2002

Netflix went public on May 23, 2002, into the least forgiving market for an internet stock in a generation. The pioneering but unprofitable online DVD-rental company, based in Los Gatos, saw its shares rise nearly twelve percent in the first day of trading, after an initial price of fifteen dollars, closing at $16.75. The Mercury News reported the offering as a ripple of investor enthusiasm for internet initial public offerings, noting that Netflix had dropped the dot-com suffix from its name three months earlier. Analysts were measured: David Menlow, president of IPOFinancial.com, called it a good, successful offering while observing that these were more sobering times, with the first-day performance far below the head-spinning gains of the late 1990s. The float's modest pop reflected the environment, a company whose category had been discredited by the crash, led by a founder who had already sold one software company, betting that subscribers to a flat-rate DVD service by mail represented a durable business rather than a bubble artifact.

Pabrai Investment Funds Memo To: All Limited Partners of The Pabrai Investment Fund 2, L. P. From: Mohnish Pabrai, Managing Partner Date: February 2, 2002 Re: Pabrai Investment Fund 3 (Offshore Fund) Launched Dear Partners: I’d like to begin by welcoming our new partners into The Pabrai Funds. I hope we have a long and mutually prosperous relationship. The BVI-based offshore fund, PIF3 went live on February 1, 2002. Between PIF2 and PIF3, over $3.8 Million in new assets came in on February 1 ($651,000 in PIF3 and $3,216,188.23 Million in PIF2). The details of the Asset Value Calculations are in the attached Appendix A. PABRAI INVESTMENT FUND 2 Performance Summary: DJIA NASDAQ S&P 500 PIF2 PIF2 (before exp.) (after exp.) 10/1/00 – 9/30/01 -15.2% -59.2% -27.5% +17.6% +12.0% 10/1/01 – 1/25/02 +11.4% +29.4% +8.8 % +34.2% +31.0% Annualized -4.2% -38.1% -16.3% +40.8% +33.3% Cumulative -5.5% -47.2% -21.1% +57.8% +46.7% Page 1 of 5

WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: Consolidated net income for the calendar year 2002 was $52,718,000 ($7.40 per share), essentially the same as $52,536,000 ($7.38 per share) in the previous year. Wesco has four major subsidiaries: (1) Wesco-Financial Insurance Company (""Wes-FIC''), headquartered in Omaha and engaged principally in the reinsurance business, (2) The Kansas Bankers Surety Company (""KBS''), owned by Wes-FIC and specializing in insurance products tailored to midwestern banks, (3) CORT Business Services Corporation (""CORT''), headquartered in Fairfax, Virginia and engaged principally in the furniture rental business, and (4) Precision Steel Ware- house, Inc. (""Precision Steel''), headquartered in Chicago and engaged in the steel warehousing and specialty metal products businesses. Consolidated net income for the two years just ended breaks down as follows (in 000s except for per-share amounts)(1) : Year Ended December 31, 2002 December 31, 2001 Per Per Wesco Wesco Amount Share(2) Amount Share(2) Operating earnings: Insurance businessesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $49,471 $6.95 $45,254 $6.36 CORT furniture rental business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,442 .34 13,076 1.84 Precision Steel businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 250 .03 388 .05 Goodwill amortization (3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Ì (6,814) (.96) Other(4) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 555 .08 632 .09 Wesco consolidated net income (3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $52,718 $7.

At the 2002 Berkshire annual meeting, I told the audience that the previous year, with its revelations about Enron and the gradual unwinding of the technology bubble, had confirmed what I had long believed about the discipline of reading accounting footnotes and refusing to invest in businesses whose accounting I could not understand. The market-psychology point I tried to convey was that the crowd, in its broad patterns, repeats the same mistakes in every cycle, because the incentives facing the participants are the same in every cycle, and the biases facing the participants are the same in every cycle. The investor who recognises the patterns, and who refuses to participate in the new version of the old mistake, has a long-run advantage over the investor who assumes that the new version is different. The discipline required is to read the footnotes, to recognise the patterns, and to refuse to participate, even at the cost of looking unfashionable during the boom. The mistakes-and-learning element was the one I had most wanted to convey. I had made my own share of mistakes in the previous two years, by being too cautious during the recovery from the technology crash, and the cost of the caution had, in opportunity terms, been very large. The lesson I drew was that the disciplined investor must be willing to act during a recovery, even when the outlook is unclear, and even when the prices may go lower before they go higher. The 2002 meeting was, in this sense, a confession. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to refuse to wait for clarity, and to act when the prices were attractive, even at the cost of being early. The investor who builds the discipline of acting during the recovery will outperform the investor who waits for clarity. The capital-allocation-discipline lesson I tried to convey was that the investor who reads the footnotes, and who refuses to invest in businesses whose accounting he cannot understand, has a long-run advantage over the investor who chases the prices on the assumption that the accounting is honest. The 2002 meeting was, in some ways, the most candid I had ever given. I told the audience that the framework had been built, in large part, from my own mistakes, and that the discipline I had extracted was to read the footnotes, to refuse to invest in businesses whose accounting I could not understand, and to act when the prices were attractive, even at the cost of being early and unfashionable. The investor who builds the discipline of refusal will outperform the investor with the higher IQ who chases the prices on the assumption that the accounting is honest.

