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Dear Reader,

What will 2003 look like? Well, we know what it could look like – a powerful and gigantic bull market. The only thing holding it back is George Bush. Back in August, we thought the “Bush Bull Market” had finally started, then, the President needed a mid-term campaign issue, and, as a result, Iraq has been depressing the markets. That is being fueled by a bunch of people who have never smelled gunpowder. That includes all of the blow-dry media airheads to just about all of the senior civilian advisers in the Bush administration, except for Colin Powell, who seems like the only sane one. This gang better have a pretty good excuse for getting a lot of 20-year-olds killed, and it better not be for oil.

Our wish for 2003 is that George Bush becomes multi-dimensional and that he focus on other problems, sort of like what FDR and LBJ did. Take a page from Ronald Reagan who brought down the “evil empire”, but laid the foundation for 90s economy. Sure, the President can give us a great tax reduction bill, but no one will spend, including business, as long as he talks about all war all of the time.

As we said last issue, small stocks usually take a heavy pounding in late December due to tax selling and mutual fund window dressing. During the last several weeks, our Current Portfolio felt even more pressure, thanks to all of the above.

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

New York Health Care (NYHC) (3/20/97). Extends $4 million credit line to 11/04. Shareholders vote for the Bio Balance acquisition. Yes, this is just about the oldest stock in the Portfolio, but maybe, just maybe, the new Congress will enact legislation this year that could give companies like NYHC a boost.

Mountain Province Diamonds (MPVI) (10/20/97). Yep, another oldie with some potential. Reports micro-diamond results for the Kelvin Kimberlite Body and MZ Lake Sill-73.

SONICblue (SBLU) (6/5/99). Several product releases. On “Endangered List”.

Genetronics (GEB) (10/5/00). Will sell its BTX Division to Harvard Bioscience, which we placed in the Current Portfolio on 10/20/02. The sale is to bring GEB $3.7 million in cash and a royalty on net sales. Should help GEB a little. On “Endangered List.”

Antex (ANX) (11/20/00). Completes analysis for Shigella infection vaccine. Phase 1 trial offers hope for troops deployed overseas. On “Endangered List”.

Hauppauge Digital (HAUP) (2/5/01). For year ending 9/30/02, revenues drop by nearly 20% but company posts a profit.

AVAX Technologies (AVXT) (3/20/01). Here’s one that is close to being placed on the “Endangered List” as company announces further staff reductions, including senior management.

InSite Vision (ISV) (4/20/01). Partners with SIFI to distribute OcuGene in Italy.

Electric Fuel (EFCX) (6/5/01). Announces successful completion of German electric van project.

ViroLogic (VLGC) (7/20/01). Registers 13.2 million shares for shareholders. This may not be good for the stock short-term.

OXiGENE (OXGN) (9/20/01). Announces Phase 2 clinical trial of lead anti-tumor compound in thyroid cancer.

Access Pharmaceuticals (AKC) (11/5/01). Zindaclin receives approval in eight additional European markets.

Saba Software (SABA) (11/20/01). 2nd QT results nothing to get excited about, but balance sheet still looks good.

Conductus (CDTS) (1/5/02). Has been acquired by Superconductor Technologies and the acquisition has been reflected in our Portfolio. CDTS shareholders received 0.60 shares of SCON.

Mechanical Technology (MKTY) (3/5/02). Completes share exchange transaction with First Albany. Awarded second U.S. Air Force contract for jet engine balancing systems.

DigitalThink (DTHK) (4/5/02). Partners with Plateau Systems to provide comprehensive e-Learning solution. Announces expanded online technical training for Red Hat RHCT and RHCE certifications.

Nanogen (NGEN) (5/20/02). Litigation settlement to boost income. Licenses mutations associated with Canavan disease. Licenses rights to a common marker linked to Alzheimer’s.

Immersion (IMMR) (6/5/02). Announces haptics support for the new Mac OS.

BioTransplant (BTRN) (6/502). Sadly, we place this on the “Endangered List”. A recent article in Forbes was pretty dire about the company’s future.

Diomed (DIO) (7/5/02). Raises $2 million in bridge financing. If it hadn’t, we may have placed it on the “Endangered List”.

Hemispherx (HEB) (7/5/02). Files new U.S. patent application on Immune-Based alternative treatment to HIV/AIDs.

Harvard Bioscience (HBIO) (10/20/02). Acquires BTX Division of Genetronics – see above.

Viewpoint (VWPT) (11/20/02). Company and On2 Technologies announce licensing of VP5 for Viewpoint media player.

Titan Pharmaceuticals (TTP) (11/20/02). Launches randomized study of Spheramine in Parkinson’s disease.

LogicVision (LGVN) (12/20/02). Expands India operations. Launches seminar series on embedded test.

ARRIS Group (ARRS) (12/20/02). Several pieces of really good news have pushed the stock into our target area. This one may be closed within a day or two, or by the time you read this.

Our first selections for the new year can best be described as a couple of oddities.

