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					              Performance Report


                                                                            February 16,
                                                                               2006

                                         Analysts:
Bhojani, Carmon, D’Souza, Feeley, Fine, Garvey, Hoz de Vila, Malinov, Mate, McNulty, Remen
                                                                        February 16, 2006




Dear Foundation Members and Investment Advisory Board Members,


The MBA Managers of the Student Managed Fund would like to begin by thanking the
Foundation, the IAB and Dr. Chinmoy Ghosh for their guidance and for giving us this
unique opportunity. As we have entered a new semester, the fund is almost fully invested
and the group is learning new aspects of portfolio management. Having the ability to
invest actual funds and utilize classroom concepts that we have learned over the past year
has been invaluable. The program has not only increased the confidence of our team but
has also assisted the managers as they interview for full-time positions with leading
finance companies. The past year has provided all the managers with a wonderful
experience that we will take forward with us as we start our careers.

This report will recap our investment philosophy and market outlook. Additionally we
will cover attribution and performance analysis for our current holdings. After diligent
research, analysis and consultation with our advisor Dr. Ghosh, we are proud of our
analysis of the portfolio and our current holdings. Overall, the portfolio has generated
positive returns and to date we are still outperforming our benchmark.

Through the following report and our presentation you will be able to see how we have
added value to the Foundation’s overall portfolio. It is our hope that with your continued
support and our disciplined approach to investing we will be able to continue this positive
trend.

Thank you for your support and providing our team with this opportunity,

Sincerely,


The MBA 2005-2006 Managers



“Information is pretty thin stuff unless mixed with experience.”
       - Clarence Day
TABLE OF CONTENTS


 Executive Summary ............................................................................1
 Investment Philosophy........................................................................2
 Investment Strategy / Process.............................................................2
 Portfolio Management ........................................................................3
   Portfolio Performance................................................................................................. 3
   Risk Adjusted Return.................................................................................................. 3
   Risk Management ....................................................................................................... 4
   Sector Allocation ........................................................................................................ 5
   Portfolio Holdings....................................................................................................... 7
   Liquidated Positions.................................................................................................... 8
   Contribution Analysis ................................................................................................. 8
   Attribution Analysis.................................................................................................... 9
   Holdings of Special Interest...................................................................................... 11
 Economic Outlook............................................................................12
 Appendix I: Sector Outlook...............................................................13
   Consumer Discretionary ........................................................................................... 13
   Consumer Staples...................................................................................................... 13
   Energy....................................................................................................................... 14
   Financials .................................................................................................................. 14
   Healthcare ................................................................................................................. 15
   Industrials.................................................................................................................. 15
   Information Technology ........................................................................................... 16
   Materials ................................................................................................................... 16
   Utilities...................................................................................................................... 17
MBA Student Managed Fund Report                                                                    Portfolio Value: $1,002,402.47
                                                                                                                         As of February 17, 2006
Investment Philosophy and Strategy
MBA SMF managers use fundamental analysis, including
both qualitative and quantitative factors, to identify and
invest in undervalued stocks expected to outperform the
S&P 500 on a risk-adjusted basis.

Investment Strategy and Process
�   The process begins with a thorough analysis of a
    company’s business model and strategy to evaluate the
    strength and competitiveness of the company.
�   SMF managers look at the historic performance of
    the business as well as current position and forward
    looking strategy that will justify our assumed valuation
    criteria.                                                                                          48 BPS Over Benchmark
�   SMF managers perform a FCF valuation and ratio
    analysis to evaluate the company’s operational and
    financial stability.
�   Managers create a one page summary and make a
    presentation to the group before voting on a stock

Holding Period                                                    Performance Highlights                           S&P               SMF
�   September 30, 2005 to February 10, 2006                       Portfolio Value (9/30/2005)                      1228.81           $952,806
�   Trading began on October 5, 2005 with a $24,870               Portfolio Value (2/10/2006)                      1266.99           $987,012
    position in Microsoft.                                        Holding Period Return                            3.11%             3.59%
�   On basis of holding period return, the portfolio              Annualized Return                                9.07%             10.52%
    outperformed the S&P 500 by 48 basis points.                  Beta                                             1                 .93
                                                                  Standard Deviation (Holding period)              6.37%             7.95%
Allocation and Management                                         Sharpe Ratio (Holding period)                    .242              .255
                                                                  Treynor Ratio (Holding period)                   .015              .022
Total in Stock                      $807,645
                                                                  M- Squared (Holding period)                                        .08%
Average Market Cap                  $58.8B
Average P/E                         22.98
Dividend Yield                      1.55%
Style                               % of Stock Value           Value Blend Growth                           As of February 17, 2006
Value                               50.28%
                                                                                    Large Mid




Growth                              49.72%                                                           $1,002,402.47: Portfolio Value
Size
Large                               62.71%                                                          5.21%: Holding Period Return
                                                                                    Small




