The China Heartland Fund Limited Releases Interim Report

In the six months to 31 December 2002, the net asset value of the Fund fell by 7.4% to $8.93.

2001 and 2002 were exciting years for China. Favourable changes to investment trading conditions, particularly the easing restrictions on foreign investment and improved transparency of investment policies, both contributed to the country's entry into the World Trade Organisation on 1 January 2002.

Over the six months to 31 December 2002, the Fund has continued to pursue various options for recovery of the sums due to the Fund by China Securities Corporation ("CSC") including selling the Investment Services and Returns Agreement ("A share Contract") to a third party. Following failure of this option, the board decided to pursue the Alternative Option approved by shareholders on 18 April of returning capital to shareholders.

The Fund has now disposed of all liquid investment holdings. Following the period under review, CSC have repatriated the remaining $1m held in their B share account with Citibank in New York, completing the repatriation of the Initial Deposit of $8.4m. The Fund made two interim capital distributions to shareholders totaling $20m on 30 August 2002 and $5m on 13 September 2002.

On 28 February 2003, the Fund will make a third interim capital distribution of $5m reducing the net asset value of the Fund to approximately $6.0m, of which $3.3m is represented by the outstanding service charge due from CSC to the Fund under the A Share contract. CSC have advised the board that, notwithstanding the terms of the A Share Contract, they are unable to pay this sum until such time as the foreign exchange regulations in China change allowing the conversion of the notional profit from Chinese Renminbi to US Dollars.

In December 2002, the China Securities Regulatory Commission ("CSRC") and the People's Bank of China published tentative procedures allowing certain qualified foreign institutional investors access to China's domestic securities markets. The Fund itself would not meet the minimum size criteria set out in the regulations and as the regulations do not permit the recognition of sub custody accounts, as is the case in Taiwan, it could not form part of a larger qualified foreign institutional investment ("QFII") quota.

The board intends to approach the CSRC and the State Administration of Foreign Exchange of the PRC ("SAFE") directly to see if the outstanding service charge could be transferred to a QFII account. There is no guarantee that the CSRC or SAFE will accept this proposal, and if this approach is not successful, the board will review other options open to it, which could include suing CSC for recovery of the outstanding service charge.

The board has significantly reduced the annual operating costs of the Fund following a series of contract re-negotiations with the various service providers. Since 30 September 2002, the investment manager no longer charges an investment management fee, and the board terminated the arrangements with the HICC Employee Incentive Trust. Forum Fund Services Ltd, Bermuda will assume certain third party administrative responsibilities. In an effort to reduce further the operational expenses of the Fund the board has reviewed it's composition and Mr. Fu Feng Xiang, Mr David Erdal and Mr Hu Hai have agreed to resign. These resignations will take effect from 28 February 2003.

It remains our aim to return the outstanding cash to shareholders as soon as practicable. However, the uncertainty surrounding the convertibility of the Chinese Renminbi means that we have no accurate estimate of the time that this will take. We will continue to work actively with the managers in order to return those assets to shareholders.