July 22, 2002

Dear Client:

Below are the returns of relevant benchmarks:

Currency Effects

The strength of the U.S. stock market in the 1990s attracted capital from all over the world, boosting U.S. stocks along with the dollar. Recent dramatic revelations of accounting fraud have rattled investors worldwide. Net foreign investment has declined, reducing U.S. stock valuations and weakening the U.S. dollar relative to the euro and yen.

Foreign stock markets have declined in lockstep with the U.S. But the decline of the dollar has tempered foreign stock market losses for U.S. residents. For example, let's say you invested $85 (US dollars) in January 2002 in a European mutual fund. If that fund neither gained nor lost in euro terms, your investment would be worth $100 now, since the euro has appreciated 18% relative to the US dollar year-to-date.

But most foreign markets had losses in the second quarter, despite foreign currency gains. Foreign markets lost about 2% this quarter in US dollar terms. Thus foreign investments have been a partial hedge against the US stock market, which lost 13% in the same period.

Fear and Greed

You’ve probably heard the adage that fear and greed are the opposing emotions that drive investor decisions. The greed factor of the 1990s becomes clearer with each new report of accounting fraud, conflict of interest and sweetheart deal that is published. According to recent reporting, risk-free profits of tens of millions of dollars for IPO trades were allotted to CEOs' personal accounts. Of course, the brokers say there was no quid pro quo for these allotments (despite the fact that the brokers worked at the same firms competing for investment banking business from the CEOs' companies).

Many parties participated in driving stock valuations through the roof. Management and employees alike benefited. Brokers and other financial companies, and eventually the small individual investor all were rewarded for maintaining the illusion that valuations no longer depended on solid financial performance of the underlying businesses.

And now we are seeing the fear factor in full display. Each new announcement of what normally would be considered a routine investigation results in an automatic 20% drop in the targeted company and rattles the broader market. The apex of the greed factor was accompanied by plumbers turned into day traders, record margin borrowing and expectations of annual 30% returns. Conversely, the depth of the fear factor is probably near at hand. Consider these facts:

• short-selling of stocks set a new record last week

• investors are taking money "out of the market" to buy more expensive houses, despite the economic slowdown and reduction in personal wealth

• brokers are pushing bond funds now, after two years of unprecedented gains (and investors are buying)

• the PIMCO Total Return bond fund has most likely overtaken Fidelity Magellan stock fund as the largest mutual fund

Of P/Es and Dividend Yields

The escalation of tech, telecom and health care stock prices in the 1990s left many stocks behind. In fact, 90% of the gains of the S&P 500 in the last decade can be attributed to just 50 stocks in the index. These 50 mostly technology companies have been decimated since March 2000. What about the other 450 stocks? Are they reasonably priced? And are the original 50 stocks now reasonably priced?

The price-to-earnings (P/E) ratio is a quick guide to stock valuations. Historically the P/E of the S&P 500 has been about 17. In recent years it reached as high as 30. Currently it is 16 (based on estimated earnings for 2002). This indicates that the S&P 500 stocks are reasonably priced, especially in light of the current low interest rate environment and an expected earnings growth rate of about 10% for the next twelve months.

The P/E of the NASDAQ Composite is 41, high by any standard, and especially when the expected earnings growth rate of the Composite is negative (meaning that if stock prices are steady the P/E will increase as earnings decrease).

The Dow Jones Transportation Index P/E ratio is negative and the DJ Utility Index P/E ratio is 9 with a dividend yield of 5.7%.

Historically, dividends have tended to stabilize stock prices. For a number of reasons technology companies in recent years have deployed cash that could have been used to pay dividends into increasing growth as quickly as possible. That strategy increased expenses to an unsustainable level. The old slow-and-steady growth companies that have continuously increased dividends over long periods will be the ones left standing. We expect the returns of these consistent dividend-paying companies to outperform growth companies in the near-term.

The dividend yield of the S&P 500 is 1.5%. Money market funds yields are 1% and Treasury bills are about 1.6%. If one invests in higher dividend yielding stocks that are able to maintain value or even appreciate somewhat, the overall return will beat cash and bonds.

Changes to Quarterly Statements

We now report aggregated totals of your managed accounts to reduce the statement size. Prior to this change we provided detailed reports of each account. You can see the detailed holdings of each account on the monthly statements provided by Schwab and/or Fidelity.

We have substituted the "Performance by Asset Class" report and graph for the "Performance by Security" report. We think it provides a more useful view of your portfolio.

Management fees are now allocated proportionately to each Asset Class. Prior to this change we allocated the fees entirely to cash, which distorted the cash return.

Please let us know if you would like to see different reports and we will do our best to accommodate you.

As always, feel free also to call to discuss your portfolio at any time.

Regards,

Audrey Grubman, CFP^®