SCM MICROSYSTEMS, INC. & ACHILLION PHARMACEUTICALS, INC.

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Hello Readers,

Since the last Newsletter, we closed one position:

E*TRADE (7/5/08). Closed position 9/19/08 at $3.93 for a 57% GAIN.

It took a Soviet-style takeover of the country’s financial system to give E*TRADE the jolt it needed to reach our 50%-plus gain, but, at this point, who’s splitting hairs over rationale. This was our second journey with E*TRADE, and it may not be our last.

The best quote we have heard about the whole mess is, “The end of the world only comes once and this isn’t it. But it is time to head for the bomb shelters”. The Paulson bailout plan is baloney. We have been saying for months that the more government gets involved, the bigger the problem becomes for the simple reason that the market freezes. It now waits for the Feds to take action and is more reluctant than ever to act on its own, and solve its own crisis. This could be a very long siege, but we could be close to a final bottom fishing stage.

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

Endeavour Silver (EXK) (9/5/08). Additional drilling continues to expand three new silver zones in San Pedro area, Guanacevi, and Durango.

Insure.com (NSUR) (9/5/08). Includes financial strength ratings on all of its insurance company illustrations.

Digirad (DRAD) (8/20/08). Receives FDA 510(k) clearance for nSPEED reconstruction software for improved quality in less time with less radiation.

Neurobiological Technologies (NTII) (7/5/08). Analysis of earlier European stroke trial supports treatment regimen for Viprinex in current international Phase 3 clinical trials. Latest balance sheet still looks good.

Microvision (MVIS) (5/20/08). Demonstrates enhancements to Pico Projector prototype at CEATEC Japan 2008. Commences shipments of accessory Pico Projectors for customer evaluation.

GlobalScape (GSB) (5/20/08). Continues push into international markets. Names new CFO.

Ziopharm Oncology (ZIOP) (5/5/08). To present at annual JMP Securities healthcare conference on October 6 and at the Maxim Group investor confab on October 7.

Biolase Technology (BLTI) (4/5/08). Granted first Japanese patent. Receives two new patents covering consumable laser tips and related technologies. Commences shipments of new Waterlase C100 all-tissue dental laser system. Receives new patent covering Core Laser Plus water technology.

Amicas (AMCS) (1/20/08). Medical Diagnostic Imaging Group chooses Amicas.

Nanophase (NANX) (1/20/08). Continues expanding direct sales effort.

Hollywood Media (HOLL) (1/5/08). Announces sponsorship of “Made In Hollywood”.

Hollis-Eden Pharma (HEPH) (12/20/07). Presents additional ‘positive findings’ for APOPTONE. Also presents positive updated data from Phase I/II clinical trial with TRIOLEX in obese insulin resistant subjects.

Amerityre (AMTY) (12/5/07). To jointly develop composite hoop belt technology for polyurethane tires.

DigitalFX (DXN) (12/5/07). Receives NASDAQ delisting notice. This is on the “Endangered List”.

American Technology (ATCO) (10/5/07). Announces new LRAD order from U.S. Army for overseas force protection.

XATA (XATA) (9/20/07). Adds customer-defined reporting capabilities to XATANET.

Wave Systems (WAVX) (9/5/07). To complete $211,200 Series I convertible preferred stock financing. On “Endangered List”.

SIGA Technologies (SIGA) (8/20/07). To participate in committee meeting for the Institute of Medicine on October 2. Receives additional $20 million from NIH for ST-246 antiviral therapeutic development.

A.P. Pharma (APPA) (8/5/07). Announces positive results on APF530 Phase 3 trial.

Radcom (RDCM) (7/20/07). Major Chinese mobile operator selects Radcom to monitor wireless softswitching. Sells Omni-Q service assurance solution to Tier 1 operator in South America.

Oncolytics Biotech (ONCY) (6/5/07). Company is issued its 28th U.S. patent. ONCY collaborators to present REOLYSIN clinical trial.

Encorium (ENCO) (5/20/07). Puts off merger talks and lays off 13 as it signs $6.2 million of new contracts mainly for vaccines clinical trials.

ECTel (ECTX) (5/5/07). Russia’s largest mobile phone operator successfully implements ECTel’s IRM and FraudView solutions for its Ukraine operations.

TTI Team Telecom (TTIL) (3/5/07). Tele2 upgrades fault management using TTIL’s Netrac FaM 10 Cruiser.

Proxim Wireless (PRXM) (11/5/06). Announces availabililty of gigabit wireless backhaul links for fiber alternative in the Nordic region. This is on the “Endangered List”.

HealthStream (HSTM) (10/20/06). Launches HCAHPS preparation and improvement library.

Hydrogenics (HYGS) (9/20/06). Awarded seven orders valued at $6.8 million for onsite hydrogen generation units. Files universal shelf prospectus.

TVI Corp (TVIN) (9/5/06). Receives $3.5 million order for C2A1 filter canisters. This is on the “Endangered List”.

Advanced Life Sciences (ADLS) (7/20/06). Sets investor update conference call for October 1, the day we post this Newsletter.

TRI-S Security (TRIS) (5/5/06). Extends exchange offer for 10% convertible notes due 2008. Amends credit facility with potential savings of about $975,000.

Pharmos (PARS) (4/20/06). Receives NASDAQ delisting notice. This is on the “Endangered List”.

