So how did we finish 2004?

The bulk of our equity investments have been in mutual funds that have demonstrated remarkable resilience and positive investment results through the past 7 years. The following table ranks them by the size position they represent in the various K&A managed accounts.

Footnotes to Table: (1) Matthews China Fund was first added to portfolios managed by K&A on October 5, 2004. (2) Tweedy Browne Global Value Fund was first added to portfolios managed by K&A on March 1, 2002. (3) Fidelity Select Medical Equipment Fund was first added to portfolios managed by K&A on February 11, 2004. (4) Vanguard S&P 500 Fund was not selected by K&A. It was an existing position in various accounts when we took over management. Cost basis is unknown.

The funds we have selected have provided extremely competitive performance. They cushioned the blow of the bear market. Most of them made it through 2000 and 2001 with positive rates of return. While most struggled during 2002, with the exception of Excelsior Value & Restructuring, they all did better than the S&P 500 Index Trust during that terrible year.

The results posted in the table above are the actual performance figures reported by the fund or fund family itself. Our source was Yahoo.finance.com/ It is important for readers of this report to understand that no one portfolio managed by has owned all of the funds for the entire periods shown. The use of this table is not meant to imply that the numbers illustrated represent actual performance numbers for individual portfolios managed by K&A. The funds listed do represent the largest mutual fund positions in K&A portfolios. This table is included in this report to provide readers with an illustration of the type of assets that K&A uses to create core positions in various portfolios.

The funds act as core holdings for us in the area of equities. Most of our allocation to equities will be through the use of these reliable funds.

We use individual stocks to supplement these holdings. Our top holdings at the end of 2003 were as follows.

We have since profitably sold all shares of Altria due to our perception of increasing and ongoing litigation risk. We sold all shares of Senetek. Both buying and selling Senetek involved multiple trades. FleetBoston Financial was merged into Bank of America. Many of our shareholders came close to doubling their money on the transactions related to FleetBoston Financial. We still hold Intel and Time Warner in some managed portfolios. We have sold Bristol Myers, for the most part at a small loss. We still hold Suburban Propane. We have sold all Petrochina LTD. Many of our shareholders nearly doubled their money on this transaction. We have since sold all shares of the Nasdaq 100 trust for a profit. We have also since shorted the Nasdaq 100 Trust in certain accounts and profited from that trade as well. We still hold Microsoft and Bank of America. AT&T Wireless was profitably merged into Cingular Wireless.

By illustrating this information about the stocks in the table we are not trying to imply that all portfolios managed by K&A owned all of these stocks. Nor did every portfolio managed by K&A own the various stocks for equal periods of time. Therefore investment results for each portfolio that owned any or all of these stocks may have varied significantly from the results illustrated in the table. K&A tracks all stocks from the first date purchased as a method of monitoring direction, momentum and potential investment results. After any stock is purchased for the first time, for inclusion in the investment portfolios of K&A clients the stock is added to a K&A stock list and tracked using the method illustrated in the tables above and below this paragraph.

Stocks may be added to investment portfolios after the first date of purchase at the distraction of the advisor represents at K&A. These stocks do represent the largest positions held cumulatively by portfolios managed by K&A at the end of 2003. This table is included in this report to provide readers with an illustration of the type of assets that K&A uses to create core positions in various portfolios.

As 2004 draws to a close our top individual equity positions are as follows.

You will note that with the exception of Sanmina and Microsoft they all have above average dividend yields. Although Microsoft’s current annual dividend is below that of the S&P 500, they have just completed payout of a one time dividend of $3.00 per share.

We believe that the solid dividend yields offered by most of these stocks provide them with a performance cushion in the market place. Investors are often slower to sell stocks that provide a high current yield. Therefore their prices often tend to fluctuate much less. At a time when we continue to be cautious about the equity markets we prefer the sizable dividends offered by this group of companies.

A Few Words about Foreign Stocks and China in Particular

Two of our largest mutual fund holdings are Matthews China Fund and Tweedy Browne Global Value Fund. Three of our largest individual equity holdings are foreign companies, Nokia ADR, Diageo PLC, and Canadian Oil Sands Trust.

We have been adding I Shares MSCI Japan Index (EWJ) to various accounts that we manage. We will be adding shares of First Eagle Global Fund (SGENX) to various accounts as well. It is our intent to enter 2005 with approximately 10 percent of total portfolio value allocated to foreign stocks.

Matthews China Fund is now our second largest mutual fund holding. You may also notice that the fund has been in existence since 1999 and has been moving up in a stair step pattern, alternating years with positive total returns with subsequent years of negative total returns. We added the fund this year, during a down year. We hope that next year will be a positive year for the fund. Whether it is or not, we will be

adding to our holdings in this fund during 2005, and dollar cost averaging well into the future.

We took these pictures from Mathews Funds website. It shows Shanghai 10 years ago and now. These pictures certainly are worth a 1000 words.

Goldman Sachs recently wrote a wonderfully thoughtful report on the future of China. The bottom line is that they expect that a day will come when China’s GDP is as large as ours. We believe that such an event is very likely. China’s growth will not be linear. It will get interrupted by recessions just like ours does. But the future is clear. They will be a world economic power of the first magnitude.

Focus on Other Asset Classes

Bonds

We entered 2004 owning as many as five different taxable bond funds in many accounts we manage. We leave 2004 owning none. We sold them early this year in preparation to the shift to the higher rates that were being forecasted at the time.

We do own individual bonds in suitable portfolios, most of which are short term or intermediate term maturities. Most bonds held in portfolio’s are California tax-free municipal bonds.

We will be adding TIPS to various portfolios. Many of our clients also own TIPS through the Pimco Commodity Real Return Strategy Fund. (Also mentioned below in the Commodities section)

Gold

We finish 2004 owning shares of two gold funds in various portfolios.

Commodities

We finish 2004 owning one commodities fund in various portfolios.

Real Estate

Our only real estate related holding is currently Cohen & Steers Realty Shares.

Currencies

As 2004 draws to a close we are marking the end of two years of trading for Predictive Growth and Income, LP, (PGI), the first currency fund that we pioneered through a company called Predictive Financial Technologies, LLC. Paul Krsek was a co-founder of that company. PGI is currently available only to a limited number of investors.

But, it is our intention to make currency investments available to more investors in 2005. PGI’s total return to investors, net of fees, has been 16.10 percent during the approximately 23 months that it has been trading; as of 12/14/04.

We are in the process of forming a new partnership called Predictive Growth and Income 3 (PGI3). Predictive Financial Technologies, LLC is withdrawing as general partner of PGI and a second partnership that was formed called PGI2. K&A will be the general partner of PGI3, which is modeled after PGI and PGI2.

PGI and PGI2 will be closing and investors in those partnerships will be offered the opportunity to purchase units of the new PGI3. PGI3 will also be open to new investors.

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