Dear Shareholders and Friends,

After last night's speech from our President, we wish safety and speed to all our service men and women who will be in harm's way. May they all be protected, as they face the ultimate human sacrifice. Hopefully, a minimum of casualties will occur.

As you have seen over the past several weeks and months, the Iraqi situation has weighed on the financial markets and the economy. Your Fund has been particularly impacted by its large exposure to retailing stocks. This does not come as a surprise to us since we experienced a similar fate back before Gulf War 1. We have been here before and feel very comfortable with our stock selection and exposure.

During the past several weeks, particularly within the last two weeks, we have been quite active. As fear and chaos have entered the stock market, valuations have declined significantly for several stocks. Our computer screens are highlighting more potential investment opportunities. The one group that has the highest representation is retailing. In light of this, we have been very active buyers of stocks. Several acquisitions have been at p/e valuations between eight and ten times earnings.

We significantly increased our positions in all our retailers. We have also established a new position in another retailer that we will disclose when we publish our March shareholder letter. It currently sells at approximately 1.1 times book value, 8 times earnings with a strong balance sheet, while dominating its industry. We also have added two new companies in the healthcare industry and the defense industry. Both are small positions currently and we hope they become larger, if the stock market will accommodate us. We have also added to several of our non-retail holdings, as they have come down in price. Finally, we have established a position in a mortgage-backed security called an IO (Interest Only). These types of securities typically rise in value as interest rates rise. This is the opposite of how traditional bonds perform. After all of these changes, our liquidity position has declined from nearly 22% to approximately 13%. We look forward to committing additional liquidity, when opportunities present themselves.

We have implemented these actions because we believe that fear has driven various stock valuations to levels that more than discount the war. We believe the economy and the stock market are very much analogous to a coiled spring. Should we have a reasonably successful outcome in the war, consumer and business confidence should improve significantly. This has positive implications for the economy this year and next year. This also means that interest rates are likely to rise. Prior to President Bush's push on Iraq in August of last year, the ten-year Treasury bond yield was in the 4.2%-4.4% range. It is very likely that it will return to that level or higher with a successful war outcome. If we are incorrect about the war's outcome, in that it takes materially longer than presently expected, this would be negative for stocks as well as bonds. In spite of this risk, we believe that current valuations warrant our taking a more aggressive posture toward the stock market.

Hopefully, this brief commentary will assist you in understanding how we are managing your assets during this difficult period.

In closing, God Bless America and may all our people come home safely.
Sincerely,

Robert L. Rodriguez and the FPA Capital Fund team