Ryan J. Morris, Managing Partner

2010 Q1 Partnership Letter

Dear Partner:

This is our first quarterly letter, after switching from semi

quite a bit shorter than the annual letters though my goal is still to give you all the information that I

would desire if our positions were re

about in future letters please let me know.

Our Performance in Q1 2010

The following is a table of our quarterly returns since inception. Our most recent quarterly return was

unusually high, though far less unusual than all four quarters in 2009 which more resemble returns I'd

be quite happy with over a 2-3 year timeframe. More importantly, as you can see from the monthly

returns in the appendix, we had our first inferio

I point out February not because something interesting happened

meaningless as the 11 month streak of

produces widgets each day, good investment ideas are far and few between (it was only 2 ideas that

gave us the vast majority of our returns in 2009).

meaningful short term performance measurement like the

the change in momentary opinion of other market participants

we are correct in our reasoning about an investment idea.

fairly measuring performance.

I make no attempt to perform over a monthly or quarterly basis and will

annual return over a smooth 15% annual return.

perspective is one of our most significant competitive adva

I will change my mind in less than a second if I have reliable new information but an updated market

quotation does not meet my definition of information.

Time Period

Q1 2009 (Feb 24 - March 31)

Q2 2009

Q3 2009

Q4 2009

2009 Full Year

Q1 2010

Cumulative return

Value of $1,000 invested at inception

1) Gross return is after expenses (which were 0.53% of assets this year)

2) Limited Partner Return is after Performance Allocation of 25% of profits above 6% annualized, calculated

3) S&P 500 Return is based only on the index (add approximately 2% annually to include dividends)

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semi-annual letters in 2009. I intend for these to be

reversed. If there are specific things you would like to hear more

gh, inferior month (February) compared to the overall market.

but rather because it is equally as

beating the market that preceded it. Unlike a factory that

y, By its nature, investing doesn't lend itself to

factory. Short term results

(i.e. market prices) rather than whether

I believe a three year minimum

gladly take a volatile 20%

It is important to understand that our long term

advantages against other less confident investors.

55.0% 41.4%

87.5% 62.8%

60.2% 45.3%

83.2% 59.4%

753.3% 433.0%

17.6% 13.5%

903.3% 505.0%

$ 10,033 $ 6,050

but before Performance Allocation to the General Partner

monthly

versed. ts merely represent

is needed for

3.2%

15.2%

12.0%

8.4%

44.2%

4.8%

51.2%

$ 1,512

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Quarter in Review - The World at Large

The S&P 500 closed the quarter at 1169, still well off the highs of over 1500 set in 2000 and 2007. The

total market capitalization relative to GDP of US companies is probably the best measure of overall

market valuations. This is generally subject to far less noise than other measures of overall market

valuation such as P/Earnings or P/Book or dividend rates.

At the end of March this ratio stood at about 85%. In 1980 it was about 40%, which gave approximately

a 17% annual return over the next twenty years and it was about 150% in 2000 which produced slightly

negative returns over the following decade. We are currently right in the middle which suggests that

the market is approximately fairly valued. This point seems to reinforce the idea that double digit

annual returns will only be achieved through intelligent security selection where one has a well

understood competitive advantage. A passive indexing approach will no doubt beat the vast majority of

active investment managers (it always has) but will not likely produce the returns of the 1980's and 90's

("The Great Bubble"). Our goal is to outperform the market by 10% per annum on forward-looking basis

by utilizing our competitive advantages.

The economy is still getting a disproportionate amount of attention in the news as the recession appears

to be ending, although job recovery - as in all previous recessions - takes time. I tend to agree with

Peter Lynch in that spending much time worrying about macro factors: Greece, recession,

unemployment, etc. is a good way to be led down a very poor investment path. While there are

certainly some long term trends that are important to stay abreast of, monthly changes in GDP

estimates or payroll numbers or Greece's CDS are no more useful than knowing to-the-second market

quotations in making intelligent investment decisions. There are simply very few predictable things -

and even fewer straight lines - in complex, nonlinear, dynamical systems (e.g. the economy).

Mistake of the Quarter

If you recall from the year end letter, we had been involved in a number of SPACs (a blank check looking

for a company to buy) that had significantly mispriced warrants. This required accurately predicting the

outcome of a shareholder vote; if there weren't enough positive votes, the warrants expire worthless.

