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Hello Readers,

Since the last Newsletter, we have closed two more positions for some nice gains.

MINDSPEED (2/20/05). Closed position 2/9/06 at $4.06 for a 57% GAIN.

NAPSTER (11/20/05). Closed position 1/31/06 at $4.90 for a 53% GAIN.

In many aspects, Mindspeed is somewhat typical of our average 50%+ gainer in that the stock fell within a few months after we recommended it, but, a major factor in holding it was that MSPD’s balance sheet remained viable; once again underscoring that patience is paramount. What propelled the stock? The stage was probably set at the end of January when the company reported half-decent numbers. The day we posted the last Newsletter, Napster went bonkers on rumors that it was on Goggle’s takeover menu. Google denied the rumors, but not before NAPS went through our 50% threshold and nearly hit $5.00 before dropping to current levels; the fact that NAPS is now takeover fodder could help boost it again, at some point.

By and large, the last few weeks have been choppy for the markets, mainly due to Iran jitters and Google bashing. Also, investors are still trying to figure out the new Fed chairman. We’re not overly worried because we still feel 2006 will be a pretty good year. Don’t forget, think long-term.

Here are the headlines since the last Newsletter about companies in the Current Portfolio. Dates in parentheses are when we first recommended them.

Gateway (GTW) (2/5/06). Company posts weaker-than-expected 4th QT results as sales to corporations tank, but, on a bright note, retail sales jumped 31% year over year. Bear Stearns downgrades the stock. CEO resigns. Lands notebook PC contract with State of Tennessee. Despite the spate of lousy news, the stock didn’t get really hammered.

MIND C.T.I. (MNDO) (2/5/06) To announce 4th QT and year-end results on February 21. Iskon Internet picks company to support multiple broadband services in Croatia. Expands support in Sentori product following new wins in the U.S.

8X8 (EGHT) (1/20/06). Rolls out new features and enhanced phone adapter for Packet8 residential VoIP phone service. Receives magazine award.

Ceragon Networks (CRNT) (1/5/06). Year-end numbers show good revenue growth but also some red ink; balance sheet still looks good. Provides IP backhaul solution for NextWeb’s pre-WiMAX network.

Digital Angel (DOC) (12/20/05). Reports 73% increase in RFID livestock tags sold in 2005, which juices the stock.

Authentidata (ADAT) (12/20/05). Advanced Home Care signs accord to use ADAT’s CareFax in its billing center. Second quarter numbers so-so; balance sheet still appears to be good.

Memory Pharma (MEMY) (11/5/05). Earnings call slated for February 21. Completes dosing of Phase 1 study of MEM3454.

IONA Technologies (IONA) (11/5/04). Evolving Systems, a telecom software provider, selects IONA’s Artix.

RAE Systems (RAE) (10/5/05). Annual revenues grow by 33%; balance sheet still looks very viable. Extends family of radiation detectors for first responders with NeutronRAE II. Selected by City of Detroit for Superbowl toxic hazard monitoring.

Discovery Partners (DPII) (10/5/05). Schedules earnings call for February 21.

Dyadic (DIL) (9/20/05). To present at Roth Capital Investor confab on February 22.

EntreMed (ENMD) (9/5/05). Secures patent for lead drug. Closes $30 million private placement.

Zi Corp (ZICA) (8/5/05). Unveils new predictive test solution for mobile email users. Extends Qix solution across Symbian OS. Says it has world’s first mobile device handwriting recognition solution with Text Prediction. To present a Roth Investor conference on February 21. Continues momentum with LG Electronics.

N.A. Scientific (NASI) (8/5/05). FDA approves kit for prostate treatment.

Electric City (ELC) (7/5/05). ELC subsidiary and Sloan Kettering Cancer Center execute energy management and monitoring pact.

Tele Systems (TSYS) (6/20/05). Awarded technical consulting and services contract by Maryland’s Department of Budget and Management.

Vion Pharma (VION) (5/20/05). Fortis Bank gives the stock a “buy”. Plans to conduct a pivotal Phase 2 trail of its anticancer agent Cloretazine in elderly patients with poor-risk acute myelogenous leukemia (AML).

Verticalnet (VERT) (4/5/05). Slates earnings call for February 16, the day we post this Newsletter. Signs deal with JohnsonDiversey for VERT’s On-Demand solutions.

