Kinnaras Capital

Management LLC www.kinnaras.com

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

November 1, 2010

Dear Investors,

Kinnaras Capital Management ("KCM", "Kinnaras", or the "Firm") Separately Managed Accounts
("SMAs") returned 9.1% net in Q3 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 all
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.

TABLE I: 2010 MANAGED ACCOUNT PERFORMANCE

Q1 2010 Q2 2010 Q3 20210 YTD 2010
KCM Net Performance 9.86% -13.16% 9.08% 4.06%

DJIA 4.78% -9.40% 11.16% 5.52%

SP500 5.35% -11.39% 11.28% 3.88%
NASDAQ 5.88% -11.85% 12.30% 4.81%

1/31/2010 2/28/2010 3/31/2010 4/30/2010 5/31/2010 6/30/2010 7/31/2010 8/31/2010 9/30/2010

KCM Net Performance -1.27% 4.61% 6.37% 2.03% -7.42% -8.06% 4.41% -6.26% 11.45%

DJIA -3.30% 2.90% 5.30% 1.50% -7.60% -3.40% 7.20% -3.90% 7.90%
SP500 -3.60% 3.10% 6.00% 1.60% -8.00% -5.20% 7.00% -4.50% 8.90%
NASDAQ -5.30% 4.30% 7.20% 2.70% -8.20% -6.50% 6.90% -6.24% 12.04%

The great economist John Kenneth Galbraith said "It is a far, far better thing to have a firm anchor in
nonsense than to be put out on the troubled seas of thought." That essentially encapsulates the current
dialogue regarding economic policy. Deficit hawks have captured the debate amongst western countries
and institutions and are imposing harsh austerity measures when government investment programs are
the most expedient ways to generate legitimate "escape velocity" for the economy.

What's particularly disheartening is that deficit hawks have been able to generate a high level of
acceptance of their ideas when much of what they advocate for has been discredited by current empirical
evidence. Ireland provides a good example of austerity in action as it was one of the first countries to
adopt aggressive deficit reduction measures. Ireland intends to reduce its deficit from 12% of GDP to
<3% by 2014. Despite GDP that contracted by 7.1% in 2009, the country adopted no stimulus
measures, with the government imposing three slash and burn budgets.1

The expectation was that Ireland would take its medicine early on and recover faster by implementing
heavy handed spending cuts. Deficit reduction proponents believe that during recessionary times,
reducing government spending will send a signal to credit markets that the country is focused on paring

1
http://www.guardian.co.uk/business/2010/sep/23/ireland-austerity-budgets-comment
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down its deficit and debt and once those programs are enacted, credit markets will reward the country
with reduced borrowing costs as debt levels decline. They also believe that reduced public spending
will allow the private sector to take a larger role in the economic recovery.

So how has the Celtic Tiger fared? In its latest reported quarter - Q2 2010 - Ireland reported a 1.8%
drop in GDP, with the country falling into a double-dip recession. Unemployment has risen to nearly
14% and long-term unemployment is at 5.3%. Ireland's borrowing costs have also continued to rise with
10 year Ireland bonds running at nearly 6.5%. These results are not consistent with the expectations of
deficit reduction advocates, especially since Ireland began its austerity measures in spring 2009.

Ireland was able to demonstrate GDP growth of roughly 2.7% in Q1 2010 but this growth was largely
due to foreign transfers. As MIT professor Simon Johnson and Effective Intervention Chairman Peter
Boone pointed out earlier this year, Ireland's GDP statistic can be a bit misleading because of its status
as a corporate tax haven. Johnson and Boone stated that "roughly 20 percent of Irish gross domestic
product is actually 'profit transfers' that raise little tax for Ireland and are owned by foreign companies.
Since most of these profits are subject to the tax code, they are accounted for in Ireland where they are
lightly taxed; they should not be counted as part of Ireland’s potential tax base."2

Bill Mitchell, Research Professor in Economics and

Director of the Centre of Full Employment and Equity
(CofFEE), at the University of Newcastle, NSW Australia
highlights the difference between Ireland's GDP and gross
national product ("GNP"), which adjusts for the profits of
foreign residents, by providing the graph to the right from
Ireland's Central Statistics Office ("CSO").3 When
adjusting for the impact of foreign profit transfers, it's clear
that economic performance for Irish residents is actually
much worse than what the official GDP figure indicates.
Ireland's Q1 2010 GNP was about -1.2%, illustrating the
significant impact foreign transfers have on the country's
GDP.4

Latvia is another country which illustrates the "benefits" of

pursuing austerity measures. In the past two years, Latvia
experienced a global historical decline in GDP of over
25% with expectations of -4% GDP in 2010. Nonetheless,
Latvia has imposed severe spending cuts, largely because it
wishes to preserve the value of its currency peg in order to
gain entry into the Eurozone.

