? Hello?

Still a little [inaudible]. Just one moment, sir.

Okay. Hello?

Thank you for your patience, and we ask that you continue to stand by. [break in audio]

Ladies and gentlemen, thanks for your patience. Dr. Gapontsev, please go ahead, sir.

Okay. Good morning and thank you for joining us today. I am played to report that once again IPG reported strong first quarter results despite a slowdown in the U.S. economy. This is a testament to the breadth of our product offerings across a variety of applications and our expanding presence in the world's major markets for industrial laser systems. In building IPG's business, we were quite conscious that no every market or every application area would perform consistently over time. But with the geographic and application diversity that we built, IPG has been able to generate superior results despite downturns or softness in some geographic or application markets. This was true this quarter. We continued to make good progress in growing our position in the overall laser market. The 27% increase in sales over last year was primarily due to the market expansion enabled by our product's breadth of laser performance, substantial energy savings, and lower cost of ownership and partially due to taking market share from makers of conventional lasers. At the end of the third quarter, IPG was the fourth largest maker of commercial nondiode laser sources as measured by revenue. In 2006, we were the sixth largest. Many of our products, such as our kilowatt fiber lasers have competitors up to date. Also we were successful in targeting new application new applications for our products and expanding our product portfolio and our geographic reach. We also dramatically expanded our intellectual property position in February with the purchase of more than 100 key U.S. photonics patents and their 340 foreign counterparts from British Telecom. These patents are relevant to both current and future photonics components and enhance our IP position. Before I turn the call over to [inaudible] Tim Mammen, let me review some highlights. This quarter, revenue increased 27% to $52.9 million from the comparable quarter in the prior year, in line with our guidance. This was driven by strong sales of our lasers used for material processing applications. Earnings per diluted share of $0.18 for the first quarter were in the top end of our guidance range and our gross margin recovered to 46% again. Now a better speaker, Tim Mammen, will provide you more details.

Thank you, Valentin. [inaudible] everyone. I will start with some [inaudible] and I will then review our financial highlights. [inaudible] top and bottom line growth in our business. Our 27% revenue growth in the first quarter over the prior year -

Mr. Mammen, I'm sorry. This is the operator. But again, we're having the same problem we just had with Dr. Gapontsev. We're unable to hear you very clearly.

Is that better?

That's perfect. Thank you very much, sir.

I'll start again. Thank you, Valentin, and good morning, everyone. I will start with some operational remarks, and I will then review our financial highlights. I want to reiterate Valentin's remarks on the top and bottom line growth in our business. Our 27% revenue growth in the first quarter over the prior year shows the traction that IPG's fiber lasers continue to experience. Our growth was driven by a 34% increase in sales for Materials Processing, which is our largest application. Growth has been driven by the broad diversity of uses for our products. With increasing global energy prices, we are experiencing additional interest in our fiber lasers because of the substantial energy savings from the high electrical efficiency. During the first quarter, we saw continued strong growth in pulsed fiber lasers from a number of customers for solar or photovoltaic manufacturing, including scribing and isolation. This is a relatively new application for us and our lasers are well suited for this emerging industry, that has increased its capital spending for tools. High power fiber lasers, an area where IPG's products stand alone, saw continued acceptance from automakers and suppliers throughout the world and for other heavy industry applications where our laser's power, beam quality and flexibility create meaningful gains in productivity. We will continue to leverage our core competencies for new sales opportunities. It is important to note that IPG achieved 27% growth despite a significant drop in medical sales and flat materials processing sales in North America. IPG has built a business model that has application and geographic diversity that is enabling us to continue to grow revenue even when one or more of our end markets or geographies is experiencing some weakness or volatility. This is a testament to the strength of IPG's diversified business model. We…

(Operator Instructions) Your first question comes from John Lau - Jefferies & Co.