These are by nature shorter term special situations as opposed to the long term undervalued positions

that constitute the majority of our portfolio. There were about ten situations that I understood and

either participated in or actively did not participate in because I was fairly certain the vote would not go

through. We ended up being correct in predicting the votes in all cases--it's only a coin toss if you don't

have any deeper knowledge, but through logic and understanding the participants involved and what

their interests and power/capability to influence the vote was, it was possible to predict fairly reliably.

We made quite a bit of money from these situations overall. One of them is still a very large holding,

though we are holding it now on the basis of valuation--the SPAC structure merely gave us the

opportunity to find it first. Unlike IPOs, SPACs are already public before the promoters come in, giving

people who like to uncover obscure situations a chance to get in early and quietly.

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From October to January these mispriced SPAC situations received an increasing amount of attention

from the investing community and, as always happens with more competition - the spoils are split more

ways. The mistake I made was for the final SPAC we were involved in where the situation changed

unusually quickly. The sponsors did not have a deal assembled shortly before their liquidation deadline

(SPACs generally have a 2 year life where they must reverse merge with a business or liquidate). It was

very likely that the warrants would expire worthless but, with only days to go, they announced a deal

which I liked after reading the proxy.

I made two mistakes here. The first was that, in my haste, I missed a point in the several hundred page

proxy that there would be significant dilution at a lower share price than I had thought, reducing the

true value from my initial estimate by about 25%. The second mistake was on the portfolio

management side; I gave too much weight to this situation, assuming that it would work out favorably in

the short term as every other similar situation had. In fact, it did work out over the very short term but

within two days the market price had declined. I wouldn't consider this a "trade" in the sense that it

was still grounded in under-valuation as opposed to speculating what other market participants would

pay in the short term, but the two mistakes together decreased our performance in the first quarter by

quite a bit, particularly since the other positions I sold to free up the cash have appreciated significantly.

I still believe it is highly likely that this situation will make us quite a bit of money over the next two

years. As I said, I fundamentally like the business, but missed a key point and my estimate of value was

clearly wrong by at least 25%.

The lessons learned from investment mistakes are rarely ever black and white. Rather, it is more of a

continuous feedback response to try to separate out what information is important from what isn't and

how to allocate positions within a portfolio. There are a number of factors that come together here and

I have shifted my balance because of then. Clearly more competition reduces how lucrative an

opportunity is, so perhaps next time we will avoid overstaying our welcome. Also, for me personally, I

am not geared toward anything short term and the amount of mental stress imposed by doing

something that requires checking a market quote every hour is not worth the potential loss of insight in

more long term situations where I have a far larger competitive advantage. So in the end, if this does

work out it will be because of that long term mentality and not because of any short term maneuvering

which I'm clearly not equipped to do!

With the mistakes out in the open, now onto what the portfolio looks like.

Chinese Companies

The partnership has been building some significant positions in Chinese companies that are listed on US

exchanges and are subject to the same reporting and audit requirements as any US publicly traded

company. With any foreign investments, there are additional risks assumed related to currency,

accounting, communication, rule of law, fraud, politics, and more. Some of these risks are mitigated by

having a more complete understanding and what remains must be appropriately compensated for. Our

approach has been to be fairly concentrated in specific companies that I understand and believe have

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virtually no risk of fraud based on various factors. Those other factors might be related to other

sophisticated investors having large positions alongside ours, having a large international auditor, and

most importantly, having a business that is simple and straightforward and therefore would be very

difficult to falsify. A company that produces widgets and is paid in cash is far more difficult to

misrepresent than Enron style 20 year contracts that are booked as profits once the signature is on the

page.

On the whole I am very optimistic for China as a country. If you have 1.3 billion people that all have the

motivation to work very hard and introduce a market system, rule of law, and free trade with far more

technologically advanced neighbors, the outcome is likely to work out very well. This contrasts to

somewhere like OPEC, which is analogous to a spoiled child who had money rained down on them from

birth and was never forced to learn any useful skills. We have already started to see some of the effects

of this with Dubai's debt scare after the price of oil dropped. I will put my money behind human

ingenuity and hard work over oil or shiny metal any day.

