Nothing virtual about this drop: The Investment Column

One of the dilemmas facing investors these days is that companies cashing in on the dramatic technological changes sweeping the world are almost by definition some of the market's riskiest investments. Shareholders in Virtuality, including those who stumped up for a placing at 280p earlier this year, had a harsh awakening to this fact yesterday after the virtual reality specialist's shares collapsed by a third to 140p.

After coming to the market three years ago at 170p, they have enjoyed a rollercoaster ride as early bid speculation was replaced by the far- from-virtual reality of profits warnings, slumping sales and rapidly reined- in brokers' forecasts.

Half-year figures to June revealed a much worse-than-expected loss of pounds 3.78m, compared with last year's interim deficit of pounds 583,000 after sales fell from pounds 6.27m to pounds 3.54m. There was a loss per share of 13.4p (loss of 2.2p).

Virtuality is passing through a difficult transition year as it lessens its dependence on arcade entertainment equipment and moves into lower- ticket home entertainment virtual reality headsets. At the same time it is transforming itself from a designer and manufacturer of equipment to a licenser of intellectual property.

With the technology of graphics moving so quickly and the cost and power of rival products moving against the company, there is an awful lot going on at the same time. Just when Virtuality needed a bit of stability from its core games business to tide it over the transition, the cycle swung sharply against it.

As a result, the handful of analysts who follow the company were busy yesterday with their red pens and expectations of the full-year loss ranged from pounds 3.5m to pounds 6m. If that seems like a big range, it is because no one really has a clue what is in store. Next year, brokers think sales of a new headset product in Japan will result in profits of anywhere between pounds 400,000 and pounds 2m.

As the basis for an investment it is all pretty unsatisfactory and Virtuality shares should remain the preserve of people closer to this fast-changing industry than the average investor or gamblers on one of the business's larger players snapping the company up for its technical know-how. Even after the large fall yesterday great caution is recommended.