ThZeal - The Zeal

N-CSRS 1 c87672bnvcsrs.txt SEMIANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-09303 & 811-09923 KINETICS MUTUAL FUNDS, INC. & KINETICS PORTFOLIOS TRUST 1311 MAMARONECK AVENUE WHITE PLAINS, NY 10605 (Address of principal executive offices) (Zip code) U.S. BANCORP FUND SERVICES, LLC 615 EAST MICHIGAN STREET MILWAUKEE, WI 53202 (Name and address of agent for service) (800) 930-3828 Registrant's telephone number, including area code Date of fiscal year end: DECEMBER 31, 2004 Date of reporting period: JUNE 30, 2004 Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. Section 3507. ITEM 1. REPORT TO STOCKHOLDERS. JUNE 30, 2004 WWW.KINETICSFUNDS.COM SEMI-ANNUAL REPORT The INTERNET Fund The Internet EMERGING GROWTH Fund The PARADIGM Fund The MEDICAL Fund The SMALL CAP OPPORTUNITIES Fund The KINETICS GOVERNMENT MONEY MARKET Fund EACH A SERIES OF KINETICS MUTUAL FUNDS, INC. [KINETICS MUTUAL FUNDS, INC. LOGO] KINETICS MUTUAL FUNDS, INC. TABLE OF CONTENTS June 30, 2004

1 KINETICS MUTUAL FUNDS, INC. SHAREHOLDERS' LETTER Dear Shareholders, We are pleased to present the Kinetics Mutual Funds semi-annual report for the period ended June 30, 2004, and wish to thank you for the confidence you have placed in us. We will always endeavor to reward you for what we believe to be your well-placed trust. The most notable feature of the first half of 2004 was the lackluster or negative investment returns across a spectrum of investment strategies. During the first six months of 2004, our Investor Class Funds posted the following returns: Internet Fund, (2.66%); Paradigm Fund, 2.08%; Small Cap Opportunities Fund, 3.08%; Medical Fund, 0.76%; and Emerging Internet Fund, 0.00%*. Our recent returns must seem anemic given the stellar year we had in 2003. As mentioned in the past, however, stock returns are not achieved in a linear fashion. Just as a good period does not portend more immediate good periods, a down or flat period does not portend more of the same. Of course, it does not preclude more of the same either, and there is much with which to be concerned in the capital markets today. Prime examples are the high valuations relative to the underlying business prospects for a great many companies. We recognize the environment in which we operate and believe we have structured our funds to achieve long-term success, while avoiding unnecessary or potentially catastrophic risks. Stocks are inherently volatile, and even great companies' stocks can fluctuate widely in any artificial or discrete time period. This volatility risk is not akin to financial risk and should be embraced and exploited to produce superior investment results. We continue to inform our shareholders through our website, www.kineticsfunds.com. The website provides an array of information, including recent portfolio holdings, investment commentary, newsflashes, performance data, and online access to account information. 2 THE INTERNET FUND has produced satisfactory long-term returns, albeit lumpy, by investing in the evolution of Internet-related technology. This Fund is sector specific and should represent only a small component of one's equity exposure. THE MEDICAL FUND provides an investment in scientific discovery within the promising field of medical research, particularly in the development of cancer treatments and therapies. The Fund focuses on pharmaceutical/biotechnology companies and should be considered a sector fund. THE PARADIGM FUND focuses on companies that can achieve sustainable high returns on equity. This Fund has produced very positive returns over the last 4 1/2 years. The typical large cap stock index has posted substantially lower returns over the same time period. This Fund has the broadest mandate of our equity offerings and can represent a much larger exposure of one's equity holdings. THE INTERNET EMERGING GROWTH FUND focuses on early-life-cycle companies that are positioned on the edge of the curve in the evolution of Internet-related technology. This offering is a sector fund. THE SMALL CAP OPPORTUNITIES FUND focuses on undervalued and special situation small capitalization equities that have the potential for rewarding long-term investment results. This Fund has a broad mandate, but is limited as to market capitalization. THE KINETICS GOVERNMENT MONEY MARKET FUND is a short-term investment vehicle that serves to complement our equity product offerings. 3 /s/ Peter B. Doyle Peter B. Doyle President Kinetics Mutual Funds, Inc. * Total return figures represent past performance and do not indicate future results, which will vary. The investment return and principal value of an investment will fluctuate and, therefore, an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the total return shown. Please call the Fund at 1-800-930-3828 to obtain the most recent month-end returns. Performance reflects expense limitations in effect. In their absence, performance would be reduced. Returns do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. 4 KINETICS MUTUAL FUNDS, INC. MARKET COMMENTARY Dear Shareholders, In our 2003 annual report, released earlier this year, we offered no market predictions for 2004, due to our acknowledged inability to predict short-term movements in the stock market. We have reassessed our abilities and still believe we are incapable of making worthwhile predictions regarding the short-term direction of the market. We did, however, caution, and still caution, that the typical stock was/is expensive based on historical valuation metrics. Perhaps, we should have also outlined, more specifically, how stock investment returns are achieved. Quite simply, stock returns are a function of the going-in dividend yield (which is known), the future earnings growth rate of the underlying company, and the expansion or contraction of valuation, which is dictated by investors, but largely driven by changes in interest rates. To quote Warren Buffett: "In economics, interest rates act as gravity behaves in the physical world. At all times, in all markets, in all parts of the world, the tiniest change in rates changes the value of every financial asset." The time value of money makes the future earnings of stocks worth much more in a low interest rate environment because your "opportunity cost" (what else you could do with your money) is much lower if interest rates are 4% than if interest rates are 10%. That is, in a low interest rate environment, your other opportunities are less desirable relative to the future earnings stream from stocks, and valuations tend to expand accordingly. While certainly not desired, the uninspiring returns for the first half of 2004 should not be a complete surprise to professional investors. This statement is not, as noted above, predicated on our investment acumen regarding the market direction, but, rather, on the relationship between financial assets and interest rates. Historically, valuation expansion as a result of declining interest rates has accounted for a very significant percentage of returns. Conversely, rising rates have typically muted equity investment results, despite substantially rising earnings. Such an environment was particularly evident during the 1970s, when corporate earnings growth was vigorous, but stock prices produced much more modest results. At the previous 1% Fed Funds rate, which was a negative inflation- adjusted interest rate, and a 46-year low, investors should have at 5 least considered the possibility that a meaningful return component was no longer available to them. That is, while interest rates did not have to move higher, it was unlikely that they would decline further. (As of this writing, early August, the Federal Reserve has raised the Fed Funds Rate to 1.5% from 1%, where it was at the start of the year.) The past and present low interest rates may prove to be debilitating, as modest absolute increases require large mark-to- market write-downs of financial assets. An interest rate move from 1% to 2% is quite different from an interest rate move from 9% to 10%, although in an absolute sense the change is identical at 1%. At a minimum, investors should have given some consideration to the possibility of valuation contraction from rising interest rates. We did, and on balance our funds were and are positioned defensively, reflecting the possibility that the market might experience temporary contraction. This does not mean that we will post positive returns, although that remains a possibility in a number of our funds, but, rather, that we are likely to suffer much less than we otherwise would have in an unpleasant environment. This positioning is critical to investors since investment returns are asymmetrical, meaning that a decline in a portfolio is not offset by a gain of a similar magnitude. For example, a decline of 50% requires an offsetting gain of 100% to get back to the starting point. This Volatility Paradox reveals perhaps one of the only certainties in financial management - that a grievous loss almost certainly precludes the possibility of a large return. Kinetics' focus on asymmetrical return securities seeks to avoid such losses. We practice this strategy in all of our funds, but it has limitations in our sector funds. Our investment philosophy is predicated upon analyzing and assessing businesses and not short-term market performance, which is largely unknowable. From this standpoint, we believe our Funds offer attractive risk/reward characteristics for investors. We thank you for choosing our funds in your quest to achieve your financial goals. /s/ Peter B. Doyle Peter B. Doyle Chief Investment Strategist 6 DISCLOSURE THIS MATERIAL IS INTENDED TO BE REVIEWED IN CONJUNCTION WITH A CURRENT PROSPECTUS, WHICH INCLUDES ALL FEES AND EXPENSES THAT APPLY TO A CONTINUED INVESTMENT PROGRAM, AS WELL AS INFORMATION REGARDING THE RISK FACTORS, POLICIES AND OBJECTIVES OF THE FUNDS. READ IT CAREFULLY BEFORE INVESTING. BECAUSE THE FUNDS [OTHER THAN THE PARADIGM FUND, THE SMALL CAP OPPORTUNITIES FUND AND THE KINETICS GOVERNMENT MONEY MARKET FUND] INVEST IN A SINGLE INDUSTRY OR GEOGRAPHIC REGION, THEIR SHARES ARE SUBJECT TO A HIGHER DEGREE OF RISK THAN FUNDS WITH A HIGHER LEVEL OF DIVERSIFICATION. INTERNET AND BIOTECHNOLOGY STOCKS ARE SUBJECT TO A RATE OF CHANGE IN TECHNOLOGY, OBSOLESCENCE AND COMPETITION WHICH IS GENERALLY HIGHER THAN THAT OF OTHER INDUSTRIES AND HAVE EXPERIENCED EXTREME PRICE AND VOLUME FLUCTUATIONS. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE PERFORMANCE. BECAUSE SMALLER COMPANIES [FOR THE INTERNET EMERGING GROWTH FUND AND THE SMALL CAP OPPORTUNITIES FUND] OFTEN HAVE NARROWER MARKETS AND LIMITED FINANCIAL RESOURCES, THEY PRESENT MORE RISK THAN LARGER MORE WELL ESTABLISHED COMPANIES. AS NON-DIVERSIFIED [OTHER THAN THE KINETICS GOVERNMENT MONEY MARKET FUND] AND SINGLE INDUSTRY FUNDS, THE VALUE OF THEIR SHARES MAY FLUCTUATE MORE THAN SHARES INVESTED IN A BROADER RANGE OF INDUSTRIES AND COMPANIES. 7 AN INVESTMENT IN THE KINETICS GOVERNMENT MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE MONEY BY INVESTING IN THE FUND. UNLIKE OTHER INVESTMENT COMPANIES THAT DIRECTLY ACQUIRE AND MANAGE THEIR OWN PORTFOLIOS OF SECURITIES, THE KINETICS MUTUAL FUNDS PURSUE THEIR INVESTMENT OBJECTIVES BY INVESTING ALL OF THEIR INVESTABLE ASSETS IN A CORRESPONDING PORTFOLIO SERIES OF KINETICS PORTFOLIOS TRUST. THE INFORMATION CONCERNING THE FUNDS INCLUDED IN THE SHAREHOLDER REPORT CONTAIN CERTAIN FORWARD-LOOKING STATEMENTS ABOUT THE FACTORS THAT MAY AFFECT THE PERFORMANCE OF THE FUNDS IN THE FUTURE. THESE STATEMENTS ARE BASED ON FUND MANAGEMENT'S PREDICTIONS AND EXPECTATIONS CONCERNING CERTAIN FUTURE EVENTS AND THEIR EXPECTED IMPACT ON THE FUNDS, SUCH AS PERFORMANCE OF THE ECONOMY AS A WHOLE AND OF SPECIFIC INDUSTRY SECTORS, CHANGES IN THE LEVELS OF INTEREST RATES, THE IMPACT OF DEVELOPING WORLD EVENTS, AND OTHER FACTORS THAT MAY INFLUENCE THE FUTURE PERFORMANCE OF THE FUNDS. MANAGEMENT BELIEVES THESE FORWARD-LOOKING STATEMENTS TO BE REASONABLE, ALTHOUGH THEY ARE INHERENTLY UNCERTAIN AND DIFFICULT TO PREDICT. ACTUAL EVENTS MAY CAUSE ADJUSTMENTS IN PORTFOLIO MANAGEMENT STRATEGIES FROM THOSE CURRENTLY EXPECTED TO BE EMPLOYED. DISTRIBUTOR: KINETICS FUNDS DISTRIBUTOR, INC. IS NOT AN AFFILIATE OF KINETICS MUTUAL FUNDS, INC. KINETICS FUNDS DISTRIBUTOR, INC. IS AN AFFILIATE OF KINETICS ASSET MANAGEMENT, INC., INVESTMENT ADVISER TO KINETICS MUTUAL FUNDS, INC. (C)JANUARY 1, 2004 -- KINETICS ASSET MANAGEMENT, INC. 8 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS STATEMENT OF ASSETS & LIABILITIES June 30, 2004 (Unaudited)

