YTD 2007 (As of end of QII)	Year 2006	Year 2005	Year 2004	Year 2003	Annualized Since Inception *
Vega Equity*.	+5.9%	+12.4%	+8.90%	+17.60%	+42. 70%	+20.1
S&P 500	+6.0%	+13.6%	+3.00%	+9.00%	+26.40%	+13.4
NASDAQ	+7.8%	+9.5%	+1.40%	+8.60%	+50.00%	+17.0
Dow Jones	+7.6%	+16.3%	-0.60%	+3.10%	+25.30%	+11.8

MARKET OUTLOOK AND PORTFOLIO ANALYSIS

As you remember, we have outlined our very conservative position towards the equity markets at the end of the First Quarter. The changes we made in the portfolio during the second quarter reflected our outlook, and for the first time in 5 years, our portfolio has become market neutral. Of course, the flip side is obvious - we have significantly under performed the market in the Second Quarter - by 3% on the net basis. Our year-to-date performance remains at par with S&P 500. We continue to maintain the same position towards the equity markets for the reasons outlined below. As you remember, our primary concern was the crisis with sub prime mortgages. What has been happening lately?

SUBPRIME WOES

Investment funds that bought stake in sub prime mortgage loans are starting to wobble; industry officials say they expect situation to unwind over the next 12 to 18 months. The problem is that they have been saying the same for the last 12 to 18 months. A recent research piece by Bank of America estimates that approximately $500 bin of adjustable rate mortgages are scheduled to reset skyward in 2007 by an average of over 200 basis points. 2008 holds even more surprises with nearly $700 bln ARMS subject to reset, nearly ѕ of which are sub primes. According to Bill Gross, the U.S. housing downturn will affect growth and short-term yields over the next year or so.

INTEREST RATES

Treasury-bond yields, a benchmark for market interest rates, scared investors in June with a sharp rise, and then a pull back. According to Mark Zandi, chief economist at Moody's Economy.com, the explanation for higher interest rates is slowly evaporating global liquidity. This is most evident in tighter monetary policies across much of the globe. Central banks ranging from the European Central Bank to the Chinese Central Bank are in the midst of a series of tightening moves. Indeed, the Federal Reserve is the only major central bank not expected to tighten policy again before the year is over. Long-term interest rates have risen across the globe, not just in the U.S., reflecting a normalization of global monetary policy after a long period of being highly accommodative.

While a further increase to 6% in the 10-year note is highly unlikely, the yield over 5% will hold. According to Matt Phillips from the Wall Street Journal, there are three reasons why we don't expect any further movement in long-term interest rates:

• Inflation rates have been easing and won't rise above the Fed's forecasts for many months.
• The current up tick in rates will be enough to give the economy another jolt via the housing market.
• There is a little chance that the Fed will be raising short-term interest rates.

The key fundamentals for the stock market are always earnings growth expectations and interest rates. Those define the future value of earnings, and thus the current value of a stock. Here are a few facts. On July 19th, 2006 Fed Chairman Bernanke testified before Congress. He gave a clear indication that the rate hike cycle was over. The S&P 500 index is up 21.8% in the 11 months since then. For 2007 so far, the S&P 500 is up 5.9%. That is about a 12% annual rate of increase. Earnings in the first quarter, however, were up only 7.9% (on a year-over-year basis). Second Quarter earnings forecasts for the S&P 500 in aggregate call for about 5% to 6% growth, and third quarter estimates are about 2% growth. Therefore, unfortunately neither interest rates nor earnings growth expectations are moving in the right direction.

Market is behaving like a drunken man during the last few weeks. Dow swings for more than few hundred points during the day. It is up one day and down another.

The traditional slow summer months may finally be upon us.

As always, we would appreciate the referrals from our loyal and satisfied clients.

¹Vega Capital Group LLC ("Vega") is an independent adviser registered with the Securities & Exchange Commission. The performance shown reflects actual performance for representative accounts. One representative account is selected for each strategy. The selection of representative account is based on the following factors: cash flows into or out of account for the reporting period, size of account sufficient to be representative of the strategy, average trading expenses. Performance of other accounts managed under the same strategy may vary. The firm maintains a complete list of its accounts performance, which is available upon request. Past performance is not indicative of future results. Accounts under Vega's management are not insured against loss of principal, and may loose value. The U.S. Dollar is the currency used to express performance. Returns are presented net of management fees and include the reinvestment of all income. In addition to an advisory fee, performance shown includes any additional custodial or service fees. The advisory fees for Vega Equity* accounts are calculated as follows: management fee of 0.375% is charged quarterly in advance, based on the closing balance on the last date of the previous quarter; and performance fee is charged annually in arrears, equal to the 10% of annual investment gain above all relevant watermarks and hurdle rates for the account. Vega's schedule of advisory fees vary based on product and type of client and is contained in Form ADV-II. Additional information regarding the policies for calculating and reporting returns is available upon request.
The indices used for comparison are Standard & Poor's 500 Index, which is comprised of 500 selected common stocks most of which are listed on the NYSE; Dow Jones Industrial Average (DJIA) Index, which is a price-weighted average of 30 blue-chip stocks and NASDAQ Composite (NASDAQ) Index, which is a broad-based capitalization-weighted index of all NASDAQ (National Market & Small-Cap) stocks. Vega Equity* Inception Date is 07/01/2003.Vega Equity* program is only available to qualified investors. Performance for Vega Equity* program for year 2003 is based on pro-forma results for months January through June of 2003. Pro-forma results may not be indicative of actual performance in client's accounts.