Fourth Quarter Update
Impact of global growth on the domestic economy

The world economy is awash in liquidity - a result of both the extremely stimulative monetary policy that followed the bursting of the technology bubble, and the excessive current level of global savings. The effects of excess liquidity can be seen in the relatively loose bank- and mortgage-lending standards (recently addressed by federal bank regulators) and in the extraordinarily low current level of long-term interest rates. In addition, the U.S. corporate sector is flush with cash. Abundant liquidity has also helped to fuel a new speculative boom, but this time in residential real estate rather than technology stocks.

Over the last several months, the Federal Reserve Board has shifted its focus from stimulating the economy toward lessening the potential inflation risk and dampening the speculative rise in housing prices. As such, the Fed has been reigning in excess liquidity by raising short-term interest rates and restricting monetary growth. But recently that task has become more difficult. Economic growth has slowed around the globe. Our economy has softened as well, in what appears to be normal mid-cycle slowdown. If that is so, we should soon begin to regain strength. However, there is a risk. Today's global economy is overly dependent on the U.S. consumer. And if this nation catches a cold, the effect might be felt worldwide. So the Fed must walk a tightrope - continuing to restrict monetary growth while, at the same time, making sure it does not overtighten and turn a temporary slowdown into something much larger. Unfortunately, the question of how much of an interest rate rise is too much, can only be answered after the fact.
At any rate, here in the U.S. the greater question is, "How well will our nation be able to compete in this rapidly changing world economy?" Certainly we have an advantage over the Western Europeans and Japanese, in that we have stayed with a low-tax, high-growth economic model. Furthermore, as ongoing benefits of immigration and a higher birth rate, our dependency ratio is far lower - defined as the number of people over the age of 65, as a percentage of the number of people 20 to 64 years old. In addition, our nation has far fewer entrenched impediments to entrepreneurship and innovation. And, we have a history of allowing our aging and obsolete industries to fail, so that new technologies may more easily rise in their place. That willingness to move on does not exist in much of the rest of the industrialized world. But even considering the prospect of a probable Chinese currency revaluation, we would still be unable to compete on a pure labor-cost basis. The gap is just too large.

From an investor point of view, there are a large number of U.S. companies prospering from their foreign activities. In fact, collectively, domestic companies' overseas earnings grew by 26% last year, accounting for a full 40% of the profit growth of all U.S. companies. General Electric, for one, says it expects 60% of its revenue growth to come from emerging markets over the next decade. One of the main reasons we own GE in the SWCM composite. And the consulting firm McKinsey & Co. has even suggested that, at least in part, our large trade deficit is due to our own companies producing overseas and shipping the goods and services back to the U.S. Indeed, our world is changing. And, as there always is with change, there are risks. However change also creates opportunity. We remain optimistic about the opportunities and prospects for our nation, and for U.S. companies in particular, to successfully compete in an open global arena. Overall we continue to believe any slowdown or change in global growth will be temporary followed by a larger and longer term of sustained level of economic growth.

SWCM Composite Portfolio (Equity and Fixed Income)

As mentioned in the past updates we continue to remain very optimistic with the current equity market conditions and consequently the current holdings in the SWCM composite. Recent additions to the SWCM Composite include SBL (Symbol Technologies) and JetBlue Airlines (JBLU). Staying with our value and contrarian approach both SBL and JBLU fit well within our parameters of value companies that trade below their respective peers in market valuation. SBL trades at 1.35 times revenues and is a major player in the growth sector of Radio Frequency Identification (RFID). JetBlue, in our opinion, is the best way to play the rise in gas prices and the recent hurricane disasters. The travel and airline sector has been beaten down based on concerns that travel will be reduced in the near future. Though we believe this is true, it does not warrant a 45% reduction in the travel sector. While JBLU trades at close to 1.25 times revenues and is a profitable company. In addition, we own Expedia (EXPE) for many of the same reasons used to describe the investment thesis for JBLU. On the Interest rate front we continue to believe the long term rates will climb. While this has not proved to be the case we are still somewhat bearish on longer term bonds and stay invested in interest rate floaters and inflation based floating rate bonds. Overall, the SWCM composite has underperformed the S&P 500 index by -3.32 percent during the first 9 months of the year.

Our approach for the quarter

Market conditions will continue to be quite volatile as we enter the final stages of the Federal Reserve interest rate tightening cycle. Though we believe that estimating what the Fed will do with interest rates is nearly impossible, we do however believe that the end is near. In addition, during the past two years the 4th quarter has been the most profitable time to be fully invested in equities. In 2003 the equity market rose almost 15% in the 4th quarter while in the 4th quarter of 2004 the equity market rose close to 8% in total. We believe that this cycle will hold true for this year as well and remain very bullish.

Closing Statement:

We remain optimistic about the long-term opportunities in the equity markets and continue to feel comfortable regarding the current stock market environment. Stocks remain the most attractive broad investment category currently available to the average investor. Bottom line, we continue in our belief that the current risk/reward environment is positive for equity investors.

While our value strategy remains solid we continue to focus on companies with strong earnings, growing revenues and attractive valuations as we select new names for the SWCM composite. Our strategic outlook has us positioned for a longer, more powerful bull market.

As always, SWCM values each client and continues to focus on your investment objectives. If you have any questions or concerns please do not hesitate to call.

Attachments: Included in this quarterly report is a copy of the "Proxy Voting Policies and Procedures" adopted by Sullivan Wood Capital Managementas required by a recent SEC mandate. SWCM is sending a copy of this policy for your records under full-disclosure.

* All performance measures are based on a model composite portfolio managed with a growth perspective. All numbers are not audited and are not in compliance with AIMR. Ask for more detail regarding the model growth portfolio.

Disclosure: Examples of specific securities and/or sectors are given for illustrative purposes only and should not be used or construed as recommendation for any security and or sector. Past performance does not guarantee future results. Total returns are historical and include security values and reinvestment of dividends. Cumulative total returns are reported as of the period indicated. The results provided have not been audited and are based on a composite of client's accounts. . For information pertaining to the registration status of SWCM, please contact SWCM or refer to the Investment Adviser Disclosure we site (www.advsierinfo.sec.gov).