January 15th, 2004


Our sanguinity, amid many concerning elements, is supported by the following:

1) Other key nations are expected to grow faster than America, thus helping the United States. This is an economic role reversal for the U.S. engine that formerly pulled much of the world.

2) An incipient boom in the outpouring and use of consumer electronic items looms as a huge worldwide phenomena.

3) The ongoing reductions of communications costs and expansion of user access to the great abundance of content and to new applications will act as widespread sponsors.

4) Months more of cheap money and a cheapened dollar will give support to American providers of agricultural products and materials.

The negatives loom as the aftermath of the huge — very huge — use of borrowed money to pay for public activities and for personal purchases in the past several years. This poses the probability of policy reversals after the elections of November, for which investors must act beforehand. Obviously, the industries that recently most benefited from extraordinary governmental policies will be the most adversely affected by these policy reversals.

Meanwhile, we look for months of good weather to promote activity and a good harvest.

There is no economic principal, or instrument of public policy, that can match for its demonstrable effectiveness that of the lowering, or the raising, of interest rates. For many generations, the effectiveness has been made evident, not often with timeliness and in degree just as intended, but nevertheless in widespread demonstrable degree. As money is made cheaper by way of lower interest rates, theoretically and practically, all economic goods are written up in nominal value. Conversely, when interest rates rise, all economic goods are written down in nominal value. Its ultimate force is largely in its pervasiveness. Few persons and few products are exempt from the effects. If the changes in interest rates are made gently, the effectiveness is gradual. The year 2003 brought yet another demonstration, and 2004 is likely to build on it for a time. We would not look for a reversal of this phenomenon in the forepart of the year.

Specifically by industry, easy money has (1) driven a housing boom, including refinancing of existing homes and properties, that has released portions of former debt service charges for the purchasing of other goods and services, (2) enabled enterprise financing, and rescheduling of debt, (3) driven an expansion of the world’s automobile market that, in combination with attractive new designs, has produced an unprecedented sequence of consecutive years of high-level production. There are more new cars on the road relative to the existing stock than ever before. The cheapening of the dollar has preferentially positioned American suppliers of agricultural products, and providers of many other materials vis-à-vis European producers, and those in other nations whose currencies have remained strong relative to the dollar. The effects have now sponsored a strong farm sector.

Prosperity on the farms swells the concert of (1) persistent ever-growing healthcare expenditures, (2) rising overall Federal expenditures (more recently with a military emphasis) and (3) all of those small businesses run by individual proprietors that seem ever to crop up in great numbers, serving both traditional and newly created interests. In recent years, many talented persons who were dismissed from the payrolls of large companies have found outlets for their talents and energies in the creation of new enterprises. And, as endemic in the American culture, teams of creative people depart large companies to provide new products or services that are lost in, or poorly served by, the bigness of their former corporate employers.

The growth pattern for nearby months seems to be pretty well set in the circumstances as mentioned. Major support is also to be derived from a burgeoning outpouring of new designs in the electronics realm for consumer use. This suffered a significant contraction in the opening years of this decade. But the influences of design change and ever-lower costs of functionalities are driving the industry now. The greatest single item of lowered cost is derived from use of the Internet, which permits digital originations in one spot to be ubiquitously digital throughout our modern world. We would not be nearly so optimistic on the American future were there not this expectation for consumer electronics. This will range from handheld mobile devices to virtually all aspects of consumer use, including more bandwidth to the home, new high definition televisions, digital television, more interactive television, and a much greater use of digital cameras (which will sponsor, through the interrelationships of electronic devices, use of more copiers, and the porting of new devices for the conveyance of images).

This is a worldwide phenomenon. It is massive in its potential for the realization of annual revenues. And will become, as it unfolds, grander and unlike anything seen before. Our sobering question is: Will this incipient boom gain speed fast enough to make up the slack that is reasonable to expect from a mature, easy-money-supported automobile market, and the housing market? Especially, we think housing can be vulnerable because we would expect interest rates to change their course of direction when there is sufficient evidence to banish the incredulousness pertaining to the durability of this business improvement. Housing could be hyper-responsive to changes in long-term interest rates such as might eventuate from the outpouring of U.S. Treasury debt to finance the huge deficits planned by this Administration. Massive deficits emanate from tax cuts, increased military spending, and the added costs of Medicare, which leaves some $400 billion (yes billions, not millions) of unfunded costs.