Pabrai Investment Funds Memo To: All Limited Partners of The Pabrai Investment Funds From: Mohnish Pabrai, Managing Partner Date: August 1, 2002 Re: Updated Performance Numbers et. al. Dear Partners: Over $4 Million is new funds were added by existing and new partners of The Pabrai Investment Funds on August 1, 2002. Of this $3,860,000 was added to PIF2 and $250,000 was added to PIF3 (offshore). It is the single largest amount added to PIF2 at any time since inception. Previously, at the Oct. 1, 2001 opening (right after 9/11), PIF2 partners added what was at that time the largest amount to the fund. I am very pleased to be associated with this august group of long term partners who have repeatedly demonstrated their high IQ by adding funds to the partnership in droves right after big drops in the stock market. While I don’t believe in trying to play market timing games, I am happy to see Pabrai Funds partners add funds to the stock market while the masses are selling their holdings in droves. It reminds me of the famous Buffett quote: Be fearful when the world is greedy and be greedy when the world is fearful. Anytime there are new subscriptions or redemptions, the funds need to publish NAV numbers so the funds can be correctly priced. Hence PIF2 and PIF3 performance data is being updated through 7/31/02. Here are the updated numbers: Page 1 of 9

Pabrai Investment Funds Memo To: All Limited Partners of The Pabrai Investment Funds From: Mohnish Pabrai, Managing Partner Date: July 18, 2002 Re: Unaudited Year-end Performance Numbers for PIFI and PIF2 Dear Partners: One of the most frequent questions I get from PIFI partners is: “Hey Mohnish, Why do you treat us like 2nd class citizens and not report updated PIFI performance when you release PIF2 data?” PIFI partners are very near and dear to my heart. You were the first group to give me your hard earned $$$ to manage when there was no track record. The investors who join the partnership today have a three year history to look at – which would not exist without you. All the funds have the same reporting rules. NAV gets reported at fiscal year end and each time there are subscriptions or redemptions. Since PIFI is closed, the only intervals that get reported are redemptions and year end – which leads to a maximum of 2 datapoints a year and a minimum of 1 datapoint a year. The Pabrai Funds are unusual when compared to other funds in their reporting frequency. When Buffett ran his partnerships in the 1950s and 1960s, he reported once a year so investors did not fixate on “noise”. I subscribe to that theory and hence the fund rules. However, it is your turn to bask in the sun. The NAV after all fees and expenses is $22.54/unit. Michael J. Liccar & Co. are in the process of preparing the statements as of 6/30/02 for PIFI and PIF2 and you’ll be receiving them in a few days.8

Pabrai Investment Funds Memo To: All Limited Partners of The Pabrai Investment Funds From: Mohnish Pabrai, Managing Partner Date: June 3, 2002 Re: Updated Performance Data; TPA in Place; Moving to the Big 4 for Annual Audit Services Dear Partners: $2,955,814 in new assets came in on June 1, 2002. All of it was directed towards PIF2. I’d like to begin by welcoming all our new partners into The Pabrai Funds – especially the one who lives in Maui, Hawaii. It’s always good to have a friend and partner in Maui! I hope all of us have a long and mutually prosperous relationship. Whenever we have new subscriptions, redemptions or fiscal year-end for a given fund, I have to publish updated NAV numbers for that fund. Here is the updated (unaudited) performance data for PIF2. The details of the Asset Value Calculations are in the attached Appendix A. PABRAI INVESTMENT FUND 2 Performance Summary: DJIA NASDAQ S&P 500 PIF2 PIF2 (before exp.) (after exp.) 10/1/00 – 9/30/01 -15.2% -59.2% -27.5% +17.6% +12.0% 10/1/01 – 5/31/02 +12.9% +7.8% +2.5% +62.9% +55.6% Annualized -2.6% -38.9% -16.4% +47.7% +39.6% Cumulative -4.3% -56.0% -25.7% +91.6% +74.3% Page 1 of 9

Pabrai Investment Funds Memo To: All Partners of The Pabrai Investment Funds From: Mohnish Pabrai, Managing Partner Date: July 22, 2002 Re: Updated Performance Data; Over $23 Million in Assets Dear Partners: I’d like to begin by welcoming our new partners into the various Pabrai Funds. I hope we have a long and mutually prosperous relationship. Between PIF2, PIF3 and our first managed account, $5,086,000 in funds came in on April 1, 2002. The breakdown is $975,000 into PIF2; $2,100,000 into PIF3 and $2,011,000 in the managed account. The details of the Asset Value Calculations are in the attached Appendix A. PABRAI INVESTMENT FUND 2 Performance Summary: DJIA NASDAQ S&P 500 PIF2 PIF2 (before exp.) (after exp.) 10/1/00 – 9/30/01 -15.2% -59.2% -27.5% +17.6% +12.0% 10/1/01 – 3/29/02 +18.2% +23.0% +10.2% +43.2% +40.4% Annualized +0.1% -49.8% -13.9% +41.6% +35.2% Cumulative +0.2% -49.8% -20.0% +68.4% +57.2% Page 1 of 7

Pabrai Investment Funds Memo To: All Limited Partners of The Pabrai Investment Fund 2, L. P. From: Mohnish Pabrai, Managing Partner Date: January 7, 2002 Re: The Misses and The Aces Dear Partners: As I had stated earlier, we have our offshore investors redeeming their interest in PIF2. They are moving their assets in PIF3, which is a BVI based Professional Mutual Fund limited to accredited offshore investors. PIF3 goes live on February 1, 2002. Whenever we add or redeem assets to the funds, I have to release performance to date to assign the correct Net Asset Value to the new funds. The details of the Asset Value Calculations are in the attached Appendix A. PABRAI INVESTMENT FUND 2 Performance Summary: DJIA NASDAQ S&P 500 PIF2 PIF2 (before exp.) (after exp.) 10/1/00 – 9/30/01 -15.2% -59.2% -27.5% +17.6% +12.0% 10/1/01 – 12/31/01 +13.4% +30.1% +10.2% +31.9% +29.5% Annualized -3.1% -39.7% -17.1% +42.1% +34.6% Cumulative -3.8% -46.9% -20.1% +55.1% +45.0%