------------------ * Each Feeder Fund invests its assets directly in the corresponding Master Portfolio. The financial statements for the Master Portfolios, along with the portfolio of investments in securities, are contained elsewhere in this report and should be read in conjunction with the Fund's financial statements. See Notes to the Financial Statements. 9 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS STATEMENT OF ASSETS & LIABILITIES June 30, 2004 (Unaudited)

------------------ * Each Feeder Fund invests its assets directly in the corresponding Master Portfolio. The financial statements for the Master Portfolios, along with the portfolio of investments in securities, are contained elsewhere in this report and should be read in conjunction with the Fund's financial statements. See Notes to the Financial Statements. 10 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS STATEMENT OF ASSETS & LIABILITIES June 30, 2004 (Unaudited)

------------------ * Each Feeder Fund invests its assets directly in the corresponding Master Portfolio. The financial statements for the Master Portfolios, along with the portfolio of investments in securities, are contained elsewhere in this report and should be read in conjunction with the Fund's financial statements. See Notes to the Financial Statements. 11 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS STATEMENT OF OPERATIONS Six Months Ended June 30, 2004 (Unaudited)

See Notes to the Financial Statements. 12 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS STATEMENT OF OPERATIONS Six Months Ended June 30, 2004 (Unaudited)

See Notes to the Financial Statements. 13 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS STATEMENT OF OPERATIONS Six Months Ended June 30, 2004 (Unaudited)