All of this suggests that the recent policy measures that were adopted to turn around lagging business circumstances will be in for sharp reversals. Thereafter, patterns within the capital markets will assume very different interactive changes. This would be evident between and among equities, between equities and fixed income securities, among currencies, and pervasively extending to most financial items. It is too early to attempt the timing or description in any detail; but it is not too early to keep it in the recesses of one’s mind as a memo to be alert to harbingers of its arrival, and to the potential constraints thereof upon the economic growth of America.

The cautiousness and the incredulousness that have been so frequently expressed concerning the recovery of American business conditions bears some further comment. In months past, these served as a sobering influence in our equity market. We considered this to have been healthy. Nothing provides a healthier stability than a broad dispersion of viewpoints. (Conversely, when a given viewpoint becomes commonplace, valuations move rapidly in response thereto, and typically in degrees that are unsustainable.) In this business of investing in equities, grand majorities nearly always are wrong, except for short trading intervals. In recent months, there have been a plenty of unlike remarks presented by persons of bearish temperament, by near-term opportunists, and by persons of positive nature that see investing in broader sweeps and longer terms. Rarely has one encountered a broader dispersion of viewpoints. More recently, the preponderance of positive business news has forced a conformity toward optimism, having the effect of elevating stock prices broadly.

Variety of industry and life patterns is woven, as always, into our Firm’s thinking, and woven as it must be from world-scale fibers. The diversity of societies is represented in our stock market providing opportunities to profitably select in most time periods. The opportunities are drawn more deeply from the origins of commerce than as expressed in the old saw that “our market is a market of stocks, not a stock market.” Only in moments when the market is under extreme financial stress, for one temporary reason or another, have all stocks (or nearly all stocks) moved in a similar direction. Variety does have a flip side: If not all are moving in the same direction at the same time, there are certain to be some that one should avoid.

We expect the growth pattern of the American society in the years ahead to have disappointing aspects that will make successful investing hyper-dependent upon selection. Avoid the ordinary. Avoid the multi-divisional companies that have such a wide spread that they involve shareholders in sluggish as well as prospering divisions. Avoid providers of materials that can be sourced from other countries (other than for short-term opportunistic trading in the perspective of nearby months, as advantaged by the cheap dollar). Concentrate on the companies that are focused upon product lines that managements have created for specific new applications, and on those companies that have the creativity to keep those products enhanced and supported by a broadening array of products that ever add appeal through new efficiencies, or newly enabling functionalities. Such companies have so much going for them, and some of such companies have such a broad arena in which to play, that their prosperity is of their own making, not so much effected by general circumstances.

In appraising changes in the patterns of American business cycles, remarks and observations come to mind that were occasionally provided by the much respected late senior editor of the Journal of Commerce and professor at New York University, Jules Bogen. In the late 1950’s and 1960’s, Professor Bogen would sometimes remark that whenever he grew concerned about the pace of America’s growth, or wondered whether or not an incipient recession was getting underway, a trip through the southern and western reaches of America would have him bullish again, long before his return to New York. The entrepreneurial spirit through these vast regions of America impressed him more than all depressing business cycle considerations.

In the 1950’s, Professor Sumner Schlicter of Harvard University expressed his perceptions that were drawn from diversity to describe changes in the American business cycle in a well coined, and well remembered, phrase. Business cycles, as had been scholarly described, were being succeeded by “rolling readjustments” that were based on industry specific pulse beats in rotational patterns, rather than all at once. I was slow to buy into this, feeling the banality of the catchy term “rolling readjustment” detracted from its appeal, and possibly its usefulness. But I have thought of Professor Schlicter’s earlier observations many times since. He was observing, as was Professor Bogen, the most essential consideration for understanding America — VARIETY — and its investment implications. Such variety is not replicated in many nations, and no nation has the blessed spread of climate, resources of the soil, or diversity of people that America enjoys.

