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Leading analyst examines the technology sector in this special Imaging Technology Stocks report from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info402.htm

TWST: Is that really where the growth is going to be in the imaging market?

Mr. Rosenzweig: In the imaging sector, companies are often beset with legacy technology. Investors looking for pure plays on the key growth themes and transition to digital will inevitably turn to the software side. Those companies offer the potential for substantial revenue gains long term, very high margins, highly attractive balance sheets and solid cash flow. Like everyone else, they’ve been hit hard by the downturn in the global economy, but Adobe in particular should generate significant operating leverage as the environment rebounds. When people think of digital imaging, there’s a tendency to focus on capture devices — specifically, digital cameras. But most of the companies participating in that area also have exposure to legacy technologies such as film. Film, we believe, is on the brink of secular decline in developed markets, beginning sometime within the next few years. Another way to play digital cameras is through the Flash media players but Flash memory has faced significant oversupply and commodity-pricing issues. In the printer space, Lexmark is an interesting opportunity long term. Lexmark (NYSE:LXK) also has the benefit of being a pure play. It’s gaining share with the help of some very successful partner programs. And, with the installed base growing so rapidly, high margin consumables sales are surging, providing some cushion for revenues and earnings. Again, this company has a solid balance sheet, and unlike EFI (Nasdaq:EFII), it offers a nice recurring revenue stream. Looking a bit farther down the road, Lexmark represents a prime play on home output of digital images.

TWST: You mentioned the problem of the legacy systems in place. What happens to that whole marketplace over the next couple of years as we make this transition to digital?

Mr. Rosenzweig: In the office equipment world, the transition to digital is well under way, while in the photographic world there is still a long way to go. The office equipment companies moved far down the digital path, transitioning from stand-alone analog copiers to network-capable digital devices that can scan, print, copy and fax. The challenge that most office equipment vendors face is enhancing the connectivity rates — in other words, convincing customers to use the systems for printing and scanning, not just copying. So far, that hasn’t been as successful as the industry hoped. The transition has effectively meant that one technology simply replaces another without leading to a whole lot of growth in the sector as a whole. The hope is that, as connectivity ramps up, page volumes will increase.

TWST: Why the drop in images?

Mr. Rosenzweig: Roughly 57% of images that are taken digitally tend to get saved, and just 20% or 30% of the images that are saved actually get printed. The question is why aren’t people printing the images. First, when people receive a photo via e-mail, there seems to be a natural inclination not to print it — there’s just not the desire. A study from Dataquest suggests that 50% of people who have received photos via e-mail have never printed one. On the other hand, if you take the image yourself on a digital camera, what’s the desire? There seems to be a greater demand to print personal memories. That being said, the technology has been lacking in terms of ease of use. The high cost of digital media also has precluded as rapid an adoption of digital output as we’d like to see. Printing images at a kiosk or on a home inkjet printer tends to be time-consuming as well. Traditional processing tends to be much simpler. People find that it’s easier to drop off a roll of film than it is to download their pictures at home and print them out.

This special issue includes:

1) Imaging Technology Stocks - In an in-depth (3,900 words) Analyst Interview, Jonathan Rosenzweig, Managing Director and Equity Analyst with Salomon Smith Barney in the Equity Research Department, examines the outlook for the sector and shares specific stock recommendations.