As We See It, the Current Equity Outlook ...                     First Quarter 2007

First quarter 2007 equity market performance was volatile in the face of an uncertain economic backdrop and an unfolding crisis in the US housing market. The interest rate outlook has become blurry in light of conflicting signals from the economy. Markets around the world were spooked by an air pocket in Chinese equity prices and pulled back sharply in late February, but rebounded nicely in March. Bottom line: the S&P 500 was up a modest 0.7% for the quarter.

Portfolio out-performers in the quarter included many of our international stocks, and an assortment of technology and business service stocks. For example, shares of Plantronics benefited from growing awareness of its Bluetooth products in the marketplace, a hopeful sign that the company’s new strategy is bearing fruit. We expect accelerating profit growth over the next year.

The healthcare sector, normally thought to be defensive, was generally an underperformer as regulators and politicians in Washington continue to focus on this part of the federal budget. Although some stocks performed well, we have been surprised by the sector’s loss of its defensive characteristics over the last nine months. Given our penchant for life-sciences and healthcare stocks, particularly those that leverage proprietary technology, we are watching this development very closely.

During March, Boston Scientific's core market, drug eluting stents (DES) was caught in a firestorm of controversy based on the results of a clinical study comparing the therapy to alternatives. Our checks with industry sources tell us that usage of BSX's products will resume their growth trajectories when the data from these studies is absorbed and better understood by practitioners. In addition, the recent lifting of the FDA's prohibition of new product releases in the company's cardiac rhythm management business (pacemakers and implantable defibrillators) should drive growth in the second half of the year.

Generally, we are cautious on the economy’s and market’s outlook, but remain constructive on our portfolio names and the strength of the individual franchises. Earnings growth for the S&P 500 is forecast to be around 7% in 2007, compared to a mid teens average for the portfolio. In many cases we feel the estimated growth rates are conservative, and have confidence that your portfolio will perform well.

Globalization has resulted in many things; the mix of technology and economic integration has transformed the world, and created unparalleled prosperity. Barriers to the free flow of goods and services, labor and capital continue to be pulled down around

the world, aided by huge improvements in communications and transport. As a result, in the past five years, the world has seen faster growth than at any time since the early 1970s.

A major trend resulting, or perhaps more accurately enhancing, the globalization trend has been outsourcing. While much has been written about the cost savings generated by moving production and customer service operations to countries with lower labor costs, there are several other significant benefits. Management is better able to focus on the company’s core competencies when non-core operations are delegated to an outside contractor. Outsourcers can more rapidly and efficiently dedicate a number of employees according to clients’ needs without affecting profitability and quality of service. As a result, they can also manage seasonality much more efficiently.

A recent addition to our international portfolios is Geneva-based SGS SA, which is a beneficiary of the growth in outsourcing. The company, previously known as Societe Generale de Surveillance, is the global market leader in verification, testing, inspection and certification. Testing services in particular, an SGS strength, are being outsourced at a growing rate as specialized companies can provide reliable, high-quality services at lower cost. In addition, the growth in outsourcing and global sourcing in general has increased the emphasis on the monitoring of process quality, which has to be developed, implemented and checked for compliance. With so much manufacturing moving to developing countries, quality control is critical.

Relatively high barriers to entry, such as the complex technical skills and equipment, service quality, and global network required to service a multinational client base support SGS’s dominant position. A large portion of SGS’s revenue is generated from recurring contracts as customer loyalty is high; it is expensive and time consuming to change from one company to another.

With the continuing attractiveness of outsourcing, along with increasing regulation, safety and performance standards, increasingly complex products and shortening product lifecycles, we believe that SGS will be able to maintain a high organic growth rate going forward.

Noteworthy Developments

Johnston Asset Management reached a major milestone when we passed through $1 billion in assets under management in December, 2006. Our clients have enabled us to reach this milestone, and we cannot adequately express our gratitude for their trust and confidence in us over the years. In another significant development, Joan Giannotti and Cassandra Hardman have agreed to become partners in Johnston Asset Management. Their participation in the firm will ensure that we continue to work together as a team for years to come.