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Five analysts and top management from nine sector firms examine the computer hardware management sector in this special 47-page Computer Hardware issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info484.htm

TWST: Would you please begin by giving us your definition of computer hardware and tell us what you include in your universe?

Mr. Bailey: Our universe includes PC, server, and storage companies. From the companies’ point of view, there is an increasing amount of convergence between these segments. For example, both Dell (Nasdaq:DELL) and Compaq (NYSE:CPQ) are trying to move beyond PCs and increase their focus on enterprise hardware, and Sun (Nasdaq:SUNW) continues to bolster its storage offerings. So there’s more overlap now than there’s ever been before.

TWST: Over the past 12-18 months, how have the computer hardware stocks performed?

Mr. Bailey: I think there’s a great deal of variability between segments and companies. However, generally speaking, the hardware stocks suffered dramatic declines in late 2000 or early 2001 and have traded in a range since that time. The PC sector was the first to fall, because demand dropped off there late in the fall of 2000. In 2001, the stocks rebounded somewhat from their lows, but not appreciably, because demand remains weak. The enterprise vendors held out longer. They typically did well through the first quarter of 2001 and then they also fell, mirroring the decline in overall IT demand.

TWST: Were there any surprises in the stocks’ performances?

Mr. Bailey: Not particularly. The performance of these stocks generally reflects the outlook for worldwide IT demand. In 1999 and 2000, the enterprise hardware vendors benefited a great deal from the explosion in demand by the dot-com and telecom companies. That demand, for the most part, evaporated in 2001 and the stocks reflected that. After huge run-ups in 1999 and 2000, we feel that the valuations are currently more in line with more sustainable long-term growth expectations for the companies.

TWST: Which issues or trends had an impact on the group in 2001?

Mr. Bailey: The biggest trend in the storage segment is the move to networked storage, either NAS or SAN (network attached storage or storage area networks). We believe this shift is significant and will continue to affect the storage vendors for the next few years. Today, in a Unix or Windows environment, storage is typically either internal to the server or directly attached to a single server. In other words, storage is dedicated to a single server. Going forward, with networked storage, the physical storage will increasingly be shared among many servers, lowering the customers’ total cost of ownership and allowing them to increase the utilization of their storage. This is a fundamental shift in technology and could allow new leaders to emerge in storage.

TWST: What are two or three of your favorite stocks in the hardware group today?

Mr. Bailey: Our favorites for 2002 are Sun and Apple. The common theme between them is that they’re both at the beginning of significant upgrade cycles with their products. Over the past year, both companies have made dramatic enhancements to their products, and we think this will cause customers to upgrade to the new offerings as the year goes by. Clearly, neither one of these companies is immune to the economy, but the availability of new products that have significantly enhanced functionality and performance should, to a certain extent, drive demand.

TWST: Are there any specific risks associated with either Sun or Apple?

Mr. Bailey: With Apple the biggest risk probably has to do with education. With Sun it’s primarily a macroeconomic issue. Sun typically targets large corporations with extremely robust, high-end products. Therefore, without some improvement in the economy, we believe that most IT departments will remain cautious and continue to limit their purchases as much as possible.

This special issue includes:

1) Mainstream Computer Companies - In an in-depth (4,300 words) Analyst Interview, Andrew Neff, Senior Managing Director, Naveen Bobba, Associate Analyst, Ted Chung, Associate Analyst and William Hand, Associate Analyst, all respectively at Bear, Stearns & Co., examine the outlook for the sector including and share specific stock recommendations.

2)PC, Server & Storage Companies - In an in-depth (2,800 words) Analyst Interview, David C. Bailey, Vice President and Research Analyst with Gerard Klauer Mattison & Co., examines the outlook for the sector including and shares specific stock recommendations.

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