PROCESS

Harmonic utilizes two complementary processes to identify potential candidates for the portfolio.  Both processes utilize a fundamental screen based upon EV/EBITDA, P/E, P/B, P/S, LTD/CAP, etc.  Our top down approach is driven by sectors or industries being out of favor with investors.  We will actively seek to identify candidates in those sectors where we feel there will be improvement in the economics.  Second, we consistently screen the Russell 2000 based upon the aforementioned criteria.  The goal is to start with a subset of 100-200 potential ideas.  Individual company analysis is then performed on each company, including not only fundamental analysis, but also the Portfolio Manager’s experience assessing valuation.  Each company receives a two year price target as a result of the analysis.  Typical expected return to the target is 20%.  Portfolios will contain 25-40 individual names, and cash will remain below 20%.  Cash levels are driven by the flow of ideas leaving the portfolio against that of new ideas that meet our criteria.  Since portfolios are built on a name by name basis, sector weights will differ greatly at times from that of the index.  Sell decisions are based upon appreciation to the two year target, discounted to the present.  Additionally, if we perceive that the improvement in operations will not progress to our expectation, we will be a seller.  In most cases we will scale into and out of positions in 2% increments.  Turnover is expected to range 40%-60%.