One company we have a significant position in has a fairly unique business niche. They provide

programming and advertisements for passengers on intercity buses in China. They make money by

selling the advertisements and have one of the strongest competitive positions of any company I am

aware of. They were awarded a 5 year exclusive contract from the Chinese Ministry of Transport to

provide programming and advertisements for intercity buses for all of China in 2007 and have been

building their network rapidly. Whether this contract is renewed in 2012 likely won't matter, as they will

have such a dominance over the niche that it will be virtually impossible to dislodge them. Additionally,

their prices are far lower than other "out of home" advertisers, on subway cars for example. I can't

think of a better opportunity for advertisers to reach potential customers than when they are stuck on a

bus for 2 hours and have nothing else to do (I don't know about you, but I can't read on a bus...), so the

prices are certain to continue rising. This has all the elements of a fantastic business story and I look

forward to sharing more over the next year as they grow.

This quarter, the company released its first 10K after coming public through a SPAC that I mentioned in

the year end letter. They have been audited by a big 4 auditor; had a large and very credible investor

make a significant private placement into them; and performed up to expectations in their Q4 earnings

release. They will probably grow their earnings at a 50% or higher rate for the next few years and yet

the market is only assigning a single digit multiple to those earnings. A big part of the reason the stock is

so cheap is because of the way it went public. Unlike a traditional IPO which is promoted heavily by

investment bankers and investors have little chance of getting a good deal--a SPAC already has the cash,

so the promotion, if any, happens long after the deal has been completed. Additionally, many of the

public databases are misinformed, as they show the shell company data (i.e. no revenues) rather than

the remarkable company that the ticker symbol actually represents. As they say, new stocks are not

bought, they are sold...

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Aircraft Lessors and Taxes

We continue to hold a position in the aircraft lessor idea that I wrote about extensively in the year end

letter and was responsible for majority of our gains in 2009. While they are still undervalued, the prices

have appreciated significantly from a year ago making them more risky and thus only worthy of a

smaller fraction of our capital. The practice of shifting from less undervalued (i.e. expensive) securities

to more undervalued (i.e. cheap) securities is additionally complicated due to tax effects. While I do not

take any specific investment actions strictly for their tax effects, it is one factor out of a multitude that

are important. In particular, there is a significant difference for our US-based partners (including myself)

between long term and short term capital gains. The former is taxed at 15% if there has been at least a

one year holding period and the latter is taxed at up to 35% as ordinary income. We are very near the

one year milestone for these holdings and so it introduces an interesting effect.

Say you buy stock A that you believe is worth $20 for $4 and 11 months later it is at $13, with an

unrealized profit of $9. After 11 months, stock B in a very similar industry trades for $10 and you also

believe it is worth $20 - do you sell A to buy B? Well the long term tax treatment has the following

effect: if you wait one month, this is the same as if stock A increased by 14% (or stock B decreased by

this much, same thing). This is because currently, 35% of the $9 profit is going to the IRS, but in only one

month, that will be 15%, or an extra $1.8 that you get to keep. While you can never know what will

happen one month to the next, taking an expected gain of 14% certainly seems sensible.

I illustrate this to be transparent in my thinking and to show the structure of our partnership is more

favorable to your interests than most others. Because partnerships are flow-through entities for tax

reasons, whether a gain is long term or not will not affect our reported performance numbers one bit.

So if I, as the manager, was measured just based on my performance (which is largely true), then it

shouldn't matter if I wait for the one year mark to sell or not. But, because I have such a substantial

portion of my own net worth alongside yours, I am cognizant of this tax effect and what saves me

money on taxes will do the same for you. Again, this is one of many factors and is far from being the

more significant, but there is no substitute for having interests in alignment. Just as I don't necessarily

know the best way to run an advertising company in China, I trust the judgment of a CEO who owns half

the company more than a consultant who comes in and gets paid by the hour.

Regional Banks

We had built up a relatively small position in three regional banks that I felt I understood relatively well -

though banking has a higher amount of un-analyzable risk than some other businesses. Two of the

three had come quite close to insolvency during the crisis but had managed to raise capital and it looked

like they were in the clear. Unfortunately (in a weird way), I did not expect perception to change so

quickly and they have gone up between 60-120% in the 3-4 months that we've held them and aren't as

interesting from a valuation point of view as before. While I will continue to seek out opportunities in

this area they are harder to find than only a quarter ago.