Tim, I wanted to follow up on your commentary with regard to bucking the normal economic downtrend with cost savings on the energy side. Can you quantify some of - the level of those savings, and not only on the electrical side but on the consumable gas side? In other words, are you saving 10% to the customer? Can you just give us a range?

I'd say it, in some instances, is much more than 10%. It depends upon whether a customer is able to replace a current laser technology with exactly the same power level. If they're able to do that, some of the feedback we're getting from people is that the electrical savings can be in the magnitude of 80%. If they're not able to do that, then the magnitude may come down to anything from 25% to 50%. I mean, Valentin, is that fair to say?

Ten times savings compared to [inaudible], three times savings or four times savings compared to gas lasers, and twice savings when compared to disk lasers. It's only laser [inaudible]. But hopefully we provide a much better  much more savings, for example, for cutting systems in [total] because cutting systems [inaudible] only fiber laser. Help much with consumption because they're much more [inaudible] energy consumable with the linear models, for example, and so on. It's also an enormous saving in the design of cutting systems, for example, and many other applications.

And as a follow up to that, Tim, when you, in terms of your business, if you come into a factory and you have these current existing bank of CO2 lasers, what is the process and how easy is that company able to replace just one of those CO2 lasers with yours, just as a comparison or design in activity, to start to immediately see the savings in energy or consumable gases?

I think I shall give Valentin that question. How easy is it to replace these lasers in some of the.

It's very easy to replace because [inaudible] is the same. You just replace the laser source for our source. In some, it's only small update in the delivery. But laser [inaudible], that's all. It's immediate, where you have a result.

Okay, so you don't need to replace the entire factory. You can start to replace those on an individual basis on the shop floor.

[inaudible] to replace a CO2, a used CO2, for our fiber laser, not to replace - and with their old [inaudible] systems without any problem.

Here's an important point, John. It really is a question of just taking one laser, in many instances, out and replacing it with the fiber laser.

The energy savings seems to be quite significant. In terms of the other area that I, as a follow up, in terms of consumable gases, you also mentioned that the consumables are down. What type of savings can you get from the consumables side on a typical cutting application?

In our case, we can work without gelium gases so it's much cheaper. It's [inaudible] nitrogen or adjusted air, adjust air without any [inaudible] of gelium. Gelium is very expensive, gelium gas.

Your next question comes from Unidentified Analyst - Thomas Weisel Partners.

I have a couple of questions. The first one has to do with some of the manufacturing yield issues you guys faced in the last quarter. Have you guys achieved now your target yield levels?

Yes. We've dealt with all of those yield issues. The production of components across the diode line, whether it be the chips, the burn in or the transfer of production from producing PLD 9 packages to PLD 20s has really effectively been dealt with, and we are pleased with the results we're seeing now in each of those manufacturing processes.

And in terms of the gross margin for the coming quarter, how should we think about that?

For the coming quarter in Q2, first of all, it depends upon where we get to on the range of revenues. So we could be slightly below where we are today if revenue is at the bottom of the range. The other balancing act that the company has at the moment is one that I tried to discuss more this quarter is depending upon the plan that we have for building inventory in anticipation of second quarter growth, that will affect gross margin a little bit. So we would expect if we get to the top end of our range or the middle end of our range, we should see gross margins broadly flat. We do expect to see, with that, a less substantial increase in inventory, but a smaller rise up as we prepare WIP for the second half of the year.

Second half of the year we expect very serious growth in gross margin.

Your next question comes from [Olga Evanson] - Lehman Brothers.

Could you talk about how you see the litigation expenses trending throughout the year and as a result, what kind of SG&A we should expect?

In the second quarter - so this major litigation that we've had at the moment has been stayed by the judge. That is dependent upon the Patent Office determining whether they will review the patent. At the moment we expect litigation expenses in Q2 to be substantially lower than they were in Q1. If that patent goes into reexamination, we would expect them to stay relatively low. If the Patent Office decides not to reexamine, we will then be back on a higher litigation spend for Q3 and Q4, but it's not - right now, we don't know how long it's going to take them to decide whether they reexamine that patent or not.