The offering's mechanics underlined how early the business still was. Netflix sold 5.5 million shares, raising 82.5 million dollars and netting about seventy-five million after expenses, and said it intended to pay off roughly fourteen million dollars in debts and significantly boost a promotion offering free trials. Churn was the standing concern: about seven percent of subscribers cancelled each month, and to make up for the loss Netflix engaged in aggressive marketing, including asking current subscribers to refer friends. The competitive backdrop made the stakes explicit. Blockbuster, the nation's largest movie-rental chain, which rented twenty million DVDs and videos a month, was rolling out test programs in several American cities that summer offering a monthly subscription service priced five dollars higher than Netflix's, letting consumers keep rental DVDs as long as they wished. Blockbuster's own disclosure that one in ten rentals incurred a late charge was, in miniature, the entire strategic case for the company Hastings was taking public.

Pabrai Investment Funds Assets Under Management (In Millions of $) 1999 2000 2001 June-02 Assets Under Management The diligent reader will notice that PIFI is at a historical high and has delivered exceptional results since inception. I would like to make a few comments at this juncture on PIFI: 1. I have stated earlier that PIFI has a few disadvantages versus PIF2 which are likely to hinder performance when compared to PIF2. The first is that there is no new money coming into PIFI. This means that when I have an idea that PIF2 invests in, PIFI may not be able to make the investment – or if it does, it means there are likely to be tax consequences as I have to sell something in PIFI to buy. The flip side of this is that there was an investment PIF2 made a few months ago that PIFI could buy a very small position in. As it turned out, it has so far resulted in a unrealized loss and PIFI’s exposure was proportionally far lower than PIF2. Time will tell if this eventually turns into a realized gain or loss. The second disadvantage is that the allowable leverage % is lower (30% vs. 50%). I’d like PIFI partners to be fully aware of these facts and their impact on performance. 2. It is harder to manage PIFI than PIF2 because of the bigger struggle with which ideas are the best. I try to do my best and so far the overwhelming number of decisions on idea selection have been good ones – hence our performance versus the broad market. 3.

40 $52,536 $7.38 (1) All Ñgures are net of income taxes. (2) Per-share data are based on 7,119,807 shares outstanding. Wesco has had no dilutive capital stock equivalents. (3) In accordance with a new pronouncement of the Financial Accounting Standards Board, Wesco discontinued goodwill amortization at the beginning of 2002. The requirement for such amortization has been replaced by a standard that requires an annual assessment to determine whether the value of goodwill has been impaired, at which time the intangible would be written down or written oÅ, as appropriate. Had the new accounting standard been in eÅect for 2001, Wesco would have reported after-tax income of $59,350,000 or $8.34 per share, exclusive of goodwill amortization. Thus, Wesco's 2002 after-tax net income, on a pro forma basis, actually decreased in 2002 by $6,632,000, or $.94 per share. (4) Represents income from ownership of the Wesco headquarters oÇce building, primarily leased to outside tenants, and interest and dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries, less interest and other corporate expenses. This supplementary breakdown of earnings diÅers somewhat from that used in audited Ñnancial statements which follow standard accounting convention. The foregoing supplementary breakdown is furnished because it is considered useful to shareholders.

DJIA NASDAQ S&P 500 PIFI PIFI (before exp.) (after exp.) 7/1/99 - 6/30/00 -4.7% +47.3% +4.7% +62.5% +50.1% 7/1/00 – 6/30/01 +2.2% -45.5% -15.9% -7.7% -8.3% 7/1/01 – 8/31/01 -5.1% -16.5% -7.4% +14.0% +14.2% Annualized -3.6% -16.9% -9.3% +28.0% +23.3% Cumulative -7.6% -33.0% -18.5% +70.7% +57.3% Comparison of Changes in Value of $100,000 invested in PIFI vs the Indices $0.00 $50,000.00 $100,000.00 $150,000.00 $200,000.00 Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 PIFI S&P 500 DJIA NASDAQ The diligent reader will notice that PIF2 is at a historical high and has delivered exceptional results since inception. I would like to make a few comments at this juncture on the performance numbers: 1. The manner in which the funds have performed has amazed me. I fully expect our future performance to be inferior to the results of the past. Actually, I’d like to restate the previous sentence as follows – I can virtually guarantee and promise that our future results in the coming years will significantly lag the performance that PIF2 has delivered in the last twenty months. I would also like to repeat the objective of The Pabrai Investment Funds. The Pabrai Investment Funds’ goal is to outperform all three major indices (DJIA, S&P 500, Nasdaq Composite) over the long haul. It is NOT our objective to beat, for example, the Nasdaq Composite by an annualized margin of 78.5% as we happen to have done in the last 20 months.

