PARTICLE DRILLING TECHNOLOGIES, INC. & A.P. PHARMA, INC.

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Hello Readers,

Since the last Newsletter, we have closed two positions; one for a very nice gain and another for a loss.

DYNACQ HEALTHCARE (1/20/06). Closed position 7/16/07 at $7.15 for a 170% GAIN.

NEPHROS (9/2/05). Closed position 7/16/07 at $1.30 for a 56% LOSS.

Never in our eleven+plus years of publishing this Newsletter had we seen anything quite like it. One day, Dynacq is around $2.50 and the next day it’s up around $5 to between $7 and $8. Sure, the company came out with some great-looking quarterly numbers, but…? Hey it’s been some time since we have had this sort of gain and we don’t care how it happened. Nephros had been on the “Endangered List” and it was time to close it.

Over the last week or so, we saw most of the babies thrown out with the bath water, especially small stocks. Despite the shellacking, the Dow and NASDAQ are still in positive territories for the year, but the Russell 2000 index of small cap companies saw all of its gains erased at one point. And, sadly, our Current Portfolio mirrored the R2K’s performance. Hardest hit have been the small biotechs. We have all heard what caused the sell-off such as sub prime problems and slumping housing prices. We feel there are excesses in certain sectors of the economy and the markets have been looking for reasons to do some profit taking.

At some point, serious buying will start again, and we have to believe that the bargain hunters should target the small stocks.

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

Radcom (RDCM) (7/20/07). Quarterly numbers about what were expected; balance sheet still looks okay. Names new CFO.

Alliance Fiber Optic (AFOP) (7/20/07). Posts good-looking quarterly numbers; balance sheet still seems very healthy.

Scolr Pharma (DDD) (7/5/07). Sets earnings call for August 7.

Heska (HSKA) (7/5/07). Quarterly numbers so-so; balance sheet still looks good.

Alphatec (ATEC) (6/20/07). Slates earnings call for August 6. Appoints new board chairman.

Xenonics (XNN) (6/5/07). Announces agreement with Home Shopping Group for national TV direct marketing campaign for SuperVision.

Oncolytics Biotech (ONCY) (6/5/07). Recent balance sheet still looks very good. Starts patient enrollment in U.K. combination REOLYSIN Docetaxel trial.

Encorium (ENCO) (5/20/07). Sets annual meeting for October 5. Gets $4 million of additional new business contracts.

Hana Biosciences (HNAB) (5/5/07). Sets earnings news for August 6.

Gene Logic (GLGC) (4/20/07). Seeking development partner for drug candidate. Quarterly loss narrows; balance sheet still looks healthy. Says bowel disease drug shows positive results.

Immuicon (IMMC) (3/20/07). Sets earnings call for August 1, the date we post this Newsletter.

Urologix (ULGX) (2/20/07). Feltl & Co. gives the stock a “buy” rating.

UQM Technologies (UQM) (2/5/07). Balance sheet still looks okay.

Endologix (ELGX) (1/20/07). Recent numbers look pretty good; so does balance sheet.

Lantronix (LTRX) (12/5/06). Announces first 32-bit embedded device networking module offering advanced security and web server with wired/wireless pin-capability.

WJ Communications (WJCI) (12/5/06). Slates earnings call for August 2.

Terabeam (TRBM) (11/5/06). Shifts more R&D activities to India. Completes $7.5 million private placement. Subsidiary provides broadband Internet access to Rijeka, Croatia.

HealthStream (HSTM) (10/20/06). Releases some good quarterly numbers; balance sheet could be better. Signs five-year contract with New York medical center.

Hydrogencis (HYGS) (9/20/06). To release 2nd QT results on August 10.

TVI Corp (TVIN) (9/5/06). Earnings call set for August 8. This one is on the “Endangered List”.

NTN Buzztime (NTN) (7/5/06). Earnings news slated for August 8.

