Todd and I are very pleased to report that Richard Dumler, a veteran venture capitalist, has joined Milestone as our third General Partner. He has experience successively at the venture division of Allstate Insurance, Bessemer Securities and Lambda Ventures (the venture arm of Drexel Burnham Lambert). Having known Richard and worked with him intermittently for over twenty years and intensively, albeit informally, for the past few months, I know his addition will greatly strengthen our firm.

We are now all moving beyond the events of September 11th, but the psychological shadow of the fall of the twin towers will be with us for many years in that we must accept that uncertainty and the threat of violence are now factors in American life. I believe that like the "Vietnam Syndrome" which marked American attitudes, public debate and policy-making for decades, the WTC tragedy has marked us as a people and a nation. But like Vietnam, we are already moving past it and learning from it.

The macro-economic picture remains mixed and based on a careful reading of the business press, one can make a robust case for growth or further contraction. The bulls point to housing starts, stronger-than-anticipated year-end retail sales, dynamic growth in the volume and dollar value of Internet-based commercial transactions, and encouraging forecasts from Intel and AMD, among others.

The bears point to the Enron debacle and hint darkly at a more pervasive disease -- "Enronomics" -- which, per se, casts doubt on the integrity of financial disclosure by all public companies which is essential to healthy capital markets. The skeptics also point to suspect corporate earnings in certain sectors, the relatively slow growth of capital inflows to equity-oriented mutual funds and the possible impact of the debacle in Argentina within a highly interdependent global economy.

Although we are not experts with respect to these macro-economic issues, we remain optimistic based on what we see daily within the ambit of our venture capital activities. The performance numbers published for the venture industry over the last year have been atrocious, double-digit negative numbers. We believe these negative reports will continue for at least two more years because these statistics reflect the unsound high entry-level VC investing of the 1998-2000 period which are either generating realized losses or being marked down to reflect values well below initial cost. However, the other side of this venture capital coin is shiny. What we have now in the VC marketplace is terrible performance data co-existing with wonderful opportunities for the liquid venture investor who is initiating an investment cycle as distinct from harvesting troubled portfolios at the end of an investment cycle.

Beginning in early November, we began to see a measurable resumption of entrepreneurial activity. This has manifested itself in quickened deal flow, the issuance of more term sheets, a modest firming up of pricing from historic lows and actual financings closing. The fact is that 2001, although a year of nightmarish recollections for many of us, was a pretty good year in the VC industry. A story headlined in Forbes magazineís December 10, 2001 issue, "Bronze Is Still a Medal," points out that 2001 was the third biggest year in the history of VC financing. Two hundred venture funds raised $55 billion and venture firms, in turn, invested $33 billion in several thousand companies, including 3,130 start-ups.

We think that in the face of the advent of a recession, the terrorist attacks, and the 70% decline of the NASDAQ from the peak to the trough, this is remarkable and reflects the fact that venture capitalists are always seeking out opportunities for explosive growth which are frequently obscured by sluggish global and GDP statistics.

We are encouraged by the number and quality of opportunities in the New York Metro area that fit our investment criteria including: enterprise software solutions, technology-based business services and business information services. We maintain our preference for post-revenue companies with sales momentum, reasonable valuations and small to medium-sized financings ($1 million to $4 million).

In addition to searching for appealing prospective investments, we are continuing our efforts to expand our capital base by attracting additional investors. MVP II can also accept additional commitments from existing investors through June of 2002.

My partners and I thank you for your interest and support and extend our very best wishes for a Happy, Peaceful and Prosperous 2002.

PricewaterhouseCoopers, Venture Economics and the National Venture Capital Association plan to jointly deliver venture capital investments data. For the first time within the venture industry, a standard system of gathering, organizing and publishing reliable performance information is emerging through a combination of the resources of these three leading monitors of data. The first release of combined data, which will feature standardized definitions, uniform reporting and accurate and comprehensive histories, will cover the fourth quarter of 2001 and the year concluding December 31, 2001.

The California Public Employees Retirement System is one of the largest investors in the world and, no doubt, the largest investor in private equity. It tracks its investments assiduously but shocked the private equity community in December, when it posted (without advising investee funds in advance) individual fund performance records on its website including those classified as "not meeting expectations" and/or on its "watch list."

In light of the frothy activity of 1999 followed by the dramatic downdraft of Spring 2000 and beyond, this posting was embarrassing to a number of firms with respect to their recent performance. It is worth noting, however, that CALPERS' performance over the long haul has been satisfactory and is consistent with the record of most large institutional investors in the VC asset class. For the 10 years concluding March 31, 2001, the CALPERS VC portfolio performance posted a return of 17.5% per annum compared to the Wilshire 2500 Index of 13.9 %.