They don't give a report, Tim. It's two months after we apply [inaudible] so it's practical they accept [inaudible].

And then in terms of -

[inaudible] for some additional formal reason [inaudible] short time, two weeks, but two months passed and no reply to it [inaudible].

And this is related to only one patent or several of them?

This is the IMRA litigation; one patent.

And then in terms of the medical market, I think on the last call you had said that you had about five potential customers lined up. Can you talk about progress there and when you see those revenues beginning to trend up again?

On the medical business, we've already started working with one medical OEM in Europe and selling to them, so that business we expect to develop through the year. There are four or five, as you mentioned, other people that we're working with. Valentin, you can give an update on those.

[inaudible] also medical companies in the U.S. We're selling and will get new orders. Getting orders from dental companies. We are watching also - in Russia we introduced in the medical market six different devices. [Finish] device service is growing. They're fully qualified by Russia, these inspections [inaudible] approved for use in medical - in clinics, so that the medical business, we expect, will grow very fast. And also the competition of our current [inaudible] the competition now is - it's open door for competition, and now would make trials of our devices. So it's only in Korea, six companies making similar devices and all of them [inaudible].

So it would be fair to assume that you could at least get to flat levels with '07 or potentially higher or would the fact that Reliant is slowing down sort of limit that a little bit?

Ultimately we would expect to get to, you know, growing medical sales, I don't think that will necessarily happen this year. We would hope to try and start to replace some of the reliant revenues that we've lost in the second half of the year, and we'd expect to see stronger medical performance next year now.

And then in terms of the North American Materials Processing market, do you think that sales will probably be flattish in the second quarter and then trend up from there? Is that kind of the sense you're getting now?

No, we're definitely already seeing an improvement in North America. I think there are very strong indications on our order flow that we should see some pickup in Q2 and then really some significant increase in strength into the second half of the year.

And how [inaudible] in America during all this, three months increase [inaudible] from the beginning of the year.

Your next question comes from Jiwon Lee - Sidoti & Company.

First, the cutting system OEM that was the biggest customer for the quarter, I think, Tim, you mentioned, where were they geographically located?

They're in Asia.

Were they ever a big customer over the last several quarters?

Yes. They were also focused on - they've moved their product line from just dealing with low power to now actually developing the cutting systems using the high power. So they have been a customer of the company for probably three or four years.

And then the IMRA lawsuit related expense, did you [inaudible] there was a $1.3 million for the quarter alone?

Yes.

And that compares to -

$400,000 a year ago.

I'm sorry.

It was $400,000 a year ago.

Okay, because last year the whole year you spent $1.5 million related to the patent, no?

Yes. There was a lot of activity in Q1 before the judge stayed the case related to preparing for the trial, so it really affected our G&A expenses in Q1.

Let me drill down a little bit on your selling G&A expenses. There were several sort of high profile hirings, especially targeting your North American growth. Going into the later part of '08, do you feel that you have enough infrastructure in place to drive that growth potentially into the beginning of '09 even?

It wasn't just North America where we've invested. I highlighted that. Japan as well, significant additional investments there. Obviously, the plan is to continue to invest in selling expenses. It's not just going to be a  we're not going to stop looking for good people in the different application markets that we address. I expect that we'll hire some sales people, both in North America and Europe and also in Asia throughout the rest of this year.

So how should we look at your selling expenses going forward?

We'll still maintain the SG&A within that guidance range that we've given, between 15% and 18%. They will ramp in absolute terms, but they're not going to jump out of line completely. The other side of the selling expense that we'll continue to invest in is obviously in demonstration units, which will go into these facilities that we're building at the moment. And that really is a key driver to growth, and we see pretty quick payback on a lot of that.

And not a terrible sort of impact from the foreign exchange. You didn't make [a comment] on that this quarter?