Loudeye (LOUD) (4/5/05). Raises 4th QT revenue view and says it will streamline by cutting jobs. We had been worried about this one but over the last few weeks, the stock has almost doubled from a 40 cents abyss; one day, over 85 million shares traded.

Advanics Pharma (AVNC) (12/20/04). Year-end balance sheet still seems healthy. Separates chairman and CEO roles; picks an M.D. as chairman.

Applied Micro Circuits (AMCC) (11/20/04). Post a 3rd QT profit; balance sheet still looks unbelievably strong. AMCC’s Network Processor Platform deployed in VoIP networks via Acme Packet’s Net-Net session border control solutions.

Aviza Technology (AVZA) (10/5/04). Quarterly numbers not great; balance sheet still looks good.

Chordiant (CHRD) (9/20/04). To present at Roth Capital confab on February 21. Posts okay quarterly results; balance sheet looks good. Names new CEO.

Network Engines (NENG) (6/5/04). Joins Microsoft’s SecureIT alliance. Chosen by NetworkStreaming to make the only appliance for remote support software.

Management Network (TMNG) (4/20/04). Teams with CFN Services to assist cable operators in integrating mobile and cable networks. Sets earnings news for February 16, the day we post this Newsletter.

Palatin Technologies (PTN) (4/5/04). Quarterly revenue numbers okay but losses widen; balance sheet still appears to be pretty healthy. Teams with King Pharmaceuticals to initiate Phase 2b clinical trial evaluating PT-141 in patients suffering from female sexual arousal disorder.

Socket Communications (SCKT) (3/20/04) Releases somewhat disappointing 4th QT and year-end results; balance sheet still looks okay.

Somera Communications (SMRA) (2/20/04). Sets earnings call for February 16, the day we post this Newsletter. Remember, this one’s on the “Endangered List”.

Actuate (ACTU) (1/5/04). Quixtar uses ACTU to provide 3.1 million web reports. To present at investor confabs on February 18 and 21.

AVANT Immuno (AVAN) (12/5/03). Announces start of Phase I/II clinical trial of its typhoid fever vaccine.

Active Power (ACPW) (11/20/03). Receives orders from Eaton Powerware and a solar energy company. Year-end numbers show good revenue growth though losses widen a little; balance sheet still looks pretty good.

Insmed (INSM) (11/5/03). Files shelf registration for $75 million in stock and warrants sale.

Art Technology (ARTG) (8/5/03). Fourth quarter numbers show a net profit with good revenue growth for the full year; balance sheet still looks good. Wins contract with OfficeMax. Announces three new OnDemand solutions. Slated to present at Roth conference on February 21.

Monogram Biosciences (MGRM) (7/20/01). Enters collaboration agreement with the Dana-Farber Cancer Institute. At some point, soon, we may really close this one. After five years of waiting, it’s become embarrassing.

Our picks for this issue are two biotechs, one is on the NASDAQ and the other on the AMEX. Remember that with biotechs, patience rules; all too often, they need a lot of time to work out.

LIPID SCIENCES, INC. (NASDAQ: LIPD) – $2.54. Twelve-month hi-low has been $5.56 – $2.08. Based in Pleasanton, CA, with about 15 employees, this biotech has 27.4 million shares outstanding, $18.42 million in total current assets, $18.87 million in total assets, little debt, and $2.85 million in total liabilities. Institutional ownership is around 6%.

Heart disease is perhaps the number one killer on the planet, and, obviously, there are many major pharmaceuticals supplying us with numerous drugs to combat the disease. There are also numerous small companies doing the same thing, such as Lipid Sciences, Inc., which has a healthy-looking balance sheet and what may be some unique technology.

Publicly traded for over ten years, Lipid is a development-stage R&D biotech that is developing products and processes to treat cardiovascular disease, HIV, and other viral infections in which lipids, or fat components, play a role. Its technologies are based on a patented process, known as delipidation, that selectively removes lipids, such as cholesterol, from targeted lipoproteins or viruses circulating in blood plasma without disrupting the non-targeted plasma proteins function. So, for instance, in an outpatient procedure, approximately one liter of plasma would be collected from the patient. The plasma is then dilipidated and the cholesterol is extracted from HDL so that the empty molecule can be re-infused into the bloodstream and reused. Current data suggests a treatment cycle of a delipidation and reinfusion once a week for six to eight weeks. The company is also making synthetic apoA-1.

