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Biotech stocks continue to thrive on the junior market. The only problem is that their fancy valuations are often underpinned, not by earnings, but by investor hopes.

Companies with great promise but no profits are continuing to capture the imagination of AIM investors.

For instance, Zi Medical has increased nearly fourfold to 32p since the beginning of January, giving the medical device developer a rather rosy valuation of roughly £14 million. A fundraising at a discount is imminent.

However, the group, set up by financier Michael Fort and 30-year-old inventor George Gallagher, is only just about to register initial sales for its Red Eye monitor, a device that assists nurses by automatically monitoring medical drips. The hope is that US giant Baxter, which holds the global distribution licence, will start to bring in significant revenues shortly.

Hot on Zi Medical's heels is another tiny device designer with a potentially big deal. Mediwatch, which has developed a bladder scanner to test for prostate diseases, has shot up from 3p to more than 10p this month on the back of gaining marketing approval from US regulator the FDA.

Chief executive Philip Stimpson tantalised investors by saying the company is close to signing a distribution deal with a major international healthcare group. As Mediwatch's major shareholder, owning a 37 per cent stake, he should be rubbing his hands at the recent share price rise.

Last year, shares of a similar nature that streaked ahead included biotech services concern Proteome Sciences and plastics producer 3DM Worldwide. Both notched up gains of over 200 per cent on the promise of similarly lucrative licensing deals.

Market values of £250 million and £100 million respectively are a hefty price to pay for businesses with minimal revenues, despite such alluring announcements.

To make a more than decent return though, investors don't need to take such high risks. Instead there are plenty of companies that have spent a few years building their businesses and are about to break into profit.

Take Bond International Software. This company makes the world's leading software for recruitment companies and human resources departments.

In 2002 sales almost halved to £6.4 million, reflecting the downturn as staff were laid off. Thus the group notched up a £2 million loss and its shares dropped to an 11p low, valuing Bond at just £1.6 million.

Since that nadir, trading has recovered, and after remedial action was taken to its US division, the group returned to profit in the first half of 2003. The shares currently stand at 60p, giving Bond a market cap of £8.8 million.

This still looks cheap considering the group has signed four deals since September's interim statement. The latest is a $1.2 million contract with a US firm, showing things are looking up States-side.

IT services concern InTechnology also looks likely to make a breakthrough this year. Shares in the group have risen over 40 per cent this month to 86.5p after InTech released a positive trading update.

Chairman Peter Wilkinson said the quarter to December was 'particularly strong' in both its storage and managed data divisions. This follows on from a buoyant set of interims released in November and should ensure a profit is made this year. At the current level the company is worth £120 million, or three quarters of last year's total sales.