FX did benefit revenue, I mentioned, by about $3 million. It actually impacted gross margin by about 1%. In absolute terms, gross margins would have been lower, but it actually affected the gross margin. And we estimate that the bottom line, it may have been - it's about between $0.01 and $0.02 impact on the bottom line. So the business model continues to be overall hedged pretty well naturally, with the expenses in euros in Germany while you benefit from the euro sales over there.

And finally, can you sort of help us qualitatively or any way you can, the sequential capital expenditure on the fixed equipment and other organic expenditure, was this sort of similar in the first quarter sequentially?

The reason why we haven't gone into, like, splitting up the Capex that we spend on both equipment and facilities and intangibles is that we currently don't want to disclose exactly what this patent portfolio cost us for competitive and legal reasons, so I can't provide you any greater clarity on that.

Your next question comes from Ian Fleischer - Friedman, Billians, Ramsey & Co.

Can you comment or update us on your capacity expansion plans? Do you still plan to have those more or less completed this year in the third quarter, and how long do you think that capacity should last you if you continue to grow in the 20-ish percent area?

The answer is yes, that the plan is still to largely complete the facilities expansion in Germany and the U.S. in the third quarter. There'll be some smaller expansion in Russia, but it's, on a cash flow basis, going to be much smaller. In terms of those facilities, in the U.S. and Germany we expect that they are sufficient for at least the next 18 to 24 months.

We don't give [inaudible] Capex serious amount, up to 2010, 2011.

So they do provide for growing revenues very, very substantially. That will enable us to hopefully limit the increases in our fixed cost base and grow into that capacity based on - and Valentin mentioned that we do expect to see some nice increases in gross margin in the second half of this year. I concur with that. I think that we've done a lot of work on our business model and we can see that, based upon the sort of [inaudible] of our product, we should be able to get nicely to the top of our gross margin range, somewhere close to 49%. And with some really good management here, there is an ability to get even above that in 2009.

And in North America, you mentioned some pickup there with respect to orders. What end markets are you seeing the pickup in?

We're seeing it sort of across the range in materials processing. There's a lot of activity on some of the microelectronics in consumer. We've seen some activity even in the auto industry although it's less from that, but we're being covered in general manufacturing, microelectronics, some of the consumer area. The telecom orders in North America have also picked up in the first four weeks of this quarter. The advanced applications should be stronger in the second half of the year. There are some pretty serious trials related to some defense applications which, if successful, should help us. But the advanced is a little bit more notoriously difficult to predict. But there definitely is a certain feeling within the company that we've seen a change compared to the first eight or 10 weeks of this year.

We're seeing forward, also, in [inaudible].

Your next question comes from Conor Irvine - Needham & Company.

A couple questions for you. My first is, are there any additional segments of the fiber laser market that you find attractive right now, such as in materials processing?

Are there any additional segments?

Yes, additional attractive end markets?

Maybe, Valentin, you can talk about some of the new technological opportunities that - outside solar.

Yes, it's - I would say the market that's now [inaudible] manufacturing growing very fast, and there's a lot of demand in that case for laser-based systems. We have found to be [inaudible] market, for example, and as we discussed, there's now a big project with such people. It's also more biosystem for field material processing, field operation, [inaudible] enormous opportunities here. Pipe welding, watch [inaudible] pipe welding. It's now a going project; going very well in the field. The replacement of these [inaudible] welding for very thick metals. It's also very interesting and fast growing, the trials in these directions. So we see many applications, but [inaudible] would be very innovative use of the fiber lasers.

And my second question, are you currently seeing any interest in your pump lasers in the merchant market?

Pump laser.

We started to market this, but now the many companies from - a big interest for this was in laser pump application and also in medical, biomedical. And now that - we discussed now, many orders since people use our - start to test our products. And it will take some time, as usual, before we'll get much orders.