Even the not so diligent reader will notice that PIF2 experienced a significant decline in July – over 14%. All the indices were down in July and the markets were quite volatile with fairly large swings in both directions almost daily. Since the funds typically have 10-15 holdings and do not engage in any sort of derivative hedging or taking short positions, the portfolio is likely to gyrate up and down with the market in the short run. As Ben Graham succinctly put it: “The s ock market is like a voting machine in the sho t run t r and like a weighing machine in the long run” Eventually the market price of a stock will tend to revolve around the intrinsic value of the underlying business. In the short-term however, we can easily see wide disparities between the stock price and intrinsic value. Occasionally, these gaps widen to allow fractions of businesses to be bought at big discounts to their underlying intrinsic value. That is the only time we’re interested in buying stakes in a select few of these businesses. Indices like the Dow have 30 stocks, the S&P 500 has 500 and the Nasdaq composite has thousands. With 10-12 holdings we are likely to experience higher volatility than the indices in the short term. In the long-run, however, the performance of the fund will gravitate towards the underlying intrinsic value of the holdings. The key to our success is to be right about the business. If we’re right about most of the businesses in the portfolio, we’ll do just fine.

PABRAI INVESTMENT FUND I (closed) Performance Summary: DJIA NASDAQ S&P 500 PIFI PIFI (before exp.) (after exp.) 7/1/99 - 6/30/00 -4.7% +47.3% +4.7% +62.5% +50.1% 7/1/00 – 6/30/01 +2.2% -45.5% -15.9% -7.7% -8.3% 7/1/01 – 8/31/01 -5.1% -16.5% -7.4% +14.0% +14.2% Annualized -3.6% -16.9% -9.3% +28.0% +23.3% Cumulative -7.6% -33.0% -18.5% +70.7% +57.3% Comparison of Changes in Value of $100,000 invested in PIFI vs the Indices $0.00 $50,000.00 $100,000.00 $150,000.00 $200,000.00 Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 PIFI S&P 500 DJIA NASDAQ The diligent reader will notice that PIF2 and PIF3 are at historical highs. We had a good couple of months and some holdings took off almost immediately after I bought them. Nonetheless, the portfolio continues to trade well below my estimation of its intrinsic value. Raising the Minimum Amount for new Partners There are now 70 limited partners between PIFI, PIF2 and managed accounts. We are limited to 100 US partners by law. As the available slots decrease, the minimum will increase. Going forward, the new minimum investment to join the funds as a new partner will be $300,000. This is effective at the next opening of 6/1/02. Existing partners can add anything over $25,000 at each opening. This does not apply to our offshore investors. PIF3 is setup an an offshore mutual fund limited to non-US accredited investors.

The annualized performance % numbers for The Pabrai Funds were off as I had been using an errored formula. There is no error in the NAV/unit numbers. Thankfully, the mistake understated annualized performance. Our actual annualized performance is better than previously reflected. This has been corrected. I’m sorry about this. The diligent reader will notice that PIF2 had a strong December and a very good 2001. I had not published our 1/1/01 NAV before, but it was $9.87/unit. For the year 2001, our gain was 57.1% before fees and expenses. Considering that all three indices were down, we had an exceptional year – one that is clearly unsustainable. When compared to 2001 mutual fund performance, PIF2 would have come in as the 5th best performing fund of the year including ALL mutual funds. Of the 4 funds ahead of us, 2 are country specific funds (Russia and South Korea). The data indicates that we’ve outperformed over 99.9% of mutual funds in 2001. As I’ve stated earlier, I think we’re fairly good, but not that good. Long term, I’d expect more funds to outperform The Pabrai Funds while we continue to outperform the indices and atleast 90% of fund managers. We achieved these returns with modest realized gains in 2001. Our portfolio continues to trade substantially below intrinsic. I’m not sure when Mr. Market will assign an appropriate value to the holdings, but I have some confidence that, for most positions, this will happen within 24 months. So, we have a few “Aces in the Hole.

The diligent reader will notice that PIF2 is at a historical high. January 2002 was good month for PIF2 – considering that we had some further appreciation while all three benchmark indices lost value. Nonetheless, the portfolio continues to trade well below my estimation of its intrinsic value. Raising the Minimum Amount for new Partners There are now 66 limited partners between PIFI and PIF2 and we are limited to 100 by law. As the available slots decrease, the minimum will increase. Going forward, the new minimum investment to join the funds as a new partner will be $250,000. This is effective at the next opening of 4/1/02. Existing partners can add anything over $25,000 at each opening. Pabrai Investment Funds Assets Under Management (In Millions of $) 7/1/1999 7/1/2000 7/1/2001 2/1/2002 Assets Under Management Third-Party Administrator Status (TPA) For PIFI and PIF2 Based on the third amendment votes received todate, the partners appear to be overwhelmingly in favor of the addition on the TPA. I’ll have a final tally when the window closes on 2/1/02 and will move forward with having the TPA in place shortly thereafter. Thank you for your continued interest, support, confidence and referrals. Warm Regards, Mohnish Pabrai Page 3 of 5

” I’d be remiss if I didn’t point out that we had several mistakes in 2001. Buffett has eloquently said that his biggest mistakes are mistakes of omission. I was trying to buy some stocks too cheaply and the trades never executed. Tricon Global (YUM) is one that I’ll remember for some time to come. Pepsi spun off Taco Bell, KFC and Pizza Hut to shareholders in a separate company called Tricon. Normally, I’m always been bearish on QSRs. However, I read an extensive piece on Outstanding Investor Digest and loved the business after I really understood it. It was at about $27/share at the time. By the time I finished my research and was all excited the stock was at about $33/share. I decided that I’d pay no more than $32 for it and placed limit orders. Tricon was an exceptionally cheap and fast growing company at $32/share. The stock came as low as $32.25, but I never changed the limit orders. Its now north of $50 and we don’t own a single share. I blew it with Tricon. American Express is another one where, when it fell to the $26 range after 9/11, I considered it a steal. I was able to get some for PIFI, but did not have cash available when it hit $26 in PIF2. Later when I had the cash, I had the opportunity to get some at $27, but I stuck to the $26 price. At $26 there was a very good chance of a 100% return in 24 month. At $27-28, I thought the return might be around 80-90% - which is still very very good for a solid blue chip like AXP.

