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Dear Reader,

We did not close any positions since the last Newsletter, and given the current panorama of the markets, it would have been a miracle if we had. Our portfolio, still in a major slump, has mostly been marking time, and, again, many of our companies had some good to great news only to see their stock prices fall victim to a bunch of yawns and ho-hums. And the Russell 2000, now in the mid-350s, looks as if it could quite easily drop to the 320 or 330 area.

Like it or not, this is about Iraq and confidence in our nation leadership, which appears to be slipping in sync with the markets. What to do now? Go ahead and pick a little here and there, but do not make any major commitments until the war starts, and, then, wait until it is several days old. We say this because it is a god bet that Saddam already has charges planted on most of his oil wells. If many of them are blown up, the markets will drop faster than George Bush’s jaw, regardless of how quick the victory may be. However, if most stay intact, then we are looking at a major buying opportunity. Oh yeah, there is also the chance that the Iraqi leadership will go quietly into exile.

And yes, we find this very sickening – talking about various strategies when many people are about to die.

Here are the headlines about companies in the Current Portfolio since the last Newsletter. Dates in parentheses are when we first recommended them.

Draxis Health (DRAX) (3/20/00). Pretty good year-end and quarterly numbers. Balance sheet also still fairly healthy.

Trimedyne (TMED) (4/20/00). Reports $290,000 profit for recent quarter. Still on “Endangered List”.

DOR BioPharma (DOR) (9/20/00). Initiates development of oral botulinum toxin vaccine. Still on the “Endangered List”, but a war could drive this one higher.

Antex (ANX) (11/20/00). This too is on the “Endangered List”, but is showing a little promise again on news that it has filed an IND with the FDA for a STD clinical trial. Also, gets U.S. patent for compounds to treat infections and inflammation.

Hauppauge Digital (HAUP) (2/5/01). Quarterly report shows revenue jump and earnings.

InSite Vision (ISV) (4/20/01). Files IND application for ISV-403 for treating ocular bacterial infections.

C.E. Franklin (CFK) (5/5/01). Quarterly and year-end numbers nothing to dance about. Balance sheet still seems relatively good. Forms joint venture with Nusco Supply.

Electric Fuel (ARTX) (6/5/01). Effective 2/6, company is changing its name to Arotech with the symbol ARTX.

ViroLogic (VLGC) (7/20/01). We still believe VLGC’s stock is grossly oversold, and its recent quarterly and year-end numbers reaffirms our suspicions. But, we’d like to see the balance sheet a little better.

OXiGENE (OXGN) (9/20/01). Released quarterly and year-end numbers.

Saba Software (SABA) (11/20/01). Deploys its e-Learning software to Kinko and 100,000 Honeywell employees.

Orthovita (VITA) (12/20/01). Launches VITOSS morsels. Also, 2002 revenues grow 163% over 2001 as losses narrow. Balance sheet still appears okay.

Superconductor Technologies (SCON) (1/5/02). Expects 2003 net sales to more than double net revenue of 2001.

Airspan (AIRN) (1/20/02). Bahamas Telecommunications selects AIRN for wireless DSL access. Launches cost-effective WipLL deployment packages for small networks.

Aerogen (AEGN) (2/5/02). Year-end numbers a slight improvement over 2001, but total assets get whacked by nearly 60%. Next twelve months may be crucial.

VASCO Security (VDSI) (2/5/02). Year-end and quarterly results show nice bump in revenues, but wider losses.

Mechanical Technology (MKTY) (3/5/02). Preliminary year-end and quarterly numbers look pretty nice.

Catalyst (CLYS) (3/20/02). Moving to Nasdaq Small Cap – that’s okay. Catalina Lighting chooses company software solution for Canadian warehouse facility.

Spectrum Pharmaceuticals (SSPI) (5/5/02). To receive $1 million investment. On “Endangered List.”

Nanogen (NGEN) (5/20/02). Public school system in Michigan selects OBAS to deploy its video-on-demand system. Sells digital receiver cards to Nielsen Media Research. Year-end results show revenues drop but substantial narrowing of losses. Balance sheet still seems to be in pretty fair condition.

Immersion (IMMR) (6/5/02). Adds five new patents to its portfolio. Releases year-end results, with mixed P&L results and a fairly stable-looking balance sheet.

Rigel Pharmaceuticals (RIGL) (7/20/02). Releases year-end and quarterly numbers. No major changes over 2001, that are apparent. Announces a restructuring.

Orbital Sciences (ORB) (8/20/02). Successfully carries out first launch of missile defense boost vehicle.

Speechworks (SPWX) (9/5/02). Delivers solution to McKesson.

Millennium Cell (MCEL) (9/20/02). Release quarterly numbers showing balance sheet still appearing viable.

Viewpoint (VWPT) (11/20/02). Consolidates U.S. offices. This may not be a good sign. Wait and see.

Interactive Intelligence (ININ) (12/5/02). FY2000 revenues about equal to a year earlier and losses narrow. Balance sheet could be a little better.

Physiometrix (PHYX) (1/5/03). Announces enhanced, exclusive distribution pact with Baxter for U.S. market. Year-end concludes on a positive note with improved balance sheet from a year earlier.