02 Diesel (OTD) (5/20/06). French company pioneers use of 02Diesel in France. Closes $2.19 million private placement. We’re still keeping this on the “Endangered List”

ThermoGenenis (KOOL) (4/5/06). Sees 4th QT revenue below analysts view. Names new CEO. Obtains FDA clearance to market CryoSeal Fibrin Sealant in liver resection surgeries.

Cytogen (CYTO) (3/20/06). Earnings call set for August 8.

TII Network (TIII) (3/20/06). Launches new brand identity, moves HQ, and closes its Puerto Rico facility.

Inventure Group (SNAK) (3/5/06). Posts pretty nice-looking quarterly results; balance sheet still looks okay though long-term debt jumps.

Lipid Sciences (LIPD) (2/20/06). FDA okays three additional clinical trial sites.

Gateway (GTW) (2/5/06). To retail in Eastern Europe. Will announce earnings on August 2. Several other news items.

MIND C.T.I. (MNDO) (2/5/06). Sets earnings call for August 8 and shareholders meeting for August 28.

8×8 (EGHT) (1/20/06). Introduces Packet8 virtual office call center solution for SMBs. To host earnings call August 2. Selected as preferred replacement VoIP service by SunRocket – benefits of this remain to be seen.

Digital Angel (DOC) (12/20/05). Awarded $1.5 million contract by U.K. Defense ministry.

Westell Technologies (WSTL) (10/20/05). Quarterly numbers not great; balance sheet still looks very strong.

RAE Systems (RAE) (10/5/05). To release earnings on August 6. Introduces SentryRAE Steel.

EntreMed (ENMD) (9/5/05). Commences leukemia clinical trial for MKC-1 in Canada.

N.A. Scientific (NASI) (8/5/05). Introduces BATCAM multi-probe ultrasound image guided radiation therapy solution. This is on the “Endangered List”.

Innodata (INOD) (7/5/05). To release quarterly results on August 9.

B.O.S (BOSC) (1/5/05). Comes out with pretty good revenue numbers; balance sheet still looks good.

Applied Micro Circuits (AMCC) (11/20/04). Quarterly numbers look bad, but CEO predicts better growth for balance of year; balance sheet still looks very very strong.

Nova Measuring (NVMI) (11/5/04). Sets earnings call for August 1, the day we post this Newsletter. Product wins Editors Choice award.

Aviza Technology (AVZA) (10/5/04). Ships Omega FxP etch system to STMicroelectronics. Receives order for Celsior ALD System from SVTC.

Network Engines (NENG) (6/5/04). Integrates appliance management with appliance-optimized Linux distribution. Slates earnings news for August 2.

TMNG Global (TMNG) (4/20/04). Sets earnings call for August 14.

OpenTV (OPTV) (3/20/04). Slates earnings news for August 2. Expands its solutions offering with Casema.

TRIS-S Security (TRIS) (5/5/06). Earnings slated for August 14.

Our picks for this Newsletter are an oil and gas equipment maker and another biotech, both listed on NASDAQ.

PARTICLE DRILLING TECHNOLOGIES, INC. (NASDAQ: PDRT) – $2.05. Twelve-month hi-low has been $4.50 – $2.07. Located in Houston, TX, with about 15 employees, this oil and gas equipment provider has 30.6 million shares outstanding, $8.19 million in total current assets, $11.68 million in total assets, little debt, and $2 million in total liabilities. Institutional ownership is around 29%. Two analysts rate the stock a “strong buy”. www.particledrilling.com

Admittedly, our luck with energy type stocks has been less than stellar over the years, and that is why you don’t see many in the Current Portfolio. However, Particle Drilling Technologies, Inc. may be worth a flier since its technology could, at some point, help get more oil and gas out of the ground and at less cost.