(Operator Instructions) Your next question comes from [Jenny Jones] - Schroder Investment Management.

I was just wondering, going back to addressing the working capital, in two years out, you know, when you feel like okay, you’ve gotten some more customer traction in certain end markets, do you still think that you have to be so ready that you have to service these customers with very timely deliveries? Because it would seem to me as long as you still have a competitive advantage in terms of, you know, your IP, you need not be such a wonderful supplier that you have to hold all this inventory. I'm saying maybe 18 months out. I mean, that's part of the problem, for is, the capital intensity from the working capital management. I understand now, but I guess I'm less understanding two years out. Can you address that, please?

Yes, hi, Jenny. Definitely at the moment we believe there are strategically important reasons to maintain this level of inventory. Just as an example, we talked about in Q4 when we had some problems with diode deals or moving production from one type of technology to another, there is a requirement, not just for satisfying the customer's needs but for maintaining some level of strategic inventory to ensure that we can - continuity of supply, if you like. The target within the company is to try and bring the number of days inventory held down over, you know, I think probably the next 18 months is a good period to look at that. As we gain greater customer acceptance, we become more and more certain of the ability to use our capacity to generate product on a more reasonable timely basis rather than to have to hold buffer supplies of inventory. So we look at inventory. We're reviewing it. We're reviewing the processes behind production planning, trying to match more closely demand. The other thing I think that should be very clearly understood, though, is that some of these opportunities that we're pursuing out there are very significant, and we can't be in a position where we would have to sort of abdicate them because we wouldn't be able to fulfill those orders in time. It's very important that if someone is going to come to us and put a multiple unit order for kilowatt lasers - and some of these opportunities can run into tens of units  that we have to be able to supply those lasers very, very quickly. And we're seeing that could happen in the next 12 months or so, if not sooner, so that's another very important reason. From a management perspective, it is absolutely our intention to manage our working capital as best as we can do. I think the vertical integration within the business is important to understand, from buying a wafer and growing a chip and testing that diode and packaging it, putting it into a module, it does take the company three or four months to go through that whole process. So there is some element of our business model that would require us to keep higher levels of inventory. And, you know, honestly, compared to some of the other people in the industry, we're not that far off. We're a little bit less efficient right now. We would obviously want to be viewed as being closer to the top of that pile.

Right, but I could expect to let - kind of what I already said was that, you know, once you've kind of built these different avenues of repeatable potential growth that you could be much more focused on how much inventory need be on hand.

We're working where we [can] in this direction, to optimize inventory, but we have to add also - I care to add also  we have part of the ready products which delay shipments to work [inaudible] due to some expert [inaudible] for example, like China and Israel. But we will ship in May this. But from the way the shipment - it's also - keep in mind its typical historic second half of the year, especially with quarter four and often quarter three, our shipments jump practically twice more than the first half of year, and we expect the same situation this year. But what we have to make, [inaudible] we'll get these orders in the end of the year, then we have to hire more people. But we produce now with existing people more inventory, which will help us without hiring new people to fulfill the program for second quarter, second half of year.

One more follow-up question. Now you may have said this, I came on a little late, but you gave kind of a backlog or a pipeline last quarter. Can you do that for us now?

No, we don't provide an update on a quarterly basis on backlog.

It's just on an annual year.

We just do it on an annual basis.

I can say only that our backlog now is about 50% more than it was a year ago.

At this time we have reached the end of the Q&A session. I would like to turn the conference back over to Dr. Gapontsev for any additional or closing remarks.

Okay, so thank you everyone for joining us today. This has been an excellent start to the year. We reported solid financial results that were at the top end of our guidance. We're also continuing to execute well on our growth strategy, positioning IPG to leverage our superior technology to capitalize on significant growth opportunities across many diverse markets. We'll look forward to speaking with you again in the second quarter.

With that, we will conclude our conference call. Thank you again for joining us today.

And thank you, everyone. Bye.