2009 Annual Review

Dear Shareholders, Partners and Employees:

In 2009, the U.S. economy began to rebound from the depths of the global recession. Although the public securities markets rallied sharply, activity in real estate, private equity and venture capital slowed to a standstill during most of the year due to the protracted credit crunch and recession-induced disequilibrium in these sectors.

Reflecting these trends, Fremont Group’s overall financial results improved markedly from 2008, based on the strong performance of our public securities portfolios and the BF Funds. In 2009, the diversification of our portfolio between public and private investments proved beneficial, as sizable returns on public securities helped offset the negative returns, most of which are unrealized, from our investments in the private markets.

As we emerge from this challenging period, I am gratified that Fremont Group’s time-tested investment disciplines have continued to prove their worth. As an example, the Fremont Public Opportunities team that manages our public securities portfolio maintained and even increased their holdings in high quality companies throughout the market downturn. As patient long-term investors, they held their ground despite the temptation to change strategy as the markets declined. The result was the significant outperformance of this portfolio in 2009 relative to indices, which will be further described later in this letter.

Turning to our private investments, the picture is mixed. Continuing last year’s trend, liquidity events were infrequent, due to the scarcity of financing and attractive exit alternatives. However, the private equity companies we own performed reasonably well under the circumstances, and we are hopeful that we will realize positive returns from these investments when the economy recovers. In our venture capital investments, the focus continued to be on conserving cash and positioning the businesses for the eventual recovery in the economy.

Commercial real estate, which provided excellent returns in recent years, experienced a sharp correction in 2009. The overall lack of credit and liquidity in the financial markets challenged real estate investment and lending markets. Institutional real estate investors’ yield requirements continued to move higher, while the global recession pressured industry fundamentals, causing significant contraction in asset values. A full recovery is not expected for several years.

While there remains considerable uncertainty and risk in the economy, the outlook today is far brighter than it was a year ago. As a result of prudent risk management, the absence of corporate debt and our stance as a patient long-term investor, Fremont Group has weathered the challenges of this recession without substantial realized losses of capital. Fortunately, over the years, we have been reducing our commitments to private equity, real estate and venture capital. We also successfully employed a hedging strategy for a portion of our portfolio, through the purchase of puts and calls on the S&P 500 Index in September and October 2008, respectively. These positions have been closed out at a profit. Another positive development was the recovery of nearly 99% of the funds invested in the Reserve Primary Fund, the money fund which “broke the buck” in September, 2008.

Entering 2010, we have a solid liquidity position resulting from our well-timed strategic shift into more liquid investments over the last six years. Consequently, Fremont Group is well positioned to capitalize on new investment opportunities that will inevitably arise out of the economic difficulties of the last two years.

The following sections provide more detail about our 2009 performance across asset categories.

Public Securities

Fremont Public Opportunities (FPO), the manager of our concentrated portfolio of public securities (including FPR Partners, LP), generated excellent returns on its portfolio in 2009, substantially outperforming the S&P 500 index and has now retraced the ground that was lost in the prior year.

This strong performance, through a period of market turmoil, validates FPO’s philosophy as a value investor focused on owning great businesses for the long term. The FPO team applies rigorous fundamental research and analysis to identify high quality companies with strong management teams and sustainable competitive advantages. Thereafter, they target their investments in these companies when stock prices are temporarily undervalued. Our newest investors support this philosophy, and have added capital during this time.

During 2009, FPO maintained and added to the majority of its long positions, while taking some profits as certain companies reached their price targets. In addition to companies whose revenues are correlated to the U.S. economy, FPO’s portfolio includes U.S. companies that are not inextricably tied to the U.S. economy, as well as companies based outside the U.S. In early 2009, FPO increased its investments in cyclical companies that would benefit from the improving health of the economy.

At year-end, FPO had investments in the insurance, retail, energy, media, asset management, consumer products and food industries. The businesses in the portfolio have performed well in this environment and have even taken advantage of the situation to improve their competitive positions. FPO believes that the companies it owns have excellent growth prospects, and that these companies remain meaningfully undervalued, notwithstanding the gains of the past year.

In recognition of his important role on the FPO team, Tom Hazlehurst, who joined the team in 2006 as an analyst, was promoted to principal of FPO and FPR. In March 2010, Pat Pierce joined FPO as an Investment Associate.

Real Estate

The global commercial real estate market was impacted by the recession and credit squeeze that started in earnest in 2008. The widespread decline in the value of commercial real estate assets across virtually all sectors adversely affected the value of Fremont Realty Capital’s (FRC’s) holdings, including its investments in hotels, senior housing and condominium developments. Despite declines in valuations, a number of FRC’s investments had positive operating performance relative to the prior year, in particular, the office properties in Chicago, Baltimore and Puerto Rico.

In response to 2009’s very difficult market conditions, FRC took proactive steps at the portfolio level to reduce expenses, renegotiate or extend existing loans, and otherwise manage its portfolio to improve performance and preserve capital. FRC’s conservative leverage philosophy was a huge benefit in 2009, allowing FRC the flexibility to retain and manage its portfolio through the sharp correction in the real estate market.

The current challenging conditions in the real estate industry are likely to persist throughout 2010 as the deleveraging and market correction continue to work their way through the economy. In this environment, FRC is actively seeking new sources of capital and exploring a variety of opportunistic investments. Looking beyond the current market cycle, we are hopeful that the value of FRC’s holdings will improve as prices stabilize. In the meantime, FRC’s seasoned management team is actively and effectively managing the portfolio to weather this industry-wide downturn.