The drastic spending restrictions imposed by Latvia are -

like Ireland - contributing to an increase in the country's debt to GDP. Debt/GDP in 2007 was under 8%
yet is expected to reach 74% in 2010 and 89% in 2014. This is a bit ironic because Latvia's devotion to
its currency peg in order to gain entry into the Eurozone has led to it possibly violating the debt limits

2
http://economix.blogs.nytimes.com/2010/05/20/irish-miracle-or-mirage/
3
http://bilbo.economicoutlook.net/blog/?p=9887
4
Central Statistics Office - Quarterly National Accounts, September 23 2010
http://www.cso.ie/releasespublications/documents/economy/current/qna.pdf
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stipulated by the Maastricht Treaty which sets out financial conditions for countries wishing to adopt the
euro.

Latvia's unemployment situation

has shown no material signs of
improvement as illustrated in the
chart to the right and the
country's Q2 2010 GDP notched
a decline of roughly 3%.5 As
with Ireland, it's very difficult to
see any tangible benefits that
have accrued to Latvia as a result
of pursuing these callous
policies.

Excessive spending cuts during a

massive economic contraction
strains a country's tax revenues
which is why Debt/GDP rises
even more. Borrowing costs have risen, not declined, contrary to the expectations of deficit hawks.

In addition, the economies of both countries continue to decline with unemployment showing no
material signs of improvement. In the case of Ireland, increased unemployment has further pressured
the country's fragile banking system. In September, the country announced it would bailout Allied Irish
Bank ("AIB") with the country's total bill for bank bailouts reaching $68B.6 Robert Peston, business
editor of the BBC, indicated that total capital provided to Ireland's banks amounted to 30% of GDP and
would cost Ireland's taxpayers €22,500 each.7

So the point is if a big tab needs to be paid, why not spend it on something that can at the very least
directly benefit ordinary citizens? Ireland could spend 30% of its GDP to back-stop banks yet the
country has been reluctant to deploy any capital on high multiplier fiscal projects? If some forms of
direct stimulus were utilized, there's a good possibility unemployment would be sharply declining,
resulting in people having cash in their hands and the ability to service their debts, alleviating some of
the pressure on the banking system and possibly reducing the total bailout bill for Ireland. Instead,
draconian cuts were implemented and the Irish are still spending a fortune to keep its banking system
alive. Further, large swaths of the working population of these countries see their skills erode and
become potentially unemployable as these problems persist while the most talented and skilled workers
eventually seek to migrate to better opportunities. It's hard to see how these policies make sense yet
they continue to receive substantial airtime.

In the case of Ireland and Latvia, default was perhaps the only other choice. However, given the
weakness of their economy, these two countries may just be postponing the inevitable. Unlike Ireland
and Latvia, the US has no constraints in financing projects that can assist in an economic recovery.
Nonetheless, the US is pursuing policies enacted by deficit hawks, driven by misinformation regarding

5
Chart from Eurostat/Google Public Data
6
http://www.nytimes.com/2010/10/01/business/global/01euro.html
7
http://www.bbc.co.uk/news/business-11441473
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"out of control" government spending and how the country has to get back to its "principles" implying
that the country was far leaner and spartan in decades past.

That may be the perception but it's not reality. The following chart uses data from the Office of
Management & Budget ("OMB").8 As one can see, total government spending as a percent of GDP and
federal government spending as a percent of GDP have both remained fairly consistent since 1970. The
spike in spending as a percent of GDP since 2008 has been due to the severity of the economic
contraction in 2008, which was far more severe than anything in the past 80 years. Various stabilizers
such as unemployment benefits and food stamps kick in as the economy contracts but the main culprit
for higher spending as a percent of GDP is due to contracting GDP.

Total Government Spending and Federal Spending as a Percent of GDP

40.0%

35.0%

30.0%

25.0%

20.0%

15.0%
70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00

02

04

06

08
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20

20

20

20
Total Gov't Exp as % of GDP Total Federal as % of GDP 20

This is further supported by data from

the Federal Reserve ("Fed").9
Government expenditures have
maintained their historical trend, even
slightly declining during the middle of
the recession. Once again, the main
problem is government receipts, which
have suffered a sharp drop due to the
recession and commensurate high level
of unemployment.

