REWARDS NETWORK, INC. & MAKEMUSIC, INC.

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Hello Readers,

Since the last Newsletter, we closed another position, for a nice gain.

ORBCOMM (12/5/08). Closed position 1/9/09 at $2.93 for a 65% GAIN.

Orbcomm’s stock got a nice boost after announcing a distribution agreement with Lloyd’s Register-Fairplay, and the 65% gain is a nice relief in this market.

If you want an indication on how the markets will probably go over the next few months, keep an eye on the weekly and, especially, the monthly jobless numbers, which are suppose to be a lagging indicator. However, when jobless claims are rolling out at over half a million a month and more, this is not a lagging indicator, but a leading indicator. It is highly doubtful that we have seen the market bottoms, despite what you hear from the TV talking heads, but it is looking more likely that we could be there by the end of April. In the meantime, beware of bull head fakes. And yes, once again, our Current Portfolio still looks as if it was shot from a cannon, although a few of our picks are showing signs of life.

Here are the headlines since the last Newsletter about companies in our Current Portfolio. Dates in parentheses are when we first recommended them. We are not giving updates about companies on the “Endangered List” unless we think the news is significant.

Aetrium (ATRM) (1/5/09). Receives NASDAQ notice about lack of independent directors; doesn’t appear to be a big deal, for now.

Endwave (ENWV) (1/5/09). Lowers 4thQT guidance, but the news doesn’t really impact the stock at this point.

AXT (AXTI) (12/20/08). Slates earnings call for February 25. Renews substrate pact with IQE for up to $14.3 million. Gives preliminary results for 4thQT 2008.

Acadia Pharmaceuticals (ACAD) (11/20/08). Gets grant from the Michael J. Fox Foundation for the development of novel ER-beta agonists for treating Parkinson’s Disease.

The Orchard (ORCD) (11/20/08). Vice Music chooses ORCD to provide physical and digital music distribution to their North American artists.

Vimicro (VIMC) (11/5/08). Establishes joint venture with TEDA and expands surveillance business.

Oilsands Quest (BQI) (10/20/08). Provides update on various drilling programs.

Akeena Solar (AKNS) (10/20/08). Completes the largest commercial solar installation in San Francisco.

Lexicon Pharmaceuticals (LXRX) (9/20/08). Initiates Phase 2 clinical trial of LX1031 in patients with irritable bowel syndrome.

Planar Systems (PLNR) (9/20/08). Slates earnings call for February 3.

Endeavour Silver (EXK) (9/5/08). Reports 2008 silver production up 9% year-over-year to 2.34 million ounces silver. Extends high grade silver mineralization in Alex Breccia Zone at Guanacevi Mines project in Durango, Mexico.

Digirad (DRAD) (8/20/08). Says that its 4thQT earnings report will show progress.

US Geothermal (HTM) (8/5/08). Mentioned in a Reuter’s story about Canadian companies that may benefit from stimulus funds.

Neurobiological Technologies (NTII) (7/5/08). Suspends development of Viprinex for treating stroke and plans to cut up to 75% of its staff. Yes, this has us worried.

Bridgeline Software (BLSW) (6/5/08). Company software selected by a leading Midwest utility and an NFL franchise.

Energy Focus (EFOI) (6/5/08). Las Vegas’ New York-New York Hotel and Casino glow anew under EFOI’s LED lighting.

Microvision (MVIS) (5/20/08). Awarded $750,000 contract to develop high-definition prototype display engine for the U.S. Army. Features pre-production handheld accessory Pico Projector and its PicoP Display at the annual CES. Unveils pre-production Pico Projector, SHOW WX, at Macworld.

GlobalSCAPE (GSB) (5/20/08). Partners with Network Automation to offer new Workflow Engine for EFT server.

Rodman & Renshaw (RODM) (3/20/08). Says it is again ranked #1 investment bank in PIPE market by deal volume.

Amicas (AMCS) (1/20/08). Company technology selected by Diversified Radiology of Colorado.

Move, Inc. (MOVE) (1/5/08). Gets an upbeat article at TheStreet.com Real Money.

Catalyst Pharmaceutical (CPRX) (12/20/07). Stock gets a nice bounce from its lows as company announces it reaches enrollment target for it U.S. Phase II cocaine trial.

Santarus (SNTS) (11/20/07). FDA declines to approve company’s OTC drug for heartburn; news did not have an immediate negative impact on stock.

Sunesis Pharmaceuticals (SNSS) (11/5/07). Provides year-end clinical update on Voreloxin.

American Technology (ATCO) (10/5/07). Announces LRAD order for bird and waterfowl control protection. Receives $500,000 in new LRAD orders from U.S. Army and a commercial shipping company. Also gets another $2.7 million in new LRAD orders from U.S. Navy.

XATA Corp. (XATA) (9/20/07). Ships XATANET 4.3.

SIGA Technologies (SIGA) (8/20/07). Clarifies European regulatory path for lead smallpox anti-viral ST-246.

Radcom (RDCM) (7/20/07). To publish earnings results on February 2.

Alliance Fiber Optics (AFOP) (7/20/07). Slates earnings call for January 28.

Heska (HSKA) (7/5/07). Sets earnings call for March 16.

Pharmacyclics (PCYC) (6/20/07). Secures $5 million in debt financing.

Xenonics (XNN) (6/5/07). Launches high definition night vision system with “record capability”. Receives $1.3 million NightHunter order.

