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Three analysts and top management from ten sector firms examine the Enterprise Hardware sector in this 65 - page Enterprise Hardware Issue from The Wall Street Transcript available at (212/952-7433) or http://www.twst.com/info/info630.htm

TWST: What has gone on in the enterprise hardware space over the past year or so?

Mr. Shope: In late 2001, we had a largely unexpected pop in demand that lasted early into the first quarter of 2002. But since then things have deteriorated considerably. On the high end of the market, on the Unix side in particular, it looks as if things will just continue to get worse going into the fall.

TWST: Bill, what is your view on what the industry has been doing to cope with this changed environment?

Mr. Shope: Each company has done different things and some companies have done very little. Obviously, I agree that Sun Microsystems is an example of a company that really needs to do more to adjust its cost structure. Sun’s cost structure, right now, would work if the economy came back in a strong fashion and if customers tended to spend as they did in the past. Of course, what I said before is that I don’t believe this is going to be the case. I think we’re going to have fundamentally different buying patterns, even when the economy recovers. So a vendor’s cost structure needs to be adjusted to that new reality. We believe other companies are further along in this adjustment process. IBM, for example, certainly does have a strong services and software organization and will benefit from the commoditization of hardware, but also from any sort of shift in the hardware landscape. Indeed, IBM benefits as more services and more infrastructure software is required to enable any major shift in hardware technology. So IBM does have a strong business model there, particularly over the longer term. In addition, if customers are shifting toward more commoditized systems or lower cost systems, obviously you tend to move away from proprietary technology and toward more of the standardized technology, such as Windows or Linux on Intel. In these markets, the server vendors tend to price very aggressively. So you need to have a very strong cost structure, and I think Dell Computer COMPUTER (Nasdaq:DELL) is the perfect example of a company that is positioned well for this trend. Dell is doing it more on the cost structure side and IBM is doing it with more of a services and software flair to it. Both companies are attacking the same goal, but with a different approach. Then there are companies like Hewlett-Packard (HPQ). They understand the need to adjust their cost structure, and that was part of the reasoning, or the stated reasoning, behind the merger with Compaq. But, of course, they’re not as far along as Dell or IBM on either side of the spectrum. HPQ is trying to build more of a services-centric business model, but they’re nowhere near IBM’s level. They’re also trying to build more of a cost-competitive hardware model, but they’re obviously nowhere near Dell’s model. So they’re somewhere in between. The point is that each enterprise hardware player is on a different path toward restructuring, and some are farther along than others. Some will be there when the economy recovers and they’ll thrive, while others will still have competitive difficulties when the economy recovers.

TWST: Bill, as we look at the market today, what do you like?

Mr. Shope: Just to let you know, I only launched coverage in August, so I have four names under coverage that I’m allowed to talk about. Dell, Hewlett-Packard, Sun and IBM are the names under coverage, and the only name I’m recommending now is Dell Computer with an overweight rating.

TWST: What is it that you see at Dell that you like?

Mr. Shope: I’d like to split the story into near-term and long-term discussions. Obviously, in the near term, Dell is showing a remarkable ability to put up growth through market share gains and to show profitability improvement through cost cutting, despite the slow economy. So that’s the near-term positive that gives me comfort. And then longer term, some of the things we’ve been discussing, particularly the shift toward commoditization, bode well for a company with a leading cost structure like Dell to continue to gain share in markets like the server market. Also, Dell continues to gain a significant amount of share in the PC space. There’s still a lot of growth left for Dell in terms of market share gains in PCs going forward.

1. Enterprise Hardware - In an in-depth (8,000 words) Analyst Roundtable, Bill Shope, a Vice President & Senior Analyst at JP Morgan and Donald Young, a Managing Director at UBS Warburg, examine the outlook for the sector and share specific stock recommendations.

2. Enterprise Hardware Stocks - In an in-depth (4,000 words) Analyst interview, A.M. (Toni) Sacconaghi Jr., a Research Analyst at Sanford C. Bernstein, examines the outlook for the sector and shares specific stock recommendations.

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