8
http://www.whitehouse.gov/omb/budget/Historicals/ (Table 15.3 - Total Government Expenditures as Percentage of GDP)
9
http://research.stlouisfed.org/fred2/graph/?#
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These problems ultimately relate to the massive output gap the US is facing. The output gap is basically
the difference between what the US economy can produce and what it is currently producing. The US
currently has an output gap that is nearly $1T and current economic growth is far too slow to close that
gap. The Washington Post recently released an interactive graph that does an excellent job of
illustrating this problem.10 The chart below is from one frame of the interactive graph but readers may
benefit by visiting the site highlighted in the footnotes.

The big risk with the current output gap is that there are no aggressive policies being considered to close
this gap. The longer this gap persists, the longer it takes for unemployment to decline. According to the
Washington Post's Neil Irwin, the current rate of 1.7% GDP growth is not sufficient enough to ever
close this gap and unemployment would likely increase to near 12% by 2020. A growth rate of 3%
would close this gap by 2020 and reduce unemployment to 5% while growth of 6% could close the
output gap by 2012 and reduce unemployment to 5%.

The challenge is that policy makers are ignoring the only element of GDP that can stimulate the demand
necessary to close this gap. GDP can be broken down into a few components: C (private consumption)
+ G (public/government consumption) + I (investment) + (X-I) (trade surplus or deficit). With the
exception of public consumption, every other component is severely constrained.

The travails of the private sector are well known at this point and all center around an over leveraged
consumer. People are saving a lot more, over 6% of their income, compared to recent historical rates of
under 1% and at times even under 0%. This is necessary as consumers repair their balance sheets but in
aggregate will reduce total economic output.

10
http://www.washingtonpost.com/wp-srv/business/the-output-gap/index.html
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Investment is constrained because of lack of demand, resulting in 5% of the country's industrial capacity
being idled. There are some policies that have been offered such as a 100% bonus depreciation
allowance for small businesses but this is unlikely to work. The following chart is from the latest survey
of small businesses, courtesy of the National Federation of Independent Business.11 The number one
concern by a significant margin is lack of sales/demand. Taxes have generally remained the biggest
concern of small business by a wide margin since 1986 so it's quite telling that weak business prospect
concerns have jumped so significantly since 2008. The lack of sales is likely to keep businesses on the
sidelines with respect to capital expenditure decisions, regardless of the sizeable tax incentive. In fact,
the Institute for Supply Management ("ISM") conducted a survey in 2005 following the bonus
depreciation provision offered in 2004 whereby 66% of respondents indicated that the provision had no
effect on the timing of capital spending.12

So with respect to GDP, both "C" and "I" are not in a position to make meaningful contributions to
GDP. As for "(X-I)", there's nothing in our bag of tricks to quickly change the US into a net exporter.
As is widely known, countries are engaged in a race to devalue their currencies in order to drive
economic growth through exports. The US is probably the most poorly equipped to devalue its currency
because most countries want a stronger USD relative to their own currency. In addition, the USD is a
reserve currency so during times of stress, the USD is likely to strengthen.

This leaves "G" as really the only available component to drive growth and it's startling that policy
makers are not seizing on this opportunity. The US has near limitless capacity to finance any project
relative to most peers with 10 Year and 30 Year Treasuries at just 2.63% and 3.88%. Given high levels
of unemployment, labor costs are very low so with low borrowing and labor costs, it’s hard to believe

11
http://www.nfib.com/Portals/0/PDF/sbet/sbet201010.pdf
12
http://www.federalreserve.gov/pubs/feds/2006/200619/index.html
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that the government is not seizing on this opportunity to enact aggressive stimulus projects that can
improve the country.

For example, the US still has very old water pipes, some dating to the late 1800’s, that are in significant
need of upgrades. The 2009 American Recovery and Reinvestment Act set aside just $2B for drinking
water systems but the Environmental Protections Agency ("EPA") estimates the country's drinking water
systems require over $300B in new investment and upgrades.13 This is a project that could immediately
employ people in a very critical investment at cheap funding rates and labor costs yet we're content to sit
on the sidelines while millions remain jobless.

Another area of focus should be on aggressively expanding broadband quality in the US. Cisco Systems
("CSCO") recently released results of its third survey from Said Business School at Oxford University
where it examined broadband quality. South Korea, Hong Kong, Japan, and Iceland rounded out the top
four while Switzerland, Luxembourg, and Singapore were tied for fifth. The US came in at 15th.
Information and speed/quality of delivery of that information are critical to compete in a global
economy and the US should not be an also-ran in cutting edge technology. Scientific American put it
best14:

The average U.S. household has to pay an exorbitant amount of money for an Internet
connection that the rest of the industrial world would find mediocre. According to a recent
report by the Berkman Center for Internet and Society at Harvard University, broadband
Internet service in the U.S. is not just slower and more expensive than it is in tech-savvy nations
such as South Korea and Japan; the U.S. has fallen behind infrastructure-challenged countries
such as Portugal and Italy as well.

