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Dear Reader, Since the last issue, we have closed three positions, two for gains, and one for a long-expected mild loss.

TSINGTAO BREWERY (6/3/96). Closed position 1/15/03 at 59ยข for a 55% GAIN.

ARRIS GROUP (12/20/02). Closed position 1/2/03 at $4.00 for a 82% GAIN.

LIONS GATE (12/20/98). Closed position 1/2/03 at $2.06 for a 28% LOSS.

Well, after six and a half years our longest-running position Tsingtao Brewery finally made it over our 50% threshold! We said in the last issue that we would be closing ARRIS and the 82% gain was a nice kick to the new year. For the last several months, we have been anxious to dump Lions Gate Entertainment because the stock has never moved even on good news.

So far, the markets have had a half-decent “January Effect”, but nothing to do handstands about. Iraq, and, to an extent, North Korea are the major overhangs as we enter another earnings season that will probably be a mixed bag. The new tax proposals should have spurred the markets much higher, but, as we said in the last Newsletter, consumers and business are not going hog-wild with spending until George Bush starts changing the national conversation.

There has been some concern if the proposed cut on dividend taxes will hurt small stocks since most rarely pay dividends. The short answer is no. What will be good for the big caps, that do pay them, will eventually be good for the markets as a whole. Actually, small caps have had a nice uptick since 2003 started, with the Russell 2000 trading in the mid-490s. Our current portfolio has been showing some signs of life once again.

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

SONICblue(SBLU) (6/5/99). A slew of releases, most notable is that company introduces world’s first DVD/VCR combo that allows users to control live TV. Even though this is on the “Endangered List”, we can’t help but feel that the stock price should be a little higher.

Draxis Health(DRAX) (3/20/00). Receives approval from Health Canada to start Phase 1 clinical trial for INFECTION, an agent for imaging difficult-to-diagnose infections.

Trimedyne (TMED) (4/20/00). Reports sharply lower loss for FY ending 9/30/02. On “Endangered List”.

DOR BioPharma (DOR) (9/20/00). Stock takes a nice jump on two pieces of very good news. First is that General Alexander Haig is now the board chairman. Next is that DOR and the U.K. Ministry of Defence execute a letter of intent for Intranasal vaccine technology. If this keeps up, we may remove DOR from the “Endangered List”.

Genetronics (GEB) (10/5/00). Dow Jones says bankruptcy likely if BTX sale is not completed. On “Endangered List”.

Electric Fuel (EFCX) (6/5/01). Completes $3.5 million private placement. Wins $2.6 million German police contract. Stock price appears sort of low here.

ViroLogic (VLGC) (7/20/01). Seeks to increase authorized shares to 100 million.

Pharsight (PHST) (8/20/01). Roche joins company’s roster of PKS customers. Stock is now trading at cellar levels and we are tempted to place it on the “Endangered List”, but first want to see the next balance sheet that should be released next week.

OXiGENE (OXGN) (9/20/01). Stock price is up over 100% since last issue on news that OXGN has commenced Phase I/II clinical trial of Combretastatin A4 Prodrug.

Abraxas Petroleum (ABP) (10/5/01). Extends exchange offer.

Access Pharmaceutical (AKC) (11/5/01). Stock is up over a dollar since the last issue on news that AKC signed a licensing pact with Zambon Group for Amlexanox; sees $4 million in revenue over the next 15-18 months.

Orthovita (VITA) (12/20/01). Stock is off over a dollar since last Newsletter, and we don’t really know why. Enrolls first U.S. patient in clinical study to assess use of CORTOSS in vertebral compression fractures. Also, gets European regulatory okay to market CORTOSS for use in vertebral augmentation.

Superconductor Technologies (SCON) (1/5/02). Dow Jones reports that Palo Alto Investors LLC hold a 13.4% stake in SCON.

Aerogen (AEGN) (2/5/02). Announces cost reductions and job cuts. Also, plans to initiate Phase 2 clinical study with Amikacin.

Mechanical Technology (MKTY) Company and Intermec developing fuel cell-powered mobile computing systems. First Albany announces gifting of MTI shares.

Magic Software (MGIC) (3/20/02). Unveils strategic roadmap for affordable iBOLT integration platform.

DigitalThink (DTHK) (4/5/02). Unveils retail-specific online courseware at NRF.

Spectrum Pharmaceuticals(SPPI) (5/5/02). Announces filing of first ANDA with the FDA for approval to market generic drugs in the U.S. On “Endangered List”.

Optibase (OBAS) (5/20/02). Sells digital receiver cards to Nielsen Media Research.

Immersion (IMMR) (6/5/02). Accelerates drive into automotive industry. Brings touch feedback to cell phones and PDAs.

InteliData (INTD) (6/20/02). Secures contract with three banks.

Diomed (DIO) (7/5/02). Elects new senior management.

Hemispherx (HEB) (7/5/02). To register five million shares to support clinical expansion.

Rigel Pharmaceuticals (RIGL) (7/20/02). Receives milestone payment from Daiichi in cancer drug deal. Begins U.S. clinical testing of allergy drug.

Compugen (CGEN) (8/5/02). Here’s another one whose stock is up nearly a dollar since last Newsletter on some good news. Abbott Labs to use CGEN technology to identify drug targets.

Orbital Sciences (ORB) (8/20/02). Receives $50 million in contract additions for ground-based missile defense system.

Speechworks (SPWX) (9/5/02). Raises 4th QT estimates. Some product news.