Founded in 2002, and public for just over two years, Particle Drilling is developing its patented Particle Impact Drilling (PID) system that it claims will provide a radical increase in penetration rates for drilling oil and gas wells, particularly through deep hard and abrasive zones or other difficult-to-drill formations. PID is a mobile system that readily adapts to typical conventional drilling rigs. The system is designed specifically for wells where penetration rates decrease due to extreme compressive strength of the formations being drilled. PDRT says tests have shown that the PID system is capable of drilling through rock formations at rates multiple times faster than current technologies.

Unlike conventional drilling techniques, PID does not rely on weight-on-bit torque to mechanically break the rock. Steel particles are introduced into the drilling fluid and then flow down the drill stem and are accelerated through the nozzles of a specially designed fixed-cutter bit, striking the formation at high velocities. The particles and cuttings are circulated to the surface by the drilling fluid where a shot-extrusion device captures the particles for reinjection. PID is designed to entrain, circulate, and recover the particles in the mud system without allowing the particles to circulate through the rig pumps.

In early June, the company announced that hardware modifications have been slowed due to overextended machine shop capacity in the Houston area. Subsequently, various testing has been delayed. However, PDRT’s two current customers have expressed continued interest and patience as the system continues to evolve.

Keep in mind that this is a development-stage company and that its financials will be dismal for a while. For example, during the quarter ending 3/31/07, revenue was zero and losses were $3.41 million.

We’re betting that the company’s technology is real and advanced, since some people have put up significant sums of money, to date, and that a few companies are willing to wait for the delayed test results.

Our 24-month target for the stock is $3.75 to $4.00

For more information, contact PDRT at 713-223-3031; info@particledrilling.com

A.P. PHARMA, INC. (NASDAQ: APPA). – $2.35. Twelve-month hi-low has been $5.76 – $1.74. Based in Redwood City, CA, with about 40 employees, this biotech has 6.4 million shares outstanding, $10 million in total current assets, $10.96 million in total assets, little debt, and $4.74 million in total liabilities. Institutional ownership is around 34%. One analyst rates the stock a “strong buy”. www.appharma.com

There is one thing to be said about staying power, and that is given enough time, people, and even companies, have the opportunity to re-invent themselves. Such seems to be the case with former high-flyer A.P. Pharma, Inc., which recently raised $40 million that is not factored into the above numbers. The company also did a reverse stock split in May, and regained NASDAQ compliance in June, so, most of the turbulence should be behind it.

Founded in 1983, and public for over 20 years, A.P. Pharma is developing products using its proprietary polymer-based drug delivery systems, or what it calls its Biochronomer technologies. These consist of bioerodible polymers designed to release drugs over a defined period, from days to several months. The company has completed over 100 in vivo and in vitro studies that it claims demonstrates Biochronomer technology is potentially applicable to a range of therapeutic areas, including pain management, prevention of nausea and vomiting, control of inflammation, treatment of ophthalmic diseases, and for use in DNA/RNA applications. APPA says it has completed comprehensive animal and human toxicology studies that has established Biochronomer polymers as safe and well tolerated.

APPA’s principal product, APF530, is in Phase 3 clinical trial for preventing acute and delayed onset chemotherapy-induced nausea and vomiting in patients undergoing emetogenic chemotherapy for cancer; more than 80% of the planned clinical sites for the trial are now active. The company expects to file a New Drug Application (NDA) with the FDA for APF530 in 2008.

APPA also offers APF112, which completed Phase 2a clinical trial for treating post-surgical pain relief; and preclinical stage products comprising APF580 for pain relief, APF328 for local anti-inflammatory, and APF505 for anti-inflammatory treatments.

This is your typical small biotech with scant income and large losses, i.e., for the quarter ending 3/31/07, revenue was nil with losses of $6 million.

APPA seems to have done a lot to clean up its act. Now, it’s up to the products.

Our 24-month target for the stock is $4.00 to $4.50.

For more information, contact APPA’s Michael O’Connell at 650-366-2626.

Look for the August 20, 2007 Newsletter to be posted on 8/16 or 8/17.

Thank you,