Kinnaras Capital

Management LLC www.kinnaras.com

225 Flax Hill Road • Suite 1 • Norwalk, CT 06854 • Phone: 203-252-7654 • Fax: 860-529-7167

August 2, 2010

Dear Investors,

Kinnaras Capital Management ("KCM", "Kinnaras", or the "Firm") Separately Managed Accounts
("SMAs") returned -9.4% in Q2 2010. Table I presents KCM SMA performance relative to key indices.
Investors should note that individual returns will vary based on the time one invested and that the
composite return presented below is net of fees and is the time-weighted return ("TWR") of Kinnaras
SMAs. TWR is one of the most comprehensive and accurate way of gauging investment performance
for managed accounts but can be skewed at times due to the timing of new portfolio openings. As a
reference, SMAs that were open since the start of the year are down approximately 7.5% through Q2
2010.

Table I excludes performance of smaller, highly concentrated SMA portfolios. Exclusion is based on
two main factors. The first is that these accounts are not reflective of the total deep-value framework
used in the main strategy. Some of these accounts literally hold 1-3 stocks which can lead to results that
do not accurately reflect the performance of the main strategy. The performance of these portfolios
were not included in Q1 2010 figures because they skewed performance upwards to a degree not
reflective of the overall strategy and are excluded in Q2 2010 for the same reason (albeit because the
results in Q2 2010 would skew downwards).

TABLE I: 2010 MANAGED ACCOUNT PERFORMANCE

Q1 2010 Q2 2010 YTD 2010

KCM Net Performance 5.19% -9.44% -4.74%

DJIA 4.78% -9.40% -5.07%

SP500 5.35% -11.39% -6.65%
NASDAQ 5.88% -11.85% -6.66%

The first half of 2010 could be characterized as manic-depressive with sharp rallies and drawdowns
occurring in nearly every month. Similar to Q1 2010, Q2 2010 started off nicely for the first few weeks
with equity markets possibly impounding a V-shaped recovery only to quickly reverse course as market
participants questioned valuations in the context of expected outcomes for the economy. Perhaps more
importantly, the market eco-system received a massive shock during the "Flash Crash" in May which
coincided with the European sovereign debt crisis. We also were faced with the BP disaster which
understandably would add to our collective negative psyches. By the end of the quarter, expectations for
a double-dip recession were beginning to be broadly discussed by a number of economists and market
observers.

These fears continue to manifest themselves in fund flows. According to Trim Tabs, $10.7B fled US
Equity mutual funds through July 2010 (at the time of the report, July was still in progress), following

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$3.8B that was liquidated in June. Those funds are stampeding into the perceived safety of bonds with
$27.8B of inflows through July and $25.7B in June. While retail investors are doing this, PIMCO's Bill
Gross is launching a set of equity mutual funds. In a recent Bloomberg article, Gross noted that he felt
that the thirty year bond run may be coming to an end and equity's may be a better place to be.

Without question, there are many challenges confronting the global economy. Every item I read and
every person I speak with can present a litany of obstacles. However, since everyone knows about these
problems and fund flows are mainly headed towards bond funds, I feel a bit more constructive about
investing. In Q2 2010, a lot of good news was snuffed out of certain stock valuations and that gave us
the chance to add to existing positions as well as establish new ones.

For example, Kinnaras did well in 2009 through investing in various consumer discretionary companies,
particularly some mall-based retailers. These retailers were able to rapidly close underperforming
stores, bargain with landlords for rent relief, achieve lower sourcing and transportation costs (cotton, oil,
etc.), and could aggressively rationalize their workforce. These cost controls led to positive cash flow
and earnings surprises despite a massive drop in sales and those earnings propelled shares.

Heading into 2010, I felt the consumer discretionary space was played out/fairly valued and spent my
time on other opportunities. However, in Q2 2010 a few of these consumer discretionary companies had
50-60% of their market capitalization wiped out in a matter of weeks. We started to buy one of these in
Q2 after the majority of its decline (knock on wood) and also have been nibbling on another in Q3.

