2005 Quarter 2 Update

July 15, 2005

Is a strong economy good or bad for equities? Does it bode well for corporate earnings? Sure. Does it increase the likelihood that the Federal Reserve will continue to raise interest rates to prevent inflation, hence slowing the economy down? Sure. So which is it, good or bad? It’s hard to tell and the current market action reflects this reality as nobody can seem to make up their mind.

So based on the market action in the first two quarters of 2005 it would appear to be a fairly disappointing year thus far for investors. The markets have fallen, shot back up and fallen down again, alas finishing the first half of the year lower by anywhere from 1% to 6%, depending on the market average you adhere to. Oil has maintained its upward trajectory, as have short term interest rates controlled by the Federal Reserve. Inflation continues to show up in different economic numbers, however it is far from alarming at this point. And bond market yields continue to indicate a slowing economy in our not too distant future. But underneath the surface there is quite a bit of exciting activity out there if one looks in the right places. In our last few updates we have discussed the promising mergers and acquisitions climate in 2005 as well as the “value” opportunities we continue to find. This focus has helped us to stay ahead of the markets this year and has kept us excited about the second half as well.

As we stated above, we have already reaped the rewards from this M&A investment thesis a number of times in 2005. Ameritrade Holdings (AMTD) is now in the process of acquiring TD Waterhouse in an extremely attractive deal for shareholders. We sold the position for a nice profit shortly after that announcement and the subsequent run-up. Charles Schwab (SCH), another one of our holdings, has been very strong as of late as it may also find itself taking part in this recent consolidation trend. And of course Midway Games (MWY) remains a core holding for our clients as Sumner Redstone continues to add to his over 80% ownership in the company, presumably to affect a buyout or takeover of the company.

Of course the fact that we are so excited about the M&A climate does not mean that we abandon our core investment philosophy: value. We are finding many opportunities to put money to work in companies that we believe to be undervalued and definitely underappreciated. As the market indices have struggled for most of the year we have continued to refine our “shopping list” and have put money to work in companies that show the potential for a great deal of upside and considerably little downside.

Finally, one of the more consistent topics mentioned in the financial press today, and subsequently in our updates to you given the market ramifications, are terror and its effect on both the domestic and global economies. The recent bombings in London have played out in a very interesting manner, and while horrific and unjustifiable, have shown us something very important. It would appear that the world has chosen to live with the reality of terror rather than be controlled by it. While this by no means marginalizes the horrible consequences of these attacks, it does show the perpetrators that global society will not let them win. This seemingly new outlook and attitude was evident in the action of the U.S. equity markets following the attacks. Most believed that we would see a drastic drop off in value following the attacks. Instead what we saw were four consecutive days of very strong equity markets. Again, this action does not indicate a lack of concern but instead would seem to represent a change in sentiment toward terror that could be very important going forward.

In closing, we remain confident and excited about the second half of 2005 and feel very good about the way in which our client portfolios are positioned. We appreciate the confidence and trust you have shown in us by hiring our firm as your investment manager and we look forward to future success.

Cordially,

Paul R. Ray III Brian M. Phillips