Mid                                 18.72%
Small                               18.57%                                                      4.76%: S&P Holding Period Return
                                                                        Top Ten Holdings Sector                 Total Return    % of Assets
                                                                        XTO                       Energy              -.39%             5.76%
                                                                        XOM                       Energy              5.47%             5.52%
                                                                        UNH                       Healthcare          -.05%             5.08%
                                                                        AET                       Healthcare          5.00%             4.97%
                                                                        JNC                       Financials         -1.40%             4.94%
                                                                        AH                        Industrials         -.63%             4.90%
                                                                        RSAS                      IT                  -.07%             4.87%
                                                                        LCAV                      Healthcare         -2.86%             4.78%
                                                                        EON                       Utilities          25.19%             4.56%
                                                                        CBH                       Financials          -.37%             4.48%
                                                                        Analysts: Bhojani, Carmon, D’Souza, Feeley, Fine, Garvey,
                                                                        Hoz de Vila, Malinov, Mate, McNulty, Remen
                                                                        February, 24, 2006                                        PG.1
                                 Investment Philosophy


The UConn MBA Student Managed Fund (“Fund”) seeks to invest in sound businesses that
are currently trading at least 15% below their intrinsic value. We chose 15% based on our
expected average annualized compound rate of return, which would cause the portfolio to
double in value approximately every 5 years. Despite the efficient market hypothesis, we
believe that in the short-term, markets can sometimes be inefficient in pricing certain
businesses. We attempt to take advantage of this mispricing by investing in companies that
are trading at prices lower than their intrinsic values, but that the market will identify and
price correctly in the long-run.


                           Investment Strategy / Process


The Fund seeks long-term capital growth with the goal of outperforming the S&P 500 on a
risk adjusted basis. The Fund primarily invests in Mid to Large Cap U.S. Equities that are
expected to offer higher returns relative to the broader index, over the five year time horizon.
In assessing the quality of every investment opportunity, the following measures and factors
are given special emphasis:

       •   Superior business model
       •   Historic performance and forward-looking strategy and positioning
       •   High free cash flow potential
       •   Financial strength and “Attractive” valuation

We believe that this blend of qualitative and quantitative analysis allows us to identify
securities whose intrinsic value has not been realized by the market. A special emphasis is
placed on industry leaders, as well as firms positioned to benefit from changes in evolving
macro and microeconomic conditions, and emerging markets and technologies. For a
company to be considered as an investment, we require that the intrinsic value of the
company be 15% more than its current market price. Although the portfolio is managed with
a bottom-up approach, allocation of the portfolio is constantly monitored to ensure proper
diversification and that each new position adds additional value to the overall portfolio.




                                               2
                               Portfolio Management

Portfolio Performance

The initial value of the MBA Student Managed Fund was $952,806 as of September 30,
2005. Our first transaction was a $24,870 investment in Microsoft on October 5, 2005.
Currently we have 25 positions across 9 different sectors with a portfolio value of $987,012
as of February 10, 2006. The holding period return for a trading period of 92 days is 3.59%.
Based on the holding period return, the fund outperformed the S&P by 48 basis points.

Two primary contributors to the portfolio’s return were Eagle Materials (EXP) and E.ON AG
(EON) which appreciated 49.9% and 24.9% respectively since the time of their purchases.
Eagle Materials holding period return translated into $14,027 of capital appreciation and
contributed 1.47% to the overall return of the portfolio. An analysis of the portfolio minus
Eagle Materials shows that without the position the portfolio’s holding period return would
have been 2.3%. This analysis assumes the sum invested in EXP would have otherwise
remained in the Spyder. EON added $7,330 in capital appreciation contributing .77% to
portfolio’s total return. Given the same assumptions applied in the Eagle Material’s analysis,
the portfolio would have produced a holding period return of 2.95% without EON. Finally,
without EXP and EON holding period return would have been 1.67%.

Risk Adjusted Return

In addition to outperforming the benchmark on the basis of holding period return, the MBA
Student Managed Fund outperformed the S&P 500 Index on a risk adjusted basis. Over the
holding period the Fund’s beta was 0.93 which resulted in a Treynor ratio of 0.022
(compared to 0.015 for the S&P). The portfolio exhibited a higher standard deviation than
the S&P over the holding period (SMF: 7.95% S&P: 6.37%). The Fund’s Sharpe ratio over
the period was 0.255 while that of the S&P was 0.242. Similar results were produced by
calculating the M-Squared measurement for the portfolio. The Fund produced an M-Squared
of 0.08%.

Given the contributions of EXP and EON, the question regarding whether their returns were
sufficient to justify the additional risk the positions may have added to the portfolio demands
attention. The analysis used to determine the portfolio’s return minus EXP and EON was
also used to determine the amount of risk each added to the portfolio. Without EXP the
portfolio’s annualized Sharpe ratio drops from .45 to .166 while its annualized Treynor ratio
drops from .065 to .02. Similarly, without EON, the portfolio’s annualized Sharpe ratio
drops to .3 while its annualized Treynor ratio drops to .04. Eliminating both positions
reduces the portfolio’s annualized Sharpe ratio to .023 and it’s annualized Treynor ratio to
zero.