The first retailer ("Retailer 1") is about a $400MM market cap mall-based women's retailer catering to a
specific age demographic. One of its competitors has been shifting its focus to a younger age group
which actually improves Retailer 1's competitive dynamic and opportunity set. Kinnaras actually owned
its competitor in 2009 so there was some good familiarity/sector intelligence that could be leveraged so
it didn't take long to get up to speed on Retailer 1.

Retailer 1 lost about 33% of its value from April to early June before reporting earnings that
outperformed Street estimates. However, due to some concerns regarding Q2 sale softness and market
pressures in June, shares further sank another 40% or so from that point. Kinnaras began buying in mid
to late June and we're still accumulating shares for managed accounts and the Fund which is why I
haven't unveiled its name yet.

Retailers can be interesting investments when they trade at high forward multiples. This may sound
counter intuitive but what happens is that the Street and investors tend to get very negative in terms of
sentiment. So what happens is that when a retailer has current depressed earnings, investors sometimes
extrapolate the factors that generated those depressed earnings (low sales growth, low margins, etc.) out
12-36 months. This leads to low expected future earnings expectation and thus a high forward valuation
multiple.

What I have found is that if you're a retailer where you're not competing solely on cost (i.e. Circuit City
vs. Best Buy), those sales and margins can bounce back with surprising strength. This is in part due to
various levers management can pull. In some cases, the fashion is just wrong or currently out of favor
and can be addressed relatively quickly (inside of 18 months) to a retailer's core customer group.

For example, if a retailer is performing poorly now, perhaps it has $1B in sales and just 1% in net
income margins spread across 50MM shares, leading to $0.20 in EPS. Investors may assume the
challenges facing the retailer will continue for the next 2-3 years. As a result, negative to low sales
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growth expectations and persistently low margins are impounded into valuations. So for 2011, the
Street may assume no sales growth and maybe even lower margins 0.5% net income margins leading to
$0.10 per share. The stock may trade at 30.0x those depressed 2011 EPS estimates or trade at $3.00 per
share.

Now if this retailer has a solid balance sheet and an investor can get comfortable with the company's
competitive dynamics and strategy, there could be an interesting opportunity. As previously mentioned,
I had followed and invested in this specific niche last year and I think the problems facing Retailer 1 are
short-term in nature. This means there's a lot of room for earnings upside which could lead to
impressive stock performance in the next year or two.

CHART I: RETAILER 1

Kinnaras has been

buying in this range

One thing to note is that many mall-based retailers have largely made their IT infrastructure upgrades
and supplier changes over the past two years that have led to streamlined corporate costs and supply
chains. This means that the real driver for earnings lies mostly in merchandising and inventory
management. Inventory management will probably be the biggest challenge facing discretionary-
focused retailers for the next few years given the reigning in of US households.

Order too much of a product and risk an inventory write-off which results in a charge against earnings in
the following quarter. Conversely, order too little off a popular product and you lose out on crucial sales
that can leverage earnings during a key selling period for the year. Retailers can be risky from this

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standpoint but if you buy them when there's a lot of negative sentiment and the valuation is attractive
enough, they can make for worthwhile investments.

With our prior example, perhaps sales which are expected to languish in 2011 actually move up 10%.
This sales growth is leveraged through the company's tight cost structure leading to say 2% net income
margins (which is still below this company's historical average). This would yield EPS of $0.44. With
just a 10.0x EPS multiple, this company could be worth $4.40 down the road or nearly 50% above the
current price. The challenge is riding out the volatility and being willing to be long potential good
news.

This approach basically encompasses most of our holdings whereby an investment is made in companies
and sectors with cheap valuations/negative sentiment and accompanying skepticism for the investment
thesis ("yeah, there's value there but..."). While I think the broader market is fair to slightly overvalued,
I think we've seen a number of sectors and industries decouple in terms of correlations. For example,
while a number of technology sectors have been trading at 52 week highs, industries like refiners are not
that far removed from their 52 week lows.