The consequences are far worse than having to wait a few extra seconds for a movie to load.
Because broadband connections are the railroads of the 21st century—essential infrastructure
required to transmit products (these days, in the form of information) from seller to buyer—our
creaky Internet makes it harder for U.S. entrepreneurs to compete in global markets. As
evidence, consider that the U.S. came in dead last in another recent study that compared how
quickly 40 countries and regions have been progressing toward a knowledge-based economy
over the past 10 years. “We are at risk in the global race for leadership in innovation,” FCC
chairman Julius Genachowski said recently. “Consumers in Japan and France are paying less
for broadband and getting faster connections. We’ve got work to do.”

Rather than capitalize on these opportunities that are necessities to remain competitive with the rest of
the world, government projects are viewed as unwarranted expenses. There are many viable
investments to be made but we're content with sitting on our hands or pursuing costlier, less effective
ways of stimulating the economy. There are always critics of government funded programs, many are
valid, but investing in key initiatives such as those mentioned above can produce a tremendous return on
investment.

The Erie Canal opened around this time in 1825, connecting Lake Erie and the Hudson River, and was
considered an engineering marvel. It yielded significant productivity gains reducing transportation costs
by over 90%. While recent generations can look back in admiration, it is important to note that the Erie
Canal experienced its own share of derision as critics at the time dubbed it "Clinton's Ditch." Skeptics

13
http://www.nytimes.com/2009/04/18/us/18water.html
14
http://www.scientificamerican.com/article.cfm?id=competition-and-the-internet
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viewed New York Governor Dewitt Clinton's project as a hole in the ground and waste of money. The
same criticisms would arise with a number of proposed infrastructure projects today but nothing would
get as much bang for the buck as these types of programs. So while developing countries like China are
unveiling high speed (262mph) trains, US policy makers continue to punt on any productive projects,
hoping that monetary policy implemented by the Fed can make a significant impact.

That brings us to current markets where the Fed's plan for quantitative easing 2.0 ("QE2") has been
stoking equity markets over the past two months. QE2 expectations have focused on roughly $500B in
purchases by the Fed. This is far too small an amount to make any difference but is consistent with the
Fed's history of under delivering. At any rate, while mortgage rates are near historical lows, the
percentage of consumers that meet credit criteria for refinancing and home purchases is low. In
addition, reducing borrowing rates by a few basis points is not likely to spur significant demand given
current low borrowing rates.

This strategy of providing supply in the form of cheaper capital through monetary policy or tax subsidies
in the case of bonus depreciation won't work in an environment with a massive dearth of demand.
Nonetheless, there will still be winners from the Fed's policies. QE2 will maintain an accommodative
borrowing environment for large companies who will choose to issue debt for either massive share
repurchases or strategic acquisitions. Leveraged buyout funds will also be able to take advantage of
cheap funding to acquire companies.

One of our holdings - Brocade Communications ("BRCD") - could be a potential target for either a
strategic or financial buyer. BRCD provides networking equipment and solutions with a main focus on
Ethernet networking and storage area networking ("SAN"). BRCD sells its products to large tech firms
such as EMC, Hewlett Packard ("HPQ"), and IBM that go on to incorporate its products into broader
networking and technology infrastructure solutions.

BRCD is cheap relative to its peers and is a play on data center and network upgrades in the corporate
world. Cloud computing and virtualization are key focus areas for corporate IT and BRCD's products,
such as its Brocade One line, are used to construct networks and IT infrastructure capable of handling
these growing needs. With a market capitalization of roughly $2.8B, BRCD could be an attractive target
for either a strategic or financial buyer.

For example, HPQ purchased BRCD competitor 3Com for roughly $2.7B in late 2009. This gave HPQ
a strong foothold in Ethernet Switching, one of BRCD's key segments. HPQ could opt to acquire BRCD
to establish an even stronger presence in this segment and also bolster its data storage solutions segment.
HPQ has a market capitalization of nearly $100B, a strong balance sheet, and more than enough cash
flow whereby BRCD would be an easy acquisition.

Aside from HPQ, competitors such as EMC, NetApp ("NTAP"), or Juniper Networks ("JNPR") could
also acquire BRCD. JNPR competes with both HPQ and BRCD in Ethernet Switching. Both are
smaller competitors than HPQ (via 3Com) but BRCD is nearly 30% larger than JNPR in this segment.
By acquiring BRCD, JNPR would be a very solid #2 in this segment and pricing in this segment could
firm up.