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I would not advocate buying financial services in general, such as the S&P Financials index. Banking is a

good business due to the high switching costs for customers and the information asymmetry,

particularly in investment banking operations. That said, over the last 20 years leading up to the crisis,

financial services grew much faster than the overall economy to the point where it became what

appears to be a disproportionately large fraction. This trend does not seem to be sustainable unless you

believe that more than 100% of the economy can be dedicated to moving around the production of

other industries (which in this case would presumably be borrowed from the future). As I said before it's

not easy to make money off of macro views, so I will stick to finding specific undervalued businesses in

what appears to be still an overcrowded industry.

Balance Sheet vs Earning Power Valuation

To end on a short but general note, valuation is determined by only one thing: the discounted cash flows

back to the present at an appropriate rate. This cash may come soon from asset sales or from the

distant future from earnings. This breaks down into two categories I find useful: valuation by balance

sheet and valuation by earning power. Valuation by earning power is almost always higher than the

balance sheet (a higher balance sheet valuation would be Adam Smith's way of saying these assets

should be put to some more effective use in society). I do not particularly have a preference and try to

seek opportunities undervalued by either metric, though balance sheets are clearly much easier to

analyze than future earning power.

The aircraft lessor purchases that we made money from in 2009 were essentially rooted in a balance

sheet valuation. Even though the lessors generate cash from cash flows rather than liquidations, those

cash flows were heavily dependent on the assets, so a balance sheet approach was more appropriate.

My reasoning for the Chinese advertising company I mentioned is entirely based on earning power

which depends largely on competitive position so copycats don't erode profits. It is very easy to get

lured into easy to calculate metrics but it is only possible to approximate value in very few situations

that you understand deeply. We will stick to those few situations.

Please email me at rmorris@mesoncapital.com or call at 607-279-5382 if you would like to discuss

Monthly Performance Figures: Inception (Feb 24, 2009) through March 31, 2010

Monthly Returns

Month Gross Net to LPs S&P 500 MCP-S&P Net-S&P

Feb 24-March 55.0% 41.4% 3.2% 51.8% 38.2%

April 80.1% 58.7% 15.2% 64.8% 43.4%

May 6.7% 5.1% 2.5% 4.2% 2.6%

June -2.4% -2.4% -2.5% 0.1% 0.1%

July 13.7% 11.1% 6.6% 7.1% 4.5%

August 36.1% 27.2% 5.2% 30.8% 21.9%

September 3.6% 2.8% -0.1% 3.7% 3.0%

October 26.1% 19.5% 0.6% 25.5% 18.9%

November 35.0% 26.0% 5.8% 29.2% 20.2%

December 7.7% 5.9% 1.7% 5.9% 4.1%

January -3.2% -3.2% -3.7% 0.5% 0.5%

February -8.6% -8.6% 2.8% -11.4% -11.4%

March 32.9% 28.3% 5.9% 27.0% 22.4%

End of Month Gross NAV LP NAV S&P 500

Feb 24, 2009 $ 1.000 $ 1.000 $ 1 .000

March $ 1.550 $ 1.414 $ 1 .032

April $ 2.791 $ 2.243 $ 1 .190

May $ 2.978 $ 2.359 $ 1 .220

June $ 2.907 $ 2.302 $ 1 .189

July $ 3.304 $ 2.557 $ 1 .267

August $ 4.495 $ 3.252 $ 1 .334

September $ 4.658 $ 3.345 $ 1 .332

October $ 5.871 $ 3.996 $ 1 .340

November $ 7.925 $ 5.034 $ 1 .418

December $ 8.533 $ 5.330 $ 1 .442

January $ 8.262 $ 5.161 $ 1 .389

February $ 7.550 $ 4.716 $ 1 .428

March $ 10.033 $ 6.050 $ 1 .512

Monthly Net Asset Values

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr

Vaule of $1 on Feb 24, 2009 (inception)

Date - Valuations at end of each month

Meson Capital Partners Performance Net to LPs

LP NAV

S&P 500

Notes: (1) LP Returns = Gross returns, net of performance fee of 25% of profits above 6% annualized, calculated monthly.

(2) S&P 500 is based on the index value and does not include dividends, which are approximately 2% annually.