VIMICRO INTERNATIONAL CORPORATION & GUIDANCE SOFTWARE, INC.

Hello Readers,

Forget about 889-point updays. Those are traps. The carnage is still continuing and will so for a while. When does it end? If we knew that, you would be paying a lot more for this Newsletter. Our Current Portfolio still looks as if it has been nuked, and then some; and we will repeat this, again: most of our picks seem to be GROSSLY OVERSOLD. The main question, for the time being, will they become even more so? And again, we do not have an answer except to say we should be a lot closer to a bottom than we were a month ago. Profound, huh?

Now, for the election and its impact on the markets. A McCain victory may juice the markets short term while an Obama win appears to be already factored in. The main cause for concern is if the Democrats end up with 60 seats in the Senate, making that body filibuster-proof, then the markets will most likely tank, REALLY TANK!

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

Akeena Solar (AKNS) (10/20/08). Sets earnings call for November 6.

Lexicon Pharmaceuticals (LXRX) (9/20/08). Zacks research report targets stock at $3.50. Recent balance sheet still looks pretty good. Stock downgraded by Piper Jaffrey. Presents Phase 1 clinical results for LX2931.

Planar Systems (PLNR) (9/20/08). Sets earnings call for November 19.

Insure.com (NSUR) (9/5/08). Recent numbers aren’t great but not awful; balance sheet still looks good.

Uranium Energy (UEC) (8/20/08). Announces positive results from first-phase drilling at the Nichols Project in South Texas.

Digirad (DRAD) (8/20/08). Recent quarter shows some revenue growth, but losses widen; balance sheet still looks good. Names new CEO.

Icagen (ICGN) (8/5/08). To report quarterly results on November 6.

Hythiam (HYTM) (7/20/08). Earnings news set for November 6.

Energy Focus (EFOI) (6/5/08). Earnings call set for November 6. Finalizes full-service contract with Architectural Floors of Cleveland. Miami Beach’s Fontainebleau glows anew under EFOI’s lighting.

Bridgeline Software (BLSW) (6/5/08). To present at RedChip investment confab on November 5. MITX selects BLSW software as finalist for two interactive technology awards. Global risk and insurance services firm launches new web application powered by iAPPS.

Ziopharm Oncology (ZIOP) (5/5/08). To present at the Oppenheimer healthcare confab on November 3. Presents Darinaparsin molecular mechanism of action and preliminary oral administration Phase 1 clinical data.

Kopin (KOPN) (4/20/08). Recent quarterly numbers look good, as does balance sheet. To present AeA Classical financial conference on November 4.

Replidyne (RDYN) (4/5/08). Argus upgrades the stock to a “buy”.

Biolase (BLTI) (4/5/08). Sets 3rdQT earnings call for November 5.

Rodman & Renshaw (RODM) (3/20/08). Bill Clinton to give keynote address at company’s annual investment confab on November 10. Slates earnings call for November 13. Several other news items on various deals.

ActivIdentity (ACTI) (3/5/08). Realigns to address ID 360 market segments. ACTI and Queensland Transport to deliver first class smartcard drivers license program.

IncrediMail (MAIL) (2/20/08). Sells $5 million of auction rate securities at par value.

Nanophase (NANX) (1/20/08). Sets earnings news for November 6.

Hollywood Media (HOLL) (1/5/08). Schedules 3rdQT earnings for November 5.

Move, Inc (MOVE) (1/5/08). Redesigns web site. Earnings news set for November 5.

Amerityre (AMTY) (12/5/07). Selected by Supergrip to supply long-wearing, flat-proof polyurethane tires.

Santarus (SNTS) (11/20/07). To present at the Rodman & Renshaw annual healthcare conference on November 12. Set to release earnings on November 3, the day we post this Newsletter.

Sunesis Pharmaceuticals (SNSS) (11/5/07). Sets earnings news for November 4. Updates clinical data of Voreloxin in platinum-resistant ovarian cancer. Announces multiple clinical data presentations.

Nucryst Pharmaceuticals (NCST) (10/5/07). To release earnings on November 6. Will present at the Rodman & Renshaw healthcare conference on November 10.

XATA Corp (XATA) (9/20/07). Eby-Brown moves to XATA’s SaaS-based XATANET solution.