All the funds’ portfolio valuations are substantially under my estimation of their intrinsic value. I am very happy with the holdings and feel very good about the long term performance going forward. 4. I think the stats are along the lines that over 80% of market gains occur in under 10% of total invested time. That’s the principal reason that it is best to avoid trying to time the market. Nonetheless, it is my belief that, due to the drop in the market recently, August 1 looks like a good window to add funds.8

The past performance numbers are not sustainable over the long haul. 2. I have mentioned earlier that the funds make two types of investments: 1. Buying pieces of exceptional businesses well below Intrinsic Value. 2. Special Situations (distressed securities, misunderstood businesses etc.)9

Assets under management are about $23 Million – up from $1 Million less than 3 years ago. Thanks for your strong vote of confidence! Pabrai Investment Funds Assets Under Management (In Millions of $) 7/1/1999 7/1/2000 7/1/2001 4/1/2002 Assets Under Management Thanks for the continued interest, support and referrals. Warm Regards, Mohnish Pabrai Page 4 of 7

Insurance Businesses Consolidated operating earnings from insurance businesses represent the com- bination of the results of their insurance underwriting with their net investment income. Following is a summary of these Ñgures as they pertain to all insurance operations except The Kansas Bankers Surety Company (""KBS''), which is sepa- rately discussed below. Pre-Tax After-Tax Operating Earnings Operating Earnings 2002 2001 2002 2001 Underwriting gain (loss) ÏÏÏÏÏÏÏÏ $ 92,000 $(12,403,000) $(1,926,000) $(8,062,000) Net investment income ÏÏÏÏÏÏÏÏÏ 64,484,000 64,529,000 44,030,000 44,001,000 Operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $64,576,000 $ 52,126,000 $42,104,000 $35,939,000 As shown above, operating income includes signiÑcant net investment income, representing dividends and interest earned from marketable securities. Our discus- sion will concentrate on insurance underwriting, not on the results from investments. Results for 2002 from insurance underwriting, other than at KBS, were sharply improved from those for 2001. Results for 2001 were the worst since we entered the insurance business in 1985. Results for 2002 were satisfactory.

While the funds have done exceptionally well over the last three years, the recent declines are not new. Here is some of the past published data on prior declines: PIFI Dec. ‘99 – Feb. ‘00: -8.3% Sept. ’00 – June ’01: -17.4% PIF2 Feb. ’01 – March ’01: -14.4% August ’01 – Sept. 01: -11.8% (9/11 impact) PIFI investors who joined the partnership on 9/1/00 had to wait 22 months before seeing a the first positive return on their investment – even though the funds have delivered an annualized return of over 30% since inception. While I believe I’m preaching to the choir here, I just want to drive home the message that it is best to fixate on long term performance – five to ten years out.9

Appendix A PIF2 NAV and Performance Fees and Expenses Since Inception. Per the January, 2002 custodian statement, the value of PIF2 assets is $7,694,840.86 Accrued interest on bonds in the portfolio is $200,163.20 The expenses incurred by PIF2 through January are legal and accounting expenses totaling $28,641.25 plus accrued expenses of $5391.82. The NAV before fees and expenses is $7,923,645.31 or $15.78/unit. In other words, PIF2 is up 57.8% since inception sixteen months ago before fees and expenses – or an annualized rate of 40.8%. NAV after all expenses is $7,889,612.24 or $14.7047/unit. The previous NAV high after fees is $14.50 set on 12/31/01. Since the NAV is above the previous historical high, there is a fee is payable to Dalal Street (General Partner) at this time. Since the last high was 1 month ago, the first 0.5% goes to investors and then the 3:1 split. Dalal Street’s share is $0.03305/unit or $17,732.55 The NAV after all fees and expenses is $14.6717. In other words, PIF2 is up 46.8% since inception sixteen months ago AFTER all fees and expenses – or an annualized rate of 33.3%. As I have always done in the past 100% of my fee is being reinvested back into PIF2 – resulting in 1208.63 units being issued to Dalal Street. Dalal Street has reinvested all fees earned from PIFI and PIF2 back into the funds. At this point, Dalal Street has 45,566.21 units of PIF2 and 25,610.78 units of PIFI. Based on last published NAV, this stake is worth 668,533.76 + 402,857.

The nature of our non-KBS insurance business was roughly described in our year 2000 Annual Report wherein we reported to shareholders that we were not currently active in super-catastrophe reinsurance and had never suÅered a super-catastrophe loss, but that shareholders should continue to realize that Wes-FIC's marvelous underwriting results were sure to be followed, sometime, by one or more horrible underwriting losses. When we said that, we had in mind a natural catastrophe. But, instead, in 2001 we were clobbered by a man-made catastrophe on September 11 Ì an event that delivered the insurance industry its largest loss in history. Fortunately, we recorded a loss of only $10 million before income taxes ($6.5 million, after taxes) in connection with that event. The $10 million is an estimate and is subject to considerable estimation error. It will literally take years to resolve complicated coverage issues, as well as to develop an accurate estimation of insured losses that will ultimately be incurred. That $10 million, however, was the principal cause of our substantial underwriting loss in 2001. At the end of 2002 we retained about $15 million in invested assets, oÅset by claims reserves, from our former reinsurance arrangement with Fireman's Fund Group. This arrangement was terminated August 31, 1989.