JNPR has a market capitalization of roughly $17B and is valued at 21.0x 2011 EPS, 3.8x Enterprise
Value ("EV")/LTM Sales, and 16.6x EV/LTM EBITDA. JNPR has a balance sheet with over $2B in net
cash. JNPR's clean balance sheet, strong cash flow, and highly valued stock provide it with a number of
financing strategies to consider if it wished to acquire BRCD. JNPR is roughly twice as large as BRCD
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in terms of scale but the market values it much more richly, in part because JNPR has boasted stronger
growth rates recently. JNPR could acquire BRCD on the cheap as BRCD is valued far less than its
broader peer group, and increase JNPR's size by roughly 50%.

BRCD is even cheap enough to attract capital from financial sponsors. Part of the reason BRCD is
cheap is because its growth has been lower than its peers. Its margins have also been under pressure in
part because it is still working through a reorganization process since acquiring Foundry Networks
("Foundry") in 2008. Nonetheless, BRCD does have attractive long-term growth rates, high operating
margins, and an improved cash flow outlook in 2011 and beyond. For example, BRCD has spent
significant capital on its new corporate campus but those associated costs will be completed by 2010.
As Exhibit I illustrates, BRCD could be an attractive investment for an LBO firm.

EXHIBIT I: BRCD LEVERAGED BUYOUT MODEL15

Transaction Metrics Transaction Structure ($MM)
Offer Price $8.50 Capital /EBITDA
Current Price (10/27/10) $6.19 Sponsor Equity 1,685 3.3x
Premium 37.3%
Shares (MM) 487 Financing
Equity Value ($MM) 4,140 Term Loan B 2,066 4.0x
Enterprise Value ($MM) 4,813 Senior Notes 590 1.1x
EV/LTM EBITDA (incl Stock Comp) 9.3x Senior Sub Notes 295 0.6x
Total Debt 2,951 5.7x

PROJECTIONS ($MM) (Kinnaras Estimates)

2011 2012 2013 2014
Sales 2,184 2,304 2,396 2,492
Gross Profit 1,215 1,278 1,327 1,377
Gross Profit Margin 55.6% 55.5% 55.4% 55.3%

EBIT 403 435 452 470

+D&A 159 166 174 182
EBITDA 562 602 626 651
EBITDA Margin 25.7% 26.1% 26.1% 26.1%

Less:
Interest Expense 256 254 253 251
Principal Repayment 21 20 20 20
Taxes (30%) 44 54 60 66
CapEx 125 131 138 144

Free Cash Flow 116 141 156 170

FCF Margin 5.3% 6.1% 6.5% 6.8%

EBITDA 562 602 626 651

Exit Multiple 10.0x 10.0x 10.0x 10.0x
Enterprise Value 5,617 6,015 6,260 6,514
Less: Net Debt 2,814 2,652 2,476 2,286
Equity Value 2,803 3,363 3,784 4,228

15
Projections for LBO model exclude equity issuance/stock compensation expense as BRCD would be private. Projected
gross profit, EBIT, and EBITDA based on BRCD's Non-GAAP adjustments which exclude stock compensation.
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The estimates in Exhibit I assume tepid long-term sales growth of just about 5% per year with a slight
decline in gross profit margins relative to historical levels. A financial sponsor such as Silver Lake
which specializes in technology LBOs would likely be able to improve BRCD's efficiency. Even
without embedding any operational improvements, a financial sponsor that took BRCD private for
$8.50/share (37% premium to its closing price on October 27, 2010) by year end 2010 and exited at
year-end 2014 would have more than doubled its initial $1.7B equity investment, generating a 26%
annualized return. If a financial sponsor can pay a 37% premium, a strategic buyer could pay
significantly more. While BRCD has not put itself up for sale, its current valuation should make it an
appealing target for a variety of buyers. BRCD contributed to a strong September as the stock increased
roughly 25% from its August lows.

We also benefited from a quick recovery in the valuation of "Retailer 1" which was mentioned in the Q2
letter. That company was Coldwater Creek ("CWTR") which benefited from unexpectedly strong Q2
2010 results. The stock never looked back after those results in late August. The strong appreciation in
value along with warnings from CWTR competitor Talbots ("TLB") led me to dispose of our entire
CWTR stake in early October. This turned out to be pretty fortunate as CWTR released a Q3 earnings
warning in mid October which returned the stock value back to where it was prior to Q2 results.

In the Q2 letter we also discussed Seahawk Drilling ("HAWK"), a shallow water Gulf of Mexico
("GOM") drilling company that was sidelined due to the drilling moratorium stemming from the BP oil
spill. One of the investment drivers was that the market was valuing HAWK at or near liquidation value
despite the fact that the drilling moratorium would eventually be lifted and that HAWK had nearly
$6/share in net cash (when the stock was trading between $8-12) and was more than capable of making
it through a tough period for natural gas drillers.

