2010 Annual Review

Dear Shareholders, Partners and Employees:

Fremont Group experienced solid improvement in its business performance in 2010. Coming out of the longest and deepest recession in post-war history, our results were good—certainly better than in 2009—but not yet where we hope that they will be longer-term. In a repeat of last year, our public securities portfolios delivered outstanding performance, more than offsetting continued weakness in some other areas. We also saw our real estate portfolio stabilize and, in some cases, begin to turn the corner. The results from our different investment sectors are described in greater detail later in this letter.

Since Fremont Group’s formation in 1986, our allocation of capital to different investments has shifted based on market dynamics and relative valuations. We have entered and exited a number of investment businesses over the years, investing capital where we saw the greatest opportunities for superior returns. For example, Fremont began investing in venture capital and private equity in the 1980s well before these became popular investment vehicles. We even formed our own business lines to do this, which have since become independent entities, as our focus changed.

In the early 2000s, we saw substantial unrealized value in the public markets and we increased our allocation to public securities, with the formation of Fremont Public Opportunities in 2003. Throughout our history, we have never been afraid to make strategic changes in our investment mix and to expand into new investment categories, based on our assessment of where optimum returns can be achieved. This approach has served us well through multiple economic cycles.

Strategic Investment Priorities

During 2010, working closely with our board of directors, I undertook a thorough analysis of our investment strategies, in light of the widespread and dramatic changes in the global investment landscape. The goal of this process was to ensure that Fremont Group capitalizes on the most promising and newly emerging investment opportunities today and in the future. In our more than two decades as professional investors, the quest for superior investment returns has been a constant. Today is no different.

As a result of this strategic analysis, we have identified four distinct strategies for future growth, which will determine how we allocate resources going forward:

• Public Securities: The concentrated portfolio managed by the FPR Partners
  investment team, using a value-oriented discipline
• BF Global Fund: The sub-advised portfolio managed in an endowment style and
  comprised of multiple asset classes including domestic and foreign equities, fixed
  income, hedge funds, private equity and real assets
• Private-to-Private Initiative: A new initiative to acquire controlling interests in
  one or more private companies and help them grow
• Entrepreneurial Initiative: A new initiative to fund entrepreneurial opportunities
  directly.

The rationale for maintaining our investments in public equities is based on the strong performance this strategy has delivered, as well as its flexibility and liquidity. Additionally, the broad diversification and liquidity of the BF Global Fund provide an opportunity for solid returns with less volatility and risk.

The new initiatives under development are designed ultimately to create a small portfolio of directly-owned businesses, which generate ongoing revenue and offer growth potential over the long term. Given our history with private companies, we know how to manage them and help them grow. Furthermore, we believe there are a sufficient number of small-to-mid-sized companies that want to remain private, but would welcome an investment partner like Fremont Group. The type of businesses we prefer are small to mid-sized companies that are not capital intensive and generate free cash flow.

To develop the entrepreneurial initiative, we will be pursuing possibilities in businesses that are low-tech and not capital intensive. This may include reinventing an old business with a new value proposition or economic model, and duplicating a proven business in an expanding or underserved market. The time line for these initiatives is based on when we identify appropriate opportunities. We will not invest any capital until we find opportunities that meet our exacting criteria.

In addition to completing our strategic investment review, the other major accomplishment of 2010 at the corporate level was the completion of our transition to a partnership structure. This important outcome is the result of years of effort and provides a more efficient framework for all of our investments going forward. As a result of these developments, we have a clear strategic direction and an improved structure for managing businesses in the future.

Public Securities

FPR Partners, the team managing our concentrated portfolio of public equities (known as Fremont Public Opportunities) and the fund FPR Partners, LP, once again achieved stellar returns in 2010, substantially outperforming the broad market as measured by the Standard & Poor’s 500 Index. With 2010’s gains, the portfolio has not only recovered from 2008’s market decline but moved well ahead of its prior peak valuation.