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See Notes to the Financial Statements. 22 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS NOTES TO FINANCIAL STATEMENTS June 30, 2004 (Unaudited) 1. ORGANIZATION Kinetics Mutual Funds, Inc. (the "Company") is registered under the Investment Company Act of 1940, as amended (the "1940 Act") and is incorporated in the State of Maryland. The Company is an open-end management investment company issuing its shares in series. One billion shares are authorized for the Company with a par value of $0.001 per share. The series of the Company presently authorized are The Internet Fund ("Internet"), The Internet Emerging Growth Fund ("Emerging"),The Paradigm Fund ("Paradigm"), The Medical Fund ("Medical"), The Small Cap Opportunities Fund ("Small Cap") and The Kinetics Government Money Market Fund ("Government") (each a "Feeder Fund" and collectively, the "Feeder Funds"). Investment operations of the Funds began on October 21, 1996 (Internet), September 30, 1999 (Medical), December 31, 1999 (Emerging and Paradigm), February 3, 2000 (Government) and March 20, 2000 (Small Cap). Each series, unlike many other investment companies which directly acquire and manage their own portfolios of securities, seeks its investment objective by investing all of its investable assets in a corresponding portfolio series (each a "Master Portfolio" and collectively the "Master Portfolios") of Kinetics Portfolios Trust (the "Trust"). On April 28, 2000, each Fund in the Company, entered into a master-feeder fund structure. By entering into this structure, each Feeder Fund invested all of its assets in a corresponding Master Portfolio which had the same investment objective as the Feeder Fund. Each Master Portfolio has multiple feeder funds. Each Feeder Fund receives a proportionate amount of interest in the Master Portfolio equal to its relative contribution of capital. Thus, each Feeder Fund is allocated its portion of income, gains (losses) and expenses from the Master Portfolio. Each Feeder Fund's respective interest in the corresponding Master Portfolio as of June 30, 2004 is as follows:

Prior to the conversion to a master-feeder fund structure, on April 28, 2000, each then existing Feeder Fund conducted its own investment operations. 23 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited) Effective April 26, 2001, the Internet, Paradigm and Medical Funds issued an additional class of shares -- Advisor Class A. Effective December 31, 2001, the Small Cap Fund issued an additional class of shares -- Advisor Class A. Advisor Class A shares are subject to an annual Rule 12b-1 fee of 0.25% of average daily net assets. The Advisor Class A shares are also subject to a front-end sales charge of 5.75%. Effective June 28, 2002 the Paradigm Fund issued an additional class of shares -- Advisor Class C. Advisor Class C shares are subject to an annual Rule 12b-1 fee of 0.75% of average daily net assets. The Investor Class shares do not pay a 12b-1 fee or have a sales charge. Each class of shares for each Fund has identical rights and privileges except with respect to the Rule 12b-1 fees paid by the Advisor Class A and Class C shares, the sales charge on the Advisor Class A and Class C shares, voting rights on matters pertaining to a single class of shares and the exchange privileges of each class of shares. Refer to the Master Portfolio's financial statements to obtain information about the investment objective of the corresponding Feeder Fund. The financial statements of the Master Portfolios, including the portfolio of investments in securities, are contained elsewhere in this report and should be read in conjunction with the Feeder Funds' financial statements. 2. SIGNIFICANT ACCOUNTING POLICIES SECURITY VALUATION Master Portfolio securities (other than Government) that are listed on a U.S. securities exchange (whether domestic or foreign) for which market quotations are readily available are valued at the last quoted sale price as of 4:00 p.m. Eastern time on the day the valuation is made. All equity securities that are traded using the National Association of Securities Dealers' Automated Quotation System ("NASDAQ") are valued using the NASDAQ Official Closing Price ("NOCP"). Purchased options, futures, unlisted U.S. securities and listed U.S. securities not traded on the valuation date for which market quotations are readily available are valued at the most recent bid price. Fixed-income securities (other than obligations having a maturity of 60 days or less) are normally valued on the basis of quotes obtained from pricing services, which take into account appropriate factors such as institutional sized trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Investments in The Kinetics Government Money Market Portfolio and instruments with remaining maturities of 60 days or less are valued at amortized 24 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited) cost, which approximates fair value. Other assets and securities for which no quotations are readily available (including restricted securities) are valued in good faith at fair value using methods determined by the Board of Trustees of the Master Portfolios. At June 30, 2004, The Internet Portfolio held one such security which represented 0.71% of the Portfolio's net assets. REPURCHASE AGREEMENTS Each Master Portfolio may enter into repurchase agreements with banks that are members of the Federal Reserve System or securities dealers who are members of a national securities exchange or are primary dealers in U.S. Government Securities. In connection with transactions in repurchase agreements, it is the Trust's policy that the Master Portfolio receive, as collateral, securities whose market value, including accrued interest, at all times will be at least equal to 100% of the amount invested by the Master Portfolio in each repurchase agreement. If the seller defaults, and the value of the collateral declines, realization of the collateral by the Master Portfolio may be delayed or limited. WRITTEN OPTION ACCOUNTING The Master Portfolios may write (sell) call or put options for trading or hedging purposes. When a Master Portfolio writes an option, an amount equal to the premium received by the Master Portfolio is included in the Statement of Assets and Liabilities as an asset and an equivalent liability. The amount of the liability is subsequently marked-to-market to reflect the current value of the option written. By writing the option, the Master Portfolio may become obligated during the term of the option to deliver or purchase the securities underlying the option at the exercise price if the option is exercised. Option contracts are valued at the average of the current bid and asked price reported on the day of the valuation. When an option expires on its stipulated expiration date or the Master Portfolio enters into a closing purchase transaction, the Master Portfolio realizes a gain or loss if the cost of the closing transaction differs from the premium received when the option was sold, without regard to any unrealized gain or loss on the underlying security, and the liability related to such option is eliminated. When an option is exercised, the premium originally received decreases the cost basis of the underlying security (or increases the proceeds on the security sold short) and the Master Portfolio realizes a gain or loss from the sale of the security (or closing of the short sale). As collateral for uncovered written options, the Master Portfolio is required under the 1940 Act to maintain assets consisting of cash, cash equivalents or liquid securities. This collateral is required to be adjusted daily to reflect the market value of the purchase 25 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited) obligation for put options or the market value of the instrument underlying the contract for call options. FOREIGN CURRENCY TRANSLATIONS The books and records of the Master Portfolios are maintained in U.S. dollars. For the Master Portfolios, foreign currency transactions are translated into U.S. dollars on the following basis: (i) market values of investment securities and other assets and liabilities are translated at the exchange rate of such currencies against the U.S. dollar, as provided by an approved pricing service, and (ii) purchases and sales of investment securities, dividend and interest income and certain expenses at the rates of exchange prevailing on the respective dates of such transactions. The Master Portfolios do not isolate and treat as ordinary income that portion of the results of operations arising as a result of changes in the exchange rate from the fluctuations arising from changes in the market prices of securities held during the period. However, for federal income tax purposes, the Master Portfolios do isolate and treat as ordinary income the effect of changes in foreign exchange rates arising from actual foreign currency transactions and the effect of changes in foreign exchange rates arising between trade date and settlement date. RESTRICTED SECURITIES The Master Portfolios may invest in restricted securities. These securities are valued by the Master Portfolios after giving due consideration to pertinent factors including recent private sales, market conditions and the issuer's financial performance. The Master Portfolios have no right to require registration of unregistered securities. At June 30, 2004, the Master Portfolios did not hold any investment securities which were determined to be illiquid pursuant to the guidelines adopted by the Board of Trustees. WHEN-ISSUED SECURITIES The Master Portfolios may purchase securities on a when-issued or delayed delivery basis. Although the purchase amounts of these securities are established at the time the purchaser enters into the agreement, these securities may be delivered and paid for at a future date. The Master Portfolios record purchases of when-issued securities and reflect the values of such securities in determining net asset value in the same manner as other portfolio securities. The Master Portfolios maintain at all times cash or other liquid assets in an amount at least equal to the amount of outstanding commitments for when-issued securities. 26 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited) SECURITIES LENDING Each Master Portfolio may lend its portfolio securities to broker-dealers by entering directly into lending arrangements with such broker-dealers or indirectly through repurchase agreements with respect to no more than 33 1/3% of the total assets of each Portfolio (including any collateral posted) or 50% of the total assets of each Portfolio (excluding any collateral posted). Securities lending and repurchase transactions will be fully collateralized at all times with cash and/or short-term debt obligations. The Master Portfolios receive interest on the collateral received as well as a fee for the securities loaned. EXPENSE ALLOCATION Common expenses incurred by Feeder Funds are allocated among the Feeder Funds (i) based upon relative average net assets, (ii) as incurred on a specific identification basis, or (iii) equally among the Feeder Funds, depending on the nature of the expenditure. Each Feeder Fund records its proportionate share of the Master Portfolio's expenses on a daily basis. In addition, each Feeder Fund accrues its own separate expenses. Any cap on expenses includes Feeder Fund-specific expenses as well as the expenses allocated from the Master Portfolio. FEDERAL INCOME TAXES Each Master Portfolio intends to qualify as a partnership for federal income tax purposes. Therefore, the Master Portfolios believe they will not be subject to any federal income tax on their income and net realized capital gains (if any). However, each investor in the Master Portfolios will report its allocable share of the Master Portfolio's income and capital gains for purposes of determining its federal income tax liability. It is the Feeder Funds' policy to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and the Feeder Funds intend to distribute investment company net taxable income and net capital gains to shareholders. Therefore, no federal income tax provision is recorded. Dividends from net investment income and distributions of net realized capital gains, if any, will be declared and paid at least annually. The character of distributions made during the year from net investment income or net realized gains may differ from the characterization for federal income tax purposes due to differences in the recognition of income, expenses and gain items for financial statement and tax purposes. Additionally, the Funds may utilize earnings and profits distributed to shareholders on redemption of 27 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited) shares as part of the dividends paid deduction for income tax purposes. Where appropriate, reclassifications between capital accounts are made for such differences that are permanent in nature. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ from those estimates. OTHER Realized gains and losses on the sale of investments are calculated on the identified cost basis. Dividend income is recorded on the ex-dividend date and interest income is recognized on the accrual basis. Income, expenses (other than expenses attributable to a specific class) and realized and unrealized gains or losses on investments are allocated to each class of shares based on its relative net assets. 3. INVESTMENT ADVISER Effective April 28, 2000, the Trust has an Investment Advisory Agreement (the "Agreement") with Kinetics Asset Management, Inc. (the "Adviser"), with whom certain officers and trustees of the Trust are affiliated, to furnish investment advisory services to the Master Portfolios. Under the terms of the Agreement, the Master Portfolios compensate the Adviser for its management services at the annual rate of 1.25% of each Master Portfolio's average daily net assets, except for The Kinetics Government Money Market Portfolio, which compensates the Adviser at an annual rate of 0.50% of the Master Portfolio's average daily net assets. Prior to January 1, 2002, the Adviser had contractually agreed to pay all operating expenses in excess of 2.74% for the Internet, Emerging, Paradigm and Small Cap Funds, and 1.25% for the Government Fund. The expense cap included Feeder Fund-specific expenses as well as the Master Portfolio's expenses allocated to the Feeder Fund. Under the terms of the Agreement, any Feeder Fund expenses waived or reimbursed by the Adviser may be recovered by the Adviser to the extent actual operating expenses for a subsequent period are less than the expense limitation caps at the time of the waiver or reimbursement. The Adviser intends to seek potential recovery of such amounts for a period of three years from the fiscal year in which such amounts were waived or reimbursed. 28 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited) Waivers and reimbursements by the Adviser in years prior to 2002 which are subject to potential future recovery include:

Although the contractual Expense Waiver and Reimbursement Agreement expired on December 31, 2001, the Adviser has voluntarily agreed to continue to pay certain operating expenses as deemed appropriate. The Adviser may discontinue the voluntary waiver at any time. For the six months ended June 30, 2004, the amounts earned by the Adviser and the reimbursed expenses for the Feeder Funds are as follows:

The Adviser receives a shareholder servicing fee from the Feeder Funds pursuant to a Shareholder Servicing Agreement in the amount equal to 0.25% of the Feeder Fund's average daily net assets. The Adviser is responsible for paying a portion of these shareholder servicing fees to various agents that have a written shareholder servicing agreement with the Adviser and that perform shareholder servicing functions and maintenance of shareholder accounts on behalf of their clients who own shares of the Feeder Funds. The Company, on behalf of the Funds, has adopted two Retail Distribution Plans pursuant to Rule 12b-1 under the Investment Company Act of 1940 29 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited) (the "12b-1 Plans"). One Plan is for Advisor Class A shares, while the other Plan is for Advisor Classes B and C shares. Under the first Plan, Advisor Class A shares may pay up to an annual rate of 0.50% of the average daily net asset value of shares to the Distributor or other qualified recipients under the Plan. During the six months ended June 30, 2004, payments under the 12b-1 Plan for the Advisor Class A shares of the Internet, Paradigm, Medical and Small Cap Funds were limited to 0.25% of the average daily net asset value of such shares of such Funds. During the six months ended June 30, 2004, the Advisor Class A shares of the Internet, Paradigm, Medical and Small Cap Funds incurred expenses of $1,349, $20,221, $920 and $2,494, respectively, pursuant to the 12b-1 Plan. Under the second Plan, Advisor Classes B and C shares pay an annual rate of 0.75% of the average daily net asset value of such shares. During the six months ended June 30, 2004, Paradigm Class C shares incurred expenses of $14,022, pursuant to the 12b-1 Plan. Through December 31, 2003, the Funds had not issued any Advisor Class B shares. 4. INCOME TAXES At June 30, 2004, the Feeder Funds had accumulated net realized capital loss carryovers expiring in the following years.

To the extent that the Feeder Funds realize future net capital gains, those gains will be offset by any unused capital loss carryovers. For the year ended December 31, 2003, The Internet, Paradigm and Small Cap Funds utilized $23,455,928, $366,486 and $1,437,670, respectively, of capital loss carryforwards. At June 30, 2004, the following Feeder Funds deferred, on a tax basis, post- October losses of:

For the six months ended June 30, 2004, the Feeder Funds did not pay any dividends or distributions. For the year ended December 31, 2003, the 30 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited) Internet Fund paid an income dividend of $0.07471436 per share or $740,840 to the Investor Class shares which is classified as ordinary income for tax purposes. The Emerging Fund paid an income dividend of $0.04759165 or $51,601 to the Investor Class shares which is classified as ordinary income for tax purposes. The Paradigm Fund paid an income dividend of $0.05412863 or $207,871 to the Investor Class shares which is classified as ordinary income for tax purposes. The Paradigm Fund paid an income dividend of $0.02982937 or $26,269 to the Advisor Class A shares which is classified as ordinary income for tax purposes. The Paradigm Fund paid an income dividend of $0.01160711 or $1,630 to the Advisor Class C shares which is classified as ordinary income for tax purposes. The Small Cap Opportunities Fund paid an income dividend of $0.16808514 or $248,072 to the Investor Class shares which is classified as ordinary income for tax purposes. The Small Cap Opportunities Fund paid an income dividend of $0.14844824 or $18,348 to the Advisor Class A shares. The tax components of dividends paid during the years ended December 31, 2003 and December 31, 2002, are:

The following information is presented on an income tax basis as of December 31, 2003.

