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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: What happened to communications-related capital spending by the semiconductor industry in the year 2000, and in 2001 year to date?

Mr. Veerappan: The service providers have been on a spending spree, as you know, over the past three to four years. I think the 1996 Telecommunications Deregulation Act essentially spurred significantly high double-digit, 30%-40% capital expenditure growth rates from the service providers (the ILECs, RBOCs and the PTTs) worldwide. They were joined, in turn, by the CLECs, and Wall Street and the average investor were more than happy to finance them. So as a result, over the past, say, four plus years, an enormous amount of capital was invested to create these new next-generation networks, and as a result of that, we certainly have, at this point in time at least, excess capacity, which I think will take probably a year or two to work itself through.

TWST: So the party is not over?

Mr. Veerappan: Absolutely not. It’s a long-term opportunity and, in fact, for the communications portion of the semiconductor industry, this is really the first cycle that they have experienced. The semiconductor industry, as a whole, has been cyclical for several decades, and coming out of each down cycle, the up cycle has been considerably higher. So for the communications portion, this is only the first down cycle that they’ve had, and I suspect that there will be many more cycles to come, with the trend, if you will, being up and to the right over the long term.

TWST: And you’ve been a strong supporter of this theme for some time now.

Mr. Veerappan: Absolutely. For almost six years now.

TWST: Talking about other end markets, what are the implications of the warnings that have been coming out of Hewlett-Packard (NYSE:HWP) and other companies?

Mr. Veerappan: It’s just an indication that end demand is anemic throughout the economies of not just the United States but perhaps even Europe as well. Sun Microsystems (Nasdaq:SUNW), another major player, as you know, came out last week and indicated that not only was North America weak, but that Europe had started to weaken. In particular, the biggest culprits came from the telecommunications industry because of the excesses that we talked about that have occurred over the past four to five years.

TWST: Where are we in the cycle, then?

Mr. Veerappan: We’re close to the bottom. The question is, how long do we stay at the bottom? That is something that I anticipate will be more prolonged than most people think. But having said that, I think the very fact that we are getting closer to the bottom is an indication that there is light at the end of the tunnel, albeit a tunnel that is quite long.

TWST: What are you predicting, as we move through 2001? Do you expect to see any new opportunities develop, or will most of the industry remain flat?

Mr. Veerappan: 2001 is going to be a down year for the industry — a significant down year for the industry. I think 2002 is going to be a year when, on a sequential basis, you’ll see improvements toward the second half, but on a year over year basis, you will see another flattish year. I think it’s going to be 2003 and 2004 before we see many of these companies returning to the peak earnings and revenue performance that they registered in 2000.

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.