It’s pretty much guaranteed we’ll continue to make mistakes (omissions and others). The good news is that we don’t need to do extraordinary things for extraordinary results. Even with the mistakes, I’m confident, we’ll do ok. Raising the Minimum Amount for new Partners Going forward, the new minimum investment to join the funds as a new partner will be $100,000. This is effective 2/1/02. We can have only 99 partners in each fund and as the number of slots left go down, the minimum needs to go up to delay the closing of the present fund for as long as possible to new investors. We have about $12 Million under management and will be targeting minimums to be about 0.75-1.25% of assets under management. Pabrai Investment Funds Assets Under Management (In Millions of $) 7/1/1999 7/1/2000 7/1/2001 1/1/2002 Assets Under Management Third-Party Administrator Status (TPA) For PIFI and PIF2 I will have the draft amendment ready this week. After attorney review, I’ll send it to all partners. Warm Regards, Mohnish Pabrai Page 4

57= $1,071,391.33. Thus I have a deep vested interest in the future performance of PIFI and PIF2. When you win, I win. Our interests are completely aligned. $3,216,188.33 in new funds have come in as of Feb. 1 leading to 220,418.96 units being issued. Thus total units outstanding on 2/1/02 are 756,955.58 PIF2’s Performance BEFORE and AFTER fees and expenses vs. the Indices. No. of Date PIF2 NAV PIF2 NAV S&P S&P DJIA DJIA NASDAQNASDAQ Units Pre-Exp. Post- Exp. 500 500 110000 10/1/2000 $10.00 $10.00 $10.00 1436.51 $10.00 10650.92 $10.00 3672.82 473269 10/1/2001 $11.76 $11.20 $7.25 1040.94 $8.48 9027.26 $4.08 1498.50 543079 12/1/2001 $13.93 $13.29 $7.93 1139.45 $9.42 10031.26 $5.26 1930.58 536537 12/31/2001 $15.51 $14.50 $7.99 1148.08 $9.62 10249.37 $5.31 1950.40 756956 1/25/2002 $15.78 $14.67 $7.89 1133.28 $9.45 10067.95 $5.28 1937.5

Page 7 of 7 Note: The source for the indices data is Barron’s. The DJIA data includes dividends. The S&P 500 and Nasdaq numbers exclude dividends as Barron’s does not provide historical dividend data for the S&P 500 and Nasdaq Composite.

I believe that public equities as a group are overvalued today (and has been since the inception of the funds). The average US-based public company delivered an average annualized return of 12.45% during the 1954-94 period. One can expect a broad based index to deliver 10-13% over the long haul if stocks are fairly priced. With the overpriced market we find ourselves in, Warren Buffett expects stocks to deliver a 4-7% annualized return over the next 15 years. I fully agree with Buffett’s thesis. Thus it is clear that if we bought a basket of businesses at their intrinsic value, we’d expect the Pabrai Investment Funds to deliver a 10-13% annualized return before expenses – and lag the indices after expenses. If we bought this random basket at present prices, our returns would resemble Buffett’s 4-7% numbers over the next 10-15 years. But I’m not interested in the typical publicly traded company. I’m interested in the great ones. The problem is that the great ones are not a secret. Everyone knows they are great and their typical valuations are stratospheric. Indeed, bought at these valuations, these businesses would probably lag the 4-7% that the market is expected to deliver. 3. I have an internal threshold of making investments only where there is a big margin of safety and a very high probability of a 30% or higher annualized return.

October 1, 2001 was an especially good window because of the market drop after the tragic events of 9/11. Thoughts on Merging PIFI and PIF2 A few of the PIFI partners met with me a few months ago to voice their displeasure and discomfort with the infrequent reporting. At the conclusion of the meeting, a plausible solution was arrived at. If the two funds were merged into one, it is likely that the merged fund would have atleast one partner (old or new) adding funds every 2 months and thus there would be 7 to 8 datapoints a year for PIFI investors. I liked the idea of merging the funds as it would simplify my task (easier to manage 1 fund vs. 2), reduce accounting, audit and administrative costs and I would no longer have less-than-happy partners. We’d also have a larger asset pool to amortize expenses over. The negatives are that the guarantee of principal etc. in PIFI would be eliminated (I see this as a positive). The leverage ratio would go up to 50%. I don’t see this as an issue as I am exceedingly careful with leverage, but some of you might. Finally, we’d have higher accounting and legal fees for 1 year as the funds merge to handle all the tax, accounting and legal issues. I only want to pursue a merge if the overwhelming number of partners want it. At this point, I’d like to get a pulse on your thoughts. Just call me or send me an email letting me know if you’re in favor or against the merger.