LOOKSMART, LTD. (NASDAQ: LOOK) – $2.40. Twelve-month hi-low has been $4.13 – 76 cents. Based in San Francisco, CA, with about 300 employees, this Internet information provider has 98.1 million shares outstanding, $67.2 million in total current assets, $97.1 million in total assets, and $67.8 million in total liabilities of which just over $40 million is debt that has mostly been restructured recently. Institutional ownership is around 16%. One analyst rates the stock a “strong buy” and another has it on “hold”. http://www.looksmart.com

Why not start the new year with an Internet company that appears to be turning the corner to profitability thanks to steady revenue growth. LookSmart seems ready to join Yahoo! and Overture as a profitable Internet search provider.

Trading on NASDAQ since April, 1999, LookSmart’s stock hit almost $45 during the Net stock mania. Simply put, LOOK, which started as a directory, has for the last two years been transforming into a pay-per-click (PPC) search engine. When LOOK began, its directory was the main search vehicle for most of the Web’s major search engines, and, to a large degree, it still is – by reaching over 75% of Internet users. Much of its directory is still used by Microsoft’s MSN, Excite, Alta Vista, and Netscape NetCenter, Dogpile, and Ask Jeeves, and, of course, they pay LOOK for the service. LOOK’s directory lists almost 3 million web sites organized into 250,000 categories.

Where it appears LOOK has begun turning things around is with its PPC searches, which, when launched in January, 2001, was trashed by the Net purists. For most of you unfamiliar with PPCs, here’s how they work. When you go to let’s say Yahoo! and enter a password, say “penny stocks”, you are sent to a page listing those particular sites. At the top of the page you will see “Sponsored Sites” and under those fall “Web Listings”. Needless to say, there is no shortage of sites scrambling to get into the “Sponsored Listings” because they give many mediocre sites much visibility and an image of legitimacy. So, because of this struggle for visibility, there is obviously a ton of money to be made. The major domo PPC is Overture, which, for the last year, has bagged about $100 million in net income and its stock hovers around $30.

Most PPCs have a bid system whereby the more a site pays for a click, the higher its page ranking. LookSmart charges a flat 15 cents per click and then shares its revenues with the search engines.

For FY2001, ending 12/31/01, revenue was $85 million with $59.6 million in losses. During the first nine months of this FY, ending 9/30/02, revenue was $64.7 million with a net loss of only $6.64 million. In addition, the company just last month restructured and sees this as a positive impact starting in the quarter just completed (4thQT of FY2002).

LookSmart still has several more hoops to jump through, but the company looks to be on the right path. Also, Internet advertising has started to kick into high gear as a new growth industry.

Our 20-month target for the stock is $4.50 to $5.00.

For more information, call LOOK’s Liz Haggerty at 415-348-7185; liz@looksmart.com

PHYSIOMETRIX, INC. (NASDAQ: PHYX) – 55 cents. Twelve-month hi-low has been $2.55 – 40 cents. Headquartered in North Billerica, MA, with about 50 employees, this medical equipment maker has 8.4 million shares outstanding, $6.69 million in total current assets, $7.2 million in total assets, little debt, and $925,836 in total liabilities. Institutional ownership is around 29% and investors include Oxford Bioscience Partners and SAFECO. http://www.physiometrix.com

So why not begin 2003 with a pick that some would call for “kicks and giggles”, but this one may not be such a laugher. Physiometrix has a modest balance sheet and even though its stock trades at under $1.00, NASDAQ did not relegate it to the Bulletin Board, but, instead, placed it in NASDAQ Small Caps.

Trading on NASDAQ since April, 1996, Physiometrix designs and manufactures medical devices that monitor brain activity. The company’s main product is the Patient State Analyzer 4000, or PSA 4000 for short, which Physiometrix believes is the next generation technology used for assessing and managing levels of sedation during general anesthesia. The major concern for anesthesiologists during surgery is over-medicating patients and that can cause nausea, increased levels of discomfort, prolonged wake-ups, and depressed cardiac or respiratory functions.

PHYX claims the PSA 4000 provides a direct measure of a patient’s level of consciousness, calculating an index rated from zero (no brain activity) to 100 (awake and alert). A multi-center clinical trial of 377 patients found that using the PSA 4000 resulted in faster wake-up times and lower anesthetic drug usage. In June, 2000, Physiometrix announced a strategic alliance and a five-year exclusive distribution pact with Baxter Healthcare for the PSA 4000 in the U.S.

A major hurdle was overcome this past October when the FDA cleared the PSA 4000 utilizing the company’s new “frontal array” sensor. With the addition of this new sensor the company believes the PSA system will gain greater market acceptance. Other company products include the HydroDot NeuroMonitoring System used for performing EEG procedures, as well as disposable biosensors for use with the system.

For FY2001, ending 12/31/01, revenue was $2.7 million with $12 million in net losses. During the first nine months of the current FY, ending 9/30/02, revenue was $277,623 with $4.6 million in losses.

This is somewhat of a crap shoot. The company appears to have the money to make it through much of 2003. If they cannot sell the new PSA with frontal array by the end of this year, then, who knows? However, any big piece of good news could give the stock a nice pop.

Our 16-month target for the stock is $1.10 to $1.25.

For more information, call PHYX at 978-670-2422.

Look for the January 20, 2003 issue to be posted on 1/16 or 1/17.

HAPPY 2003,

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