My own personal antidote to pessimistic appraisals of overall growth is even more conveniently derived. First, just observing the price changes of the shares of most listed and unlisted securities always reveals a broad array of diversity of enterprises, and of share price changes. As such, similarity of change should not be expected. These broad scans are always revealing; it is just too obvious, and too simple, and too intelligent to be adopted widely. It is the simple observance of the breadth of variety and the distinctions of diversity that is represented in publicly traded securities of American enterprises that provide one of the perennially best guides to investing in equities. The interrelationships are sufficiently different and independent to allow considerable degrees of freedom of growth patterns. In earlier years, when closing daily prices were available before one caught the homebound train, I would have the chance to check nearly all prices on my hour-long ride. By the time I reached New Brunswick on the way to Princeton, New Jersey, I typically noted a dozen, or several dozen, shares that I thought were indeed attractive. Variety and diversity have long been an element of America’s stability, and of its vigor and its strength.

Antidotes to pessimism can be derived often simply from conversations and visits with managements of creative companies. Creativity always earns a right of way in an open society. Most significantly, there are literally thousands of medium-sized and small companies that are driven essentially, and well, by the creativity of managements. New products (for new applications or to supplant old ways and methods) always prosper, and in total contribute to the growth of the nation far beyond that which seems to be generally appreciated. Add to this the thousands of vigorous entrepreneurs who, in our open and financially sufficient society, start a broad variety of new businesses — from car washes, ice cream parlors, consulting firms, restaurants, entertainment firms, and to many others. This widespread category of vigorously run family owned small businesses adds importantly to economic growth, though this becomes included in the national figures only with considerable lag. Accordingly, this is not a fully represented element in America’s understanding of itself, or so it seems. It is well to remember that these very small companies have recurrently been an element of resiliency on the downside, as well as a force adding to growth in expansionary periods.

These observations and conceptual views of the American economy have special relevance as solid growth phenomena are seen in certain companies while extended sluggishness prevails in certain others. There is also a continuing outward migration of employment to take advantage of lower costs in other nations (now including sophisticated, high-value-added assignments), and a slowing of activity in the mature automobile industry (international), while an incipient acceleration that might well blossom into a world-wide boom in consumer electronics gains strength. This consumer electronics boom is design driven, and reduced-cost sponsored. It is worldwide — huge. Consider this as complementing all those industries that seem ever to grow, such as healthcare, governmental services, retail, dine-away-from-home, transportation in all of its manifestations, and energy consumption related to all aspects of activities.

There is no doubt about it, America has experienced a traumatic sequence of most trying years. Misfortune hit with never-before-seen force into the electronics realm, which had (just preceding) experienced an enormous expansion, and overbuilding of infrastructure communications and data processing facilities. There was also a (temporary) saturation of some end markets in the business realm, and even in the home computer realm. Our observations and perceptions through this several-year interval reveal that, meanwhile, many a company translated the slogan, “when the going gets tough, the tough get going” into words that might be rephrased as “never sound defeat, depend upon designs”. These enterprises design their way through slow times with new products so that they do not need to count upon a general prosperity, or old markets for their success. It would seem that never in the lifetimes of the living has there been a time when design improvements have been more influential in their dynamics in creating consumer purchasing.

This design phenomena is not exclusive to any of the major nations, it is common to most. It is germane to recall that China produces more than one quarter of the world’s television sets, and purchases over one third. The percentages of PCs and phones would range impressively high as well. Rapidly growing China, India, the rim of Asia, Russia and those nations that lie between Russia and Continental Europe are now in catch-up phases. These nations have cost advantages that also help in developing new alignments of political and commercial relationships in today’s uni-polar world. Indeed, those who doubt the recovery in America might lift their eyes from the desk and view change in global terms. This is today’s counterpart of Professor Bogen’s traveling in the southwest and the far west of America to understand, in contradistinction, that the eastern, more established regions of America would be pulled by the new. The case for being bullish on the American economy is not so much that America will lead in the next recovery, but as other nations grow faster, the interrelationships between nations will be reinforcing to the growth of each. China will be both a major influence in holding costs of finished goods down and in buying American product, also paying royalties to Americans for certain designs. In the longer run China looms as a competitor, but in the shorter focus, its effects on our economic growth will be more upward than competitive.

