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October 26, 2007

Dear Client and Friends,

Third Quarter 2008 Financial Asset Performance

Office Move

We moved into our new office on August 16th. The office is located about one mile south of the intersection of Centerville Road and Route 48 (Lancaster Pike). Going south on Centerville Road, we are on the left side just past Agilent and across from the Little Falls office complex. We are on the second floor. Our new phone number is 302.994.4444 and our fax number is 302.994.4443. Please make a note of these changes. We look forward to having you stop by for a visit.

Survey of Objectives

In the beginning of the planning process we asked all of you to fill out a confidential survey. One of the benefits of the survey is to give you an opportunity to communicate important concerns and objectives. While we encourage clients to contact us at any time with any imminent concerns, we thought it would be useful to understand what priorities have moved to the top of your list; priorities we should be conscious of as we service your needs. To that end, we have enclosed a short survey. Please take the time to provide us with this valuable feedback.

Second Quarter 2007 Financial Asset Performance

The Lehman Brothers Aggregate Bond Index was up 2.8%. The S&P 500 U.S. stock index was up 2%. The Russell 2000, a representative index of small companies, was down 3.1%. Foreign equities, as represented by the MSCI EAFE Index, were up 2.2%.

We have included a Morningstar table of performance figures for many of the mutual funds in your portfolio, plus some comparative market indices noted by the prefix “Idx”.

Investment Commentary

In recent years, residential real estate, much like technology stocks in the late 1990s, became the “no-brainer” investment du jour. As interest rates fell and home prices appreciated, investors piled on. In an unprecedented manner, new home buyers and speculative real estate investors began purchasing homes with little or no money down, variable financing rates, and even negative amortization loans. Some of the many reasons we’ve heard about why to purchase real estate in the last few years ranged from “land is one of the few finite assets” and “housing prices never go down” to “we want to lock into beach property now because it will cost us 10% more next year” and “we can buy this property with no money out of pocket”.

Investment Commentary (continued)

Creative financing caused this housing bull market to continue longer than many thought possible, including us. A key ingredient to all of this was the disconnect between borrower and lender. In the past, a bank that extended credit to others retained the loan on their books, thereby creating an obvious incentive for the bank to evaluate the credit worthiness of their borrower. Today, many loans are being made by non-bank intermediaries. These intermediaries do not retain the loans, but instead securitize them (break them up into a pool of securities, referred to as CMOs) and sell them to investors. Agencies responsible for rating these securities did a poor job assessing their riskiness, and assigned these securities undeservedly high ratings.

Now that the residential real estate party is over, for many, including some prominent institutional investors and hedge funds, this will be a painful experience. To quote Warren Buffett, “It's only when the tide goes out that you discover who's been swimming naked.”

We will use this recent market activity as an opportunity to re-convey some important investment considerations:

· No investment is so great that it makes the price of entry irrelevant. Many use the fact that land is a finite resource as justification for why real estate is a great investment. Japan has approximately 10% of the land we have in the U.S, adjusting for population size. Interestingly, Japan’s property prices are valued at 50% of what they were in 1991. Clearly, the purchase price at the time of investment is important.

· Use leverage wisely. Leverage is a double-edged sword. It magnifies all investment returns, both up and down. If an investment that is purchased with 10% cash and 90% debt is later sold for 10% less than its acquisition price, that investment return is -100%, ignoring interest costs. If real estate is purchased in this manner and then forced to be sold, transaction costs alone can be 7%, which means the property only needs to fall by 3% to wipe out all equity.

· Stay diversified. This applies both at the asset class and individual security level. We all know that stocks can go under (i.e. Worldcom and Enron). However, it is rare that you hear about high quality bonds defaulting. The CMO and subprime mess has highlighted this danger. Investment concentration can be a great builder of wealth, but it is horrible when it comes to preserving it.

The full impact of the housing slowdown to the U.S economy is unknown. With tighter lending standards and reduced equity in homes, access to credit has become more restrictive. Jobs in housing and related industries will continue to be squeezed.

New home buyers that were seduced by aggressive loans may lose their homes, and that is a shame. Unfortunately, it is the misinformed or misguided that often get hurt. Our hope is that this crisis will lead future home buyers to become better educated about the home buying process. Unfortunately, additional education may not be enough. It may be necessary for the government to enact legislation that promotes more responsible lending.

Our mission is to help clients strike a balance between portfolio growth and capital preservation to endure all market environments. Following disciplined investment management using sound investment fundamentals will help us to do just that.

Income Tax Planning

The reviews we prepare this quarter will include a projection of your 2007 and 2008 tax liabilities. These reviews will enable us to look for opportunities to lessen your tax burden over these two calendar years, and to look for further wealth building opportunities through tax deferral.

We are making income tax projections assuming that there will be an AMT patch signed into law before year end. In addition, it appears that there will be substantial distributions from mutual funds before year end. The market was up for most of the year and most funds have used up all of their carryover losses from previous years. We do as much tax planning around these distributions as possible, including the placement of tax inefficient funds, such as high turnover equity funds or taxable fixed income funds, into retirement accounts.

We do not expect major tax legislation to be enacted prior to 2009 or 2010, when the new administration and Congress set their priorities. At that time, we expect:

income taxes to go up on high earners

some AMT relief

an agreement on the estate tax exclusion

Flexible Spending Accounts

Understand your plan’s spending period. Some plans require using contributions in the plan by year end, others provide a 2 ½ month grace period after year end. Amounts in the plan not spent by the plan’s deadline are forfeited.

Energy Credits

You may have heard about the energy tax credits available for the purchase of eco-friendly cars. Credits are also available for making certain energy-efficient improvements to your home. These credits are scheduled to expire by the end of 2007. Some of those improvements include: exterior doors, windows, insulation, furnaces, and water heaters. In order for the improvement to qualify for a credit, they must meet specific standards for energy efficiency. The tax credits can range up to $500.

We continue to work daily to earn your trust and confidence.

Best regards,

Vincent A. Schiavi, CFP®, CPA/ PFS Ravi P. Dattani, CFP®, CPA President Vice-President


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