LIPD focuses its lipidation applications in two primary areas, including cardiovascular disease using its high-density lipoproteins (HDL) therapy platform, as well as viral infections using its viral immunotherapy platform. The HDL therapy platform aims at developing treatments for reversing atherosclerosis, which is the main cause of heart attacks, stroke, and peripheral vascular disease; while the viral immunotherapy platform focuses on treatments caused by lipid-enveloped viruses such as HIV, hepatitis B and C, coronavirus, West Nile, and influenza.

Lipid recently received mention in USA Today and its lipidation process was highlighted in Newsweek’s special health issue “Your Health in the 21st Century”. At the end of December, 2005, the company filed a Investigational Device Exemption (IDE) with the FDA to determine if and when LIPD can begin a human clinical trial using the HDL therapy platform. Lipid hopes to begin the trial sometime this quarter.

The company’s P&L is typical of a small R&D biotech in that it reads like death warmed over. For example, for the quarter ending 9/30/05, there was zero revenue and $2.6 million in losses.

We like the idea of the company’s technology, and so probably does brokerage powerhouse A.G. Edwards who, in October 2005, raised for Lipid about $7.2 million in a private placement with the potential to garner another $4.5 million.

Our 24-month target for the stock is $5.00 to $6.00.

For more information, contact LIPD’s Deborah Lorenz at 925-249-4031;

ADHEREX TECHNOLOGIES, INC. (AMEX: ADH) – $1.25. Twelve-month hi-low has been $2.20 – 72 cents. Headquartered in Durham, NC, with about 20 employees, this biotech has 42.6 million shares outstanding, $16.6 million in total current assets, $36.13 million in total assets, little debt, and $9.3 million in total liabilities.

Like Lipid Sciences above, here’s another of those cheap biotechs with a decent balance sheet and what appear to be some nifty products in the pipeline. Also, Adherex Technologies, Inc. has a very interesting licensing pact with GlaxoSmithKline.

Founded in 1996, and recently trading on the AMEX, Adherex is attempting to discover and develop new cancer therapeutics using what is known as as a cadherin-based biotechnology platform and specialty pharmaceuticals. The company has several oncology products in the clinical development stage including ADH-1 (Exherin), currently in Phase 2 trials; Eniluracil, which is expected to be in Phase 3 trials in early 2007; and Sodium Thiosulfate (STS).

ADH-1, the company’s lead biotech compound, selectively targets N-cadherin, a protein present on certain tumor cells and the established blood vessels of solid tumors. Eniluracil, a dihydropyrimidine (DPD) inhibitor, is a chemoenhancer being developed to improve the therapeutic value of effectiveness of 5-fluorouracil (F-5U), one of the most widely-used oncology drugs. STS is a chemoprotectant being developed to reduce hearing loss that often results from treatment with platinum-based chemotherapy drugs.

Adherex also has a preclinical pipeline that includes back-up peptides and small molecule successors to ADH-1; peptides that combine both angiolytic and antiangiogenic properties, which target VE-cadherin; and molecules to inhibit the metastatic spread on some cancers, which target OB-cadherin.

In July 2005, Adherex entered into a licensing agreement with GlaxoSmithKline covering Eniluracil and ADH-1. The deal provides for potential maximum payment to ADH of around $220 million with additional double digit sales royalties. GlaxoSmithKline has already made a $3 million equity investment in Adherex.

In early January, Adherex activated the Phase 1 trial of the combination of eniluracil and 5-FU. At the end of December, 2005, ADH received FDA Orphan Drug designation for Eniluracil in liver cancer, which also provides up to seven years market exclusivity upon regulatory approval. Eniluracil received IND clearances from the FDA in November, 2005.

Once again, this is your typical small R&D biotech in that it makes little money and has a ton of losses. During the first nine months of FY2005, ending 9/30/05, income was negligible while net losses were $12.15 million.

The stock seems cheap at these levels and the company’s products appear to have some potential, or at least GlaxoSmithKline may think so.

Our 24-month target for the stock is $2.00 to $3.00.

For more information, contact ADH’s Melissa Matson at 919-484-8484;

Look for the March 5, 2006 Newsletter to be posted on 3/1 or 3/2.

Thank you,

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