Nowhere is creativity such a significant force as in new configurations of electronic equipment. On a world scale, electronics grows in inherent capabilities each year without cessation. Uses and new capabilities under development in consumer items have begun to comprise one of the strongest and broadest of design driven influences of a lifetime. A prospective boom is further supported by the abundance (and the lower user cost) of infrastructure and communications facilities. A further boost awaits completing a build-out of the last mile to the home. In some communities cable TV companies have already upgraded, while in most others, it is still to be completed. The ultimate beneficiaries will be providers of content. Content providers are not so numerous, and they have distinct characteristics that will make selection not so difficult. We suspect we will be choosing among these, but not at this moment.

Neither will we at this moment invest in the huge companies that manufacture end products, such as televisions, cameras and phones. There are already plenty of producers of such end products and the game is certain to be hyper-competitive. Even more certain, the volume will be expanding — worldwide — allowing interim prosperity with thinning margins. The competitive fight, on an international grid, will be among giants whose strength in combat against one another will be ever pressuring profitability, while sponsoring total societal growth.

This is not the time to invest in the end products of commercialization. The battle lines are forming. Thompson has just announced a major alliance with a Chinese manufacturer, which followed Sony’s announcement of a major plant in China to be operated jointly with a Chinese company. Add to this all the Japanese and European producers of television sets, PCs and phones, and one can imagine that the consumer will be the ultimate beneficiary, not necessarily the shareholders of these giant manufacturing entities.

The home will undergo a thorough electronic redesign. Televisions and PCs are growing more alike. There is even a convergence among the displays. Liquid crystals are knocking out the cathode ray tube, light emissive materials will probably knock out liquid crystals for most categories of displays, and projectors will also compete for most indoor use of displays. For instance, the portable laptop is not complete now without porting to a projector. And the projector is miniaturized to two pounds or so for ease of portability, and functions without cables. The PC in the home and the TV in the home will probably play through the same interconnected displays, so these will not bear close resemblance to configurations we know today. There is a generation of rear projection PCs coming on the market even now that take much of the weight and bulk out of high definition television, and provide a superior picture (but this would seem to us to be an interim solution). Wi-fi will obviate the need for wiring in many instances.

Under present dynamics of the consumer electronics industry, we have made the determination to discard a guiding principle that runs through economics 101, 201, 301, 401, graduate school, and the university of hard knocks. That principle emphasizes investing in end products; that is, as close to the final user as providers can get. A provider should wish to be able to influence the user with information and advertising, and to establish a rapport so that design enhancements might be quickly made to comply with changing ways and wishes. One aspect of total customer service is customer capture. That is basic to sophisticated large provider strategies, and fundamental to our appraisals. That principle, too, is suppressed by other considerations when big manufacturers have too much that is losing, or not of special interest. For investing, we prefer the critical components. These are displays, processors, and materials. We are focusing (unconventionally) toward the back of the supply chain.

There are new materials under development of interest, not many of which are yet apparent investments, or are hidden in major companies. Cree, AXT, and Universal Display are illustrative of our choices. Rather than use manufacturers of end products that incorporate flat screen displays, or the fabricators of the display itself as a major component, we prefer to use the creative providers of controller chips that control the displays.

Digital technology allows means for image improvement by separation of artifacts and through intensification of the density of information conveyed. The small displays for handheld devices can be made to function with a density of data that will show virtually all the information that now comes through the laptop. Needed brilliance, as it relates to use in all shades of ambient light, suggests that the ultimate screens will not be of liquid crystals, but will be of light emissive materials. Battery use is also much enhanced by the use of light emissive materials, largely because they use current only at the point of use, at the time of use, and do not require persistent back lighting of the full screen to allow liquid crystals (light shutters) to perform their appointed duties. Pixelworks, Zoran, Silicon Image, Kopin, Anadigics, TriQuint and Microvision represent our choices at this time.