The Q2 letter illustrated that the market was implying that HAWK's 20 rigs were valued at a total of
$142MM or roughly $7MM per rig. However, on September 29, HAWK entered into an agreement to
sell one of its rigs, the Seahawk 2505, for $14.6MM. The 2505 is a slot format rig which implies that
HAWK's liquidation value alone could be worth much more than $10 per share.

HAWK has 20 rigs that are either slot (6) or cantilever (14) formats. Cantilever designed rigs allow the
drilling platform to be extended out from the hull to perform drilling and work-over operations over pre-
existing platforms and structures. In contrast, slot designed rigs are less flexible, and require drilling
operations to take place from a slot in the hull. As a result, cantilevers generally maintain higher
utilization levels relative to slot design rigs and are therefore worth more.

While there are other factors involved in the value of a rig, the 2505 is hardly one of HAWK’s best rigs.
It is actually mediocre for HAWK given its design and age yet it sold for nearly $15MM. Multiplying
20 rigs by $15MM yields $300MM in value for HAWK's rigs. Adding that value to HAWK's current
assets of $115MM and Other Non-Current Assets of $2MM and netting out roughly $150MM in total
liabilities yields a share price of nearly $23/share. Of course there are other variables that could reduce
this value but what investors should note is that our concern is on the downside value for HAWK and its
latest sale, in the midst of a collapse in natural gas prices, suggests that HAWK has some solid asset
protection in place.

As we move into Q4, we've also begun to reduce some holdings. We sold off our position in Kraft
Foods ("KFT"), Tesoro ("TSO"), and Republic Airways ("RJET") in the past two weeks. KFT was sold
because there are just better places to invest given our size. The relatively late release of this letter was
in part due to the research involved with adjusting the portfolio to capitalize on some of these new
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opportunities. Most of these are in small and micro capitalization opportunities. TSO was sold for
similar reasons to KFT but also because we had additional refinery exposure through our investment in
Western Refining ("WNR"). RJET was one of our largest holdings and was sold because it was
approaching our valuation estimate of $10-11.

Our other key positions are Citigroup ("C") and Sprint-Nextel ("S"). C's credit outlook continues to
improve but investors still have to deal with the overhang related to the US Treasury disposing of its
stake in C as well as the earnings drag stemming from Citi Holdings. Investors will note that C was
essentially split into a "good" and "bad" bank. Citi Holdings is the "bad" bank and its assets are being
wound down. The drag on C from those Citi Holdings is becoming smaller as the assets are disposed of.
In addition, C does not pay a dividend but could be in a position in the coming 12-18 months to return
capital to shareholders. Reinstating a dividend and reduced earnings drag from a shrinking Citi
Holdings will eventually boost C shares as a normalized operating scenario becomes more apparent. In
addition, C will benefit from a very low effective tax rate stemming from the accumulation of
considerable net operating losses during the financial crisis. These various factors in combination
should warrant a share price well above $5 in the coming year.

S has been our most confounding investment this year...confounding because in my estimation it's
attractively valued and also has a number of positive catalysts that are coming to fruition, but also
frustrating because the stock continues to be range bound between the high $3's and low $5's almost
irrespective of its earning reports. S continues to improve operationally but its highest share price in
2010 was in late May stemming from a Goldman Sachs upgrade. In late July, S released impressive Q2
results whereby its share price surged over 10% only to top out over the next few days before losing
about 25% over the course of August. The stock rebounded through September and most of October
until it released Q3 earnings on October 27, 2010 when S missed analyst EPS estimates (-$0.30 vs -
$0.28 est).

While the market has punished S since this earnings release, the company's fundamentals are moving in
the right direction. S beat Street estimates for both revenue and postpaid subscriber losses. Many
analysts had expected S to grow revenues in Q4 or 2011 yet revenues were up in Q3 driven in part by
the addition of 644,000 wireless subscribers, which was the company's highest quarterly net addition
since 2006. To put that in context, in Q3 2009, S lost nearly 550,000 wireless subscribers. The huge
positive swing demonstrates management has taken the right steps to stop the hemorrhaging and bring
growth back to the company. This 1MM+ swing in subscribers contributed to the first year over year
improvement in quarterly growth in over three years.

S has also fully turned around its customer service quality, which in years past was a huge deterrent to
the brand. S came in #1 or #2 in five of six regions in a recent JD Power & Associates Wireless Call
Quality Performance Study and moved from last place in recent years to a tie for first in a JD Power
Retail Sales Satisfaction Study. In addition, S was the fastest growing postpaid brand in terms of net
new customers in Q3, indicating that S is taking share from its competition.