31 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited) The Internet, Emerging, Paradigm and Small Cap Funds designate 27%, 11%, 94% and 8%, respectively, of dividends declared after December 31, 2003 from net investment income as qualified dividend income under the Jobs and Growth Tax Relief Reconciliation Act of 2003 (unaudited). The Small Cap Fund hereby designates $11,703 as long-term capital gain distributions for the purposes of the dividends paid deduction, which include earnings and profits distributed to shareholders on redemptions of Fund shares (unaudited). For corporate shareholders in the Funds, the percentage of ordinary dividend income distributed for the year ended December 31, 2003, which is designated as qualifying for the dividends-received deduction, is as follows: Internet 25.3%, Emerging 7.7%, Paradigm 52.7% and Small Cap 6.5% (unaudited). 5. ADDITIONAL INFORMATION PricewaterhouseCoopers LLP ("PWC") was replaced as the auditors to Kinetics Mutual Funds, Inc. (the "Company") effective April 22, 2004. The Company's Audit Committee participated in and approved the decision to change auditors. PwC's reports on the Company's financial statements for the fiscal years ended December 31, 2003 and December 31, 2002 contained no adverse opinion or disclaimer of opinion nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's fiscal years ended December 31, 2003 and December 31, 2002 and through April 22, 2004, (i) there were no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PwC, would have caused it to make reference to the subject matter of the disagreements in connection with its reports on the Company's financial statements for such years, and (ii) there were no "reportable events" of the kind described in Item 304(a)(1)(v) of Regulation S-K under the Securities Exchange Act of 1934, as amended. On April 22, 2004, the Company by action of its Board of Directors upon the recommendation of the Company's Audit Committee engaged Tait, Weller & Baker as the independent registered public accounting firm to audit the Company's financial statements for the fiscal year ending December 31, 2004. During the Company's fiscal years ended December 31, 2003 and December 31, 2002 and through April 22, 2004, neither the Company, its portfolios nor anyone on their behalf has consulted Tait, Weller & Baker on 32 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited) items which (i) concerned the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements or (ii) concerned the subject of a disagreement (as defined in paragraph (a)(1)(iv) of Item 304 of Regulation S-K) or reportable events (as described in paragraph (a)(1)(v) of said Item 304). 33 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS FINANCIAL HIGHLIGHTS

------------------ (+) Commencement of operations. (1) Not annualized. (2) Annualized. (3) Information presented relates to a share of capital stock outstanding for the entire period. (4) Rate listed represents the portfolio turnover rate from January 1, 2000 through April 28, 2000 (date on which Feeder Fund entered into a master-feeder fund structure). (5) The total return calculation does not reflect the 5.75% front end sales charge on Advisor Class A shares. (6) Net investment income per share represents net investment income divided by the average shares outstanding throughout the period. See Notes to the Financial Statements. 34

See Notes to the Financial Statements. 35 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS FINANCIAL HIGHLIGHTS

------------------ (1) Information presented relates to a share of capital stock outstanding for the entire period. (2) Rate listed represents the portfolio turnover rate from January 1, 2000 through April 28, 2000 (date on which Feeder Fund entered into a master-feeder fund structure). (3) The amount is less than $0.005 per share. (4) Not Annualized. (5) Annualized. See Notes to the Financial Statements. 36 (This page intentionally left blank) 37 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS FINANCIAL HIGHLIGHTS

------------------ (+) Commencement of operations. (1) Information presented relates to a share of capital stock outstanding for the entire period. (2) Rate listed represents the portfolio turnover rate from January 1, 2000 through April 28, 2000 (date on which Feeder Fund entered into a master-feeder fund structure). (3) The amount is less than $0.005 per share. (4) Not annualized. (5) Annualized. (6) The total return calculation does not reflect the 5.75% front end sales charge on Advisor Class A shares. (7) Net investment income per share represents net investment income divided by the average shares outstanding throughout the period. See Notes to the Financial Statements. 38

See Notes to the Financial Statements. 39 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS FINANCIAL HIGHLIGHTS

See Notes to the Financial Statements. 43 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS FINANCIAL HIGHLIGHTS

See Notes to the Financial Statements. 45 KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS FINANCIAL HIGHLIGHTS

------------------ (+) Commencement of operations. (1) Not annualized. (2) Annualized. (3) Information presented relates to a share of capital stock outstanding for the entire period. (4) The amount listed is less than $0.005 per share. See Notes to the Financial Statements. 46 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE INTERNET PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited)

See Notes to the Financial Statements. 47 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE INTERNET PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued)

See Notes to the Financial Statements. 48 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE INTERNET PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued)

See Notes to the Financial Statements. 49 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE INTERNET PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued)

See Notes to the Financial Statements. 50 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE INTERNET PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued)

------------------ * -- Non-income producing security. (+) -- Security has a stepped rate. The rate listed is as of June 30, 2004. + -- Calculated as a percentage of net assets. ++ -- Fair Valued Security. # -- Contingent value right (contingent upon profitability of company). ADR -- American Depository Receipts. (1) -- All or a portion of the shares have been committed as collateral for written option contracts. (2) -- This security or a portion of this security was out on loan at June 30, 2004. Total loaned securities had a market value of $10,304,558 at June 30, 2004. (3) -- Collateralized by U.S. Government or U.S. Government Agency securities, U.S. Government Agency mortgage-backed securities, certificates of deposit or banker's acceptances. See Notes to the Financial Statements. 51 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE INTERNET EMERGING GROWTH PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited)

See Notes to the Financial Statements. 52 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE INTERNET EMERGING GROWTH PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued)

See Notes to the Financial Statements. 53 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE INTERNET EMERGING GROWTH PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued)

See Notes to the Financial Statements. 54 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE INTERNET EMERGING GROWTH PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued)

------------------ * -- Non-income producing security. ** -- Variable rate demand notes are considered short-term obligations and are payable on demand. Interest rates change periodically on specified dates. The rates listed are as of June 30, 2004. (+) -- Security has a stepped rate. The rate is listed as of June 30, 2004. ADR -- American Depository Receipts. + -- Calculated as a percentage of net assets. # -- Contingent value right (contingent upon profitability of company). (2) -- This security or a portion of this security was out on loan at June 30, 2004. Total loaned securities had a market value of $241,800 at June 30, 2004. (3) -- Collateralized by U.S. Government or U.S. Government Agency securities, U.S. Government Agency mortgage-backed securities, certificates of deposit or banker's acceptances. See Notes to the Financial Statements. 55 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE PARADIGM PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited)

See Notes to the Financial Statements. 56 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE PARADIGM PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued)

See Notes to the Financial Statements. 57 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE PARADIGM PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued)

See Notes to the Financial Statements. 58 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE PARADIGM PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued)

PREFERRED STOCKS -- 0.29%+ ----------------------------------------------------------------------

See Notes to the Financial Statements. 59 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE PARADIGM PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued)