Throughout, this scene is supported by the inexpensive use of the Internet, and the massive amount of channels (both terrestrial and satellite) the digitization of television broadcast will release. The cheapness of the communications realm was not earlier available in support of some aspects of home and personal use of electronic equipment. Communications have become distance indifferent. Not only is it cheap, it is point-to-point, point to every point, every point to point, and twenty-four hours, daily. The influence of design change of user equipment gains support and thrust through the availability of cheap communications. This already is supportive to a reconfiguration of interconnects at all phases of human life and enterprise.

There is surely cause to question how we get from present circumstances to that invigorated, massive worldwide boom in consumer items as just described. America has used an untoward amount of debt to survive the past few years of increased unemployment, and, downright depression in several major industries. Moreover, the automobile industry, one of the largest and most international of industries, has been expanded aggressively by price cutting and give-away leases and loans, accounting for much of the increased total use of debt. Never have we seen, as now, so high a percentage of cars on the road of less than four years of age, in Europe and in America. Nor have we seen dealer lots more abundantly stocked. Moreover, there is the aftermath of our Iraqi war that throws question marks into many a forward surmise.

In truth, as we survey America there might be more cause for soberness than for optimism. But if one’s head is lifted from the desk to survey in the context of world growth patterns, it is much easier to grow optimistic. China, and other nations of Asia, will lead, and in turn pull America’s rate of growth. One of the most amazing of recent take-home statistics (as mentioned earlier) is that China manufactures 27% of the world’s televisions, and purchases 34% of the world’s production of television sets. This is astonishing; indeed, it would be if the figures were half that. And the percentages have not peaked yet. This is an enormous prospective uptake of electronic and related goods. Russia, too, seems headed (perhaps spasmodically) toward accelerating growth, and so does the expanse of nations between Russia and Europe. The southern hemisphere of nations is also likely to grow more rapidly, having withstood a few years of financial turmoil in Latin America, and having been stymied by social strife in certain African nations. Yet, it is not too much to hope, and to expect, that these nations will enjoy an improved growth pattern in nearby years. As each major nation experiences a revival of activity, other nations will, in turn, benefit.

Thus, we do not see America as leading the next growth phase, but it will benefit as activity increases in other parts of the world. We think this is where so many who still are fearful of investing are failing to correctly visualize the more likely patterns of imminent years. Do not expect the pattern to look like the past. Do not expect America to be the engine that pulls Europe, or the rest of the world, with the exception of our next-door neighbors, as a matter of relative size, their labor cost advantages, and proximity. Expect America to benefit from the increased activity of other nations whose populations exceed our own, and whose ability to sponsor their own growth grows better year-by-year.


Recent Conversations With Small Companies

In the opening week of November, I spent three days listening to eighteen companies at the American Electronic Association Conference in San Diego. As you very likely know, this conference invites only small and micro-cap companies. No major companies were present. The conference has sometimes had a large company address the plenary sessions at lunch or dinner, but this year there were general sessions led by representatives from Nasdaq, The New York Stock Exchange, and Needham and Company. I only attended these forums when Needham analysts presented.

Of the eighteen companies whose presentations I attended, clients own nine, and the other nine were for my broader surveillance, an ever-ongoing quest for prospective shares to own, and for broadening my understanding. Thus, I listened to three computer design companies, simply to better understand Mentor Graphics (which we own, but was not in attendance). These were brainy micro-cap companies — PDF Solutions, Synplicity, and Verisity. All are so narrowly based to be of insufficient interest to me. They might be good investments. I prefer to have the one representation in Mentor Graphics, because I know the management, and I think Mentor Graphics gives us a sufficient representation in this early phase of chip production.

There were four companies having appeal to me that we have not yet approved. The decisions on all four of these companies are subject to further checkout. I listened especially to the management of Digimarc, which is a relatively low-risk way of participating in what is certain to be a rapidly growing use of security measures for identifications of persons and transactions through the use of Smart Cards, personalized ID’s, and electronic or physical encryptive devices on documents. Digimarc bought the Polaroid division, which accounts for most of its revenues, and provides greater spread and presence. The reason for buying shares would be related more to the technology and their patents in other applications that will grow more rapidly.

