QUARTERLY COMMENTARY FIRST QUARTER 2006

CHAIRMAN THE ONLY CHANGE AT FOMC

The Federal Open Market Committee (FOMC), now lead by Bernard Bernanke, has stayed the course charted by his predecessor Alan Greenspan. Despite the change at the FOMC Chairman position, not much changed in regards to their view on the prevailing economy. At the end of March, it raised rates by % for the 15th (and counting) consecutive meeting and the longer end of the yield curve largely ignored it for the 15th straight time (see chart). In the 1st Quarter many closely watched metrics remained the same. Oil and precious metals maintained their lofty levels, small company stocks and international stocks outperformed their domestic large company peers, corporate profits posted double-digit increases, employment improved and economic growth continued. The equity and fixed income markets have begun to act as if this environment will continue. The S&P 500 in the 1st quarter posted a return of 4.21% which nearly matches the return for all of 2005. The bond market has begun to test the upper end of the yield range it has maintained since the FOMC began raising rates in the Spring of 2004. At Nelson Roberts Investment Advisors, we have maintained our position of being fully invested within our equity allocations while keeping the fixed income maturities in our portfolios short.
CONTENT AS KING

milestone in the migration of traditional media to digital distribution devices allowing consumers to view television, films and other content when and where they choose. There are more than 9 million Internet blogs, over 5,000 unique podcasts and uncountable number of vblogs and video clips. Mobile phones, handhelds (like Apples iPod), and laptops, are all tools giving the consumer more control over the content they watch. While the consumer shift to digital media presents a challenge to the traditional media business model, we believe the transition also represents an opportunity for CBS and Viacomleaders in both the production and distribution of TV and cable programmingto push their content across new distribution platforms. With popular programs and content, they can now sell pieces of what they do to numerous places and are in a position to exploit and leverage this content and existing media brands with the Internet, mobile devices, video games and interactive TV. Viacom has launched MTV OverDrive and Comedy Centrals Motherload, websites that enable users to view and download content previously available only through TV programming. As we shift to a subscription-based world, we expect content rather than distribution channel will increasingly command the power.
JAPAN

In January the old Viacom spun-off into New Viacom (tkr: VIA/B) (retaining the cable networks and Paramount) and CBS (tkr: CBS) (CBS network, TV and radio stations) illustrating the dramatic changes within the media landscape. Armed with technologies like the Internet, TiVo, and satellite radio, people are increasingly consuming media, but at different times and in new placeson the go and at their desks, as well as watching TV at home. The agreement last fall between Apple and Disney to sell episodes of Desperate Housewives and other shows over iTunes to be viewed on the video iPod was a

Early in the first quarter, we increased our exposure to Japan with the addition of an exchange-traded fund (tkr: EWJ), giving us low cost and diversified exposure to leading Japanese companies. A string of good economic news has helped to support gains in Japan, whose economy has been shaking off the remnants of a malaise that persisted through much of the 1990s. In its most recent economic report, the Japanese government raised its growth outlook and removed the word gradual from its description of the

recovery. Rising wages and improved employment conditions encouraged consumer spending, fueling economic expansion. Japan's economy expanded 1.1% in the 1st quarter of 2005, followed by growth of 2.7% in the 2nd quarter, 2.8% in the 3rd, and 4.5% in the 4th. The Bank of Japan decided on March 9 to end its accommodative monetary policy that had lasted for five years. Still, interest rates will likely remain close to zero for some time, to allow for further growth and Index Performance slight inflation. After Dow Jones Industrials the latest labor market and inflation reports, Standard & Poors 500 the Nikkei closed at EAFE (international stocks) 17,059, up more than Russell 2000 (small stocks) 40% over the last year. Lehman Intermediate We believe there is Lehman Municipal more to go. The further broadening of activity across economic sectors due to growing domestic demand (rather than being concentrated in the export arena), should lead to higher corporate profits and growth.
SCARCITY AND SUSTAINABILITY

retailer Whole Foods, we have been unable to justify the extremely large premium (Price-to-Earnings of 63) being afforded that stock. Instead, we have moved down the food chain (in this case quite literally) and have focused on suppliers whose products grace the shelves of natural food retailers. Hain Celestial manufactures products under a number of brand names, most recognizably, Earths Best and Terra Chips. SunOpta is even further vertically integrated and aids in Q1 06 YTD bringing non4.24 4.24 genetically modified 4.21 4.21 and organic crops to 9.49 9.49 market. MEMC Electronic Materials (tkr: WFR) is a play on the shortage of polysilicon. Used most notably in the semiconductor industry, polysilicon is also a key component in Solar Cells. Governments world wide, including the U.S., are providing incentives for expanding the use of solar energy. Televent (tkr: TLVT) is a leading provider of real time monitoring and control systems. Televent solutions are critical for the movement and transportation of energy resources and traffic. Their exposure to water and wastewater management applications is particularly intriguing. Trex (tkr: TWP) and Headwaters (tkr: HW) are companies with exposure to the construction industry. Trex is best known for it wood-like decking products and Headwaters is a manufacturer of concrete products from a byproduct of coal combustion. We mentioned in our last quarter the success in our investment in the payroll processing industry. A combination of increasing short-term interest rates and improved employment numbers provided a positive landscape for Paychex (tkr: PAYX) and Automatic Data Processing (tkr: ADP). Though both solid companies, we are now looking for an exit point for both names. We are encouraged by the economic results posted through the 1st Quarter of 2006. We believe returns in the equity market, driven by solid corporate profits, will outpace the returns from a fixed income market that will reflect inflationary pressure on interest rates.

13.94 0.26 0.25

13.94 0.26 0.25

The dramatic rise in the price of oil has once again focused politicians, consumers and manufacturers alike on the topic of scarcity. President Bush in his State of the Union address in January cited Americas addiction to oil and introduced the Advanced Energy Initiative, intent on developing alternative ways of powering our homes and workplaces. Consumers have long been at the vanguard in the battle for sustainability. Toyota reported that U.S. sales of the Toyota Prius rose to 151,000 in 2005. The Prius has enjoyed phenomenal success despite a price point that commands a 25%-35% premium over its comparable non-hybrid counterpart. Whole Foods Market has seen its revenues more than double in the last four years by catering to a consumer, again willing to pay a premium price, in search of a purer product. Are these examples of consumers willing to pay a premium price for a sustainable product anecdotal evidence of a sea change for consumers? Though our research of this theme remains a work in progress, we thought we would share some of the ideas we are considering for inclusion in our equity portfolios. Hain Celestial (tkr: HAIN) and SunOpta Inc. (tkr: STKL) are both plays on the growth of the natural food industry. Despite the success, cited above, of the

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