opinion/speculation/valuation

Even with current market sentiment generally against mid-cap tech stocks, I value ERG at 40c on the basis of existing contracts/balance sheet, and so rate the stock a strong buy at current prices.

A few points to note:

1) The stock is presently trading at NTA backing.

2) The company posted an operating profit of $1.8mill in the Dec half. (Typically, stocks trade at NTA when they are expected to post massive losses or have serious debt problems).

3) I expect the company to post a $5mill operating profit for the full year (NPAT will be significantly higher than operating profit).

4) I expect the company to post an operating profit in the region of $20mill for FY06 and be strongly cash-flow positive. Again, NPAT will be significantly higher than operating profit.

5) Company has solid cash reserves, so no further dilution.

6) I'm aware of one Tech fund in the UK currently doing due diligence on ERG. In my opinion, ERG is a screeming buy for professional investors, and it is only a matter of time before Australian instos/brokers/analysts revisit this stock.

7) Company is in a stong position to win contracts in Las Vagas ($30mill approx, Northrop Grumman partner), and Toronto ($60mill approx, IBM partner) before the end of CY05.

8) Company is also in strong position to win a number of small contracts over the next 12 months.

9) Cubic (key competitor) in trouble over recent contract cancellations in Huston and San Diego. Washington was originally a Cubic contract, but went to ERG after problems with Cubic, and I think Huston and San Diego also stand a good chance of falling into ERG's lap.

10) I see Melbourne loss as a catalyst for legal action against Thales. (For those out of loop, Thales stole ERG's proprietary software via MRT in Hong Kong and have since been winning numerous contracts on the strength of ERG's technology — I'll post more about this later). Should ERG win a potential court action (and I think it will), ERG will receive a significant payment ($150mill?) from Thales. Also a possibility of Thales settling out of court should ERG initiate action. ERG could well be supported by IBM and perhaps also Northrop Grumman. Because legal costs would likely be minimal from ERG's perspective, and because the financial return could be significant (not to mention the strengthening ERG's IP), action against Thales makes excellent sense in my view.

11) Investors interested in ERG might also want to look at Adacel Technologies (another beaten down stock that will soon return to profitability) and Prana Biotech (presently trading at a 30% discount to its cash assets).