I also think Pinnacle is a low cost way of participating in the high growth area of media management, editing and broadcast. It is much cheaper than Avid. Pinnacle is not as well and coherently run as Avid. They overlap in places, but not through most of their endeavors. Pinnacle is located in Mountain View, California.

At the conference a year ago, I identified Intervoice as the most attractive of presenting companies in terms of price of shares. At that time, they were in violation of certain loan covenants, they were in desperate need of cash, and the means of their survival resided only in their industry position, not in their financial status, nor in the circumstances that prevailed at that time in the financial markets. Therefore, I simply listened and did nothing. Meanwhile, the shares are up seventeen times. Even so, it’s a worthy growth holding, possibly not vigorous enough for the YES program, but it is a means of participating with a lead company in the ever-rising use of more efficient facilities in voice messaging, and all other forms of messaging inasmuch as everything is digital these days.

A year go, Anadigics’ CEO presented well and convincingly to me. I did not care at that time to use the stock, because their total presence in their marketplace in terms of personnel and in terms of longevity of relationships suggested we use other participants. We have Triquint as a better substitute, and we have a good stake already in competitively involved companies in the use of high performing gallium arsenide (and compounds derived thereof) chips. Management of Anadigics came out of Lucent for the most part. They are technically superior, and I believe they have respect among their client base that gives them great opportunity, and gives the shares a lot of volume leverage in this incipient consumer electronic boom. Anadigics is in Warren, New Jersey. It’s an easy check out, which I plan to do soon.

Of the shares of companies that we own (AXT, Cree, InFocus, Microvision, Silicon Image, Pixelworks, Triquint, and Zoran) presentations were supportive to our possessing these shares for our clients. InFocus has come through some damaging months, to be sure, but the outlook for this quarter seems to be especially encouraging, and the company seems positioned well for next year. To be sure their marketplace is hyper-competitive, but InFocus is the best participant in this marketplace, with the broadest and the best lines of equipment in most instances. The stock is still unduly cheap. It could double from here and this would still pertain. The conference presentation helped the shares of InFocus, as it did for most of the companies just mentioned. Zoran was the exception, but I think the presentation was still fundamentally quite positive. The founding CEO presented, and their IR representative is knowledgeable beyond that commonly encountered. He is good enough so that one doesn’t need always to talk to the CEO, but listening to Dr. Gerzberg gives insights and encouragement to own the shares.

Aspect, QRS, and Trimble, that we own, were also at the conference, but I did not attend their presentations. I felt I would learn more of importance elsewhere. Aspect shares have continued strong. Tom Weisel’s company has produced another favorable report on the company. My own belief is that the stock is being put in play for takeover. My surmise might explain why Beatrice Enfante, CEO, left (because she didn’t wish to go along with it). She participated in a remake of this company that is most respectable, though it didn’t show up in revenues. Aspect’s revenues did better than Avaya’s, the principle competitor, but a real turnaround awaits a change in business spending for basic equipment. The Company, of course, cannot verify why Beatrice Enfante left, but my surmise is identical to another friend who knows something of this company. I think we shall sell Aspect soon. At least, I regard it as a source of funds. The upside from here seems highly probable, but seems to be small, and takeover related.


Needham Conference in New York – January 6-9, 2004

Needham’s Conference (300 companies presenting, 3,000+ investors attending, as anecdotally reported) was propitiously timed from the standpoint of increasing investor interest in technology shares—influential regarding specific companies and boosting attitudes generally. Nearly all companies presenting had appealing stories to present, based on new products or recoveries (from recent years) gaining scale and strength. Four days packed with so many bold stories has the potential to develop its own contagion. The necessity for these companies to provide public releases simultaneously, or just preceding, about anything of material consequences newly revealed at the Conference amplifies this.

The conference coincides with the market’s own buoyant tendency, supported as it is with abundant money, a substantially depreciated dollar, and very favorable business news, recently spreading more broadly to involve more industry sectors and regions. Furthermore, there is an overlap between this technology conference and the worldwide gathering in Las Vegas of providers of consumer electronics products. These annual events always occasion bevies of news as released by product providers, or as perceived as interesting and significant by media reporters — such as the recent high profile announcement by Microsoft and Intel. These, though lacking in product specificity, can be liberally translated as “we fully comprehend this grand unfolding consumer electronics boom, and we intend to have and enjoy our share of it.” This, of course, means lion-sized shares, at the expense of so many wannabes.

