1. Technology Outlook Does anyone remember 1999?… Morgan Stanley Chuck Phillips Managing Director 1-800-MRCHUCK charles.phillips@morganstanley.com www.morganstanley.com/mrchuck

2. 2 Tech Financing Boom l 70% of technology venture capital financing over the past twenty-five years occurred in 1999 and 2000 l 56% of technology IPO financing over the past twenty-one years occurred in 1999 and 2000 l 54% of technology follow-on financing over the past twenty-one years occurred in 1999 and 2000 l 62% of technology mergers and acquisitions (dollar volume) over the past twenty-one years occurred in 1999 and 2000

3. 3 Tech Spending as % of Capital Spending

4. 4 Technology impact on Economy 1993-2000 l Technology grew from 6% of the economy in 1993 to 8% in 2000 l Technology represented 30% of the growth of the economy during the boom l Technology grew at 11% rate compared to 5.0% for the U.S. economy over the last four years l Technology’s contribution to inflation has been –7.5% l Technology increased to 19% of exports from 16% over the last five years

5. 5 Components of IT spending

6. 6 Tech Market Cap as % SP500 Tech S&P% 12/85 1531,033 15% 12/90 1391,669 8% 12/95 4453,618 12% 12/98 1,7748,835 20% 12/99 3,50811,605 30% 3/00 4,13011,980 34% 1/02 1,94610,250 19%

7. 7 Software License Growth Morgan Stanley Software Universe: License Revenue Growth 14.0% 18.2% 10.9% 23.0% 14.9% 25.2% 32.4% 27.8% 20.5% 3.6% -11.2% -17.0% -20% -10% 0% 10% 20% 30% 40% l 1C99 l 2C99 l 3C99 l 4C99 l 1C00 l 2C00 l 3C00 l 4C00 l 1C01 l 2C01 l 3C01 l 4C01 l License Revenue ($MM)

8. 8 Software Industry Growth

9. Our Macro Economic Assumption

10. 10 A Modest Inflection Point Within the Next 12 Months l S&P 500 Profits will be down 14.9% for 2001 – largest decline in 50 years.. but our forecast is up 2% in 2002 l Average duration of recession has been 7 months but as long as 13 months l Budgeting process was more complicated and not all the way complete going into Q1 l 47% shifted spend plans toward 2H of year between November and January

11. 11 2002 Outlook l Gradual thawing of budgets l Stabilization in environment facilitates planning and more forward looking thinking l Positive GDP Growth in Q202 l Positive Growth in Business Equipment Investment in Q203 l We’re in the modest recovery but it could be more modest than investors expect l Software sequentially flat to down in Q1; slow build from there

12. 12 Indicators l Unemployment claims - stabilizing l Commodity prices – good indicator for manufacturing sector; stabilized but no upturn l Energy prices – spike in 2000 helped usher in downturn; prices have subsided l New business formation – still down l Hiring rates at integrators – headcount trends say a lot; layoffs stopped but not hiring yet l Unit shipments on servers and storage – up sequentially in Q4 l High Tech Skills Demand – positions listed on monster.com, etc – very slight uptick after 7 months of declines

13. 13 Help Wanted Index Total for Top Four (ORCL, PSFT, SAP, SEBL) -32% -33% -36% -45% -46% -48% -54% -67% -69% -70% -73% -71% -75% -72% -1% -17% -67% -95.0% -75.0% -55.0% -35.0% -15.0% 5.0% 5/2/2001 5/22/20016/11/2001 7/1/2001 7/21/20018/10/20018/30/20019/19/200110/9/2001 10/29/200111/18/2001 12/8/2001 12/28/2001 1/17/2002 Finally turning up

14. 14 Earnings Upside Trend 354 Technology Companies

15. 15 Application Deferrals

16. 16 Budgets Flat to Up Modestly

17. 17 New Projects Spending Should Improve but…

18. 18 What Deals are Closing? l Smaller up front outlays l Short payback period not just high ROI l Shared risk; trial software or subscription l Limited/targeted deployments on small scale l Upgrades and enhancements easier to sell than new projects l Application integration, ERP upgrades, operating system upgrades, backup and recovery seem to be priorities

19. 19 Automation Requires Too Much Labor! Breaking Down Commerce Department Software Expenditure Numbers – 3 Components Packaged Software 30% Custom Software 37% Own Account Software 33% (Internal Development) (Third party consultants developing custom software) Obvious opportunity for growth is to eliminate these labor intensive software categories with technology!

20. 20 Tech Outlook l Maturing sector l More cyclical growth l Start ups in the enterprise chasing incremental improvement and more marginal opportunities in niche markets l More conservative buyers l Large companies favored l Biotech could be more exciting

21. Thanx