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Five analysts and top management from eight sector firms examine the Semiconductor sector in this special 57-page issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info377.htm

TWST: Jonathan, has the semiconductor cycle bottomed? And if not, how far off the bottom are we?

Mr. Joseph: No, it has not bottomed yet but we expect it to bottom in August. Obviously some areas will probably bottom before others. For example, we expect the PC component segment to act a little bit better than the wireline communications segment.

TWST: Barron’s recently cited a prediction by the World Semiconductor Trade Statistics group that the global market for chips will decline 13.5% in 2001 to 176.8 billion. How should investors interpret this?

Mr. Joseph: That’s actually overly optimistic. We think that it’s going to decline about 16% before growing about 10% next year. So we think that the WSTS is actually a little bit optimistic.

TWST: Will this industry always be subject to cyclical swings?

Mr. Joseph: Yes. Cycles are neither positive nor negative. It’s like fire — you get it right and it helps you or you get it wrong and it burns you. This is a highly cyclical business. Over the last 30 years it has shown very clear patterns, though each time the cycle is a little different because it is based on human nature and reaction time. And human nature never really changes, nor do, essentially, the physics of the reaction time. That has to do with how quickly we can respond to perceived demand and the time it takes to get new capacity online.

TWST: Many, if not most of these stocks, are trading very much below their 52-week highs. What are you telling investors? Is this a buying opportunity?

Mr. Joseph: We definitely think it’s a buying opportunity. We think this is a tremendous chance to get into the group at a reasonable, relative valuation to the S&P 400. On an absolute basis, these stocks are still selling at 6 times trailing sales, and that’s well above the trough of 2 times trailing sales that they traded at in the last recession. But the whole market is significantly higher. Semiconductors, by the way, have grown both top and bottom lines 3 times faster than the S&P over the last 15 years. But when you look at their valuation against the market as a whole, then they’re actually rather attractive. For example, on a price to sales basis, they’re trading about 2.5 times trailing sales against the S&P 400. The low was 2 times in the early 1990s. In fact, these companies have been growing multiples faster than the S&P 400, which I think is really a very compelling valuation on a relative basis.

TWST: Which stocks should investors be buying today? What are your favorite picks in the group?

Mr. Joseph: Traditionally, it’s the PC components that lead the market out of the downturn. And I fully understand that the PC components are seeing some seasonal weakness. That being said, Analog Devices (NYSE:ADI) is our top pick in the group, and we like Texas Instruments (NYSE:TXN) as well, as a broad-based company.

TWST: What’s the rationale for your recommendation of Analog Devices?

Mr. Joseph: It’s very diversified and has very little commodity product, so it will likely see significantly less pricing pressure than the average semiconductor company. In addition, we think that it is in a very strong position, in terms of its new product development, its design wins, and its high performance market share gains. That has resulted in extremely strong relative outperformance against the group. In addition, relative to its previous performance in past downturns, it’s doing a great job. So we think that, on a relative basis, ADI is really one of our top stocks.

This special issue includes:

1) Semiconductor - In an in-depth (5,500 words) Analyst Roundtable, Eric Chen, Senior Analyst at JPMorgan H and Q and Joseph A. Osha, top ranked Analyst responsible for covering the semiconductor industry at Merrill Lynch Global Securities, examine the outlook for the sector including, inventory levels, future outlook for smaller companies and share specific stock recommendations.

2) The TWST confidential Off-The-Record survey of management performance at twenty-three sector firms asked market insiders about the ability of management teams to create shareholder value.

3) Outlook for Semiconductors - In an in-depth (3,000 words) Analyst Interview, Dan Scovel, Semiconductor Analyst with Needham and Company, examines the outlook for the sector and shares specific stock recommendations.

4) Semiconductor Industry Overview - In an in-depth (2,000 words) Analyst Interview, Arun Veerappan, Managing Director at Robertson Stephens, examines the outlook for the sector and shares specific stock recommendations.

5) Semiconductor Stocks - In an in-depth (1,900 words) Analyst Interview, Jonathan Joseph, Managing Director at Salomon Smith Barney, examines the outlook for the sector and shares specific stock recommendations.

6) CEO interviews (average 2,500 words). Top management of eight sector firms examine the outlook for their firm and the sector.