Inventure Group (SNAK) (3/5/06). Burger King and SNAK add Onion Rings to snack line and debut snacks internationally.

8×8 (EGHT) (1/20/06). Receives “Best of Show” award at ITEXPO West 2008. Partners with Microsoft to offer Packet8 VoIP phone service with response point business phone system.

Westell (WSTL) (10/20/05). Home monitoring application selected for display at The Cable Center. Raises FY second quarter 2009 guidance.

RAE Systems (RAE) (10/5/05). Makes inroads into the Latin American energy market.

Zi Corporation (ZICA) (8/5/05). Announces HTC touch dual featuring Zi’s Qix for Windows Mobile. Provides updates on recent deals. On “Endangered List”.

Network Engines (NENG) (6/5/04). Receives notification from NASDAQ. Revises FY 4thQT estimates.

Our picks for this Newsletter are a maker of computer peripherals and another biotech, both trading on NASDAQ.

SCM MICROSYSTEMS, INC. (NASDAQ: SCMM) – $2.30. Twelve-month hi-low has been $3.89 – $2.08. Based in Fremont, CA, and in Ismaning, Germany, with about 150 employees, this seller of computer peripherals has 15.7 million shares outstanding, $40.8 million in total current assets, $44.12 million in total assets, little debt, and $10.3 million in total liabilities. Institutional ownership is around 20%. www.scmmicro.com

In this sort of market it may be a good idea to fall back on a small tech with a good-looking balance sheet and appears to be holding its own. So, we add SCM Microsystems, Inc. to the Current Portfolio. And yes, the stock has not been a high flier for a number of years, but it is at an eight-year low.

Founded in 1990, and public for over ten years, SCM develops and sells solutions that enable people to securely access digital content and services. It offers various PC security products, such as a range of smart card reader technology solutions, including secure card and secure PINpad readers, contactless and dual interface readers, physical access control terminals, ehealth terminals, epassport readers, and mobile and keyboard readers; application specific integrated circuits chip sets, which provide smart card interface capabilities for embedded platforms, such as desktop computers or keyboards; and various CHIPDRIVE packages consisting of smart cards, readers, and software applications.

SCM offers its PC security products for various applications and environments including PCs, networks, physical facilities, and various authentication programs. It also offers digital media reader products that provide an interface to various formats of digital media cards to download digital images and other content primarily to photo kiosk manufacturers, including preconfigured drives that provide plug-and-play interface for photo kiosks and mini labs; and single board drives, which offers interface solutions for print kiosks, photo labs, and other applications. In addition, the company provides an interface technology that offers interoperability between PCs and smart cards from various smart card manufacturers and with various operating systems for its PC security products; and various hardware solutions for a range of digital access applications. SCM serves government contractors and systems integrators, as well as PC and computer components makers and manufacturers of consumer electronics and photo processing equipment.

For FY2007, ending 12/31/07, revenue was $30.43 million with $1.92 million in losses. During the first six months of this FY, ending 6/30/08, revenue was $12.98 million with $3.2 million in losses.

SCM is not the sexiest of plays, but it could have a nice move back to the upper end of its trading range in the near future.

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

For more information, contact SCMM’s Stephan Rohaly at 510-360-2300; ir@scmmicro.com

ACHILLION PHARMACEUTICALS, INC. (NASDAQ: ACHN) – $1.20. Twelve-month hi-low has been $6.75 – 85 cents. Located in New Haven, CT, with about 60 employees, this biotech has 26.4 million shares outstanding, $22.91 million in total current assets, $25.32 million in total assets, little long-term debt, and $15.32 million in total liabilities. Institutional ownership is around 20%. Two analysts give the stock a “strong buy” and one has it on “hold”. www.achillion.com

Yes, Achillion Pharmaceuticals, Inc. is another small biotech that we have added to the Current Portfolio for the simple reasons that it has a decent balance sheet and some interesting drug candidates in its pipeline.

Founded in 1998, and public for just over two years, Achillion is developing treatments for infectious diseases, namely HCV, resistant bacterial infections, and HIV. The company’s focus is currently on developing two clinical candidates for treating chronic hepatitis C infection. First, in collaboration with Gilead Sciences, Inc., Achillion is developing ACH-1095 (also known as GS-9525) a candidate from a class of compounds called NS4A antagonists which have demonstrated to be synergistic or additive with other inhibitors under development for HCV infection. Second, the company is developing ACH-1625, a proprietary NS3 protease inhibitor. Each compound is expected to enter the clinic in the first half of next year. ACHN is also developing ACH-702, its candidate for treating serious hospital-based bacterial infections.

Achillion is also finalizing its Phase II clinical program for its lead drug candidate, elvucitabine, a novel nucleoside analog currently being evaluated for treating patients with HIV. The company feels that elvucitabine addresses several of the limitations of currently marketed therapies.

Achillion is another one of those small biotechs with scant/or no revenue and mega losses. During the first six months of this FY, ending 6/30/08, net losses totaled $12.8 million.

This is another situation where as the drug candidates progress, so should the stock price.

Our 24-month target for the stock is $1.80 to $2.20.

For more information, contact ACHN at 203-624-7000; info@achillion.com

Look for the October 20, 2008 Newsletter to be posted on 10/16 or 10/17.

Thank you,
George