In the eight years since it was established in 2003, FPR Partners has developed a strong track record, based on the team’s adherence to a strict and unchanging investment discipline through both up and down market cycles. Their philosophy of investing in a concentrated portfolio of high quality businesses as owners has proven its worth.

The investment team seeks to understand existing and potential portfolio companies better than other public market investors. Relying on their own intensive due diligence, the team seeks to identify businesses that offer a compelling risk/reward ratio, with a low risk of permanent loss of capital. In 2007, the investment team made their expertise available to investors outside of Fremont through the fund FPR Partners, LP, which has steadily attracted new investors. Reflecting the success of this approach, the FPR Partners has produced a net cumulative gain of 35.20% over the past three years, compared with a loss of 4.66% for the S&P 500 for the same period.

2010’s robust returns came from the portfolio of stocks as a whole rather than a few standouts, as well as from a few strategic short positions. At year-end, the portfolio’s eight largest positions represented 79% of the portfolio. The portfolio included holdings in insurance, energy, media, wireless communications, retail, asset management, consumer products, and food and biopharmaceutical industries. Because some holdings have appreciated meaningfully, the team trimmed some positions in 2010 and early in 2011. The team also identified some attractive new investments.

The companies in the portfolio have navigated the challenging and rapidly changing economy very well, and their competitive positions are even stronger today than before the market’s decline. While the team is optimistic about prospects for these holdings, no successful investment team, including ours, can rest on their laurels. The investment team’s goal remains the same: to optimize the portfolio for the highest returns over the coming years consistent with a desire not to lose capital.

Real Estate

For Fremont Realty Capital (FRC), which manages real estate investments for Fremont Group and other investors, 2010 marked a turning point. After two years of declining valuations, the value of FRC’s portfolio began to increase and operating profits for many investments improved. Nevertheless, significant challenges remain, due to the widespread dislocations in credit markets and the continued impact of the recession on real estate.

FRC’s portfolio is diversified across sectors that include lodging, land, senior housing, residential housing, retail, office, storage and mixed-use facilities. Throughout 2010, FRC’s team continued to focus on aggressively managing the portfolio to improve operating results for each individual property and address mortgage maturity exposure and loan covenant issues. Sales activity began to pick up at several of the condominium projects in the portfolio, and improving occupancy for office and retail properties contributed to better financial performance overall.

During the year, FRC successfully completed the foreclosure of the Tidewater Beach Resort, a Florida condominium project, and assumed management of the property. All of the remaining condominium units at the St. James Club, a condominium development in Boca Raton, Florida, were sold. Sales at Purgatory Lodge, a resort property in Colorado, also showed improvement.

Initiatives to attract new tenants and to enhance market appeal through value-added improvements at a number of properties were successful, and the portfolio’s office properties maintained their strong performance. As the recovery in commercial real estate continues and our management initiatives gain further traction, we believe the value of our portfolio should continue to improve.

Also during 2010, Fremont Group completed the restructuring of the financing for Cheyenne Corporate Center, an office/retail building complex in Las Vegas. The property is being aggressively marketed for lease, although the real estate market in Las Vegas continues to have a high vacancy rate. We are hopeful that we will see an improvement in leasing activity over time, which should allow for improved future financial performance of this 321,000 square foot property.

Private Equity

Results for our private equity investments were mixed in 2010, with Calera Capital’s portfolio continuing to face challenges, while our investments through PAI, a leading European private equity firm, provided positive returns.

In 2010, the performance of our Calera Capital private equity investments continued to be dampened by the impact of the recession and accompanying high unemployment. The strongest performer was Ironshore, a specialty property and casualty insurer, which increased premiums written and earned substantially in 2010. IPS Corporation, a leading manufacturer of adhesives and plumbing products, stabilized its revenues and improved its operating results, based on its successful international expansion and cost controls.

The protracted decline in commercial construction continued to adversely affect results for ModSpace, which provides modular units for mobile offices, job sites and classrooms. Following a trough in new construction during 2010, ModSpace’s operating results improved as the year progressed and its future outlook is favorable. At Direct General, a nonstandard auto insurer, new operating initiatives are in place to improve its performance after its business was hurt by unemployment and increased claims.