SIGA Technologies (SIGA) (8/20/07). Set to announce 3rdQT earnings on November 10.

A.P. Pharma (APPA) (8/5/07). To hold earnings call on November 5.

Radcom (RDCM) (7/20/07). Release some decent quarterly numbers; balance sheet still looks okay.

American Fiber Optic (AFOP) (7/20/07). Latest numbers look pretty good, as does balance sheet.

Heska (HSKA) (7/5/07). Sets earnings call for November 10. Receives NASDAQ minimum bid notice.

Pharmacyclics (PCYC) (6/20/07). Recent balance sheet still okay, but has shown some wear and tear.

Oncolytics Biotech (ONCY) (6/5/07). Announces a slew of presentations. Merriman Curhan Ford gives the stock a “buy” rating.

ECtel (ECTX) (5/5/07). Cellcom Israel reaffirms trust in ECtel’s revenue assurance.

Ore Pharma (ORXE) (4/20/07). Recent balance sheet looks okay, but has weakened since start of the year. This is on the “Endangered List”.

TTI Team Telecom (TTIL) (3/5/07). Pelephone chooses company’s Fault Management Solution for its UMTS Network.

Eon Communications (EONC) (2/5/07). Reports quarterly and end of FY results. This is on the “Endangered List”.

UQM Technologies (UQM) (2/5/07). Recent balance sheet still looks okay. RUF Automobile introduces all-electric sports car powered by UQM propulsion system.

Endologix (ELGX) (1/20/07). Several news items, including earnings, but as reported in the last Newsletter, ELGX has received a buyout offer for $2.25 a share.

Lantronix (LTRX) (12/5/06). Recent quarterly numbers seem okay, balance sheet still looks good.

HealthStream (HSTM) (10/20/06). Recent numbers show year over year revenue growth but earnings weaken; balance sheet seems so-so. Partners with Essential Learning to deliver behavioral health courseware library.

Hydrogenics (HYGS) (9/20/06). To provide fuel cells to CommScope for back-up power in telecom centers.

TVI Corp (TVIN) (9/5/06). Sets earnings call for November 12. This is on the “Endangered List”.

Advanced Life Sciences (ADLS) (7/20/06). Slates earnings call for November 6. Completes debt transaction.

NTN Buzztime (NTN) (7/5/06). Earnings call set for November 6.

TRI-S Security (TRIS) (5/5/06). Earnings call set for November 13.

ThermoGenesis (KOOL) (4/5/06). Sets earnings call for November 6.

TII Network Technologies (TIII) (3/20/06). Earnings news was pretty dismal; balance sheet still looks sort of okay.

The Inventure Group (SNAK) (3/5/06). Recent quarterly numbers seem pretty good; balance sheet still looks fair.

8×8 (EGHT) (1/20/06). Latest quarter swings to a profit; balance sheet still looks good.

Digital Angel (DIGA) (12/20/05). To release earnings on November 6. On the “Endangered List”.

Westell Technologies (WSTL) (10/20/05). Although revenue numbers hold up, losses mount; balance sheet still looks good.

RAE Systems (RAE) (10/5/05). Sets earnings call for November 5.

EntreMed (ENMD) (9/5/05). ENMD-2076 demonstrates tumor regression in human colon cancer model.

Zi Corp (ZICA) (8/5/05). Several news items. On “Endangered List”.

B.O.S (BOSC) (1/5/05). Launches OptimizeIT, a new family of software products.

Nova Measuring (NVMI) (11/5/04). Announces full recovery of its $3 million auction rate securities investments.

Network Engines (NENG) (6/5/04). Slates earnings call for November 6.

TMNG Global (TMNG) (4/20/04). Earnings news set for November 5.

Our picks for this Newsletter are a Chinese semiconductor and a application software developer, both trading on NASDAQ.

VIMICRO INTERNATIONAL CORPORATION (NASDAQ: VIMC) – $1.85. Twelve-month hi-low has been $5.36 – $1.23. Based in Beijing, China, with about 560 employees, this semiconductor has 35.2 million shares outstanding, $140.47 million in total current assets, $157.58 million in total assets, little debt, and $13.72 million in total liabilities. Institutional ownership is around 4%. Three analyst have the stock as a “hold”. www.vimicro.com

The few Chinese stocks we have in the Current Portfolio have been battered to shreds, as have most of our picks during the recent carnage. Vimicro International Corp. appears to be about at its all-time low and has a very strong-looking balance sheet, so, it may be worth another trip to China.

