Existing revenue stream is a key factor that separates the real players from the hopefuls. It also enables you to evaluate growth, a market niche and future financial condition. In requiring a current revenue stream, are we eliminating research and development companies? Absolutely not. Many of the companies we selected are developing new products and new markets. They have substantial investments in research and development, acquisitions and strategic alliances.

Financial solvency as measured by traditional ratios is important to us—we closely inspect debt/equity, current ratio and working capital. However, some companies struggle financially and yet can attract necessary capital infusions because of other strengths. We don't necessarily dismiss companies whose auditors have issued going-concern qualifications in their opinions. Nor are companies involved in bankruptcy proceedings necessarily out of the running. While the end of the road may be near for some these companies, others may go on to recover beautifully. We simply try to balance all pertinent factors, and we always inform our readers of the same.

Longevity and history weigh a great deal in separating substantial companies from those that might not be for real. Often the smaller but older, more established companies are good value investments. The companies we chose this year average more than twenty years of age.

Profitability or trending towards profitability speaks to the viability of any concern. Huge losses are difficult for any company to sustain over prolonged periods of time.

The number of employees an organization has is another example of a flag. A company with just a handful of employees should be evaluated with caution, not rejected outright. On the other hand, one with the infrastructure required to handle hundreds of employees would appear to have greater stability, but this should not be assumed without other supporting evidence.

Factors we did not consider include:

The size of a company varied considerably. We neither favored nor prejudiced small companies, which certainly have their advantages as well as disadvantages. One look at the popularity of the small-cap segment of the marketplace should dispel any doubts about small company stocks. As with every other criteria, individual appetite applies. And, lastly,

Where the stock trades is not inherent to our definition of penny stock. Many over-the-counter penny stocks can no longer seriously be considered as investments, because they are only skeletons of their former entities. Once those are eliminated, we applied no rules of thumb to the remainder under consideration. Each was evaluated on its own merits. We ended up selecting stocks from each of the markets for the final company mix that is in Walker's Manual of Penny Stocks.