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2008 Second Quarter Commentary
July 8, 2008

The fact that our all-cap, large-cap, and mid-cap composites all rose last quarter against declining markets, and declined significantly less than the indices over the past 12 months and YTD (see below), is neither random nor an accident, but another demonstration of the low volatility and low incidence of loss our approach has been providing since 1986 (see attached sheet).

This lower volatility over 22+ years – with no sacrifice in return - would appear to challenge the prevailing theory that:

a. Diversification is the technique of choice for reducing risk, and
b. Investors are compensated for higher risk through a higher return.

Regarding the first, while diversification is one tool in risk management, markets are highly correlated during declines, as shown by recent experience. Moreover, we believe risk is not a random occurrence. Instead, actions have consequences, and imprudent actions increase the chance of undesirable consequences. If we can avoid such consequences, we reduce risk in a way not obtainable through diversification alone.

For example, borrowing beyond one’s means is unsustainable by definition, and therefore investing in stocks whose earnings are the beneficiaries of such actions means taking on the risk that current earnings will not be sustained. That is why we had little exposure to firms dependent on consumer borrowing, such as homebuilders, auto manufacturers, mortgage lenders, and banks.

Excessive leverage is another action with consequences. For example, a 3% decline in asset value eliminates 90% of equity for a company with 30:1 leverage. That partially explains why we did not invest in investment banks, asset guarantors, and highly-leveraged lenders such as Fannie Mae, Freddie Mac, and Barclays.

Finally, undisciplined lending has consequences just as dangerous as undisciplined borrowing, since a lender’s balance sheet assets are in jeopardy if the borrower cannot pay. This is why we minimized our exposure to banks over the past 3 years, and did not rush to buy them as they fell.

In response to the theory that investors are compensated for added risk, our experience has been that while a high return sometimes follows a high-risk investment, the majority of such decisions don’t work out, inflicting frequent losses. While some may be impervious to such experiences, most find a loss painful, which reduces patience and time horizon, and often leads to selling at the most inopportune time.

Moreover, the attached sheet shows that investment styles with high frequency of loss have not compensated investors through higher returns over the past 22 years. Likewise, despite our low incidence of loss, our returns have exceeded those of most of the style-box indices. Perhaps this is because by reducing the odds of losing money, we’ve increased our chances of making money.

Reducing Exposure to Today’s Risks
We want to temper expectations that our out-performance over the past 12-months can be extrapolated into the future; however, we have tried to structure our portfolio to withstand events around us. For example, wars and deficits typically lead to inflation and a declining currency. Our investments in companies with non-dollar earnings (AFLAC, NTT Docomo, Cadbury, Symantec, etc.), strong franchises where cost increases can be passed along (Hershey, Anheuser Busch, Microsoft), and operating leverage that benefits from commodity inflation (BP, Chevron, Cimarex, Newmont Mining), help protect capital against this risk.

In addition, the likely consequence of the de-leveraging now required of consumers is lower economic growth and a low probability that corporate earnings power enjoyed looking backward will repeat looking forward. Hence, our ownership of companies less exposed to the economy, such as Medtronic, Quest Diagnostics, IMS Health, Eli Lilly, St. Paul Travelers, Chubb, Torchmark, and Microsoft.

We have also tried to minimize our exposure to the leverage and credit quality issues affecting the banking system. For example, we own Sallie Mae partially because the U.S. government guarantees most of its loans, reducing credit risk. Our two bank positions (CMA and KeyCorp) sell below tangible book value and have less leverage and risky asset exposure than most other banks. And Annaly Capital Management has relatively low leverage and only invests in U.S. government agency securities to avoid credit and liquidity risk.

Today’s environment is one of greater uncertainty than normal. We have been cognizant of these uncertainties in our decision-making, and tried to buttress ourselves against them.

The Opportunity Set and Earnings Environment
As we said last quarter, the investment opportunity set as well as the underlying earnings environment are changing rapidly. We expect there will be earnings disappointments, and plan to take advantage of resulting price declines to purchase strong businesses at opportunistic prices, as we have during past slow-downs. In the past, such purchases could be made with the assumption that the backdrop had not changed, and regression to the historic mean was likely. Today we believe the past earnings environment will no longer be relevant for gauging the future for many companies, and the leverage ratios that were prudent in the past will no longer be so.

Portfolio Changes
As part of the breakup of Cadbury Schweppes, we received shares in Dr. Pepper Snapple. Rather than sell this small position, we purchased more due to the attractive price. Also, we purchased a position in Consolidated Edison, a New York utility. We had sold our utilities in recent years due to higher prices but that has reversed, and some utilities have returned to more normal price levels. Finally, having reviewed numerous fallen banks over the past year, we did purchase a small (1.5%) position in KeyCorp this quarter. The price of this geographically diversified Ohio bank fell in half following a write-down and capital raise. However, we believe its balance sheet is stronger than most banks we have looked at because of greater diversification of assets and less leverage.

We made a number of trims last quarter, especially in our energy exposure, where we trimmed Cimarex Energy and Nabors Industries, which had increased significantly in price. Other trims included IMS Health and Office Depot. Finally, we sold our position in U.S. Bancorp, which had held up well versus other banks.

Conference Call
Our quarterly conference call is scheduled for Tuesday, July 22 at 4:30 p.m. (Eastern Time). If you would like to participate, the call-in number is 800-977-8002, and the password is 200414#. As always, we appreciate the confidence placed in our investment approach and investment team.

James F. Barksdale (jbarksdale@eicatlanta.com)
W. Andrew Bruner, CFA, CPA (wabruner@eicatlanta.com)
R. Terrence Irrgang, CFA (tirrgang@eicatlanta.com)
Ian Zabor, CFA (izabor@eicatlanta.com)

¹For Broker Use Only. Not approved for presentation to wrap program clients. Such presentations should reflect EIC's wrap composite information, which is available upon request. EIC’s returns are as of June 30, 2008, represent gross returns for three equity composites (non-wrap All-Cap Value, Large-Cap Value, and non-wrap Mid-Cap Value accounts), and are presented as supplemental information to full GIPS© disclosure presentations.(enclosed). All returns include reinvestment of dividends and interest. Index returns exclude fees and commission costs. After-fee returns for EIC were:

All results are historical and do not imply future rates of returns, incidence of loss, or volatility for EIC or the indices, which may be materially different from the past and from one another. Individual account results may differ relative to the past and to composite figures.

Equity Investment Corporation makes every reasonable effort to comply with industry best practices and the Global Investment Performance Standards (GIPS©). As part of our compliance with the GIPS© standards we prepare and present our composite performance and make this presentation available to all current and prospective clients. Attached in PDF format you will find our 2007 year end disclosure presentations prepared and presented in accordance with the GIPS© standards. Please take the time to review these disclosures and let us know if you have any questions.

Marketing Contact: Mr. John P. Stewart, Jr., CIMA