Model Portfolio Report

Standard & Poors Neural Fair Value 25

February 8, 2005
Summary: The Neural Fair Value 25 Model Portfolio (NFV25) seeks to outperform the market by buying undervalued issues with the potential to deliver superior returns over the next six months. NFV25 is a model portfolio, not an actual portfolio. In order to "buy" this portfolio, you need to buy each stock designated in the model.
Company

Sample Holding as of 02/08/05

Ticker Price as of 02/08/05 Score

Year-To-Date Performance (1/31/05)

NFV 25 Portfolio S&P 500 0.23% -2.53%

2004 Performance
NFV 25 Portfolio (Since October 5) S&P 500 16.82% 6.83%

Accenture Ltd'A' Altera Corp. Amphenol Corp. Bausch & Lomb Coventry Health Care D.R. Horton Dana Corp. Doral Financial EarthLink Inc Eastman Kodak Endo Pharmaceuticals Hl Federal National Mortga Hewlett-Packard Home Depot Humana Hydril Intel Corp. Men's Wearhouse NIKE, Inc. RadioShack Corp. Sabre Holdings Stanley Works Swift Transportation Varco International Weight Watchers Intl

ACN ALTR APH BOL CVH DHI DCN DRL ELNK EK ENDP FNM HPQ HD HUM HYDL INTC MW NKE RSH TSG SWK SWFT VRC WTW

25.73 19.40 40.42 74.84 58.03 43.84 16.06 43.66 10.31 34.32 20.71 65.14 20.45 42.42 34.65 56.25 23.00 36.12 87.04 34.08 20.94 47.82 22.61 31.52 46.70

55B+ 54B+ 35B 22B 34B 35B 24B 45A 54B+ 35A 35A 14B 24A+ 35A+ 22A+ 35A 24B+ 15A+ 34B 35A+ 55B+ 44B 25A+ 22A 23A+

Monthly Performance
The NFV 25 started the new year on a good note, rising 0.23% in the month of January while the S&P 500, hit by profit-taking after a strong November and December, fell 2.53%. Humana Inc. was the big winner, rising 15.43% on perceptions Medicare rules to be implemented this year will benefit managed-care companies. Eyecare product player Bausch & Lomb gained 13% on better than expected 4Q results and a positive outlook for 2005. Hydril gained almost 10% on expectations for strong 4Q results. Losers included Earthlink, down 12.93% with a weak technology sector, and Doral Financial, down 12% on concerns about 4Q trading losses.

Overview

Neural Fair Value is created by combining the Fair Value Model and the Neural Model, quantitative stock ranking systems proprietary to Standard & Poors. The Fair Value Model calculates a stock's weekly Fair Value the price at which it should theoretically trade at current market levels based on fundamental data such as earnings growth potential. The Neural Model is based on Neural Network theory, an artificial intelligence concept which seeks to replicate the human brain's ability to learn from mistakes. During a Neural Networks training period, inputs are adjusted to reduce the models prediction errors. In Standard & Poors Neural Model, we input the factors that produced better market performance during the most recent 6-month period. The Fair Value data is filtered through the Neural Model, creating the Neural Fair Value universe of equities. There are roughly 3000 stocks in the Neural Fair Value Universe. The Neural Fair Value 25 Portfolio is composed of stocks from the Neural Fair Value universe considered to have superior price appreciation potential.

Suitability
Because the turnover rate in this portfolio can be high, it is suited for tax deferred accounts such as an IRA, and less suited for other accounts. Since NFV25 generally selects small to mid-cap stocks, it should be used to supplement core holdings. NFV25 makes no effort to give any weight or representation to all industry sectors. In fact, it often excludes whole sectors and shifts weight from one sector to another. The quantitative analysis that drives NFV25 is derived from the earnings and growth estimates of numerous Wall Street analysts. However, NFV25 may contain stocks that are not covered by Standard & Poors analysts. In such cases, we recommend checking the opinion of another independent third party. Standard & Poor's is not recommending any particular investment, and recommends that each investor must make his or her own determinations as to the suitability of a particular investment.

Model Portfolio Report

Standard & Poors Neural Fair Value 25
User Guide
How Do I Get Started?
New investors should establish their portfolio with equal dollar weights. Ideally, an investor should buy all the stocks in the portfolio on the outset. However, this is not necessary. One can start with the highest ranked stocks (44A+ and above), and add on as new stocks enter the portfolio. It is important to note that due to purchase timing differences and different weights applied to stocks, the portfolio created will not exactly match NFV25. Also, diversify as you build the portfolio, or returns can become very volatile.

How Is the Portfolio Weighted?

When a stock is removed from the model portfolio, the whole position is presumed sold at the closing price that day. When a stock is added, the following happens: If the removed stock position has a value that exceeds the average value of all remaining stock positions in the model portfolio, the excess over that average value is allocated to cash reserves. A dollar amount equal to the amount of the average value is presumed invested in the new stock at the closing price that day. If the removed stock has a value that is less that the average value, the entire value of the removed stock is presumed invested in the new stock. In this manner, the portfolio is not rebalanced monthly, but rather as transactions occur. Standard & Poors attempts to keep new additions in line with the average value of all stocks in the portfolio.

What Does the Score Mean?

