TEGAL CORORATION & QUIDEL CORPORATION

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Hello Readers,

Just when you think things cannot get any worse, they do. Is this the beginning of “The Kerry Market”? If the price of crude doesn’t drop big time, and soon, it may very well be. Right now, the markets are pricing in what $45 – $50 oil will mean to corporate P&Ls, and the diagnosis isn’t pretty. The Market is also factoring in what impact a Kerry victory will have, and things get downright ugly, particularly among the health care and drug stocks.

However, there are potential silver linings. We must believe that the Bush oil gang will soon figure out how to drive down oil’s price, i.e. tap the Strategic Petroleum Reserve; and that Bush will get a lift from the GOP convention. As for our Current Portfolio, it continues to get hammered along with the rest of the market, which still leads us to think that there should be a lot of good bottom fishing opportunities.

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

DOR BioPharma (DOR) (9/20/00). Even though balance sheet seems okay, we have just about given up hope, and so we add this to the “Endangered List” once again.

Genetronics (GEB) (10/5/00). Presents positive results from study of clinical utility of electroporation-mediated DNA delivery without anesthesia.

Arotech (ARTX) (6/5/01). Second quarter losses widen on charges. ARTX technology allows electric bus to run on commercially available zinc. Completes acquisition of Armour of America, which has a $37 million backlog.

ViroLogic (VLGC) (7/20/01). 2nd QT results not bad; balance sheet still looks relatively good.

Art Technology (ARTG) (8/5/03). Plans to acquire software developer Primus Knowledge Solutions; since this will be an all-stock deal, pressure has been put of ARTG’s stock, needless to say.

Insmed (INSM) (11/5/03). Although 2nd QT balance sheet still shows $15.5 million in total current assets, that number is about half of what is was at the end of 2003. This is making us nervous.

V.I. Technologies (VITX) (11/20/03). Balance sheet still looks good, thanks to funding from several months ago. Proposed merger with Panacos gets green light from Institutional Shareholder Services.

Actuate (ACTU) (1/5/04). Launches D.C. training campus. Pitt Ohio Express implements Actuate. Offers comprehensive support for Linux.

Peerless Systems (PRLS) (1/20/04). Delivers key components for two Konica Minolta controllers aimed at North America and Europe.

Crossroads Systems (CRDS) (2/5/04). Will announce 3rd QT results on 9/2.

Analysts International (ANLY) (2/5/04). Renegotiates and extends credit facility with GE Capital. Upgrades Foote Hospital’s IT infrastructure.

Oplink (OPLK) (2/20/04). Launches “environmentally friendly” GREEN platform to meet the demands of next-generation passive-centric photonic devices.

Transgene (TRGNY) (3/5/04). 2nd QT balance sheet still appears healthy. Manufactures clinical lots of HIV vaccine candidates for the EUROVAC Project.

OpenTV (OPTV) (3/20/04). Posts narrower 2nd QT loss as Sky Italia deal boosts sales.

NexMed (NEXM) (4/5/04). Recent balance sheet still looks to be healthy.

Palatin Technologies (PTN) (4/5/04). Receives $2 million milestone payment related to the FDA approval of NeutroSpec. Forms alliance with King Pharma to jointly develop and commercialize sexual dysfunction drug.

AVI BioPharma (AVII) (4/20/04). Announces NEUGENE Antisense collaboration with USAMRID on biodefense agents. One brokerage upgrades stock while another downgrades. Second quarter balance sheet still looks good.

Management Network (TMNG) (4/20/04). Recent financials not great but balance sheet still looks strong.

Glenayre (GEMS) (5/5/04). 2nd QT revenues increase 20% over 1st QT 2004 and balance sheet still appears to be strong.

GoRemote (GRIC) (5/5/04). Recent quarter shows revenue growth over same time last year but losses need paring; balance sheet still seems good. Names new CEO. Gets new analyst rankings and announces new strategic roadmap.

EMCORE (EMKR) (5/20/04). Recent revenue numbers and balance sheet look pretty good.

Altair Nanotechnologies (ALTI) (6/20/04). Recent quarterly balance sheet still looks good.

Zi Corporation (ZICA) (6/20/04). Dalian Daxian selects eZiText predictive text technology for mobile handsets. Posts pretty good quarterly numbers.

Avanex (AVNX) (7/20/04). Names new CEO. Year-end numbers could have been better, but balance sheet still looks to be very strong.

IONA Technologies (IONA) (8/5/04). Medical Insight selects Artix. IONA earns certified partner status in Microsoft partner program.

Tripath (TRPH) (8/5/04). Recent QT numbers okay and balance sheet still looks okay. Secures $5 million in financing. Brokerage downgrades stock. TRPH chosen by Changhong for LCD and plasma TVs.

Our picks for this Newsletter are another nanotech and a diagnostic tests maker, both on the NASDAQ.