Oncolytics Biotech (ONCY) (6/5/07). Issued 31st U.S. patent.

ECtel (ECTX) (5/5/07). ZON Multimedia places first-time order for company’s Fraud Management solution.

Endologix (ELGX) (1/20/07). Sets earnings call for February 19 and expects 2008 revenue growth of 35%.

AdvanSource (ASB) (12/20/06). Antimicrobials patent application published by U.S. Patent Office.

Lantronix (LTRX) (12/5/06). Sets earnings call for February 4. Secures ManageLinx orders from global customers.

TRI-S Security (TRIS) (5/5/06). Stock had hit its lows but bounced up on news that it had received a $42.5 million Federal contract for facilities in Southern Virginia and then was awarded two more contracts valued at $141 million for facilities on Los Angeles and San Diego. In a better market, the stock probably would have soared to nose bleed levels.

MIND C.T.I. (MNDO) (2/5/06). Earnings call set for February 19.

8×8 (EGHT) (1/20/06). Sets earnings news for January 29.

Westell (WSTL) (10/20/05). To host earnings call on January 21.

Network Engines (NENG) (6/5/04). Wins Internet Telephony’s Magazine’s Product of the Year Award.

Our picks for this Newsletter are a restaurant marketer, of sorts, and a multimedia music company, both NASDAQ-listed.

REWARDS NETWORK, INC. (NASDAQ: DINE) – $2.12. Twelve-month hi-low has been $5.52 – $2.00. Based in Chicago, IL, with about 390 employees, this marketing company has 27 million shares outstanding, $118.92 million in total current assets, $139.12 million in total assets, little long-term debt, and $40.32 million in total liabilities. Institutional ownership is around 41%. One analyst has the stock on “hold”.www.rewardsnetwork.com

For the last several years, Rewards Network, Inc. has seen declining revenues, and part of the reason could be that in good times people are less prone to seek discounts, coupons,etc. Now, the tables are turned and this company could see an increase in business, despite slumping restaurant patronage.

Founded in 1963, and public for over 20 years, Rewards Network operates dining programs by marketing its participating restaurants to members in North America. The company offers two programs for its participating restaurants, including the Marketing Services Program and the Marketing Credits Program. The first offers incentives to members to dine at these restaurants and provide the restaurants with business intelligence on member activity and member feedback. The second offers access to capital by purchasing a portion of future member transactions. It also provides incentives to members to dine at participating restaurants, including airline miles, college savings rewards, reward program points, and cashback rewards savings.

Currently, members can earn Rapid Rewards credits when dining at more than 9000 restaurants, bars, and clubs across the U.S. and Canada. The company markets its participating restaurants to members through Web sites and email, as well as printed materials, such as welcome kits and directories.

In mid-November, the company became a preferred partner of Southwest Airlines. Members will have the opportunity to earn travel rewards when dining at any restaurant in the Rewards Network.

For FY2007, revenue was $226.81 million with $6.96 million in net income. During the first nine months of FY2008, ending 9/30/08, revenue was $187.22 million with net income of $4.55 million; this is a 12.2% sales increase over the first nine months of 2007.

This is a pretty easy company to understand and the recession could give it a boost.

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

For more information, contact DINE at 877-491-3463; info@rewardsnetwork.com

MAKEMUSIC, INC. (NASDAQ: MMUS) – $3.80. Twelve-month hi-low has been $10.39 – $2.51. Based in Eden Prairie, MN, with about 70 employees, this multimedia company has 4.6 million shares outstanding, $8.08 million in total current assets, $14.95 million in total assets, little debt, and $4.71 million in total liabilities. Institutional ownership is around 3%. www.makemusic.com

MakeMusic, Inc. is another one of those easy-to-understand companies that has a decent balance sheet and some nice revenue growth. We also like the idea behind the company.

Founded in 1990, and public for over a dozen years, MakeMusic designs and markets application solutions to music teachers, students, music makers and the music publishing industry. It offers SmartMusic software, a music teaching and learning solution for band, orchestra, and choir students for use at home and at school, as well as access to its library of thousands of band and orchestra literature. The company also provides SmartMusic Impact, a Web-based grade book that allows teachers to post assignments to students, receive the completed assignments, assess student achievement, and manage student records. MakeMusic also offers the Finale family of products, including music notation software, which enables a musician to enter musical data into a computer using the computer keyboard, a musical digital interface (MIDI) equipped electronic music keyboard, or other MIDI-equipped instruments, and displays the data on a computer screen as a musical score.

The company’s SmartMusic serves public school music administrators, music educators, and students primarily in the U.S.; while Finale notation products serve composers, arrangers, publishers, and music teachers worldwide. At the end of November, 2008, SmartMusic subscriptions totaled 104,907, a net gain of 2544 from the previous month and a 23% increase over the prior year.

For FY2007, ending 12/31/07, revenue was $14.58 million with $650,000 in net income. During the first nine months of FY2008, ending 9/30/08, revenue was $10.98 million with $11,000 in net income.

We like the concept, the revenue growth, and the earnings, which we hope will get back to previous levels.

Our 24-month target for the stock is $6.50 to $7.00.

For more information, contact MMUS’ Karen VanDerBosch at 952-906-3690; kvanderbosch@makemusic.com

Look for the February 5, 2009 Newsletter to be posted on 2/2 or 2/3. HOWEVER, IF THE EAGLES GO TO THE SUPER BOWL, WE MAY PUBLISH ON 1/29 or 1/30.

GO EAGLES!
George