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Three analysts and top management from eight sector firms examine the computer software sector in this special 53-page Computer Software issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info494.htm.

TWST: How are you approaching the computer software group as a whole today?

Ms. Eisenstat: In terms of the stocks themselves, obviously there’s been a huge run-up since September, and I would say that these stocks are probably ahead of where the earnings are right now. I think the stock prices anticipate a lot of good news, especially going into the second half of the year. So a number of the stocks could end up in a trading range near where they are right now. I would expect this to hold up as long as the companies themselves continue to execute and until we get evidence that the numbers are really starting to show the good news that people are anticipating.

TWST: Are there any similarities among the computer software companies you cover?

Ms. Eisenstat: They’re actually quite different. Generally speaking, they’re all in what I call “infrastructure,” which includes operating systems, databases and systems management. While each of these sectors has different players, they are all “behind the scenes” technology that makes all the business applications that we use on a daily basis actually work.

TWST: How did computer software stocks perform in 2001?

Ms. Eisenstat: Obviously, 2001 was a very tough year because the economy slowed down, and when the economy slowed down that meant IT organizations stopped spending money, and when they stopped spending money, that was curtains for my companies for a while. The earnings estimates got cut constantly during the year for almost every single stock I cover and when the earnings estimates go down that hurts the stocks. So it was a tough year for the companies.

TWST: Will the challenges that the computer software industry faced in 2001 still have an impact in 2002?

Ms. Eisenstat: It seems like at this point IT budgets have stopped declining and have even stabilized. Those budgets are the key to revenue visibility for the software companies, so this news is a positive factor. However, before investors go to the bank with that one, I would also observe that IT budgets are not going up wildly. So the likelihood of a sudden upswing in spending is unlikely, at least for the next couple of quarters.

TWST: You also mentioned Mercury Interactive.

Ms. Eisenstat: Mercury Interactive (Nasdaq:MERQ) is a leader in the application testing space. They have software that makes sure there are no bugs in the software applications that companies deploy. Customers use Mercury’s software to test applications like CRM, SCM or ERP before they are actually implemented in the corporation. Mercury really made a name for itself and positioned itself well in the testing space over the last nine years. About two years ago the company entered the application performance management space. The vision was that if testing is about making sure the application works before it goes live, application management is about making sure the application stays up and alive once it’s been deployed. We think getting into performance management is a logical extension of Mercury’s core business. The company has focused on measuring the end-user performance of Websites, which is an area that is probably less crowded than performance management of internal networks, where there are several competitors. Mercury has done quite well with the performance management space, especially over the last year as people rolled out all the applications they had purchased the year before. Today, the company derives about 80% of revenues from testing and 20% from performance management. If companies begin to evaluate new applications in the middle of the year, it should be a driver to Mercury’s core testing business again. We think this could re-ignite growth in this area, which has been fairly stagnant.

This special issue includes:

1) Computer Software - In an in-depth (8,800 words) Analyst Roundtable, George Godfrey, Director at ABN AMRO, Inc. and Christopher C. Shilakes, First Vice President at Merrill Lynch, examine the outlook for the sector including stock performance in 2001, share of IT budgets and share specific stock recommendations.

2) Computer Software Stocks - In an in-depth (2,200 words) Analyst Interview, Melissa Eisenstat, Managing Director at CIBC World Markets, examines the outlook for the sector and shares specific stock recommendations.

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