See Notes to the Financial Statements. 60 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE PARADIGM PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued)

------------------ * -- Non-income producing security. ** -- Variable rate demand notes are considered short-term obligations and are payable on demand. Interest rates change periodically on specified dates. The rates listed are as of June 30, 2004. ADR -- American Depository Receipts. See Notes to the Financial Statements. 61 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE PARADIGM PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued) + -- Calculated as a percentage of Net Assets. (2) -- This security or a portion of this security was out on loan at June 30, 2004. Total loaned securities had a market value of $2,245,293 at June 30, 2004. (3) -- Collateralized by U.S. Government or U.S. Government Agency securities, U.S. Government Agency mortgage-backed securities, certificates of deposit or banker's acceptances. See Notes to the Financial Statements. 62 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE MEDICAL PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited)

See Notes to the Financial Statements. 63 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE MEDICAL PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued)

See Notes to the Financial Statements. 64 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE MEDICAL PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued)

See Notes to the Financial Statements. 65 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE MEDICAL PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued)

See Notes to the Financial Statements. 66 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE MEDICAL PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued)

------------------ * -- Non-income producing security. ** -- Variable rate demand notes are considered short-term obligations and are payable on demand. Interest rates change periodically on specified dates. The rates listed are as of June 30, 2004. ADR -- American Depository Receipts. # -- Contingent value right (contingent upon profitability of company). + -- Calculated as a percentage of net assets. (1) -- All or a portion of the shares have been committed as collateral for written option contracts. (2) -- This security or a portion of this security was out on loan at June 30, 2004. Total loaned securities had a market value of $127,225 at June 30, 2004. (3) -- Collateralized by U.S. Government or U.S. Government Agency securities, U.S. Government Agency mortgage-backed securities, certificates of deposit or banker's acceptances. See Notes to the Financial Statements. 67 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE SMALL CAP OPPORTUNITIES PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited)

See Notes to the Financial Statements. 68 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE SMALL CAP OPPORTUNITIES PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued)

See Notes to the Financial Statements. 69 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE SMALL CAP OPPORTUNITIES PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued)

See Notes to the Financial Statements. 70 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE SMALL CAP OPPORTUNITIES PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued)

See Notes to the Financial Statements. 71 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE SMALL CAP OPPORTUNITIES PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited) -- (Continued)

------------------ * -- Non-income producing security. ** -- Variable rate demand notes are considered short-term obligations and are payable on demand. Interest rates change periodically on specified dates. The rates listed are as of June 30, 2004. # -- Contingent value right (contingent upon profitability of company). + -- Calculated as a percentage of net assets. ADR -- American Depository Receipts. GDR -- Global Depository Receipts. (2) -- This security or a portion of this security was out on loan at June 30, 2004. Total loaned securities had a market value of $2,304,964 at June 30, 2004. (3) -- Collateralized by U.S. Government or U.S. Government Agency securities, U.S. Government Agency mortgage-backed securities, certificates of deposit or banker's acceptances. See Notes to the Financial Statements. 72 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE KINETICS GOVERNMENT MONEY MARKET PORTFOLIO Portfolio of Investments -- June 30, 2004 (Unaudited)

------------------ + -- Calculated as a percentage of net assets. See Notes to the Financial Statements. 73 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE INTERNET PORTFOLIO Portfolio of Options Written -- June 30, 2004 (Unaudited)

See Notes to the Financial Statements. 74 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS THE MEDICAL PORTFOLIO Portfolio of Options Written -- June 30, 2004 (Unaudited)

See Notes to the Financial Statements. 75 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS STATEMENT OF ASSETS & LIABILITIES June 30, 2004 (Unaudited)

See Notes to the Financial Statements. 76 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS STATEMENT OF ASSETS & LIABILITIES June 30, 2004 (Unaudited)

See Notes to the Financial Statements. 77 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS STATEMENT OF ASSETS & LIABILITIES June 30, 2004 (Unaudited)

See Notes to the Financial Statements. 78 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS STATEMENT OF OPERATIONS Six Months Ended June 30, 2004 (Unaudited)

------------------ * See "Expense Reduction" in the Notes to Financial Statements. See Notes to the Financial Statements. 79 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS STATEMENT OF OPERATIONS Six Months Ended June 30, 2004 (Unaudited)

------------------ * See "Expense Reduction" in the Notes to Financial Statements. See Notes to the Financial Statements. 80 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS STATEMENT OF OPERATIONS Six Months Ended June 30, 2004 (Unaudited)

------------------ * See "Expense Reduction" in the Notes to Financial Statements. See Notes to the Financial Statements. 81 KINETICS MUTUAL FUNDS, INC. -- MASTER INVESTMENT PORTFOLIOS STATEMENTS OF CHANGES IN NET ASSETS

See Notes to the Financial Statements. 82 KINETICS MUTUAL FUNDS, INC. -- MASTER INVESTMENT PORTFOLIOS STATEMENTS OF CHANGES IN NET ASSETS

See Notes to the Financial Statements. 83 KINETICS MUTUAL FUNDS, INC. -- MASTER INVESTMENT PORTFOLIOS STATEMENTS OF CHANGES IN NET ASSETS

See Notes to the Financial Statements. 84 KINETICS MUTUAL FUNDS, INC. -- MASTER INVESTMENT PORTFOLIOS STATEMENTS OF CHANGES IN NET ASSETS

