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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: 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. With all that said, I think the real growth in office equipment will be tied to the transition to color. Over time, every copier and print device will be “color-enabled.” For the same price as a black-and-white device today, customers will be able to purchase a color-capable device. Users will have the option of printing/copying black and white or color, though the price per page will not be any different than a stand-alone device.

TWST: And who looks like the winner there — or is it too early to say?

Mr. Rosenzweig: While it is still early to tell, there are clearly distinctions between copier and printer vendors. On the color laser side, HP (NYSE:HWP) is certainly dominant and seems best positioned to ride the growth wave at this point. On the other hand, as it relates to inkjet, HP is facing a lot of competitive pressure. At some point, I see the inkjet business shifting from a “new adds” model to a replacement cycle. This benefits Lexmark (NYSE:LXK) at the expense of HP, since Lexmark’s share of new shipments is greater than its share of the installed base.

TWST: So this is still kind of a wait-and-see segment?

Mr. Rosenzweig: On the copier side, I believe it may take another two to three years for true color-enabled devices to really begin penetrating the market. On the laser color printer side of the business, while the product is there, price points still have to come down. In terms of the cost per copy or cost per page, I think we need to get down to a consistent $0.05 or less for color, and current levels well exceed that. At the same time, we need to keep the black and white cost per page at historical levels or even less. That said, we are starting to see prices coming down at the very high end of color, approaching the levels I just mentioned. In particular, Xerox’s FutureColor device, which is intended to serve as a digital replacement for offset printing, particularly for lower-end, shorter-run applications, is closing in on that targeted level of $0.05 a page. Still, there are many devices that are producing at the $0.15-$0.20-per-page level, and that’s going to have to come down.

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.