Overall, the conservative portfolio performed as expected, losing .8% in the second quarter of 2008. The investment environment was difficult with declines in both equity (-2.5%) and fixed income (-1.2%) investments. Equities continue their slide this year with the S&P 500 down almost 12% year to date. Bright spots could be found in US Midcap and US Growth stocks. We believe that emerging market equities are no longer attractive on a valuation basis and have cut back our positions by half. We intend to increase the weight to inflation protected fixed income investments, while decreasing exposure to shorter duration investments.

Outlook

We expect the investment environment to remain challenging through the remainder of the year, and will position the portfolio for growth into 2009.

On a peer basis, the portfolio performed well, easily outperforming the Dodge and Cox Balanced Fund and losing some ground to the Fidelity 2015 targeted retirement account.

Overall, the conservative portfolio performed as expected, losing 3.7% in the first quarter, 2008. The investment environment was difficult with the US economy probably having entered recession and ongoing credit issues for financial institutions. Equities in particular were hard hit, with the S&P 500 down over 9% for the quarter. The portfolio performed well, easily outperforming the Dodge and Cox Balanced Fund as well as the Fidelity 2015 targeted retirement account.

Outlook

We expect a difficult investment environment for most of 2008, with increased volatility in all asset classes and lower return expectations.

We made some shifts in the Asset Allocation over the past year:

1. decreasing exposure to US REITs (ICF) at the end of the 1st Quarter
2. increasing exposure to International Equity (EFA) at the end of the 1st Quarter and in the 3rd Quarter
3. decreasing exposure to High Yield Bonds (VWEHX) in the 1st Quarter and the remainder at the beginning of July
4. increasing exposure to higher quality in the Lehman Bond Aggregate (AGG) in the 1st Quarter
5. increasing exposure to MidCap Growth stocks (IWP) 2nd Quarter
6. decreasing exposure to US Equity Value (DVY) in the 3rd Quarter and (IWD) in the 4th Quarter
7. increasing exposure to US Equity Growth (IWF/SPY) in the 4th Quarter

Portfolio Performance

Overall, we are happy with the performance of the portfolio which returned more than 6% in 2007, handily beating the 4% annual target return and in line with estimated, model performance. Our performance versus the benchmarks was also good, beating most standard indexes and some well regarded peers. 2007 was a challenging year, requiring several changes to our asset allocation. The increase in volatility, several sharp drops in both fixed income and equity markets and subsequent market rallys required careful re-positioning of the portfolio.

Asset Allocation

We made some shifts in the Asset Allocation over the past year;

1. decreasing exposure to US REITs (ICF) at the end of the 1st Quarter
2. increasing exposure to International Equity (EFA) at the end of the 1st Quarter and in the 3rd Quarter
3. decreasing exposure to High Yield Bonds (SPHIX) in the 1st Quarter and the remainder at the beginning of July
4. increasing exposure to higher quality in the Lehman Bond Aggregate (AGG) in the 1st Quarter
5. increasing exposure to MidCap Growth stocks (IWP)
6. decreasing exposure to US Equity Value (DVY) in the 3rd Quarter and (IWD) in the 4th Quarter
7. increasing exposure to US Equity Growth (IWF/SPY) in the 4th Quarter

We were fortunate to anticipate the erosion in both REITs and High Yield Bond investments early in the year. Our over-weights in US MidCap Growth, International and Emerging equities were profitable for the entire year. Our exposure to Inflation Protected Treasuries (TIP) and shorter duration Treasuries (SHY) finally payed off and helped the portfolio performance in a difficult period. As well, our large cash balance and the excellent risk free return to cash in 2007 dampened portfolio volatility.

On the flip side, we were late in the shift from Value to Growth, only recognizing the rotation in the 4th Quarter and only just in time with the shift from smaller companies to larger companies.

Outlook

2008 looks to be another challenging year. A recession in the US is possible, although the global economy may fair better, at least initially. We do expect that Emerging markets will end their long run-up sometime in the 3rd or 4th quarter of 2008 and we will trim our exposure accordingly. As well, we expect returns to cash to diminish. Investors may have to contend with both diminished returns and increased volatility in equity, fixed income and commodity markets; as the month of January has shown.

We are comfortable with the current asset allocation and will use some of the excess cash to position the portfolio for a return to growth late in 2008 and into 2009.

Please, find attached the updated performance for Scientific Advisors’ retirement products for the 2nd Q, YTD, 1,3,5 and 10 years ending June 30, 2007. A couple of notes.

We did make a few changes this year.

Notably, in the 1st quarter, we went from short quality to neutral quality, resulting in selling ALL of our positions (3-5%) in high yield bond funds (VWEHX) on March 1, 2007. As well, we trimmed our REIT holdings (ICF) from 3-5% to 1-3% on March 15, 2007.

We added to our mid-cap growth positions (IWP) +2%, International (EFA) +2% and Cash +2% in April, 2007 removing our Small-Cap Value (+5%) bias.

In September, 2007; the overall value bias was removed; decreasing the Large-Cap Value bias (IWD) -3% and increasing the Large-Cap core holding (SPY) +3%.

The conservative portfolio performed well in the 3rd Quarter, with a return of 2.3%. We took advantage of the downturn to re-position some assets, maintaining a larger cash balance for new opportunities. We plan on cutting our value bias, which is reflected in an over-weight of financial companies and building a bias towards larger, growth oriented investments. We believe that emerging markets will be a good source of returns through 2008.

Outlook

Overall, the third quarter of 2007 represented a turning point in the markets. A substantial decline at the end of August into the beginning of September, triggered by credit market turmoil, also marked the transition between investment themes. Going forward, we expect less performance from smaller companies and risky fixed income assets and greater emphasis on larger companies, risky international and emerging assets and higher quality fixed income investments.

We made a few changes this past year. Notably, we went from short quality to neutral quality, resulting in selling ALL of our positions (3-5%) in high yield bond funds (VWEHX) on March 1, 2007. As well, we trimmed our REIT holdings (ICF) from 3-5% to 1-3% on March 15, 2007.

We added to our mid-cap growth positions (IWP) +2%, International (EFA) +2% and Cash +2%.

Some changes to note. Our recommended tilts to the core asset allocation have been updated to reflect changing market conditions. Notably:

Target allocations have been updated to reflect the new regime.

The portfolio experienced transactions to reflect this, selling the high yield mutual fund (SPHIX) in July as well as trimming back US real estate REITS (ICF) in February and increasing the allocation to international markets (EFA) in March.

Performance

Equity markets had a robust showing in the 2nd quarter, with Emerging, US Large Cap and International markets showing the strongest performance. Fixed income investments did not fair as well with losses in the general bond markets and increased worries about credit quality and a more hostile interest rate environment.