The Holmes Growth Fund is a diversified portfolio of common stocks seeking long-term growth of capital. The fund includes smallcap to large-cap companies, but normally its focus is on companies with less than $10 billion in market capitalization at the time of purchase. The fund’s benchmark is the S&P 400 Mid-Cap Index.

This no-load fund began in 1994 as the Bonnel Growth Fund, with well-known money manager Arthur Bonnel at its helm. The first three letters in the fund’s ticker symbol — ACBGX — are Bonnel’s initials, and of course the G is for “growth.” In 2004, the fund’s name was changed when Frank Holmes, U.S. Global’s CEO and chief investment offi cer, took over as head of its management team.

Holmes Growth Fund Performance as of 9/30/06
1 Year	3 Years	5 Years	10 Years	Since Inception
1.43%	13.32%	6.70%	7.38%	11.49%

The diversified fund uses a growth-style process to choose companies for investment. Potential investments are identified through a fundamental, quantitative analysis of financial data. Then, a significant analysis takes place of various companies, sectors and economic trends currently evolving in the market. For the first nine months of 2006, the Holmes Growth Fund has outperformed its peer average among mid-cap growth funds, which as a group have struggled this year after posting strong returns from 2003 to 2005. In the dozen years since it was started, the fund has an average annual total return of 11.5 percent.

Performance data quoted above is historical. Past performance is no guarantee of future results. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. Performance does not include the effect of any fees described in the fund’s prospectus (e.g. short-term trading fees) which, if applicable, would lower your total returns. Obtain performance data current to the most recent month-end at www.usfunds.com or 1-800-US-FUNDS, option 5.

Romeo Dator, a manager of the Holmes Growth Fund, thinks 2007 could bring a better climate for mid-cap funds. The Shareholder Report staff recently spent a little time speaking with Romeo about the fund and its prospects for the coming year.

Q: How does the Holmes Growth Fund differ from other mid-cap funds?

What makes the Holmes Growth Fund different from other funds speaks to what is unique about U.S. Global Investors as an investment company. We are global in our focus. Our stock ideas are not limited to those companies that are only in the United States. In an effort to produce the best return for our fund shareholders, we will look to other markets for the best opportunities. Second, in terms of strategy, we have a matrix of dynamic models that we use to select stocks and sectors. Our goal is to be in the top half of our peer group every month, every quarter and every year.

Q: What are these models and how do they help you select investments?

We marry top-down and bottom-up processes when managing the portfolio, and we use a weekly timeline that is rigorously maintained. On Mondays we try to spot broad market trends and the opportunities these trends might present. Then starting Tuesday and for the rest of the week, we get more specifi c by looking at sectors, industries and individual stocks. In addition, as a fi rm we use cycles to manage risks and take advantage of opportunities. There are long-term cycles, like the Kuznets Cycle for infrastructure development; medium-term cycles, like the four-year U.S. presidential election cycle; and short-term cycles, like seasonal weather cycles. In each of these cases, we try to anticipate what the effect to the portfolio may be depending where we are in a particular cycle.

Q: You mentioned selection of individual stocks. What sorts of things do you look for when picking an investment for the portfolio?

As far as new stock ideas go, we look at companies that have just reported quarterly earnings. Our screening criteria are to look for those companies that just reported accelerating growth rates for both revenue and earnings per share compared to the prior quarter. We also look at the year-over-year growth rate for both revenue and earnings. After compiling a list of stocks that meet these criteria, we do a detailed examination of the strengths, weaknesses, opportunities and threats for each stock in the list. The analysis includes taking into account what effect this stock may have on our sector and industry allocations, and we look for indicators that might tell us how much longer this stock will meet our selection criteria. It’s only after all of this effort that we seriously consider adding a stock to the portfolio.