                                               3
Performance Highlights                   S&P 500     MBA Portfolio
Portfolio Value (September 30, 2005)      1,228.81         952,806
Portfolio Value (February 10, 2006)       1,266.99         987,012
Holding Period Return                       3.11%            3.59%
Annualized Return (%)                       9.07%           10.52%
Beta                                             1             0.93
Standard Deviation (Holding period)         6.37%            7.95%
Sharpe Ratio (Holding period)                0.242            0.255
Treynor Index (Holding period)               0.015            0.022
M-squared (Holding period)                                   0.08%


Risk Management

There are several risk management techniques that we incorporate while managing our
portfolio. Stop-loss orders are implemented to limit the losses on individual stock positions.
These are activated when a stock depreciates 15% in value. Similarly, whenever a stock
appreciates 20% in value, a review of the company’s fundamentals is done to decide whether
or not we should continue holding the security. In addition to this, constant monitoring of our
positions and the portfolio’s allocation is done in an effort to dynamically respond to
company events and changing economic conditions.




                                               4
Sector Allocation

Currently we have twenty-five positions across 9 sectors. Although we are not attempting to
replicate the S&P 500 Index, the chart below displays sector allocation of the Fund, as
compared to the S&P 500 Index.

 25%
                                                                                                                                                                                                                     SMF




                                                                                                  21.0%
                                                                                                                                                                                                                     S&P 500




                                                                                                           18.7%
 20%




                                                                                                                                                                                15.6%
                                                                                                                                              14.8%
                                           13.8%




                                                                                    13.8%




                                                                                                                        13.2%
 15%
                                                                    11.5%




                                                                                                                                    11.2%
                                  10.4%




                                                                                                                                10.1%
                                                                             9.6%
                                                             9.4%




                                                                                                                                                                 8.3%
 10%




                                                                                                                                                                                                                     4.7%
         4.3%




                                                                                                                                                                                                                                 3.3%
                                                                                                                                                                                                              3.2%
  5%




                                                                                                                                                          3.0%




                                                                                                                                                                                        0.0%
  0%
                                                                                                                                Industrials




                                                                                                                                                                                                                     Utilities
                                                                                     Financials




                                                                                                                                              Materials



                                                                                                                                                                   Technology
                                                                    Energy




                                                                                                          Health Care
         Consumer Discretionary



                                          Consumer Staples




                                                                                                                                                                                         Telecommunications




                                                                                                                        5
        Size and Style of Holdings

        Thus far, we have primarily invested in large-cap stocks. Approximately 64% of our stock
        selections are large-cap, 18% are mid-cap, and 18% are small-cap. We have also adopted a
        blended style strategy. Approximately 50.28% of our holdings are value-focused and
        49.72% are growth-focused. The criteria we used to classify value and growth stocks
        include, but are not limited to, P/E multiples, projected growth rates, dividend yields, and
        current book values. The diversification of the portfolio, with respect to size and style, fits
        well with our bottom-up approach of identifying and investing in the best opportunities that
        will yield high risk-adjusted return in addition to further diversifying the portfolio.



  As of Feb 10th 2006
                                               % of                                                   % of
                                  Total       Total                                      Total       Total
                        Ticker                              Value Stocks     Ticker
  Growth Stocks                  Return       Stock                                     Return       Stock
                                              Value                                                  Value
     Aetna Inc          AET      0.21%        4.28%        Arch Chemicals     ARJ       -0.24%       4.17%
 Franklin resources
                        BEN      -0.04%       4.70%        Black & Decker     BDK       -0.07%       3.60%
         Inc
Commerce Bancorp
                        CBH      -0.02%       5.14%        Dow Chemicals      DOW       0.09%        3.58%
         Inc
  Eagle Materials       EXP      2.19%        4.46%           E.ON AG         EON       1.32%        5.23%
    Florida Rock
                        FRK      0.10%        4.39%             Coke          KO        -0.11%       3.51%
     Industries
Nuveen Investments
                        JNC      -0.08%       5.67%          Microsoft Inc   MSFT       0.28%        3.79%
         Inc
   LCA Vision Inc       LCAV     -0.16%       5.49%             Nike Inc      NKE       -0.14%       3.60%
  Medtronics Corp       MDT      -0.08%       3.96%              Pepsi        PEP       -0.08%       4.11%
                                                               Procter &
   Strericycle Inc      SRCL     -0.04%       2.12%                            PG       0.27%        4.24%
                                                                Gamble
                                                                 Tyco
 United Healthcare      UNH      0.00%        5.83%                           TYC       -0.12%       3.62%
                                                             international
   Whole Foods
                        WFMI     -0.40%       3.68%          Exxon Mobil      XOM       0.23%        4.22%
     Market
                                                             XTO Energy       XTO       -0.03%        6.61%
       Total *                   1.68%       49.72%                                      1.40%       50.28%




                                                      6
         Portfolio Holdings

         The graduate SMF team started trading on October 05, 2005 with a $24,870 position in
         Microsoft. As of February 10, 2006, we have 25 positions with an investment of $807,865.

