Sincerely,

BlueLake Partners, LLC

The best performing IPO in 2002 was a gold mining company, Randgold Resources, Ltd. (up 125.8% as of 12/31/02, not on list below), followed by Leapfrog Enterprises a children's electronic games company both non technology.

We don't expect Randgold Resources to hold onto its number one spot forever. We are seeing technology companies begin to contemplate going public and commence discussions with and interview potential underwriters. Most companies complete the IPO process in four to six months, though some take one or two years to get to market. When deferred, the reasons are mostly due to spotty quarterly performance combined with economic conditions and poor financial markets. Still, once the IPO process begins, it is usually successfully completed.

Mergers & Acquisitions
In 2002 the value of deals was 35% below 2001, 68% below the 1999 peak. For those bankers compensated on the value of the transaction, it was another sad, sad year. Everyone is crying in their beer these days, investment bankers included. The smaller deal size accounts for the 2002 deal level being only 15% below 2001 and 35% below 2000's peak.

2002 was a quiet year on the technology M&A front. The most notable technology deal was HP's contentious $19 billion ($25 billion at announcement) acquisition of Compaq. Also notable was Microsoft's $1.5 billion acquisition of Navision, eBay's $1.5 billion acquisition of Paypal and IBM's $1.2 billion acquisition of Rational Software. The acquisitions in 2002 were in general much smaller than in prior years. The majority of deals were in the single to double digits with a few leaping into the triple digits.

The triple digit deals include Legato's acquisition of OTG Software for $403 million, Sun Microsystems' acquisition of Pirus Networks for $160 million, SAP's acquisition of Top Tier Software for $400 million, Smartforce's acquisition of Centra for $284 million and Autodesk's acquisition of Revit Technology for $133 million. Paypal was a 'flip,' from a $789 million February IPO into a $1.5 billion acquisition by eBay in July.

Cisco continued its acquisition strategy in 2002, though on a smaller scale, with five acquisitions as compared to the 20 it closed in 2000. The targets were Psionic Software for $12 million, Andiamo Systems for up to $2.5 billion, AYR Networks for $97 million, Navarro Networks for $85 million and Hammerhead Networks for $173 million. As long as Cisco continues to make acquisitions there are indications of life in the technology sector.

In the once red hot optics and photonics industry, Agere sold their optical components division to TriQuint for $40 million and Nortel sold their optical components division to Bookham for a 30% share of the combined business or approximately $55 million. Business combination activity in the optics and photonics sector is focused on staying alive in the rash of industry closures and bankruptcies.

Over the past year we have held conversations with numerous buyers and sellers on a number of assignments. While we have not noticed a pick up in transaction activity, we have felt that the tenor of the conversations has become more serious over the past three months. The key sticking points remain valuation and hesitation to bring on more expenses with an acquisition, particularly in this economic environment. It is very difficult for executive management to defend an acquisition to their employees after multiple rounds of layoffs (we have experienced this phenomenon in our deals firsthand). Those in the most precarious position are the most reluctant to move forward. It is far easier for management to acquire companies when the stock is trading at a P/E of 100x rather than a P/E of 10x (or for that matter with no E). This is still the case, even if the relative value of buyer to seller remains the same.

Retailing
Retailing was one of the high profile growth sectors in the 1990's with the emergence of specialty retailing. These specialty retailers grew by stealing business from old-line department stores and becoming category killers. Examples include Bed Bath & Beyond and Linen's & Things in the home category, Office Depot and Staples in the office category, and Dicks Sporting Goods and The Sports Authority (Garts) in athletic equipment are some of the most obvious examples. Famous, though now bankrupt concepts include Zany Brainy, Garden Botanica, Noah's Bagels, Natural Wonders and Just for Feet. All prove that the categories have been killed and now the competition in specialty retail is brutal. A focus on operations is mandatory- only the strongest will survive. Industry experts have told us that 20 years ago a six, on scale of one to ten, could have made money in retail, now you have to be a nine to survive. The LBO firms saw some of the larger specialty retailers as investment vehicles, only to be disappointed with the likes of Loehmann's, Filene's Basement, Pathmark, Grand Union and FAO Schwartz who have all fled to bankruptcy. The Old Guard, such as Montgomery Ward's, Ames and Bradlee's have disappeared, replaced by discounters like Costco, Sam's Club, BJ's, WalMart and Target.

Sophisticated supply chain management and IT systems, coupled with the increasing speed of communication enabled by the Internet have dramatically increased the rapidity of change and impacted all retailers to varying degrees. Certainly, this phenomenon is partially to blame for the demise of the industry dinosaurs.

In speaking with one sanguine retail industry executive, we were told that retailing is a mature industry and that any growth will likely come from services rather than products. We will continue to look for the catalyst that could cause a new spurt of growth.

2003: The Year Ahead
Looking ahead, we see more of the same in 2003 and 2004. ‘Geopolitical instability' is the term heard time and again; and it definitely has an impact. However, we increasingly see companies and people adapting to the new uncertainty and having the desire and motivation to get on with their lives. Still, the economic environment will continue to dictate a tepid IPO and Secondaries market and an M&A market driven by consolidation and necessity.

Growth in the future will be incremental and frequently niche-oriented. The Consumer and Wireless areas continue to be highlighted. According to the Consumer Electronics Association, the consumer accounts for 19% of electronics consumption, and is forecast to grow to 23% by 2004. DVD's have experienced the highest adoption rate of any new product in consumer electronic history, showing the legs the consumer sector has for growth. Still, no one anticipates any form of hyper growth.

WiFi is increasingly being adopted in the home and to bridge the infamous ‘last mile.' Again, we anticipate incremental growth in that segment. In addition, Asia will continue to be a huge source of growth as well as a potent new source of competitors.

So we end as we began. While we do not expect an exciting economic and industry scenario on any front, we do not expect to be bored. Terrible markets only go on for so long. Companies and management teams are aware if they of the penalty of remaining in the same spot. While sales levels may remain flat, product mix will continue to change. Companies are aware they must add new skills, capabilities and products to remain competitive. Mergers and acquisitions is an important tool for companies in this environment. We expect to see the activity level rise and deal completions increase as management teams get a better handle on this environment and move forward to face the future.

Errata:
In BLP Newsletter #3, Telica was noted as having been sold, which is not the case. We understand that the Company is independent and is thriving.

- Margaret Johns, Ron Rossetti and Michael Dolce

If you have any comments or observations, we are very intereseted in hearing from you at Newsletter@BlueLakePartners.com.