S churn rates, which represent customer attrition and erode profitability, continue to remain low. Before
2010, S churn rates were well over 2% and hampered the company's operating margins. For its two
most recent quarters, S churn rates have been under 2%. If the company can maintain churn rates at
these levels, improved profitability will begin to materialize.

While S appears to be on the right track, investor expectations leading into Q3 were clearly for an even
faster turnaround. I believe S is perhaps 1-2 quarters away from returning itself to positive growth on a
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net postpaid addition basis. The market values S relatively poorly compared to its peer group but as
investor sentiment begins to appreciate a potential growth and earnings leverage story, S shares could do
very well.

Right now there are a few issues inhibiting margins. The first is that Q3 was the first quarter where the
company's two hottest phones, the HTC EVO and Samsung Epic 4G, were released. The EVO came out
in the final two weeks of Q2 so Q3 was really when it had a full quarter of availability while the Epic 4G
was released in the latter part of Q3. The costs of smartphones, especially two of the very best such as
the EVO and Epic, raise the company's cost of products as S, like other telecoms, heavily subsidizes the
cost of handsets. 16 As a result, S is paying for these phones upfront in the form of heavy subsidies but
won't reap the benefits of these phones until its customers cycle beyond the first few weeks of usage.

As these subscribers with more expensive plans and devices are cycled through the company's lower
average revenue per user (“ARPU”) base of subscribers, ARPU should increase and more than offset the
high cost subsidies associated with these smartphones. Investors should also note that just 45% of the
company's current customers have a smartphone and that 60% of the company's new sales are
smartphones. As that base of smartphone subscribers increases, the overall cost drag of these newer
phones should be more than offset by higher ARPU.

Another catalyst for S is the rationalization of its network. S has two networks: code division multiple
access ("CDMA") and Integrated Digital Enhanced Network ("iDEN") stemming from its horrific
acquisition of Nextel. The company has 49MM subscribers of which 33MM are postpaid, 12MM
prepaid, and 4MM wholesale/affiliates. The postpaid segment offers the highest profit subscribers while
prepaid offers major growth.

There are 6MM postpaid and 5MM prepaid subscribers on the iDEN network. No other large carrier
supports this format and there is far less phone support for the iDEN format. More importantly, iDEN
has been a major source of customer losses for S. In Q2 2010, S added 136,000 CDMA postpaid
customers but saw 364,000 iDEN subscribers leave while its prepaid segment experienced a gain of
638,000 CDMA customers but a loss of 465,000 iDEN customers. In Q3 2010, S added 276,000
postpaid subscribers to its CDMA network but lost 383,000 iDEN customers while its prepaid segment
notched 1.2MM new CDMA customers offset by losses of 700,000 iDEN customers.

iDEN is a dying format in the US for the retail customer and business professional yet the company's
maintenance of this network format, combined with servicing a diminishing subscriber base is a huge
cost drag. During the Q2 2010 earnings call, S management indicated that S will be modernizing its
network and a recent interview with CEO Dan Hesse suggested iDEN would soon be phased out as part
of this modernization plan. During the Q3 2010 conference call, Hesse indicated operating results
would reflect these efforts in 2012.

This matters because cost of service ("COS") is a huge cost component for S and is currently a
competitive disadvantage as its main competitors can leverage costs around just one network format
(VZ- CDMA, AT&T - GSM, T-Mobile - GSM). The company's COS account for roughly 61% of its
total cost of goods/services sold. Between equipment costs and service costs, the company is able to

16
PC World ranked Epic and EVO #1 and #2, ZDNet ranked EVO as the "Best Smartphone", Popular Mechanics awarded
the EVO with the 2010 Breakthrough Product Award, Laptop Magazine suggest that "Sprint has the best 1-2 punch of any
carrier" regarding the EVO and Epic
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generate gross margins of roughly 47%. S has also done an excellent job of controlling its operating
costs so any improvement in gross margins should largely flow through to its operating earnings.

Exhibit II illustrates the potential benefits S could reap from its modernization plan with the highlighted
segments emphasizing the areas that would directly impacted from these efforts. The projections in
Exhibit II assume the costs associated with the modernization plan would run roughly $3B over two
years and would yield a cost reduction in COS of roughly $2B by 2012 and beyond. If the
modernization plan is effective, S could be well above $7 per share.