Each stock within the portfolio has a score with four elements. For example, 54A+ would mean the following: 5 - Neural Rank. Ranked from 5 (most likely to outperform over the next six months) to 1 (most likely to underperform). 4 - Fair Value Rank. Also ranked from 5 (stock is significantly undervalued relative to its Fair Value price) to 1 (the stocks current price substantially exceeds its Fair Value price). A - Earnings Surprise Indicator. Stocks are divided into five tiers, based on their ability to beat earnings estimates. A ranked stocks are most likely to beat estimates, with E stocks most likely to miss. "N" indicates data was not available to determine Earnings Surprise Indicator. + - Timing Index. Indicates if a stock meets certain underlying trend requirements proven favorable to long-term capital appreciation. A + is favorable, while a - is unfavorable. If a stock displays no + or -, this indicates a neutral timing index.

What Rules Govern the Portfolio?

A stock is added to NFV 25 when its Neural rank is 5, its Earnings Surprise rank is A and its Timing Index is positive (+). New buys must also meet a minimum $10 million average daily trading volume. A stock is sold from NFV 25 when its Neural rank drops under 3 and, either its Earnings Surprise rank drops under B, or its Timing Index goes negative (-). Every time a stock is sold, it triggers a new buy. This new buy will normally meet the buy rule described above, but may be stepped down on occasions when no candidates meet the strict rule. This step-down schedule is clearly pre defined.

When are Stocks Added to the Portfolio?

Fair Values for the universe of roughly 3000 stocks are calculated based on Friday's close. This universe is then filtered through the Neural Model on Mondays. Portfolio additions and deletions will be announced at 10:15 am- 10:30 am Eastern time Tuesday. Portfolio performance, however, is based on Tuesday's closing price.

Model Results
The performance shown above represents the model performance of the Neural Fair Value 20 Portfolio. The Model Portfolio performance shown has inherent limitations. These results are model results only and do not represent the results of actual trading of assets. Thus, the performance does not reflect the impact that material economic and market factors might have had on decision-making if actual assets had been managed. In addition, These returns also do not take into account timing differences between NFV 25 selections and purchases made based on those selections by actual investors.. In calculating these results, stocks are presumed purchased for, or sold from, the Model Portfolio at the close of market the same day a change to a Model is made. Its important to note that the performance of an investors actual portfolio will not necessarily match the performance of the Model Portfolio due to differences in the weightings of the individual stocks purchased. The performance does not reflect the deduction of any fees or commissions The imposition of fees or commissions would cause actual performance to be lower than the performance shown. For example, the deduction of 1.5%, deducted on a quarterly basis over the 1- and 3-year periods looking back from Aug. 31, 2004, would have reduced performance by 1.33% and 4.31%, respectively. This performance does not take into account the reinvestment of dividends and distributions, or taxes and other applicable charges. The imposition of taxes and other charges would decrease performance further. These returns necessarily reflect the effects of market and economic conditions, which change over time; however, the returns do not reflect the effects that material economic and market conditions may have on investment decision making by persons managing actual assets. The benchmark is the S&P 500 (Composite) Index. This index is unmanaged, includes a different number of holdings, has different risk characteristics than the stocks that are included in the Model Portfolio, and does not include the deduction of expenses or fees. Past performance is no guarantee of future performance. Assets managed in accordance with the Model Portfolio may lose money. As of Oct. 5, 2004, SPIAS changed the methodology for selecting the stocks in the Neural Fair Value 20 Model Portfolio (NFV 20) to accommodate the creation of other S&P Neural Fair Value Model Portfolios, including the Neural Fair Value 25 Model Portfolio (NFV 25), and Additional Model Portfolios (the Additional Model Portfolios) (. As of this date, stocks are selected for the NFV 20, the NFV 25 , and the Additional Model Portfolios according to a methodology that assures no security will be selected for a Model Portfolio if that security is included in another Model Portfolio. Thus, before Oct. 5, 2004, all stocks meeting the Neural Fair Value criteria were eligible for inclusion in the Neural Fair Value 20 Model Portfolio. After this date, stocks that are included in NFV 20 will not be eligible for inclusion in NFV 25, or the Additional Model Portfolios. If new stocks are being selected for the NFV 20, the NFV 25, and/ or more Additional Model Portfolios at the same time, a random allocation method will be used to determine which stocks are included in which Model Portfolio. Had the Additional Model Portfolios existed prior to Oct. 5, 2004, the stocks that would have been included in the Neural Fair Value 20 Model Portfolio would have differed to some degree from the ones that were actually included. As a result, the performance of the Neural Fair Value 20 Model Portfolio would have been different from the performance shown above. Occasionally, minor adjustments may be made to the Neural Fair Value methodology. The performance shown above illustrates performance from the stated time period only; performance is not adjusted to take into account any changes in methodology.

Advisor Notices
Efforts toward creating the NFV25 Model Portfolio should only be used for a portion of a client's total assets. This portfolio would be subject to considerable risk given the volatility and turnover inherent in the model. Actual performance of the account using the model portfolio may differ materially from the model performance.

FOR ADVISOR USE ONLY

This report is for information purposes and should not be considered a solicitation to buy or sell any securities. Neither Standard & Poors nor any other party guarantees its warranties regarding results from its usage. Redistribution is prohibited without written permission. Copyright 2004.