I like the refiners because they are cheap across a number of metrics. Refiners scrubbed their balance
sheets over the past few years as oil prices declined. With the decline in oil prices, the carrying values
of a number of their intangible and hard assets were impaired. Yet even with aggressive write downs of
their asset values, share prices of some refiners are still very cheap. Reviewing the balance sheet of
Western Refining ("WNR") can help illustrate this embedded value.

EXHIBIT I: WNR BALANCE SHEET

Q1 2010 Liquid Adj Liquid Value
Cash 25.33 100% 25.33
A/R 333.59 70% 233.51
Inventories 460.09 70% 322.06
Prepaid Expenses 139.33 20% 27.87
Other Current 36.23 0% 0.00
Total Current 994.57 608.77

PPE 1,753.47 70% 1,227.43

Intangible Assets 60.72 0% 0.00
Other 48.56 20% 9.71
Total Assets 2,857.33 1,845.91

Total Liabilities 1,453.73 1,453.73

Book Equity 1,403.59 392.18
Shares Outstanding 90.00 90.00
Book Value per Share $15.60 $4.36

Exhibit I applies a Liquid Adjustment whereby WNR's assets as of Q1 2010 are written down similar to
a liquidation scenario. It's important to note that like many refiners, WNR had already gone through
asset write downs in recent years due to the economic decline so the above liquidation value estimates
may be a bit aggressive.

In addition, most of WNR's inventories are oil products. Oil products, like many commodities, are
pretty liquid and can be sold at prevailing market values. It's unlikely in a liquidation scenario that if
WNR had $460MM of oil or refined products like jet fuel and diesel in inventories that these assets
would be sold at a huge discount. Nonetheless, I still assumed only 70% of the carrying value would be

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realized. This exercise yields about $4.36 in liquid book value yet the stock trades for about $5 per
share right now.

There are challenges facing the refining industry but many of the stocks in this sector are at five and six
year lows, suggesting that the market has more than impounded these problems into their valuations.
This makes me feel optimistic about the longer term performance of stocks such as WNR. Further, with
capacity continuing to be stripped out, eventually even a slight uptick in demand will yield outsized EPS
results which can drive share price appreciation.

Many cyclical industries are characterized by over investment in boom periods and under investment
and overzealous capacity reduction in bad times. During the peak oil years, refiners were making
significant investments in more expensive refineries that had the ability to process sour and heavier
crude. This was because at a certain price it was cost effective to refine what was typically less
desirable classes of crude oil. However, since oil prices have collapsed, refiners have been closing a
number of refineries including some of the most recent, high cost ones. The industry has been
downsizing itself over the past two years and while there is still work to be done, I suspect that refiner
executives have made the 180 degree shift to the view that ultra high oil prices are the "new normal" to
the new "new normal" whereby demand will be so tepid there are far too many refiners out there.

Both cases are probably wrong, and what I anticipate is that the industry reduces capacity to the point
where acceptable utilization rates are achieved based on the current, weak economy. This will lead to
little excess capacity if the economy has even a slight uptick in the coming years which will result in
much higher capacity utilization which in turn will lead to big EPS figures which could result in
meaningful share price appreciation.

The concept of having a solid level of asset protection and riding out some tough current times also led
us to an investment in Seahawk Drilling ("HAWK"). HAWK was spun off from Pride International
("PDI") in August 2009. Kinnaras investors know that I am a big fan of spin-offs, as are most investors
that are familiar with Joel Greenblatt's You Can Be a Stock Market Genius. Spin-offs can be excellent
investment opportunities which is why I track upcoming spin-offs. Kinnaras has invested in its fair
share of spin-offs over the years and once HAWK was spun out, I kept an eye on it.