                                         Purchase    No of    Cost   Current             Current       Total        % of
Ticker               Name                  Date     shares    Basis   Price               Value       Return     portfolio **
                                              CONSUMER DISCRETIONARY
BDK        Black & Decker               11/28/2005      300    86.16   84.58            25,374.00      -1.83%          2.57%
NKE        Nike Inc                     11/28/2005      300    87.84   84.47            25,341.00      -3.84%          2.57%
                                                 CONSUMER STAPLES
PEP        Pepsi                        11/4/2005       500    59.15   57.93            28,965.00      -2.06%          2.93%
PG         Procter & Gamble             11/4/2005       500    56.14   59.70            29,850.00       6.34%          3.02%
KO         Coke                         11/8/2005       600    42.44   41.16            24,696.00      -3.02%          2.50%
WFMI       Whole Food Market            11/8/2005       400    72.75   64.85            25,940.00     -10.85%          2.63%
                                                       ENERGY
XOM *      Exxon Mobil                  11/4/2005       750    57.26   59.43            44,572.50       3.79%          4.51%
XTO *      XTO Energy                   11/8/2005     1,100    43.21   42.30            46,530.00      -2.11%          4.71%
                                                     FINANCIALS
BEN        Franklin Resources Inc       11/29/2005      350    95.45   94.64            33,124.00      -0.85%          3.36%
CBH *      Commerce Bancorp Inc         1/25/2006     1,100    33.04   32.92            36,212.00      -0.36%          3.67%
JNC        Nuveen Investments Inc       2/6/2006        900    44.97   44.34            39,906.00      -1.40%          4.04%
                                                    HEALTHCARE
AET *      Aetna Inc                    11/28/2005      400    96.54  100.41            40,164.00       4.01%          4.03%
LCAV       LCA Vision Inc               2/6/2006        720    55.25   53.67            38,642.40      -2.86%          3.91%
MDT        Medtronics Corp              11/28/2005      500    56.97   55.79            27,895.00      -2.07%          2.83%
UNH *      United Healthcare            11/4/2005       700    58.63   58.60            41,020.00      -0.05%          4.16%
                                                    INDUSTRIALS
AH         Armor Holding Inc            2/10/2006       800    49.14   49.45            39,560.00       0.63%          4.01%
SRCL       Stericycle Inc               2/6/2006        255    59.65   58.40            14,892.00      -2.10%          1.51%
TYC        Tyco International           11/8/2005     1,000    26.31   25.46            25,460.00      -3.23%          2.58%
                                             INFORMATION TECHNOLOGY
MSFT       Microsoft Corp.              10/5/2005     1,000    24.87   26.69            26,690.00       7.32%          2.70%
RSAS       RSA Security Inc             2/10/2006     2,800    14.06   14.05            39,340.00      -0.07%          3.98%
                                                     MATERIALS
ARJ        Arch Chemicals Inc           2/6/2006      1,000    31.16   29.37            29,370.00      -5.74%          2.97%
DOW        Dow Chemicals Inc            2/6/2006        600    41.02   42.01            25,206.00       2.41%          2.55%
EXP        Eagle Materials              11/4/2005       200 104.88    156.93            31,386.00      49.63%          3.18%
FRK        Florida Rock Industries      2/8/2006        550    54.94   56.18            30,899.00       2.26%          3.13%
                                                      UTILITIES
EON        E.ON AG                      11/8/2005     1,000    29.42   36.83            36,830.00      25.19%          3.73%
                                          CASH and S&P Depository Receipts
Cash       Cash                                                                         98,950.62                     10.02%
SPY        S&P Depository Receipts                         635    126.64     126.64     80,416.40                      8.15%
                                                                                       987,231.92

* Indicates purchases on multiple dates
** % of portfolio is value of the holding with respect to value of the total portfolio including stock positions, cash and the
S&P Depository Receipts


                                                             7
Liquidated Positions

The graduate SMF team liquidated 2 positions. The team liquidated 1/3rd of Eagle Materials
(EXP) in order to lock in part of the gain of 48.07% over the holding period. Intel
Corporation (INTC), with a loss of 15.33%, was liquidated due to the stop-loss trigger.

