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Leading analyst and top management from five sector firms examine the imaging technology sector in this special 23-page Imaging Technology issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info519.htm.

TWST: Speaking of Hewlett-Packard (NYSE:HWP), shareholders have voted on whether to merge Hewlett-Packard and Compaq (NYSE:CPQ). When will we know the results and what are the implications?

Ms. Cross: The voting has been completed and now the proxy counters have their work cut out for them figuring the final tally. We expect to see resolution within the next few weeks. It appears at this point that Hewlett-Packard has won based upon management statements. That being said, it’s probably a very, very close call, and we’re going to have to wait and see what happens. There’s obviously a lot riding on this. Carly Fiorina has stated that she can’t guarantee that she will remain with the company if the vote is negative. In addition, if the deal is voted down, upheaval in the Board of Directors may also occur. We believe the merger is the correct strategy at this point; we are concerned about will happen at Hewlett-Packard if it isn’t approved.

TWST: When would investors want to get involved with Hewlett-Packard?

Ms. Cross: We think that with the stock at approximately $18, you have limited your downside. We estimate that the printer business alone is worth $20 per share which obviously isn’t being fully reflected in the share price. Overall, we think that the deal will prove to be a positive for Hewlett-Packard, as it positions the company strongly in the server and PC markets and provides the printer business with further entrée into the Fortune 100. That being said, we do think longer term there is benefit to spinning out the printer business.

TWST: What are some of the other issues that affected the group in the 12-18 months?

Ms. Cross: To a large extent getting expectations in line with reality has been the toughest issue. I believe this has plagued most of the tech sector. Within imaging technology, the expectation was that a solid increase in color technology would drive revenues and it hasn’t occurred. It’s been much, much slower to take hold due to three reasons. First of all, you’ve had the economy, which has cut discretionary spending for both businesses and consumers. Second, the speed of color laser printers needs to increase to the point at which they are competitive with current offerings in monochrome printing. For instance, the fastest color laser printer is 28 pages per minute right now, which compares to 50 pages per minute plus for workgroup monochrome laser printers. We are all at a point where we are used to hitting the print button and seeing a page spit out of the printer. Unfortunately, that speed does not happen with the majority of color laser printers. So I believe that widespread adoption will not occur until we get the speed of color laser printers up, which is most likely a 2003-and-onward story. The third issue impeding color adoption is the high prices charged for color laser hardware. Currently, color laser hardware is about 3 times the cost of monochrome laser hardware. When you factor in the cost of ink, the printing of a color page is almost 6 times as expensive. I believe you need prices to come down and an economic recovery before color demand will grow. Therefore, I think 2003 and 2004 will be much better years for the industry as technology brings down costs and the economy improves.

TWST: We were talking about Pitney Bowes earlier. Are there any other names in the group that you particularly favor right now?

Ms. Cross: The other two stocks that we have buys on in the near term are Hewlett-Packard and Xerox (NYSE:XRX). For Hewlett-Packard, the printer business alone is worth $20 a share and the stock is trading at $18, so there has obviously been overhang on the stock based upon the merger. But as this works its way out and the company integrates and is able to come to some resolution with all the issues that are surrounding the merger, we think that you’ll see some value unlocked in the next several months.

This special issue includes:

1) Imaging Technology Stocks - In an in-depth (3,600 words) Analyst Interview, Shannon S. Cross, Director at Merrill Lynch Global Securities, examines the outlook for the sector including and shares specific stock recommendations.

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