Our investments through PAI, a European private equity firm, provided positive returns in 2010. The favorable results were driven by the recapitalization of Yoplait, the fresh dairy products company, and the successful public offering of shares in Chr. Hansen, a Danish supplier of natural ingredients to the food industry. Additionally, the valuations of two other portfolio holdings increased during the year.

Venture Capital

A healthy increase in initial public offerings and merger and acquisition activity in 2010 created an improved environment for venture capital investments, in comparison to the prior two years. Our investments in Trinity Ventures, the venture capital firm started by Fremont 26 years ago, reflected these trends.

Trinity invests in early stage business-to-business and consumer companies in specific technology categories, which are benefitting from the theme of connectedness and rapid adoption of internet-enabled technologies. The initial public offering of Sciquest, a leading provider of online procurement and supplier management solutions, represents at the current valuation one of the larger outcomes in Trinity’s history. This benefitted our holdings in Trinity Fund VII and Fund VIII. The remaining nine companies in Fund VIII (two of which are also shared with Fund VII) are all generating revenue and none expect to need additional capital in the near future. We expect Fund VIII to be solidly profitable at maturity. Fund VII is still below breakeven, but we hope ultimately to achieve close to a full return of capital, which would be a favorable outcome given the fund’s very challenging 1999 vintage.

In Fund IX, acquisitions of portfolio companies Ankeena, Netcordia and Cubetree provided solid outcomes, with holding periods of less than five years. Of the 23 remaining companies in Fund IX, a number received follow-on financings in 2010 at increased valuations, including Care.com, New Relic and Enovix. With technology spending outpacing growth in the overall economy, we hope that the stage is set for excellent venture capital returns on the Fund’s technology-oriented holdings.

Fremont Group also owns a stake in eSilicon, a provider of outsourced semiconductor production. The company’s revenues have climbed substantially during the recovery, as technology spending accelerates. Based on the company’s size and progress, we are optimistic about the prospects for a future exit.

Core Values and Community

While our investment mix has evolved over the years to stay abreast of changes in the markets, Fremont Group’s core values have remained unchanged since our founding. Above all, we adhere to the highest standards of professional and personal integrity, ethical conduct and fair dealing. We seek these qualities in our investors and partners, and require them of our employees.

Our core values recognize the central role our employees play in the company’s success. Looking back over the last few years of unprecedented economic challenges, I want to reaffirm that it is the caliber of our people that sets us apart. Thanks to their investment acumen, hard work and perseverance, Fremont Group is well-positioned to capitalize on the economic recovery and the investment opportunities that are emerging.

This year, I also want to highlight Fremont Group’s commitment to community service, which is another of our core values and an essential and enduring part of our culture. Through four principal annual fundraising events and direct donations, employee matching gifts and volunteer service program, The Fremont Group Foundation and our employees contribute to a wide range of worthy, non-profit organizations. During 2010, our employees once again raised a record amount benefiting the San Francisco Food Bank during its Food from the Bar campaign. Other charitable activities included the American Cancer Society’s Daffodil Days, the Susan G. Komen Breast Cancer Foundation and Raising a Reader. At a time when community resources were severely strained, our employees devoted their time and financial support to helping those less fortunate through these and many other volunteer efforts.

Given the dramatic changes under way in the global political and economic landscape, we do not expect it to be business as usual in 2011 and beyond. With growth accelerating in the developing world and the economies of the U.S. and much of Europe battling sizable budget deficits, the economic environment is far from stable. To invest successfully in this complex and interconnected global economy demands the right balance of caution and prudence, coupled with vision and forward thinking. These are the qualities that underpin our investment strategies, as we strive to achieve superior, long-term results in an uncertain world.

In closing, I want to express my appreciation to the board of directors for their wisdom and guidance and to thank our shareholders, employees and business partners for their continued confidence and support.

Sincerely,

Alan Dachs
President and CEO