                                                                                            Period
                                Shares     Price      Value        Gain / Loss    HPR       (days)
            INTC         Intel Corp
Purchased   11/28/2005          1,100.00      27.00    29,700.00
Sold        1/18/2006           1,100.00      22.86    25,146.00    ($4,554.00)   -15.33%            34

            EXP          Eagle Materials
Purchased   11/4/2005               100 104.88         10,488.00
Sold        2/3/2006                100 155.30         15,530.00      $5,042.00    48.07%            62

            Realized gain/losses
                         Cost                          40,188.00
                         Proceeds from sale            40,676.00
Realized Gains                                                         $488.80      1.21%


Contribution Analysis

Contribution analysis shows how individual sector weights and returns contributed to the
overall portfolio holding period return (Sep 30, 2005 – Feb 10, 2006) of 3.59%. The sectors
with the most significant contribution to the portfolio during this period include Materials
(1.35%), Financials (0.88%), and Utilities (0.42%). An analysis of the individual sector
contributions are given in the table below.

          Sector               Weight           Return        Contribution
Consumer Discretionary            9.11%            0.74%               0.07%
Consumer Staples                 13.64%           -1.63%              -0.22%
Energy                           10.21%            0.70%               0.07%
Financials                       13.89%            6.31%               0.88%
Healthcare                       13.05%            1.47%               0.19%
Industrials                       8.30%            3.19%               0.26%
Materials                         4.36%           30.93%               1.35%
Technology                       12.42%            2.47%               0.31%
Telecom                           1.76%            6.07%               0.11%
Utilities                         4.22%           10.05%               0.42%
Money Market                      9.04%            1.46%               0.13%
Transaction Costs                                                     -0.04%
Other                                                                  0.07%
Total Contribution                                                     3.59%




                                                 8
Nine of the ten sectors had positive contributions with Materials and Utilities making the
biggest contribution to the portfolio return. The high contribution from the Materials sector
is attributed to the strong performance of Eagle Materials, which returned 49.9% over its
holding period; likewise, Utilities greatly benefited from EON, which appreciated 24.9%
since the time of its purchase.


Attribution Analysis

Attribution Analysis is another important aspect in portfolio management. It provides further
understanding of the various aspects of contribution that we looked at earlier. By comparing
sector weights and returns of our portfolio to sector weights and returns of the S&P 500
index, we are able to understand how allocation and stock selection in our portfolio directly
impacts performance. We have chosen the Brinson-Fachler model for attribution analysis.

As stated earlier, the MBA SMF portfolio outperformed the S&P by 48 basis points. Sector
allocation accounted for negative 18 basis points, stock selection contributed 103 basis points
and cash accounted for negative 40 basis points

Sector Allocation

Sector allocation attributed negative 18 basis points. A majority of the negative contribution
can be attributed to the Consumer Staples sector, which accounted for negative 25 basis
points. The sector underperformed over the holding period and was over-weighted as a
percentage of the Fund as compared to the benchmark.

Stock Selection

Stock selection contributed 103 basis points. A majority of this contribution can be attributed
to Materials, Utilities and Energy. Within the energy sector, the Fund’s holdings had a
holding period return of 70 basis points whereas the S&P energy sector had a holding period
return of negative 324 basis points. This can be attributed to our superior stock selection
(Exxon Mobil and XTO Energy) within the sector.

Cash Position

The average cash position over the holding period was 9.04% of the portfolio and contributed
negative 40 basis points. This can be attributed to the superior performance of the S&P as
compared to the Money Market Fund.




                                              9
                       Rate of Return               Weight                Market Affect
                                                                       Stock       Sector
                   Portfolio   Benchmark    Portfolio    Benchmark    Selection   Selection
Consumer
Discretionary          0.74%        2.50%        9.11%       10.73%     -0.160%       0.06%
Consumer
Staples               -1.63%       -0.58%     13.64%         9.69%      -0.144%      -0.26%
Energy                 0.70%       -3.24%     10.21%         10.26%     0.402%        0.00%
Financials             6.31%        7.83%     13.89%         20.07%     -0.211%      -0.12%
Healthcare             1.47%        1.83%     13.05%         13.28%     -0.046%       0.01%
Industrials            3.19%        5.20%        8.30%       11.08%     -0.167%       0.02%
Materials            30.93%        12.60%        4.36%       2.88%      0.800%        0.10%
Technology             2.47%        3.29%     12.42%         15.28%     -0.102%       0.07%
Telecom                6.07%        6.07%        1.76%       3.09%      0.000%        0.00%
Utilities            10.05%        -5.62%        4.22%       3.64%      0.661%       -0.07%

Stock Portfolio                                                         1.034%       -0.18%

Money Market           1.46%        3.11%        9.04%          0%      -0.150%      -0.25%

Total Portfolio                                                          0.88%       -0.43%

Benchmark
Return                                                                                3.11%
Excess Return                                                                         0.45%
Transaction
Costs                                                                                -0.04%
Other                                                                                 0.07%
Portfolio Return                                                                      3.59%




                                            10
Holdings of Special Interest

Although the Attribution and Contribution Analysis was completed as of February 10, 2006
and we have reported an updated Fund portfolio value as of February 17, 2006, we feel it is
appropriate to address several developments that have occurred through February 22, 2006.
Specifically, we would like to briefly comment on several individual holdings that may be of
significant interest to the Foundation and IAB.