HAWK is a shallow water natural gas driller in the Gulf of Mexico ("GOM"). Like many GOM drillers,
HAWK saw its share price crumble once the BP disaster and drilling moratorium occurred. Shares
peaked shortly after the spin-off at roughly $35 per share and commensurately lost about 50% before the
BP oil spill. Once the BP spill and moratorium occurred, shares plunged from $18 to as low as the mid
$8s. Shares are now at about $10 and Kinnaras began buying in the $10-12 range.

HAWK has attracted the attention of other value investors such as Corsair Capital but the best analysis
of HAWK comes from Toby Carlisle, founder of Eyquem Fund Management. Anyone that wants to get
fully up to speed on HAWK should check out his blog, www.greenbackd.com, which contains a number
of excellent posts on HAWK.

The basic thesis with HAWK is that it provides tremendous operating leverage to an upswing in natural
gas prices. Natural gas prices are low due to economic weakness and a lot of supply that has been
discovered in recent years. Right now, the world is awash in natural gas due to weak economic activity
and new gas discoveries. However, if one can look past a one year time period, HAWK can begin to
look really exciting.

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Dayrates - or what drillers charge for their services - are correlated with natural gas prices. So with
natural gas prices so low, dayrates for drilling rigs are low. The cost of operating these rigs are fairly
fixed, however, so assuming HAWK can make it through a weak economic period, there should be the
potential for upside over the years. If natural gas prices increase, the drilling rates will as well.

The challenge is making it through a slow period. Right now, the GOM drilling market has been very
depressed but there are signs of some life with more rig activity occurring and more inquiries regarding
rig availabilities being made. But even in the event that drilling activity remains extremely poor in the
Gulf region, HAWK should be able to make it through this slow period.

HAWK has a very attractive balance sheet with about $67MM in net cash. More importantly, HAWK's
drilling rigs have considerable value but are being severely discounted by the market. In fact, the
market value of drillings rigs has declined to levels below even 2004 market values. There have also
been some recent transactions by Hercules Offshore ("HERO") and Ensco ("ESV") that suggest HAWK
has much more value solely based on the value of its rigs than its current share price implies.

At $10 per share, HAWK's market cap is $118MM. HAWK has about $164MM in total liabilities so
the market is saying HAWK's total assets are worth $282MM. Out of the $282MM in asset value
implied by the market, $73MM is cash leaving $209MM in implied asset value. Another $67MM is
accounted for by current and other assets so that leaves $142MM in asset value for its rigs. HAWK has
20 rigs and its current share price implies that the average value of its rigs are about $7MM each.
HAWK's CEO has mentioned in the past that the scrap value of a rig is about $8-9MM each and rig
transactions over the past year have implied rigs similar to HAWK's support higher rig values.

As with Retailer I, WNR, and HAWK, our approach is really about reconciling valuation to expected
future outcomes. Sure, things are bad but if they remain status quo, then we still have a valuation
cushion. But if things improve even slightly, we have the chance to make some pretty solid returns.

That also applies to our larger holdings like Citigroup ("C") and Sprint Nextel ("S"). C has explicit
government support whereby it cannot fail and still trades at a discount to its P/B and P/normalized
earnings power. Trends continue to move in the right direction for C with net credit losses declining
sequentially and on a comparable quarterly basis per C's Q2 2010 earnings report.

In addition, C realized a Loan Loss Reserve Release in Q2 2010. This is a point of criticism by some
skeptics that will say the earnings are juiced to some extent by these reversals. These critics say the
swipe of an accountant's pen is leading to these reserve releases which artificially boost earnings. This
is an unfair and inconsistent criticism because these same skeptics in prior quarters would point to the
high level of loss reserves these banks were setting aside in anticipation of future losses as a warning to
investors.

