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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: 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.

TWST: Has this also been the case in the transition to digital cameras?

Ms. Cross: Yes, in the past high prices were gating factors to the adoption of digital cameras. However, I believe the transition has picked up steam as pricing has declined 30% to 40% year-over-year. We are seeing the impact in the results of film manufacturers, as customers substitute digital technology for traditional silver halide film, chemicals and paper — especially in the professional market. I think that digital camera prices need to come down even further within the consumer market in order to attract the mass market. I expect to see 120-150, high quality cameras launched during this year. Historically about 15% of cameras sold were digital; however, in the December quarter it was more like 30%. I attribute much of the increase to severe pricing declines. In terms of professional cameras, you’ve seen the quality of digital alternatives improve dramatically while prices have remained relatively high. The good news for camera manufacturers in the professional space is that they tend to actually have a positive gross margin on professional digital cameras as opposed to consumer digital cameras. Overall, it’s a really tough market so professional cameras are a bit more attractive. The problem from the standpoint of the film manufacturers is that every time they sell a digital camera they have eliminated not only future film sales, but also most likely limited the amount of paper and chemicals that will be sold. We estimate only 10% of digital images are ever developed as opposed to 80% of images taken with the traditional silver halide technology.

TWST: We have yet to touch on Creo (Nasdaq:CREO) and Electronics for Imaging (Nasdaq:EFII). Would you tell us a little about those companies?

Ms. Cross: Electronics for Imaging is a company that essentially makes the brains of printers and copiers. This is a company that has a very specialized technology. Their competition is the internal development departments at their customers, and their major customers are Xerox, Canon and Ricoh. They also serve companies like Minolta and Hewlett-Packard. Basically they make the software and the firmware that allow what you see on your terminal screen to be printed out on a page. In addition, Electronics for Imaging technology allows for high speed and accuracy in color printing. Unfortunately, the components that Electronics for Imaging sells go alongside the sale of color copiers, both at the high end and the low end, and sales have been extremely weak in those markets. So the company recently took down expectations for 2002 and the stock took a big hit. Longer term, we think that the company is a good play as the economy recovers and color adoption grows.

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.