On February 3, one-third of the Fund’s position in Eagle Materials, Inc. was liquidated to
ensure a “simple” realized gain of approximately 48%. A revised “protective” stop/loss
order was placed to help ensure the remaining shares would be sold for an approximate
minimal 40% gain above our original cost basis. This “strategy” was devised to “cushion”
the overall portfolio against realized losses. Although we remain extremely confident in the
company’s future performance, we felt it only prudent to take advantage of such a dramatic
increase in share price.

On February 22, shares of Whole Foods Market Inc. (WFMI) and LCA Vision Inc. (LCAV)
were liquidated in entirety. When first purchased in early November, Whole Foods Market,
Inc. was believed by all managers to be a strong, long-term, high-growth investment
opportunity. In November, the company reported 4th Quarter fiscal-year 2005 earnings
below analyst consensus estimates, but we believed this disappointment was an isolated
incident that was mostly attributed to lost sales due to Hurricanes Katrina and Rita. In
February 2006, the company reported 1st Quarter fiscal-year 2006 earnings that were again,
slightly disappointing. Management cited stock-based compensation as the primary factor for
the lower than expected earnings results. Since then, the Fund has considered purchasing
additional shares at what may be argued a further discount to the company’s intrinsic value.
However our extensive research over the past week has led us to conclude that we have
insufficient evidence that Whole Foods does in fact trade at a discount to its intrinsic value.
Our Fund’s approach precludes us from therefore assuming this unknown risk. It may in fact
turn out that Whole Foods Market Inc. is trading at a true discount. However, questions
regarding the company’s plans for current and future growth have been a concern of ours, as
well as, investors overall. At approximately the same time we agreed to sell the shares, a
stop/loss was triggered and the position was liquidated.

LCA Vision was also liquidated due to a stop/loss trigger. The company reported 4th Quarter
2005 revenue growth that was in-line with market expectations. However, the company
reported compressed margins due to increased new store start-up costs. Although earnings
on a per-share basis were also in-line with consensus estimates, these results were believed to
have been attributed to “generous” tax treatment during the most recent period. At market
close, these shares were down approximately 16%.




                                              11
                                 Economic Outlook

After a disappointing fourth quarter GDP growth rate of 1.1%, the general view among
economists is that GDP growth will rebound to an estimated 4% in the first quarter of 2006.
For 2006 as a whole, GDP growth is estimated at approximately 3.5%. With concerns over
core inflation being 2.2% for the fourth quarter of 2005, the Federal Reserve is expected to
raise interest rates to 4.75% at its March 28th meeting. Beyond the March 28th meeting, there
is a lot of uncertainty among economists over the continuation of the tightening policy.

Consumer spending rose at a much slower pace during the last months of 2005. The rise in
oil and gas prices will be absorbed by consumers, thus affecting consumer spending,
especially on large-ticket items. The rising energy costs coupled with increasing interest rates
is slowly affecting consumer borrowing and discretionary spending. This has been further
aggravated due to the slow-down in the housing market.
Further, the unemployment rate fell to 4.7% in January and there are signs that the labor
market will continue to strengthen in the first half of 2006. Business spending is expected to
grow at a measured pace, following a 2005 fourth quarter rise of orders of non-defense
capital goods. Overall, the growth of industrial production is expected to be in the range of
3.5% for 2006

Corporate earnings outpaced returns of the S&P 500 in 2005. The average P/E within the
S&P 500 is approximately 15%, which is the historical average. With a strong earnings
outlook for 2006, we see room for significant performance for the S&P during 2006.

The graduate SMF team will use the economic outlook and the detailed sector outlook (see
Appendix) as a guideline to an effective portfolio management strategy. We are making our
stock selections based on our view of the market and the “value added” characteristics of
individual stocks on the entire portfolio.




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                              Appendix I: Sector Outlook


Consumer Discretionary

Over the past few months, the Consumer Discretionary sector has faced challenges that
threaten its growth, both now and in the future. Consumers have been hit with record high
energy prices, leaving less income for discretionary goods. Most hard hit have been stores
that target consumers with low-to-moderate incomes and discount retailers, as sales have
declined due to consumers’ more limited discretionary income. However, demand for
specialized products, clothing that caters to children and teenagers, and high-end, luxury
goods remain strong.

Recent increases in interest rates have also threatened to curb consumer spending. Over the
past few years, due to low-interest rates, consumers increasingly relied upon cheap debt to
finance purchases. Consumers readily refinanced their mortgages, or took out a line of equity
in order to increase disposable income and increase discretionary spending. However, with
the Fed steadily increasing short-term interest rates, consumers may be more unlikely to take
these actions. As a result, spending on larger-scale purchases, which include home
improvement, electronics, furnishings, and appliance specialties, may decrease.