Reflecting the ongoing challenges facing commercial real estate, Fremont Group’s investment in Cheyenne Corporate Center, a 321,000 square foot office/retail building complex in Las Vegas, continues to face an extremely difficult leasing market. We have entered into discussions with the lenders to restructure the mortgage on the property.

Private Equity

In 2009, the companies we own through our principal private equity funds generally performed well through the difficult economic environment as a result of rigorous expense control and the success of their operating initiatives. Not surprisingly, given economic conditions, there were no liquidity events in 2009.

Ironshore, one of two insurance companies in the portfolio, delivered strong performance. Ironshore is a specialty commercial property and casualty insurer. The company had excellent growth in premiums and profitability in 2009, and raised additional capital for further expansion in 2010. In contrast, at IPS, a leading manufacturer of a wide range of adhesives and plumbing products, revenues were negatively impacted by the downturn in real estate construction, but the declines were partially offset by significant actions taken to reduce costs. ModSpace, which provides modular units for mobile offices, job sites and classrooms, suffered lower earnings as commercial construction hit a 40-year low. We are confident that all of these companies will generate positive returns when they are ultimately sold.

Venture Capital

Trinity Ventures, a firm started by Fremont nearly 25 years ago, which manages most of our venture capital investments, reported that the majority of its portfolio companies achieved revenue growth in 2009, despite the difficult economy. In a liquidity event in the Trinity Ventures VI and VIII funds, Sabrix, a company that provides transaction tax software and services, was acquired by Thomson Reuters, resulting in a return of 2.5 times invested capital. Another Trinity Ventures fund, Trinity Ventures IX, completed its investment program with an investment in LoopNet, an online, real estate marketplace and information services provider. That Fund now holds 24 active early stage companies in non-capital intensive service sectors: information technology infrastructure, digital media, internet services and mobile applications. Many of the companies in the Trinity Ventures funds show great promise.

Fremont Group also held stakes in two other venture capital companies, BioSeek and eSilicon, during 2009. In February 2010, BioSeek, a pioneer in applying predictive human biology to drug discovery, was acquired by Asterand, a leading provider of human tissue and human tissue-based services to pharmaceutical and biotechnology companies. The sale is structured as an earn-out based on BioSeek’s 2010 revenue, with investor returns dependent on the level of those revenues.

The other holding, eSilicon, a provider of outsourced semiconductor production, experienced lower revenues in 2009 as part of a general slowdown in the semiconductor industry. With the recent rebound in that industry, and as more manufacturers turn to outsourcing chip production, eSilicon is experiencing strong growth.

Corporate Developments

In 2009 Fremont Group lost a trusted advisor, counselor and friend with the passing of Harold J. (Bill) Haynes, who had served on the board of directors of Fremont Group and its predecessor company since 1982. Prior to this, Bill was chairman and chief executive officer of Standard Oil Company of California (now Chevron), where he had a distinguished 34-year career. We will remember Bill as a person of the highest integrity, intelligence and business acumen. He will be greatly missed by all of us.

In January 2010, Bob Peck, who established the FPO business and co-leads FPR Partners, was elected to Fremont Group’s board of directors. Bob’s experience and business acumen, as well as his knowledge of U.S. and world economies and financial markets, will be an asset to the board.

Andy Raab, who co-leads FPO and FPR Partners with Bob, was named a partner of Fremont Group in recognition of his important and lasting contributions to the success of FPO and FPR Partners.

Newly elected to the board is Ernie Cockrell, chairman of Cockrell Interests, Inc., a private diversified asset holding company, and president and director of the Cockrell Foundation. For three decades, Ernie led Cockrell Oil Corporation, a family-owned oil and gas exploration and development company. Ernie has chaired the boards of many major non-profits, including The University of Texas M.D. Anderson Cancer Center Board of Visitors, The Methodist Health Care Research Institute, The Welch Foundation and Reasoning Mind, Inc. Ernie’s extensive knowledge of business and his sound judgment will be of tremendous value to the board.

One of Fremont Group’s core values is a longstanding commitment to community service. In 2009, in addition to a variety of ongoing charitable projects and donation programs, Fremont Group provided major support for the San Francisco Food Bank to provide meals to hungry individuals and families. Our employees met this growing need by not only contributing financially to the Food Bank, but also by volunteering their time on weekends. We are very proud of our employees’ support, which enabled Fremont Group to be the top-grossing food drive participant last year for the San Francisco Food Bank.

Looking Ahead

Although the outlook is brighter today than it was in 2008 and early 2009, we are bombarded with proposed new government regulations aimed at reforming the investment and financial industries and changes in tax policy and health care. There also remain long term issues, including the ballooning deficit, the nation’s competitive position and persistent high levels of unemployment.

Yet, amid these challenges new business opportunities arise. As always, our goal is to identify the most compelling opportunities that afford the potential for superior returns. Toward this end, we have undertaken a search to identify an individual to head a new direct investment business line. This business line will acquire controlling interests in private companies that we believe will make excellent investments. We seek to attract businesses that appreciate the continuity of private ownership. There are advantages to being a private company, as we experience at Fremont Group, and we will invest in companies that share our view of the benefits of being private.

Additionally, for the past several years we have been following the clean technology sector, which promises to be a major growth engine of the future, and we have made one small investment in this sector to date. Beyond these initiatives, we remain open to new entrepreneurial opportunities as they emerge.

Fremont Group has a tremendously capable staff, whose talents and abilities have enabled us to navigate the economic turmoil of the last two years, and have positioned us to capitalize on the investment opportunities of tomorrow. I extend sincere thanks and appreciation to our shareholders, board, partners, and employees for their confidence and continued support.

Sincerely,

Alan Dachs
President and CEO