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 potential 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's performance has been negatively impacted by the flight to quality syndrome that has been at play in the bond market. The fear of war and its potentially negative effects on economic activity has pushed the yield on the ten-year Treasury bond to a low of 3.56% on March 10, matching the low of 3.56% on October 9 of last year.

Your Fund is positioned to be extremely defensive. Its duration is currently 1.5 years, the shortest ever. Over the last few months, we have chosen not to participate in the bond market because of a lack of attractive high-quality investment opportunities. Both Tom Atteberry and I have searched and reflected on potential short-term investment securities and have found very few that meet our exacting standards. Last year, we directed a large portion of new money inflows into short-tranche, collateralized-mortgage obligations. Since then, other investors have found them equally attractive and now have driven their valuations to levels that we find unattractive. As a result of this trend, we have allowed short-term liquidity to rise. Additionally, we have reduced our positions in Treasury inflation bonds and our euro denominated French inflation indexed bonds. In both cases, we felt that their prices had risen to levels where it was prudent to reduce our exposure. The proceeds of these sales have gone into short-term money market instruments. In light of these changes, short-term liquidity is now slightly more than 30% of the Fund-a record.

We have recently been making small additions to our high-yield holdings while materially increasing our IO (Interest Only securities) exposure. These latter securities have negatively affected your Fund's valuation within the last few weeks. As you may recall from previous discussions, IOs are securities that typically rise in value when interest rates rise. With the latest dramatic decline in interest rates, their prices have been negatively hit. In fact, they have become extremely volatile because of the general belief that interest rates will continue to fall and prepayments will remain at extremely elevated levels. We strongly disagree with these expectations.

Interest rates began to fall last year in August, in conjunction with President Bush's escalation of the Iraq issue. Prior to this initiative, the ten-year Treasury yield was in the 4.2%-4.4% range. The fear of war has weighed heavily upon the economy in terms of both consumer and business confidence measures. We believe Treasury bond yields have been driven to levels that are totally non-sustainable. Various types of consumer and business decisions are being delayed until the economic environment appears to be more clearly defined. We believe that the economy and the financial markets 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 outcome has positive implications for the economy this year as well as for next year. Because of this expectation, we do not believe that the high-quality bond market presents any value today. In our opinion, the ten-year Treasury bond yield recently fell to a level that makes the bond market as over valued as was the stock market in 2000. In other words, it is a sell. That is why we are so defensive. We want to protect your capital so that we may deploy it at another time, when the interest rate environment is more attractive for investment.

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 New Income team