The giants were in Las Vegas. In New York at Needham, the companies were largely mid-sized and smaller. Oracle, I believe, was the only giant there. The presentation was made by Mr. Timothy Chou, President, Oracle Outsourcing, a recently composed thrust by Oracle into the broad domain of all-sized users. In briefest terms, this intends to let customers know that they can have a full system service on their own premises, or on Oracle’s premises, or on Oracle’s outsourced premises. Customers can rent, lease or buy. They can pay for only what and when they use the service. This is a commitment on the part of the Company to move computing toward the utility concept. Oracle, of course, has the mass in terms of persons to accomplish this on a world scale basis, and Oracle intends to provide the whole ball for many mid-sized and small users. This includes, of course, applications and database traditional activities. This is consistent with their interest in Peoplesoft, and no doubt in other smaller companies that will add applications to the main line of Oracle’s offerings. We have not purchased Oracle in client accounts, nor do we think we shall, given the more attractive alternatives. However, this would seem to give encouragement to its shareholders. Also, the Company’s intent seems to be clearly a formative force for the industry, and a benefit to society.

This is yet another large step toward increased efficiencies and decreased costs. This is a constant phenomenon of the electronic age that is too grand in its comprehensiveness and in its full effects to ever be comprehended. We only know it’s a mighty driving force. As we have many times pointed out, the drive gained from lower cost communications acts as a mighty subsidy beyond that possible by any tax reduction, or, for that matter, any measures of governmental stimulation.

The presentations attended were quite affirming to our perceptions, strategies, and selections. We did not encounter any significant negatives for companies whose shares our clients own. All were net positive. There were more other attractive opportunities made clear in company presentations than any one investor or we could possibly own. Jim Fitzpatrick, sometimes accompanied by Joe Self or Bill Cox, attended the following company presentations, and Joe and Bill listened to other companies on their own. These were (in no specific arrangement): Skyworks, Cymer, RF Micro Devices, CheckFree, Zoran, MIPS Technologies, Lightbridge, Viisage Technology, MSC Software Corporation, Bookham Technologies, Pixelworks, Kopin, Cadence, Transmeta, Digimarc, AXT, Brocade, First Data, Anadigics, Garmin Ltd., Akamai Technologies, Coherent, SeaChange, Aspect Communications, Triquint, @Road, McData, Agile Software, Oracle, and Intersil Corporation. Attended by Joe Self and Bill Cox: Emulex, Terayon Communications, InFocus, Acxiom Corporation, Ceradyne, Kronos, DoubleClick, Palm Source, Trimble Navigation, Ionics, Palm One, Inc., Analog Devices, Color Kinetics (privately owned), Mentor Graphics, Rambus, Planar Systems, Avid Technology, and PSS World Medical.

One Line Comments On Companies Of Interest Whose Presentations Were Attended

@Road, Inc.– Creativeness and vigor of management is impressive. The shares are too expensive for us, because the entry of competitive products is a distinct possibility, which explains our view of its overvaluation.

Acxiom Corporation– Acxiom is proceeding well with a worthy mix of services. We simply do not know the Company sufficiently well to use the shares.

ANADIGICS, Inc.– Excellent products, excellent orientation, facing a broadening and deepening demand for products. The Company competes against many larger and very able companies, and counts essentially upon the excellence of their chips. The presentation is affirmative to our interest.

Avid Technology– Matters steadily go better for Avid, and we are impressed with their opportunities. Earlier, we sold the stock on a price basis only. Some day, we might purchase it again, or use it more broadly than only in our YES universe that has such a high bogie to meet.

AXT, Inc.– Sources a vital element (gallium) and compounds thereof for high performance wafers. The world has only a few producers of gallium, and the demand for gallium substrates, or high performance chips, is in a bold worldwide up-trend. AXT should win on both volume and price. It is vertical to the mine, and its costs are largely Chinese, preferentially positioning the Company.

CheckFree Corporation– Impressively positioned and likely to be an excellent long-term investment. At current prices, it is moderately attractive.