Lastly, although there was record high sales growth in housing, there are signs that this
growth is slowing. Home improvement and appliance retailers have benefited from this
growth, as well as the rebuilding efforts in the South. Going forward, however, these retailers
may be negatively affected by a slowing housing market.

Given these considerations, the outlook for this sector is mixed, as increases in gas prices and
interest rates will continue to tighten discretionary spending. However, it is expected that
firms that have high pricing power and little competition will perform well.


Consumer Staples

The Consumer Staples sector has been facing challenges from a strengthening dollar and
increased raw materials pricing, particularly in the area of energy where increased fuel prices
are expected for the foreseeable future. In the beverages sub-industry, these increased energy
and raw material costs remain a significant concern as bottlers are heavy users of PET resins
in packaging. With improvement in volume trends as companies increase marketing spending
behind core brands, the index is likely to perform in line with the broader market in 2006.
Long-term prospects are good as enhanced productivity and product mix trends contribute to
a stronger bottom line. There remain significant growth opportunities in developing and
emerging markets for beverage producers, particularly as consumers there begin to have
more disposable income.

The Consumer Staples sector is considered by many to be defensive in nature and should


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continue to receive considerable investor attention. This low-beta sector, accounting for
about 10% of the S&P 500 market capitalization, typically underperforms the market as the
economy improves and investors seek fewer defensive positions. The consumer staples
sector is likely to see further consolidation activity, as witnessed by Proctor & Gamble’s
acquisition of Gillette. Mergers & Acquisitions speculation is expected to provide some
support for the sector. The substitution effect of consumers opting for generics over name-
brands does not appear unduly high as the reduction in consumer discretionary income due to
higher energy prices and interest rates would likely have to be much higher as many of these
staples make up a relatively small part of the average consumer’s budget.

Energy

The recent hurricane season, specifically Hurricane Katrina and Hurricane Rita, severely
impacted domestic oil and natural gas production. The industry will continue to see the
effect of the unexpected supply disruption well into 2006. Even before losses in the U.S. Gulf
of Mexico due to Katrina and Rita, industry supply/demand dynamics were characterized by
limited capacity, which explains the rise in hydrocarbon price levels over the past two years.
The West Texas Intermediate price of crude oil per barrel rose dramatically after the
hurricanes and has continued to rise steadily.

Booming economies in the Far East and Asian sub-continent have increased the worldwide
demand for oil to its highest level in seven years (Global Insight estimated that world oil
demand will increase to 1.79 million b/d in 2006). This increase in demand combined with
constrained supplies provides a solid base for strong performance. The Energy sector should
continue to benefit from increased overall demand and rising prices.

Our two positions in the industry, Exxon Mobil and XTO Energy are well positioned in both
oil and natural gas markets given emphasis on production growth and reserve replenishment,
while maintaining low operating costs. High natural gas prices and new exploration and
exploitation technologies are opening up new opportunities to these companies to develop
previously under-explored areas. Natural gas has been trading above $9 per million British
thermal units since late August; more than quadruple its price at the beginning of the decade.
With the demand for fuels rising faster than the domestic additions to supply, oil supplies
should remain tight and exploration and production companies should continue to perform
well.

Financials

The Financial Sector has provided mixed results over the past year. Increased economic
growth, a strong performance in the stock market, and increased M&A activity resulted in
solid gains for the diversified financial services and asset management firms. On the other
hand, the flattening of the yield curve has created a difficult environment for the banking
industry as their profits have been under pressure over the past year due to margin
compression. Overall, the outlook remains positive for the Financial sector. The economy
seems poised for stable growth that should be favorable for further M&A activity and rising
equity prices. When the Fed finishes its tightening policy, which is expected to end
sometime in the first quarter, the yield curve should slowly normalize and result in a recovery

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in the banking sector.

Healthcare

The managed care sub-sector has witnessed tremendous growth in recent years. Focusing on
profitable customers, containing the medical cost ratios, and reigning in SG&A costs has led
to significant stock appreciation in the managed care industry. In addition, legislation and
political vision have helped the industry, as the MMA created growth opportunities for those
companies, such as United Healthcare and Aetna, who were poised to take advantage of it.
In his recent State of the Union Address, President Bush made improving the state of
healthcare in the US one of his goals in 2006 via expansion of private health savings
accounts and increasing the use of electronic medical records. By putting healthcare at the
forefront of political policy, President Bush has signaled that 2006 will be another year of
growth for managed care.

The past couple of years have also witnessed tremendous consolidation in the managed care
industry, as WellPoint merged with Anthem, United with PacifiCare, and all of the major
players engaged in the acquisition process. As such, 2006 will be focused on integration,
leveraging economies of scale, and perhaps continuing the acquisitions process on a small
scale. Finally, new consumer-directed products offer another growth opportunity, as
employers continue seeking new ways to control rising medical costs.