KANA Software (KANA) (1/20/03). Several product announcements.

Allscripts (MDRX) (1/20/03). Several healthcare groups select MDRX solutions. Year-end numbers look good compared to FY2001, and balance sheet still seems to be very strong.

Our picks for this issue are two very highly recognizable names that both trade on the NYSE.

AVAYA, INC. (NYSE: AV) – $2.25. Twelve-month hi-low has been $7.60 – $1.12. Based in Basking Ridge, NJ, with about 18,800 employees, this systems giant has 365.8 million shares outstanding, $2.2 billion in total current assets, $3.74 billion in total assets, $1.2 billion in total current liabilities, and $2.54 billion in total noncurrent liabilities, of which $934 million is long-term debt. Institutional ownership is around 57% with Warburg Pincus the largest investor. One analyst rates the stock a “strong buy” and four have it as a “hold”. http://www.avaya.com

Many of you who have seen their TV ads remember this as the Lucent spin-off, and, like Lucent, Avaya, Inc. appears to be reeling somewhat, although perhaps not as badly as its former parent.

Spun-off in 2000, Avaya was part of Bell Labs for 75 years and is a world leader in secure and reliable Internet Protocol (IP) telephony systems, communications software applications, and services. It designs, builds, and manages networks for more than one million businesses around the world, including 90% of the Fortune 500. AV’s global sales force includes 20 major distributors, 2800 dealers, 1200 system integrators, and 14,000 direct sales service people. The company operates through four business segments which are converged systems and applications (40%), small and medium business solutions (5%), services (43%), and connectivity solutions (12%).

The pulse, or the heart and soul, of the company is Avaya Labs, which is focusing on next-generation technologies, including nanotech, and speed to market. The Labs employ about 3000 R&D types and owns over 1500 U.S. patents and patent applications.

To get a better handle on AV’s breath and scope, we urge a visit to their web site, and to get an understanding of how their products are applied, just review some of their recent press releases. During the last several weeks alone, AV introduced its IBM Lotus Domino Version of its unified messaging software; teamed up with the NBA to deliver portable “Event-in-a-Box” wireless network for the NBA All-Star 2003; and, with DCM communications, installed a converged network for the new Federal Law Enforcement Training Center.

For FY2002, ending 9/30/02, revenue was $4.95 billion with $656 million in losses compared to FY2001 revenue of $6.79 million and $353 million in profits. During the 1stQT of FY2003, ending 12/31/02, revenue was $1.06 billion with a net loss of $37.6 million.

We know the numbers are not real pretty and that the next year will be challenging, to say the least, however, at some point, when the markets improve, AV’s stock could get a nice boost just based on expectations.

Our 20-month target for the stock is $4.25 – $5.00.

For more information, call AV’s IR department at 908-953-7504; avirsvcs@avaya.com

E*TRADE GROUP, INC. (NYSE: ET) – $3.80. Twelve-month hi-low has been $10.45 – $2.81. Headquartered in Menlo Park, CA, with about 3400 employees, this online brokerage firm has 363.1 million shares outstanding, $18.2 billion in total current assets, $7.8 billion in long-term debt, and $8.25 billion in other current liabilities. Institutional ownership is around 53%. Three analysts rate the stock a “strong buy” and four as a “hold”. http://www.etrade.com

For those of us who still have an undying belief that the markets will come roaring back by at least summertime, then buying shares in a highly-recognizable brokerage firm would seem like a measured risk. So, why not take a stab at E*TRADE Group, Inc, one of the most well-known names in online trading. Public since 1996, about the start of the Internet explosion, E*TRADE is probably as popular as Charles Schwab and Ameritrade in online brokerage. The company is a global provider of financial services to retail, corporate, and institutional customers, about four million in all. Transactions, obviously are mostly made online, and can also be done by phone. Besides stock trading, ET also provides market data, portfolio management, and options trading, as well as employee stock plan administration, market-making services to brokerage firms, and mortgages.

Much of E*TRADE’s growth has come through acquisitions. In fact, a few years ago, it bought one of our old picks WebStreet (10/5/00 issue). Last year, the company acquired the online trading operations of Tradescape, and, in an effort to broaden its consumer lending product line, acquired Ganis Credit Corporation. Then, to widen its reach even further into the financial services industry, ET bought more than 4,000 ATMs from Xtracash earlier this month. This now gives ET more than 15,000 locations, making it the second largest ATM network in the U.S.

For FY2002, ending 12/31/02, revenue was $1.33 billion, a 4% rise from $1.28 billion in 2001. Net losses narrowed to $186.4 million from 2001’s $241.5 million. However, earnings from ongoing operations during 2002 were $161 million, or 52 cents a share.

The company expects the current quarter to be soft. That’s okay. ET seems to have built a good foundation that should hold it up for some time to come.

Our 24-month target for the stock is $7.50 to $10.

For more information, call ET’s Robert Simmons at 916-859-4004; robert.simmons@etrade.com
Look for the March 5, 2003 issue to be posted on 3/3 or 3/4.

Thank you,

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