YTD 2008 (As of end of QI)	Year 2007	Year 2006	Year 2005	Year 2004	Year 2003	Annualized Since Inception *
Vega Equity*.	-10.5%	+7.5%	+12.4%	+8.90%	+17.60%	+42. 70%	+20.1
S&P 500	-9.9%	+3.5%	+13.6%	+3.00%	+9.00%	+26.40%	+13.4
NASDAQ	-14.1%	+9.8%	+9.5%	+1.40%	+8.60%	+50.00%	+17.0
Dow Jones	-7.6%	+6.4%	+16.3%	-0.60%	+3.10%	+25.30%	+11.8

MARKET OUTLOOK AND PORTFOLIO ANALYSIS

The market took a nosedive in the first quarter of 2008, much of which is the result of extreme fear of global economic recession (here you go, the dreaded "r" word in the first sentence of our update) due to the developing credit crunch. No sector was left undamaged, and our portfolio also suffered. Yet, we are currently comfortable with our portfolio overall exposures to the market segments.

Much of the portfolio losses of the 1st quarter 2008 came from our exposure to the technology sector. Indeed, we were somewhat too early on our call to build up the technology portfolio, which we started to gradually do in August of 2007, and are continuing to do through spring of 2008. The reason for our bullish (relative to market) view on the technology sector is rooted in the fact that it is somewhat distanced from the credit crunch that is causing the present market turmoil. The only clear link between the two is the consumer (consumer demand drives about half of semiconductor industry output). On the other hand, consumers so far have been only slightly influenced by the tight credit market.

The positive factors that influence technology sector, are, in our view, the other big part of the story, that is being underreported. Despite the worries that consumer demand will suffer (which is a well known worry, that we believed, was priced into the market as early as last summer), the weak dollar combined with 2008 being the Olympic year, effects of the fiscal stimulus (usually start playing major role 6 months after being effected) will definitely help the demand, while the industry environment coming out of the tough 2007 is filled with restructuring, supply chain management, increased level of outsource manufacturing, M&A activity, and joint ventures that are bound to reduce fixed and R&D costs, thus shifting the supply curve upward. The intersection of stronger expected demand and more robust supply is complemented by very solid fundamentals (tech sector forward P/E is close to historic lows at about 16) and low leverage, decoupling the industry from the credit crunch. So, our view of technology sector is bullish, and while there certainly is a fair amount of volatility, even that can be exploited (as we do by writing options on tech companies).

Yes, in retrospect, our entry point was not ideal, and we are certainly taking notes on our timing error. However, we saw a significant upward move post-Easter with notable gains in Comm/Network Equipment, PC Hardware, and Semis segments. Tech heavyweights, Intel (INTC), Cisco (CSCO), Apple (AAPL), have posted strong gains.

With respect to the sector exposures of our portfolio, our position is little changed since last newsletter. Namely,

• Risks to the financials provide huge potential rewards; however to avoid significant downside, extreme caution is warranted. The primary problem with financial stocks is that the total losses associated with mortgage crisis/credit crunch are hard to estimate due to high leverage created via structured products and derivatives, and proliferation of SPV, which hide the real exposure from balance sheets of financial institutions.
  
  We believe that financials certainly represents a significant and important sector of the economy and should be a part of any broad equity portfolio (such as Vega Equity Star). The conflicting economic data, however, make the entry point uncertain. We allocated small portions of our portfolios to the financials over the last 1/2 year; both times we were forced to liquidate the positions to avoid potential large losses.
• Energy sector in our view represents the best value in the current economic situation. The sector is experiencing much volatility, most of it explained by the fluctuation in demand. The story of energy sector, however, is not that the demand is growing too fast, but rather that the supply is extremely tight and is getting tighter as the easy sources of carbohydrates are being exhausted. Thus, the producers are forced to invest significant portions of their (huge!) profits into exploring, drilling, and increasing efficiency of their operations. With this in mind we are heavily invested in the companies that we believe will benefit most from these activities.
• Technology sector is certainly not immune from economic downturns. However, assuming that this slowdown (or even recession in some opinions) is caused primarily by widespread credit crunch, and taking into account that upgrade cycle is long overdue in many non-financial sectors of the economy, technology in our opinion represents the second best equity value (second only after energy stocks).
• Consumer discretionary is a very uncertain sector of the economy as it is almost impossible to predict how the declining net worth of US consumers will influence their spending patterns. Early indications show significant deterioration of consumer sentiment; on the other hand sales reports are not looking recessionary. We avoid the sector for the time being.
• We believe that healthcare sector is unfairly depressed. Much of this depends on the very uncertain political situation. It is paradoxical, but the market seem to assume that Democratic party favors different parts of healthcare industry than Republicans do. Meanwhile, the stocks are depressed across the whole sector. As the situation is bound to clear up within reasonable time, thus lifting the fog from the future values of the cash flows, we believe that it is time to overweight the healthcare sector.

Overall, the current uncertainty is caused by the credit crunch. How much of it will filter into the sectors of economy other than financials is anybody's guess. However, these guesses will become more definite as the crisis progresses. The stock market looks at least 6 months ahead, however, and the recent volatility seem to indicate that opinions are divided approximately equally between the market participants who believe that the crisis will be if not over, at least much better understood within 6 months and those who believe that the sky will fall and the doomsday is upon us. We belong to the first camp, and would like to remind everybody that over the past 100+ years no "doomsday-er" have ever been right.

As always, call us with any questions you might have.

As always, we would appreciate the referrals from our loyal and satisfied clients.

¹Vega Capital Group LLC ("Vega") is an independent adviser registered with the Securities & Exchange Commission. The performance shown reflects actual performance for representative accounts. One representative account is selected for each strategy. The selection of representative account is based on the following factors: cash flows into or out of account for the reporting period, size of account sufficient to be representative of the strategy, average trading expenses. Performance of other accounts managed under the same strategy may vary. The firm maintains a complete list of its accounts performance, which is available upon request. Past performance is not indicative of future results. Accounts under Vega's management are not insured against loss of principal, and may loose value. The U.S. Dollar is the currency used to express performance. Returns are presented net of management fees and include the reinvestment of all income. In addition to an advisory fee, performance shown includes any additional custodial or service fees. The advisory fees for Vega Equity* accounts are calculated as follows: management fee of 0.375% is charged quarterly in advance, based on the closing balance on the last date of the previous quarter; and performance fee is charged annually in arrears, equal to the 10% of annual investment gain above all relevant watermarks and hurdle rates for the account. Vega's schedule of advisory fees vary based on product and type of client and is contained in Form ADV-II. Additional information regarding the policies for calculating and reporting returns is available upon request.
The indices used for comparison are Standard & Poor's 500 Index, which is comprised of 500 selected common stocks most of which are listed on the NYSE; Dow Jones Industrial Average (DJIA) Index, which is a price-weighted average of 30 blue-chip stocks and NASDAQ Composite (NASDAQ) Index, which is a broad-based capitalization-weighted index of all NASDAQ (National Market & Small-Cap) stocks. Vega Equity* Inception Date is 07/01/2003.Vega Equity* program is only available to qualified investors. Performance for Vega Equity* program for year 2003 is based on pro-forma results for months January through June of 2003. Pro-forma results may not be indicative of actual performance in client's accounts.