EXHIBIT II: SPRINT NEXTEL PROJECTIONS17

2010 2011 2012 2010 2011 2012
Revenues 32.2 33.2 33.5 Cash Flow Analysis:
Cost of Service 10.6 11.0 8.8 EBITDA 5.6 5.7 8.2
Cost of Products 6.6 7.0 7.0 - Cash Taxes 0.0 0.0 0.0
Total COGS 17.2 17.9 15.7 - Maintenance CapEx (2.0) (1.5) (1.5)
Gross Profit 15.1 15.3 17.8 - FCC License Expenditures (0.6) (0.6) (0.6)
SG&A 9.5 9.6 9.7 - Network Modernization Plan 0.0 (1.5) (1.5)
EBITDA 5.6 5.7 8.2 Cash Flow before Financing Needs 3.0 2.1 4.6
D&A 6.5 5.9 5.5 - Interest Expense (1.4) (1.4) (1.1)
EBIT (0.9) (0.2) 2.7 - Debt Maturities 0.0 (1.7) (2.8)
Interest Exp (1.4) (1.4) (1.1) Cash Flow 1.5 (0.9) 0.7
EBT (2.3) (1.6) 1.6
Taxes (40%) (0.9) (0.6) 0.6 Cash Balance 5.2 4.3 5.0
Net Income (1.4) (0.9) 1.0 Total Debt 20.3 18.6 15.9
Shares (MM) 3.0 3.0 3.0
EPS ($0.47) ($0.32) $0.32

Operating Metrics:
Revenue Growth 0.1% 3.0% 1.0%
COS/Rev 32.9% 33.0% 26.1%
COP/Rev 20.4% 21.0% 20.8%
COGS/Rev 53.3% 54.0% 46.9%
Gross Profit Margin 46.7% 46.0% 53.1%
EBITDA Margin 17.3% 17.2% 24.3%

The Cash Flow Analysis table in Exhibit II demonstrates that S can also afford these future upgrades and
more importantly has enough cash on hand to address principal maturities. Clearly there are a number
of positive fundamental catalysts both current and in the future that the company is realizing. However,
the market action of S is currently dictated by its relationship with Clearwire Corporation ("CLWR").

S owns 54% of CLWR, which is basically the company's 4G strategy. CLWR provides 4G service in
the US, currently covering 63MM people with the expectation of covering roughly 120MM by the end
of 2010. In fact, on November 1, 2010 CLWR will launch 4G service in New York City followed by
plans to launch 4G in San Francisco and Los Angeles in the coming weeks.

CLWR is continuing to roll out its service nationwide but this requires considerable capital, perhaps up
to $4B in total capital over the next 12-18 months whereby CLWR will likely need an equity infusion in
H1 2011. In late September, reports suggested that Deutsche Telekom ("DT"), through its subsidiary T-
Mobile ("TM"), was considering an investment in CLWR. This did not materialize and it appears that
this was due to S, which as majority owner of CLWR opposed an outside investment.

This was a bad move and delayed, if not eliminated one potential catalyst for S shareholders. If TM was
allowed to invest in CLWR, it could have set the stage for a potential consolidation of S into DK.

17
Projections (Non-GAAP) based on Kinnaras estimates
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Perhaps TM/DK would have directly bought S and then consolidated CLWR into the combined entity.
Unfortunately, TM can now either roll out its own 4G network or partner with independent 4G providers
such as a LightSquared, which is owned by hedge fund Harbinger Capital Partners.

The one good thing is that this is an issue that needs to get resolved relatively soon given the near term
funding needs of CLWR. Given the company's cash balance and ability to handle near-term debt
maturities, S could fund immediate CLWR needs of up to $1B-$1.5B. However, S management should
seriously consider engaging TM, primarily because this combination would yield an entity that is much
less hampered by capital constraints and also can leverage a broader subscriber base over a growing 4G
network.

Currently, CLWR's existing 4G network can handle a lot of subscribers but because the technology is
relatively nascent and tied mainly to S's existing subscribers that upgrade to 4G service, the costs of that
network are spread over a relatively small subscriber base. Adding TM's 34MM subscribers would
allow a combined TM/S/CLWR to introduce 4G over a much broader customer base, yielding
significant scale benefits. While S can succeed on its own and drive share price appreciation, a
consolidation would yield the fastest benefit to existing S investors.

Aside from S and other holdings mentioned in this update, the portfolio is currently being deployed into
new opportunities as well as keeping a sizeable portion in cash. We turned over a fair portion of the
portfolio in the early part of Q4 because of larger valuation gaps appearing in the small cap segment
relative to large capitalization companies and some holdings like RJET nearing our valuation estimates.

As always, feel free to contact me with any questions.

Best regards,

Amit Chokshi

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
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any opinion, analyses, or other information contained in the material.

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