As you are aware, the funds are allowed to employ leverage. PIFI can leverage upto 30% and the other funds can go upto 50%. When Buffett ran his partnerships in the 1950s and 60s, he almost always had more ideas than money and the funds were nearly fully leveraged (50%) during most of the period. Buffett’s use of leverage was focused on workout and special situation investments. Today Buffett’s vehicle for leverage is insurance float – which is simply brilliant since that float is subdivided into a myriad of risk classes being covered that are very very unlikely to have any sort of aggregation ever. As an example, after 9/11, some of Berkshire’s Insurance units saw big claims, but its GEICO auto insurance unit with about 15% of the float was untouched by the events of 9/11. Many partners and potential partners have voiced concerns about the use of leverage in the funds to me from time to time. I have always been very careful with leverage – only using it for special situations. However, after a great deal of reflection, I have come to the conclusion that there are really no limits to the short-term irrationality of markets. I don’t believe 1929 represents the extreme to which markets can go. If fact, until 1987 common wisdom was that big market drops were a thing of the past. So while we are probably protected against a 50 or 100 year flood, I don’t think we’re protected against a 1000 year flood.

I have not talked to the legal/accounting folks yet, but 12/31 might be a good date to merge to minimize tax issues. PIF2 Performance Update The diligent PIF2 reader will notice that PIF2’s NAV declined from $17.43 (on June 1, 2002) to $15.89 on June 30, 2002. While this is not what folks who added funds on 6/1 like to see, it is basically “noise”. As Ben Graham succinctly put it says, “In the short run, the market is a voting machine and in the long run it is a weighing machine”. The broad market volatility in the last few weeks has “voted” us down temporarily. The portfolio’s market value was well below my estimation of its intrinsic value on June 1 and, as I write this, that gap has widened. 2002 Annual Meeting Reminder: The 2002 Annual Meeting will be held at 4:00 PM on the Saturday Sept. 14, 2002 at: Carlucci’s Restaurant 6111 North River Road Rosemont, Illinois 60018 Tel. +1847.518.8

The only exception to the 30% rule is “temporary placeholders” where the expected ROI is between 20-30%, but the margin of safety is even bigger (see point 6 below). How then can our 30% ROI threshold be met? How have we performed so well for the last few years? The answer lies in a few simple facts: Since public equities are overvalued as a group and great businesses are even worse investments at present prices, I’ve managed the funds since inception with a big focus on special situations. To give you some color, as I write this letter, PIF2 has 17 distinct businesses in the portfolio. About 88% of the portfolio is comprised of 10 businesses and the remaining 7 make up the remaining 12%. Our fate will be largely determined by the 10 companies that make up 88%. The only reason we have 17 vs. 10 is that assets have come into PIF2 at a very fast rate and positions that at one time represented 10% are now down to just 2-3%. We were unable to buy more as they had appreciated before new $$$ came in, but have not appreciated to the point of becoming candidates for sale. Of the 10 businesses, 3 are great businesses. However, all 10 were bought as special situations. The 3 great businesses had big clouds hanging over them when they were bought. However, applying Munger’s Latticework of Mental Models allowed me to see beyond the clouds. We’ve done very well on these three (two have appreciated over 80% in the last 8 months and one has appreciated about 25% in the last 4 months).

If the market were to drop 50+% in a course of 2 to 3 days and if it happened while we were fully leveraged, we’d have a problem. We’d be forced to sell positions at the exact opposite time that we’d like to sell. As an example, the Nasdaq has seen over 75% of its capitalization disappear over the last 2 years. There is nothing that prevents such drops from occurring over a matter of days versus a matter of years. While I don’t believe we will ever see the type of drops I’m alluding to, I would not want to bet on it – especially with your hard-earned money. If we are totally unleveraged and the market dropped 50%, there is no real problem. We can just wait out the storm and eventually the underlying businesses will get priced around their intrinsic value. Indeed, if we ever saw such big drops with no change in portfolio fundamentals, I’d be asking partners to add funds and we’d go shopping selectively. I started thinking hard about the leverage issue last year when Charlie Munger made the following comment at the 2001 Berkshire Hathaway meeting alluding to the “Monopoly” board game when speaking on the subject of use of leverage. “I don’t want to go back to Go! I’ve been a Go once and have no desire to see it again.” t I thought a lot about the appropriate percentage of leverage (while still being able to withstand a 1000 year flood) and concluded that it should be zero.

However, it will take a long time before all claims are settled, and, meanwhile, Wes-FIC is being helped over many years by proceeds from investing ""Öoat'' and by favorable loss develop- ment, which has enabled it to reduce the liability for losses and loss-related expenses, beneÑting after-tax operating earnings in 2002 and 2001 by $.8 million each year.

4:00 – 6:00 PM Presentation & Q&A 6:00 – 7:00 PM Cocktails 7:00 PM Dinner Attire: Business or Business Casual The formal invites will go out within 2-3 weeks. Kids are welcome. Please RSVP as soon as you know. Many past attendees have expressed a strong desire to attend every year. I hope you can make it and meet your fellow partners and get all your queries on The Pabrai Funds answered candidly. Thanks for your continued interest, referrals and support. Warm Regards, Mohnish Pabrai Page 6 of 8

Our current leverage is small and, over the next few weeks, I will be completely eliminating use of leverage in all the funds. We have a couple of appreciated positions that are near intrinsic value and would prefer to get long term capital gains treatment since we’re under 8 weeks away from it. The impact of being fully unleveraged is significant from a performance perspective.9