Coherent, Inc.– The best there is in lasers, broadly oriented so demand phenomena is dispersed. They win by being broad, but also lose thrust by being so diffused in their customer base. Excellent scientifically.

Cymer, Inc.– Best of breed, too highly priced for us at this whip-end of the semiconductor cycle. It, nevertheless, is a best buy in its realm. It is a realm however, that we do not care to be involved in.

Digimarc Corporation– For modest downside risk, for a very strong balance sheet, and for opportunity out of its new digital watermark protective encryptions, this seems to be a compelling purchase. Patience will have a high reward.

Garmin Ltd.– The shares give an expensive way to participate in a company that is on the move. However, the very success of their product lines is likely to attract competition from large companies that could move into Garmin’s territory, we fear.

InFocus Corporation– Clearly the best of breed who has overcome its recent-year difficulties. Their new products addressing the home market give exciting possibilities to the shares. Shares could double from today’s prices and still be cheap.

Intersil Corporation– Mid-sized, and good, we are giving preferences to companies with even narrower focus, and at lower valuations.

Kopin Corporation- CyberDisplay is pulling the Company well at the moment, and their deposition technology on gallium arsenide and other high performance chips is in a re-invigoration mode, so the shares appear attractive.

McDATA Corporation– We were impressed by the CEO’s presentation. McDATA is vigorous and creative. However, it must compete with Brocade, and it addresses markets where giant companies play. At this moment, the shares appear to be a buy, with the caveat that their marketplace could turn even more competitive on short notice.

Mentor Graphics Corporation– Our favorite, and the only stock we use, in computer assist design work. More than the two larger competitors, Mentor Graphics addresses the more rapidly growing aspects of circuitry compression.

Pixelworks, Inc.– The follow-on demand for products was a delight to hear. Fortunes are accelerating. We are pleased to be owners of the shares.

Planar Systems, Inc.– Shares were hit hard by parts bottlenecking deliveries of healthcare products. It is a chance to buy this well run company. For the long haul, we prefer others who will benefit from the rapidly growing use of flat screens.

PSS World Medical, Inc.– Distributing to physicians, PSS seems to have its act together under a new discipline. Shares appear attractive for investors whose expectations are simply to beat the averages, but not matching our objectives for Young Enterprise Shares.

RF Micro Devices, Inc.– A strong contender, facing a recovering demand for its products. The shares could be purchased for most investors. We do not feel the need for it at this time, because we have alternatives in the space they address.

SeaChange International, Inc.– The Company is gaining beautifully well in new customers and in increased volumes with existing customers. It has a clear path of rapid growth just ahead of it.

Silicon Image, Inc.– The Company is unduly cheap in its peer group, having been hurt by the delays in its audit. The settlement with Genesis is moderately important in dollar terms, but much more important in relational terms. This is a good way to play integration of electronic equipment within the boxes, and in porting to communications, and in transferring graphic images to displays.

Skyworks Solutions, Inc.– An impressive company having deep technology roots in two founding companies. We do not own the shares at this time, largely because we have not visited the Company.

Transmeta Corporation– A fascinating story. I would love to be a believer. We haven’t planned at this time to use the shares, but we might look back with regret if we don’t.

Trimble Navigation Limited– The Company has done well for us in times past. It is doing well for us now, and it is gaining respect and fortune as it goes. Shares are not cheap, but there is more for us.

TriQuint Semiconductor, Inc.– This is a lead candidate in mobile handhelds. The Company’s balance sheet is strong. They have acquired intelligently in the last several years when demand phenomena has been so weak. They are guided by sound strategies, and seem to understand their marketplace. We are counting on this one.

Viisage Technology, Inc.– The use of their technology of facial and physiological identification seems certain to grow in usage. The Company is too small to push itself ahead, but the need will probably pull the Company. Keep an eye on this.

Zoran Corporation– The Company is very strong in cameras, DVD’s, photo production from digital cameras, high definition television, and displays. The quality of senior management, a strong balance sheet, and a respected product line evidenced by its customer list are all assuring. The shares are not cheap, but long-term success seems highly probable.

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