Harvard Bioscience (HBIO) (10/20/02). Settles name dispute with Harvard Univ.

Viewpoint (VWPT) (11/20/02). Completes $7 million private placement.

Interactive Intelligence (ININ) (12/5/02). Signs OEM pact with Hitachi IT. Inks premier partnership agreement with Philips.

LogicVision (LGVN) (12/20/02). Announces preliminary 4th results.

Looksmart (LOOK) (1/5/03). Upgraded by USB Piper Jaffray from a Market Perform to Outperform (sounds good).

Our picks for this issue are a couple more of those small tech stocks that have been doing well for us lately; both trade on NASDAQ.

KANA SOFTWARE, INC. (NASDAQ: KANA) – $3.55. Twelve-month hi-low has been $29.20 – 59 cents. Based in Menlo Park, CA, with about 410 employees, this software company has 22.9 million shares outstanding, $51.2 million in total current assets, $90.89 in total assets, $1.31 million in debt, and $71.2 million in total liabilities. Institutional ownership is around 48%. One analyst has the stock as a “moderate buy” and five as a “hold”. http://www.kana.com We have been doing pretty well lately with beaten-down tech stocks, so why not push another few envelopes. Even though KANA Software, Inc. is still climbing out of the hole, the stock looks ripe for bottom-fishers.

Founded in 1996, KANA stock once hit over $1700 a share during the slap-happy days of the Net stock craze, and this is one reason it still holds the fascination of some investors. KANA boasts that it provides the industry’s leading external facing eCRM solutions (customer relationship management software) for large corporations. By combining its iCARE Architecture with enterprise applications, KANA believes it has become the fastest-growing provider of next generation eCRM technology, which may be the main reason to buy the stock. The iCARE suite is comprised of applications that manage call centers, automates marketing campaigns, and analyzes customer data. The Web-based software ties together multiple channels of customer interaction, including online contact, email, and phone. The company also provides consulting, technical support, and training, all of which account for over half of sales.

Through its 22 worldwide locations, KANA services more than 1300 leading companies such as 1-800-Flowers, Canon, Datek, Raymond James, Mellon, Staples, British Telecom, Rockwell, Lockheed Martin, Abbott Labs, Cisco, Hewlett-Packard, Yahoo!, eBay, Comcast, and E*TRADE.

Earlier this month, Customer Interaction Solutions Magazine (talk about niche pubs) awarded its 2002 Product of the Year Award to KANA for its Response 7.5 software, which is a modular component of the iCARE suite that provides immediate response to customer inquiries in most languages. It was KANA’s fourth such award for new product development.

For FY2001, ending 12/31/01, revenue was $113.3 million with $113.1 million in losses. During the first nine months of FY2002, ending 9/30/02, revenue was $60.36 million with $96.3 million in losses.

Obviously, KANA needs to shave the bottom line much more, and it also needs a change in the economic environment. When the economy changes, KANA should benefit because of its emphasis on new product development.

Our 20-month target for the stock is $6.00 to $7.00.

For more information, call KANA at 800-737-8738; InvestorRelations@kana.com

ALLSCRIPTS HEALTHCARE SOLUTIONS (NASDAQ: MDRX) – $2.15. Twelve-month hi-low has been $6.67 – $1.60. Located in Libertyville, IL, with about 360 employees, this software company has 38.4 million shares outstanding, $57 million in total current assets, $105.1 million in total assets, little debt, and $17.2 million in total liabilities. Institutional ownership is around 48%. One analyst rates the stock a “moderate buy”, seven as a “hold”, and one as a “moderate sell”. http://www.allscripts.com

And here is even another bruised tech stock that seems poised to see better days. Allscripts Healthcare Solutions has grown through acquisitions and still has a healthy-looking balance sheet.

Founded in 1986, Allscripts took its present form in 1997 and today is one of the leading providers of point-of-care decision support solutions for physicians. In sum, the company computerizes prescriptions and patients’ records, which, of course, can eliminate medication errors, reduce lost charges, and improve workflow. This is done through MDRX’s TouchWorks suite of software solutions that can be used with wireless devices or desktop workstations. TouchWorks automates activities such as prescribing, capturing charges, dictating, ordering labs and viewing results, providing patient education, and taking clinical notes.

During 2000, MDRX had a growth spurt as it completed three acquisitions, the most significant perhaps was the purchase of ChannelHealth from IDX Systems, adding nearly 118,000 physicians to its clientele; IDX owns about 20% of Allscripts. The other purchases were Medifor that provided care planning and clinical reference tools, and MasterChart that brought MDRX a solution for document management and dictation.

The company’s most important new product, launched in November, 2000, was TouchWorks availability on the Tablet PC which offers physicians additional flexibility. Last month, Allscripts announced that Affinity Health Group had selected TouchWorks technology to reduce their dependency on paper-based patient records.

For FY2001, ending 12/31/01, revenue was $70.75 million with $419 million in losses, most of which was due to an “asset impairment change”. During the first nine months of FY2002, ending 9/30/02, revenue was $58.87 million with $13.18 million in losses.

There isn’t anything real glitzy here except that MDRX has carved a broad niche market for itself. It also appears to be getting its financial house in order.

Our 20-month target for the stock is $4.00 to $5.00.

For more information, contact MDRX CFO Bill Davis at 847-680-3515, ext. 282; bill.davis@allscripts.com

Look for the February 5, 2003 issue on 2/3 or 2/4.

Thank you,

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