The bubble has burst, what now? Our current investment strategy is based on the assumption of rapidly expanding worldwide use of the internet during the next three to five years. Based on industry trends of the past several quarters, however, the industry outlook is not entirely positive. Most importantly, only a few internet organizations dealing with the public are successful. The majority will not become profitable businesses. A large number of dot com firms have depleted all or most of their funds in recent months. The collapse of prices for internet and internet related stocks, however, has impacted viable firms as well as failing ones. Many of the firms which deal with individual consumers, by selling goods, providing services or selling advertising on web sites, have been unable to achieve sufficient revenues to approach profitability. On the bright side, a few companies, such as America Online, Amazon.com, eBay and Yahoo! have earned money or seem likely to report more than minimal profits in the next several quarters. In the future, selling merchandise to consumers is likely to be more successfully accomplished by divisions of offline firms such as retail chains or catalog companies. While additional internet-only organizations dealing with the public could become successful, the odds against identifying and successfully investing in such companies seems unfavorable. More positively, firms specializing in business-to-business (b to b) transactions on the internet probably will be able to achieve particularly high profit margins and cash flow in coming years. At the same time, operating costs for traditional companies could be significantly reduced by greater use of the internet. Moreover, lower costs will be accompanied by other efficiencies, which will reduce time lags in many processes, particularly for such large industries as automobiles, chemicals and petroleum. Since the greater likelihood of success for b to b specialists is clear to most observers, the stocks have performed significantly better than other internet issues. At current price levels, therefore, the risks of such companies not meeting optimistic expectations are high. Consequently, we consider current prices for most participants (including firms providing structural elements for the internet) particularly vulnerable. As a result of this combination of factors, the uncertainties of attempting a successful investment approach in this sector of the economy become apparent. Although difficult, a logical investment approach does seem possible - in part reflecting the almost total aspect of the declines in stock prices. Purchase of viable companies, either online or related firms, at prices below book value and in certain cases at less than cash per share, seems likely to produce well-above-average investment returns. An extremely selective approach is needed. At this point, we recommend Commerce One in the business-to-business segment. The volatility of the price, however, makes the stock suitable only for risk-oriented portfolios. The unusual controversy regarding Amazon's business strategy and financial prospects could present a good buying opportunity for accounts able to assume the associated high risk. Close examination of other stocks seems warranted, even among consumer-oriented companies. We stress, however, that strong balance sheets and cash flow are the critical keys to determining which stocks have the best chances of rebounding from current price levels. 

Stock symbols and prices for the publicly traded issues mentioned in this report follow.

Amazon.com (AMZN - OTC - $37 3/8) 
America Online (AOL - NYSE - $51.90)
Commerce One (CMRC - OTC - $63 35/64)
EBay (EBAY - OTC - $54 1/64) 
Yahoo! (YHOO - OTC - $64 23/64)