The Medical Products sub-sector has been characterized by expensive new technologies,
such as drug-coated coronary stents, resulting in above-average price inflation. With
continued pressure on containing healthcare costs both in the US and abroad, it is likely that
R&D will be suppressed in the long-term, and providers of these products may face lower
reimbursement rates for their technologies. The national deficit contributes to this outlook,
as Medicare and Medicaid are now the second and third largest federal programs; they will
continuously look for ways to decrease reimbursements and healthcare spending. However,
near-term prospects remain positive, especially for producers of cardiology supplies, such as
Medtronic, Inc., which are forecasted to capture the largest portion of medical device sales.

Industrials

The Industrials sector is greatly affected by the increase in raw materials prices due to the
sharp rise of energy costs. As a result, companies in the sector are feeling pricing pressures.
In an attempt to deal with these conditions, some companies have been cutting costs. Still, in
many cases companies have to transfer the price increase to end products in order to sustain
their margins. As an example, Tyco International is now considering measured price
increases on products across many business lines.

The increase in global commercial construction, the strong U.S. housing sector, the recovery
of global demand for industrial equipment, and the increased global demand for electronics
components are among the trends that had a positive impact and favor a positive outlook on
the sector. At the same time, the industrial conglomerates industry is facing uncertainties
stemming from the U.S. interest rate environment, currency fluctuations, the state of the US
as well as of the global economy. A slowdown in the U.S. or the global economy will be

                                              15
immediately felt by big global conglomerates like Tyco, who will see decreased demand for
some of their products.

Information Technology

The end of 2004 and the beginning of 2005 witnessed significant merger and acquisition
activity, including Oracle’s takeover of PeopleSoft, IBM’s acquisition of Ascential,
Symantec’s merger with Veritas, and Oracle’s second acquisition of Retek and Siebel. The
computer software industry has recovered somewhat from its post-2000-technology-bubble
state, and is growing at low to mid-single digit rates. However, the industry heavily depends
on economic expansion; as the economy recovers, corporate spending on software will also
increase. With its new Vista operating system, Microsoft is poised to take advantage of such
opportunities.

Other trends that affect the Systems Software sub-industry include rapidly expanding internet
users, “the open source movement,” and computer network popularity. As internet users
increase, so does the market for IT protection from internet threats. U.S. online retail
revenues are forecasted to increase by approximately 25% from 2005 to 2006. The rising
trend of online transactions will drive demand for authentication, encryption, and online
security services. Computer network popularity also will expand the need for protection-
based software, as networks become exceedingly more conscious of internet threats. A threat
to the industry is “the open source movement,” as companies face competition that cannot be
matched on price.

Materials

The Materials sector is similar to the Industrials sector in terms of the costs associated with
raw materials used in the production of goods and finished products. Increased energy costs
have negatively impacted many firms within the sector, while other firms have successfully
passed on additional costs to their customers or accurately hedged such increases.

The chemicals industry, specifically, has seen a lot of consolidation and globalization to meet
domestic and overseas demand growth. It has also experienced movement of domestic
customers to regions with lower feedstock costs. This industry presents a sustainable
positive outlook with the passing of U.S. hurricane related disruptions, a recovering
manufacturing sector and an increasing global demand. Limited industry capacity additions
and low inventories also favor the tightening of supply-demand balances.

The portfolio currently consists of four companies classified in the Materials sector. While
the sector as a whole is highly dependent on macro-economic factors, we believe we have
identified several companies that are well positioned to succeed regardless of how the U.S.
and global economies actually perform in the future. Eagle Materials Inc. has performed
well since we purchased company shares and has served as an excellent example of how
smaller-sized, “niche” firms are able to succeed regardless of external pressures.




                                              16
Utilities

The Utilities industry has gone through tremendous changes over the last few years. Even
though the industry is still highly regulated, there is increased competition and the industry is
moving towards a highly consolidated phase. This has mainly been due to changes brought
about by the National Energy Policy Act (NEPA).

The Utilities industry is currently in its mature phase with domestic annual growth estimated
at 1.8% for 2006. Usually sale of electricity moves in tandem with GDP in the U.S. Over
the last few years, companies in the utilities sector have started focusing on becoming
“providers of energy”. Thus it is very common to see utility companies merging with gas
companies since demand for natural gas is on the rise everywhere in the world. In 2004,
natural gas was used to generate 18.1% of electricity and this figure is estimated to increase
to 21% by the year 2010.

Additionally, utility companies have been increasing dividends to shareholders and there is
an expectation that this will continue as companies reduce the amount of debt recorded on
their balance sheets. Demographic trends significantly influence an electric utility’s customer
base. New household formations and the rate of new housing construction are the key
sources of residential customer growth in 2006. Prices of crude oil may also be a major factor
affecting profit margins of utility companies.




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