See Notes to the Financial Statements. 85 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS NOTES TO FINANCIAL STATEMENTS June 30, 2004 (Unaudited) 1. ORGANIZATION The Kinetics Portfolios Trust (the "Trust") was organized as a Delaware Statutory Trust on March 14, 2000 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company issuing its beneficial interests in series, each series representing a distinct portfolio with its own investment objectives and policies. The series currently authorized are The Internet Portfolio, The Internet Emerging Growth Portfolio, The Paradigm Portfolio, The Medical Portfolio, The Small Cap Opportunities Portfolio, and The Kinetics Government Money Market Portfolio (the "Master Portfolios"). Pursuant to the 1940 Act, the Master Portfolios, with the exception of The Kinetics Government Money Market Portfolio, are "non-diversified" series of the Trust. Each of the Master Portfolios commenced operations on April 28, 2000. Each Master Portfolio is a Master Investment Portfolio in a master-feeder fund structure. Each Master Portfolio has multiple feeder funds invested in the Master Portfolio. By contributing assets to the Master Portfolio, the feeder funds receive a beneficial interest in the Master Portfolio. The Master Portfolio then invests the contributed assets in portfolio securities and allocates income, gains (losses) and expenses to the feeder funds based on the funds' proportionate interest in the Master Portfolio. Each of the Master Portfolios, with the exception of The Kinetics Government Money Market Portfolio, seeks to provide investors with long-term capital growth. The Internet Portfolio invests primarily in the equity securities of U.S. and foreign companies engaged in the Internet and Internet-related activities. The Internet Emerging Growth Portfolio invests primarily in the equity securities of small and medium capitalization U.S. and foreign growth emerging companies engaged in the Internet and Internet-related activities. The Paradigm Portfolio invests primarily in the equity securities of U.S. and foreign companies that the investment adviser believes are undervalued with high returns on equity, as well as, well positioned to reduce their costs, extend the reach of their distribution channels and experience significant growth in revenues. The Medical Portfolio invests primarily in the equity securities of U.S. and foreign companies engaged in medical research, pharmaceutical treatments and related medical technology with a focus on companies engaged in cancer research and drug development. The Small Cap Opportunities Portfolio invests primarily in the equity securities of U.S. and foreign small capitalization companies that provide attractive valuation 86 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited) opportunities due to special situations such as lack of institutional ownership, lack of significant analyst coverage or companies with sound fundamentals that have experienced a short-term earnings shortfall. The Kinetics Government Money Market Portfolio seeks to provide investors with current income consistent with the preservation of capital and maintenance of liquidity by investing in money market instruments issued by the U.S. Government, its agencies or instrumentalities. 2. SIGNIFICANT ACCOUNTING POLICIES SECURITY VALUATION Master Portfolio securities (other than Government) that are listed on a U.S. securities exchange (whether domestic or foreign) for which market quotations are readily available are valued at the last quoted sale price as of 4:00 p.m. Eastern time on the day the valuation is made. All equity securities that are traded using the National Association of Securities Dealers' Automated Quotation System ("NASDAQ") are valued using the NASDAQ Official Closing Price ("NOCP"). Purchased options, futures, unlisted U.S. securities and listed U.S. securities not traded on the valuation date for which market quotations are readily available are valued at the most recent bid price. Fixed-income securities (other than obligations having a maturity of 60 days or less) are normally valued on the basis of quotes obtained from pricing services, which take into account appropriate factors such as institutional sized trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Investments in The Kinetics Government Money Market Portfolio and instruments purchased with remaining maturities of 60 days or less are valued at amortized cost, which approximates fair value. Other assets and securities for which no quotations are readily available (including restricted securities) will be valued in good faith at fair value using methods determined by the Board of Trustees of the Master Portfolios. At June 30, 2004, The Internet Portfolio held one such security which represented 0.71% of the Portfolio's net assets. REPURCHASE AGREEMENTS Each Master Portfolio may enter into repurchase agreements with banks that are members of the Federal Reserve System or securities dealers who are members of a national securities exchange or are primary dealers in U.S. Government Securities. In connection with transactions in repurchase agreements, it is the Trust's policy that the Master Portfolio receive, as 87 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited) collateral, securities whose market value, including accrued interest, at all times will be at least equal to 100% of the amount invested by the Master Portfolio in each repurchase agreement. If the seller defaults, and the value of the collateral declines, realization of the collateral by the Master Portfolio may be delayed or limited. WRITTEN OPTION ACCOUNTING The Master Portfolios may write (sell) call or put options for trading or hedging purposes. When a Master Portfolio writes an option, an amount equal to the premium received by the Master Portfolio is included in the Statement of Assets and Liabilities as an asset and an equivalent liability. The amount of the liability is subsequently marked-to-market to reflect the current value of the option written. By writing the option, the Master Portfolio may become obligated during the term of the option to deliver or purchase the securities underlying the option at the exercise price if the option is exercised. Option contracts are valued at the average of the current bid and asked price reported on the day of the valuation. When an option expires on its stipulated expiration date or the Master Portfolio enters into a closing purchase transaction, the Master Portfolio realizes a gain or loss if the cost of the closing transaction differs from the premium received when the option was sold, without regard to any unrealized gain or loss on the underlying security, and the liability related to such option is eliminated. When an option is exercised, the premium originally received decreases the cost basis of the underlying security (or increases the proceeds on the security sold short) and the Master Portfolio realizes a gain or loss from the sale of the security (or closing of the short sale). As collateral for uncovered written options, the Master Portfolio is required under the 1940 Act to maintain assets consisting of cash, cash equivalents or liquid securities. This collateral is required to be adjusted daily to reflect the market value of the purchase obligation for put options or the market value of the instrument underlying the contract for call options. FOREIGN CURRENCY TRANSLATIONS The books and records of the Master Portfolios are maintained in U.S. dollars. For the Master Portfolios, foreign currency transactions are translated into U.S. dollars on the following basis: (i) market value of investment securities and other assets and liabilities are translated at the exchange rate of such currencies against the U.S. dollar, as provided by an approved pricing service, and (ii) purchases and sales of investment securities, dividend and interest income and certain expenses at the rates of exchange prevailing 88 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited) on the respective dates of such transactions. The Master Portfolios do not isolate and treat as ordinary income that portion of the results of operations arising as a result of changes in the exchange rate from the fluctuations arising from changes in the market prices of securities held during the period. However, for federal income tax purposes, the Master Portfolios do isolate and treat as ordinary income the effect of changes in foreign exchange rates arising from actual foreign currency transactions and the effect of changes in foreign exchange rates arising between trade date and settlement date. RESTRICTED SECURITIES The Master Portfolios may invest in restricted securities. These securities are valued by the Master Portfolios after giving due consideration to pertinent factors including recent private sales, market conditions and the issuer's financial performance. The Master Portfolios have no right to require registration of unregistered securities. At June 30, 2004, the Master Portfolios did not hold any investment securities which were determined to be illiquid pursuant to the guidelines adopted by the Board of Trustees. WHEN-ISSUED SECURITIES The Master Portfolios may purchase securities on a when-issued or delayed delivery basis. Although the purchase amounts of these securities are established at the time the purchaser enters into the agreement, these securities may be delivered and paid for at a future date. The Master Portfolios record purchases of when-issued securities and reflect the values of such securities in determining net asset value in the same manner as other portfolio securities. The Master Portfolios maintain at all times cash or other liquid assets in an amount at least equal to the amount of outstanding commitments for when-issued securities. EXPENSE REDUCTION The Adviser has directed certain of The Internet Portfolio, The Internet Emerging Growth Portfolio, The Paradigm Portfolio, The Medical Portfolio and The Small Cap Opportunities Portfolio trades to brokers believed to provide best execution and has generated directed brokerage credits to reduce certain service provider fees. For the six months ended June 30, 2004, The Internet Portfolio, The Internet Emerging Growth Portfolio, The Paradigm Portfolio, The Medical Portfolio, and The Small Cap Opportunities Portfolio expenses were reduced by $84,487, $1,955, $46,653, $640, $27,404, respectively, by using directed brokerage credits. In accordance with the requirements of the Securities and Exchange Commission, such amounts are required to be 89 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited) shown as an expense and have been included in each of the service provider fees in the Statement of Operations. SECURITIES LENDING Each Master Portfolio may lend its portfolio securities to broker-dealers by entering directly into lending arrangements with such broker-dealers or indirectly through repurchase agreements with respect to no more than 33 1/3% of the total assets of each Portfolio (including any collateral posted) or 50% of the total assets of each Portfolio (excluding any collateral posted). Securities lending and repurchase transactions will be fully collateralized at all times with cash and/or short-term debt obligations. The Master Portfolios receive interest on the collateral received as well as a fee for the securities loaned. EXPENSE ALLOCATION Common expenses incurred by the Master Portfolios are allocated among the Master Portfolios (i) based upon relative average net assets, (ii) as incurred on a specific identification basis, or (iii) equally among the Master Portfolios, depending on the nature of the expenditure. All expenses incurred by the Master Portfolios are allocated to the Feeder Funds daily based on their proportionate interest in the Master Portfolio. FEDERAL INCOME TAXES Each Master Portfolio intends to qualify as a partnership for federal income tax purposes. Therefore, the Master Portfolios believe they will not be subject to any federal income tax on their income and net realized capital gains (if any). However, each investor in the Master Portfolios will report its allocable share of the Master Portfolio's income and capital gains for purposes of determining its federal income tax liability. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts in the financial statements. Actual results could differ from those estimates. OTHER Realized gains and losses on the sale of investments are calculated on the identified cost basis. Dividend income is recorded on the ex-dividend date and interest income is recognized on the accrual basis. 90 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited) 3. INVESTMENT ADVISER The Trust has an Investment Advisory Agreement (the "Agreement") with Kinetics Asset Management, Inc. (the "Adviser"), with whom certain officers and trustees of the Trust are affiliated, to furnish investment advisory services to the Master Portfolios. Under the terms of the Agreement, the Master Portfolios compensate the Adviser for its management services at the annual rate of 1.25% of each Master Portfolio's average daily net assets, except for The Kinetics Government Money Market Portfolio, which compensates the Adviser at a rate of 0.50% of the Master Portfolio's average daily net assets. For the six months ended June 30, 2004, The Internet Portfolio, The Internet Emerging Growth Portfolio, The Paradigm Portfolio, The Medical Portfolio, The Small Cap Opportunity Portfolio, The Kinetics Government Money Market Portfolio incurred expenses of $1,362,410, $27,876, $453,875, $148,525, $114,379, $6,556, respectively, pursuant to the Investment Advisory Agreement. 4. SECURITIES TRANSACTIONS Purchases and sales of investment securities, other than short-term investments, for the six months ended June 30, 2004 were as follows:

As of June 30, 2004, unrealized appreciation (depreciation) on investment securities for federal income tax purposes was as follows:

91 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited) At June 30, 2004, the cost of investments for federal income tax purposes was $222,019,126, $3,917,489, $63,081,234, $22,690,764 and $19,228,454 for The Internet Portfolio, The Internet Emerging Growth Portfolio, The Paradigm Portfolio, The Medical Portfolio, and The Small Cap Opportunities Portfolio, respectively. For the six months ended June 30, 2004, the Master Portfolios wrote the following options:

92 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited) 5. PORTFOLIO SECURITIES LOANED As of June 30, 2004, the Master Portfolios had loaned securities that were collateralized by cash. The cash collateral is invested by the custodian in a money market pooled account approved by the Adviser. Although risk is mitigated by the collateral, the Master Portfolio could experience a delay in recovering its securities and possible loss of income or value if the borrower fails to return them. The Master Portfolio receives interest on the collateral received as well as a fee for the securities loaned. The value of the securities on loan and the value of the related collateral at June 30, 2004, were as follows:

93 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited) 6. SELECTED FINANCIAL HIGHLIGHTS Financial highlights for the Master Portfolios were as follows:

------------------ * Annualized. (+) Commencement of operations.

------------------ * Annualized. (+) Commencement of operations. 94 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited)

------------------ * Annualized. (+) Commencement of operations.

------------------ * Annualized. (+) Commencement of operations. 95 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited)

------------------ * Annualized. (+) Commencement of operations.

------------------ * Annualized. (+) Commencement of operations. 7. ADDITIONAL INFORMATION PricewaterhouseCoopers LLP ("PWC") was replaced as the auditors to Kinetics Portfolios Trust (the "Company") effective April 22, 2004. The Company's Audit Committee participated in and approved the decision to change auditors. PwC's reports on the Company's financial statements for the fiscal years ended December 31, 2003 and December 31, 2002 contained no adverse opinion or disclaimer of opinion nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the Company's fiscal years ended December 31, 2003 and December 31, 2002 and through April 22, 2004, (i) there were no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PwC, would have caused it to make reference 96 KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2004 (Unaudited) to the subject matter of the disagreements in connection with its reports on the Company's financial statements for such years, and (ii) there were no "reportable events" of the kind described in Item 304(a)(1)(v) of Regulation S-K under the Securities Exchange Act of 1934, as amended. On April 22, 2004, the Company by action of its Board of Trustees upon the recommendation of the Company's Audit Committee engaged Tait, Weller & Baker as the independent registered public accounting firm to audit the Company's financial statements for the fiscal year ending December 31, 2004. During the Company's fiscal years ended December 31, 2003 and December 31, 2002 and through April 22, 2004, neither the Company, its portfolios nor anyone on their behalf has consulted Tait, Weller & Baker on items which (i) concerned the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements or (ii) concerned the subject of a disagreement (as defined in paragraph (a)(1)(iv) of Item 304 of Regulation S-K) or reportable events (as described in paragraph (a)(1)(v) of said Item 304). 97 Kinetics Mutual Funds, Inc. 1311 Mamaroneck Avenue White Plains, NY 10605 INVESTMENT ADVISER AND SHAREHOLDER SERVICING AGENT Kinetics Asset Management, Inc. 1311 Mamaroneck Avenue White Plains, NY 10605 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TAIT, WELLER & BAKER 1818 Market Street, Suite 2400 Philadelphia, PA 19103 DISTRIBUTOR Kinetics Funds Distributor, Inc. 1311 Mamaroneck Avenue White Plains, NY 10605 ADMINISTRATOR FUND ACCOUNTANT AND TRANSFER AGENT U.S. Bancorp Fund Services, LLC 615 East Michigan Street Milwaukee, WI 53202 CUSTODIAN U.S. Bank, N.A. 615 East Michigan Street Milwaukee, WI 53202 THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS THE FUNDS'S PROXY VOTING POLICIES AND PROCEDURES ARE AVAILABLE WITHOUT CHARGE UPON REQUEST BY CALLING 1-800-930-3828. INFORMATION REGARDING HOW THE FUNDS VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE TWELVE MONTHS ENDED JUNE 30, 2004 WILL BE AVAILABLE AFTER AUGUST 31, 2004 ON THE SEC'S WEBSITE (at http://www.sec.gov) AND BY CALLING 1-800-930-3828. ITEM 2. CODE OF ETHICS. Not applicable for semi-annual reports. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable for semi-annual reports. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable for semi-annual reports. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable to open-end investment companies. ITEM 6. SCHEDULE OF INVESTMENTS Not applicable at this time. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable to open-end investment companies. ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASES. Not applicable to open-end investment companies. ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. ITEM 10. CONTROLS AND PROCEDURES. (a) The Registrant's President/Chief Executive Officer and Treasurer/Chief Financial Officer have concluded that the Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the "1940 Act")) are effective as of a date within 90 days of the filing of this report that includes the disclosure required by this paragraph, based on the evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934, as amended. (b) There were no changes in the Registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the Registrant's last fiscal half-year (the Registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. ITEM 11. EXHIBITS. (a) (1) Not applicable. (a) (2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. (b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) Kinetics Mutual Funds, Inc. & Kinetics Portfolios Trust By (Signature and Title) /s/ Peter B. Doyle ----------------------------------------------- Peter B. Doyle, President Date September 8, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title) /s/ Peter B. Doyle ----------------------------------------------- Peter B. Doyle, President Date September 8, 2004 By (Signature and Title) /s/ Leonid Polyakov ----------------------------------------------- Leonid Polyakov, Treasurer Date September 8, 2004 * Print the name and title of each signing officer under his or her signature.