TEGAL CORPORATION (NASDAQ: TGAL) – $.90. Twelve-month hi-low has been $4.05 – 59 cents. Based in Petaluma, CA, with about 90 employees, this nanotech has 44.3 million shares outstanding, $16.4 million in total current assets, $22.65 million in total assets, little debt, and $7.7 million in total liabilities. Institutional ownership is around 10%. http://www.tegal.com

Nanotech, like most market sectors of late, has been fizzling, but this appears to be a short-term aberration and perhaps a great buying opportunity. So, why not pick one like Tegal Corporation that has a nice-looking balance sheet and some nifty technology. And, the stock trades around a buck. NOTE: The above numbers are as of 3/31/04, but we do not expect much of a change with the new balance sheet, which should be released about the time we post this Newsletter.

Founded in 1972 and public for nearly nine years, Tegal designs and makes plasma etch and deposition systems that enable the production of integrated circuits (ICs), memory, and related microelectronics devices used in PCs, wireless telecom, radio frequency transaction devices, smart cards, data storage, and micro-level actuators. The company claims to be the leading supplier of etch solutions to makers of advanced “non-volatile” ferro-electric (FeRAM) and magnetic (MRAM) devices.

Tegal holds 61 patents worldwide and has another 60 applications pending. The company’s products include 6500 Series Critical Etch, configured to address film types and applications desired by customers; 900 Series Non-Critical Etch, which was enhanced as a non-critical etch system capable of performing the etch steps required in the production of silicon-based IC devices; and Endeavor Series Critical Deposition Products, available in several models configured to address film types and applications.

TGAL supports its installed base of more than 3500 platforms from 15 offices in all major semiconductor producing regions of the world. Its customer list includes AT&T, International Rectifier, Matsushita, Motorola, NEC, Nortel, RF Micro Devices, Oki, ST Microelectronics, Sony, and Toshiba.

At the end of July, Tegal was awarded two key patents for nano layer deposition, which the company believes surpasses atomic layer deposition in flexibility and throughput. Also, in July, Tegal announced that a wireless component supplier had placed a multiple system order for Advanced Control System i901 Series etch system; and that a consumer products maker placed an order for an Endeavor AT PVD cluster tool.

For FY2004, ending 3/31/04, revenue was $16.52 million with $12.6 million in net losses versus FY2003 revenue of $14.1 million and $12.65 in net losses.

Nanotech is still in its early teenage years and Tegal appears to have a lot going for it. Trading at around $1, it seems to be a pretty good bet.

Our 20-month target for the stock is $1.70 to $2.00.

For more information, contact TGAL’s Steven Selbrede at 707-763-5600; investor@tegal.com

QUIDEL CORPORATION (NASDAQ: QDEL) – $3.15. Twelve-month hi-low has been $13.98 – $3.11. Located in San Diego, CA, with about 280 employees, this diagnostic tests maker has 31.6 million shares outstanding, $35.26 million in cash/cash equivalents, $114.38 million in total assets, and $21.16 million in total liabilities of which $11.14 million are long-term obligations. Two analysts have the stock as a “hold”. Institutional ownership is around 69%. http://www.quidel.com

Sometimes we see a company with a decent-looking balance sheet that has had a revenue slump, but we suspect this may change over the next six to twelve months due to future legal proceedings that should go in the company’s favor. Such seems to be the case with Quidel Corporation.

Founded in 1979, Quidel bills itself as a worldwide leader in the manufacturing and marketing of point-of-care (POC) rapid diagnostic tests for detecting and managing a variety of medical conditions and illnesses. The company’s product areas include pregnancy, infectious disease, osteoporosis, and urinalysis. Focusing on women’s and family health, Quidel sells its products in the U.S. through a network of distributors for use in doctors’ offices, hospitals, clinical labs, and wellness screening centers. QDEL also sells through distributors in Asia, Europe, the Mideast, Africa, and Latin America.

Quidel’s POC diagnostic tests are sold under the brand names QuickVue, QuickVue+, QuickVue Advance, RapidVue, Blue Test, Metra, QUS-2, UrinQuick, and Semi-Q. In 2002, QDEL introduced what it calls LTF (layered thin film) technology, which is a POC test platform that is extremely precise and is as small and thin as a credit card – the first two available tests are for infectious vaginitis.

One of the major drags on the P&L and, of course, the stock price stems from a patent infringement lawsuit that Quidel filed earlier this year against Inverness Medical Innovations and Applied Biotech. The company believes its sales have been adversely impacted by a drop in orders for its Strep A test products due to distributor confusion over the litigation.

For FY2003, ending 12/31/03, revenue was $95.1 million with $19.65 million in net earnings. During the first six months of FY2004, ending 6/30/04, revenue was $34 million with nearly $2 million in losses, much of which was due to the litigation.

We could get cute and call this a “lawsuit play” because that’s what it is. If the suit goes in Quidel’s favor, then the company once again should see better growth and earnings.

Our 24-month target for the stock is $5.75 to $6.50.

For more information, call QDEL at 858-552-7955; ir@quidel.com

Look for the September 5, 2004 Newsletter to be posted on 9/1 or 9/2.

Thank you,
George