Founded in 1999, and trading on NASDAQ since 2005, Vimicro is the first fabless chip company from China to be listed on NASDAQ. Its develops and markets semiconductor products that enable multimedia capabilities in a variety of products for consumer electronics and communications markets. Vimicro primarily designs, develops, and markets multiprocessors for personal computer and mobile phones. The company provides its customers with system-level solutions that include integrated semiconductors, customizable firmware and software, software development tools, reference designs, and applications support in order to facilitate customers’ designs and their assembly and supply chain processes. Recently, the company developed and started to ship its first home TV camera product.

Vimicro’s chip solutions have been adopted by such companies as Sony, Samsung, HP, Philips, Fujitsu, Logitech, Lenovo, Bird, and ZTE. The company has also established strategic partnerships with China Telecom, China Netcom, China Mobile, China Unicom, and Microsoft and has carried out projects for a number of Chinese government ministries. It is now actively participating in the R&D of the standards for the next generation broadband and mobile multimedia applications in China.

For FY2007, ending 12/31/07, revenue was $92.75 million with over $2 million in losses. During the first six months of the current FY, ending 6/30/08, revenue has been $39.37 million with $4.3 million in losses. Yes, the trend for 2008 is heading south, but this may be temporary.

If you are looking for ‘dead cat bounces’ in this market, Vimicro may be a good candidate. The company’s balance sheet should take it a long way.

Our 24-month target for the stock is $3.25 to $3.50.

For more information, contact VIMC’s Ryan Bright at 972-239-5119.

GUIDANCE SOFTWARE, INC. (NASDAQ: GUID) – $2.80. Twelve-month hi-low has been $14.89 – $2.80. Based in Pasadena, CA, with about 350 employees, this application software developer has 23.2 million shares outstanding, $62.93 million in total current assets, $75.93 million in total assets, little debt, and $42.04 million in total liabilities. Institutional ownership is around 35%. One analyst rates the stock a “strong buy”, one as a “moderate buy”, and one as a “hold”. www.guidancesoftware.com

Here’s another one with a pretty good balance sheet and is trading at its lows. Also, Guidance Software, Inc. appears to have some pretty nifty products focused on an industry that most of us understand, thanks to those TV crime shows.

Founded in 1997, and trading on NASDAQ for about three years, Guidance provides software solutions for digital investigations. EnCase Enterprise, the company’s flagship product, enables corporations and government agencies to search, collect, preserve, and analyze data on the servers, desktops, and laptops on their computer network. It also provides EnCase Forensic software, which is used primarily by law enforcement and government agencies for searching, collecting, preserving, analyzing, and authenticating electronic forensic data for use in criminal and civic court proceedings.

In addition, Guidance Software offers EnCase eDiscovery that automates the search, collection, preservation, and processing of data; EnCase Information Assurance, which enables customers to ensure compliance with information security mandates; EnCase Automated Incident Response Solution, an add-on to the EnCase Enterprise platform that enables reactive and proactive computer-related incident response; FastBloc Write-Blocking hardware and software to connect EnCase Forensic to a hard drive to which investigators have physical access; and Neutrino, a mobile device investigative solution. Further, the company provides consulting services, including eDiscovery request services, network security incident response, civil/criminal digital investigation and implementation services, as well as customer service technical support.

In mid-October, Guidance announced EnCase Legal Hold, a web-based litigation hold and tracking solution. Earlier in the month, the company said that EnCase eDiscovery is on a pay-per-use basis.

For FY2007, ending 12/31/07, revenue was $78.88 million with $2.87 million in losses. During the first six months of the current FY, ending 6/30/08, revenue was $21.57 million with $5.31 million in losses. The company 3rdQT report is due out on November 6.

Yes, the growth is slowing and earnings are not real good, but let’s see how things look mid-2009.

Our 24-month target for the stock is $4.50 to $5.00.

For more information, contact GUID’s Bill Powell at 626-229-9191; investorrelations@guidancesoftware.com

Look for the November 20, 2008 Newsletter to be posted on 11/17 or 11/18.

Thank you,
George