What I had noted when Kinnaras first started looking at financials was that banks were likely over-
reserving for future losses. For example, one regional bank that Kinnaras owns has about $100MM in
non-performing loans ("NPLs"). However, $31MM of those NPLs were still current on principal and
interest through Q1 2010. If one assumes that the period from late 2008 through 2009 was the zenith of
the financial crisis, as the economy recovers, even at this anemic pace, those $31MM in NPLs could
eventually be classified as performing. Basically, if those loans which are current on principal and
interest did not kick out during the worst of the recession, they are likely money good.

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What this means is that a number of loss provisions for banks could be reversed across the board. This
is consistent with historical bank crises, whereby loss provision reversals are recognized as the realized
credit losses come in well below prior expectations. This expectation was what led me in January to
present the notion of a bank-only investment vehicle to some investors, with a specific emphasis on
regional banks. While C is a money center bank, the same phenomenon of loan loss reserve reversals
will occur throughout the year and have the most pronounced impact on regional banks. We own a few
regional banks and I think we will be pleased with their performance.

S is also continuing its impressive turnaround. In late Q2 2010 it released its new phone, the HTC EVO
4G. I bought one, electing to pay the penalty to cancel my T-Mobile bill and drop my Blackberry to
sign up for S and get the new phone. This phone is powered by Google's Android Operating System
("Android OS") and is the real deal. It's a major iPhone competitor and I would know considering my
household has gone through two iPhones.

S released its Q2 2010 results which were very strong. Churn was under 2%, with S reporting its best
churn figures in its history. It added postpaid subscribers for the first time in three years and CEO Dan
Hesse mentioned that this would be the case even without the EVO. The EVO was released late in Q2
so I expect the full EVO impact will likely be felt in Q3 2010. S continues to generate strong cash flow
and has no significant near term debt maturities. In addition, its customer service metrics continue to
improve. The company is doing just about everything right and I expect the stock to eventually reflect
these positive developments, albeit with the typically high volatility associated with S.

These quarterly missives can sometimes be a challenge because the reality is three months is a very
short time period. There may be a lot of noise within 90 days but not a lot of news. It's also difficult to
reflect on what's happened over just a few months when most of your time is focused on the
fundamentals of the companies and a 1-2 year time horizon for catalysts to materialize.

In addition, my sensitivity threshold to market volatility is pretty low whereby our holdings may swing
heavily but it doesn't really register with me. For example, June was a vicious month for Kinnaras but
that was largely due to S, one of our largest positions, declining about 20% on no news. In fact, S
reported impressive Q2 2010 results a few days before the end of July and the stock but sold off about
12% in the last two days of the quarter which dinged what would have been stronger July numbers. S is
doing the right things but short-term market fluctuations are part of the game.

Overall, I feel pretty good about what we hold. For marketing benefits I'd certainly love it if Mr. Market
hurried up and assigned better valuations to our holdings but I feel that what we have is well positioned
to do some great things for us. In fact, I would love to deploy more capital in some of our regional bank
names as well as one very interesting microcap. I'll save that for the next quarterly letter.

Best regards,

Amit Chokshi

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DISCLAIMER: Any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an
endorsement, or inducement to invest with any fund, manager, or program mentioned here or elsewhere. Neither Kinnaras Capital Management LLC nor
any persons or entities associated with the firm make any warranty, express or implied, as to the suitability of any investment, or assume any responsibility
or liability for any losses, damages, costs, or expenses, of any kind or description, arising out of your use of this document or your investment in any
investment fund. You understand that you are solely responsible for reviewing any investment fund, its offering, and any statements made by a fund or its
manager and for performing such due diligence as you may deem appropriate, including consulting your own legal and tax advisers, and that any
information provided by Kinnaras Capital Management LLC and this document shall not form the primary basis of your investment decision. This material
is based upon information Kinnaras Capital Management LLC believes to be reliable. However, Kinnaras Capital Management LLC does not represent that
it is accurate, complete, and/or up-to-date and, if applicable, time indicated. Kinnaras Capital Management LLC does not accept any responsibility to update
any opinion, analyses, or other information contained in the material.

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