We engage in other reinsurance business, including large and small quota share arrangements similar and dissimilar to our previous reinsurance contract with Fire- man's Fund Group, and, from time to time, in super-cat reinsurance, described in detail in previous annual reports, which Wesco shareholders should re-read each year. Following is a summary of Wes-FIC's current reinsurance activity: ‚ A three-year arrangement entered into in 2000 through an insurance subsidi- ary of Berkshire Hathaway, our 80%-owning parent, as intermediary without ceding commission, for participation to the extent of 3.3% in certain property and casualty exposure ceded by a large, unaÇliated insurer. The terms of this arrangement are identical to those accepted by that Berkshire subsidiary except as to the amount of the participation. ‚ Participation in four risk pools managed by a Berkshire insurance subsidiary (also acting as intermediary without ceding commission) covering hull, liability, workers' compensation and satellite exposures relating to the aviation industry as follows: with respect to 2001, to the extent of 3% for each pool; for 2002, 13% of the hull and liability pools, 3% of the workers' compensation pool and, eÅective mid-year, 15.5% of the satellite pool; and, for 2003, 10% of the hull and liability pools only. The Berkshire subsidiary provides a portion of the reinsurance protection to these aviation risk pools, and therefore to Wes-FIC.

The remaining seven are boring, mediocre businesses – but with an overhang on the business that has depressed its valuation. Again, using Munger’s Latticework approach led me to the conclusion that these businesses were temporarily mispriced. The typical boring business was bought by us at fifty cents on the dollar with the expectation that it was highly likely to be recognized as a dollar bill within about 2-2½ years (thus yielding a 30% annualized return). What has actually happened is that many of these businesses have been recognized as being worth 70 or 80 cents within a few weeks of our purchase. If we buy something for 50 cents and eight weeks later, it’s selling for 75 cents, our portfolio looks like it’s on steroids! I am explaining all of this as a word of caution. Virtually none of our purchases are based on “catalysts” in place that will drive the stock price. I believe value is its own catalyst and eventually most of these businesses selling at 50 cents on the dollar do get recognized as dollar bills by the nearly fully efficient market. However, its is totally an anomaly to have this recognition take place in a matter of weeks rather than years. I do not expect our future special situation purchases to appreciate as quickly as the past purchases have done. The past is an anomaly. 4. Not only have the great ideas appreciated very rapidly, we have had far more than our share of great ideas.

employed leverage. We still expect to continue to beat the indices and 90+% of mutual funds, but this is now one more reason future performance will be less spectacular than the past. The good news is that we have far more control over our destiny and have a substantially lower risk profile. I’ve recently had conversations with some partners on this change and nearly all are enthusiastic about it. I’d welcome your thoughts and comments. Finally, in the highly unlikely event, that I ever change my mind on leverage use, I’ll be giving partners a heads up and a chance to exit the fund before employing leverage again. Merging PIFI and PIF2 Michael J. Liccar & Co. are researching some of the nuances of merging the funds. It appears that it is fairly straightforward with no negative tax impact on anyone. I’ll be proposing an amendment to the PIFI and PIF2 on 1/1/03 after we’ve gotten a handle on all legal, tax and accounting issues. Assuming 2/3 or more of partner units vote in favor, we will proceed with the merger. We’ll also allow any PIFI or PIF2 partners opposed to the merger to exit the fund on 12/31/02, so no one has the merger forced on them if they disagree with it. I see this as a big positive with the reduction in fees and a single larger fund with is easier to manage and amortize the reduced fees over a larger pool of assets. Stay tuned. I’ll email you before any of the amendment docs get sent out so you can watch for them.

Since inception, I have almost always had more investment ideas than available investment dollars. That is a great situation, but again another one that I don’t expect to always be the case. As an example, I have no new investment ideas at this time. I have not had a new investment idea for some time now and while I’m confident great ideas will pop up on the radar in the future, I expect them to be far fewer than the past. 5. As we grow assets our universe of opportunities will shrink. We have already had a couple of situations where I was unable to buy the full position I wanted to buy before the price moved up. At $28 Million, our assets under management is a very modest size. I don’t see size as a big problem at this time, but I’d like investors to recognize that size does impact performance negatively. 6. Occasionally, I have made investments where the perceived ROI was expected to be 20-29%, but there is was a massive margin of safety. An example is a REIT investment we made that has an exceptional management team, a relatively high current dividend yield (even compared to other REITs) and selling at about 2/3 of its fair value. In that instance, there was a huge margin of safety and an expected 20% ROI. I viewed that investment as a “temporary placeholder” – until a better idea came along. Temporary placeholders have added to our returns in the past and will probably continue to do so in the future. At this time I have no new temporary placeholder ideas. 7.

Appendix A PIFI NAV and Performance The June 30, 2002 NAV for PIFI is 4,867,508.36. Accrued bond interest is $53,797.22. Paid expenses since inception are $55,134.42. This yields a pre-expense NAV of $4,976,440. Excluding Dalal Street’s reinvested fees, there are 188142.40 units outstanding. This yields a pre-expense and fee NAV/unit of $26.45. In other words PIFI is up 164.5% since inception or an annualized rate of 38.3% BEFORE all fees and expenses. Accrued expenses and Accrued prior year Illinois Replacement Taxes are $22,200. After adding in all paid and estimated accrued expenses, the estimated NAV is $4,899,105.94. Including Dalal Street’s fee, there were 203,753.19 units outstanding. This yields a NAV after all expenses of $24.04/unit. This is a historical high and hence a fee is payable to Dalal Street. The last high was set on 8/31/00 of $16.68. The 6% annualized return from 8/31/00 to 6/30/02 on $16.68 yields $18.56. Dalal Street’s fee is ¼ of $5.48 or $1.37/unit or $279,115.14. The NAV after all fees and expenses is $4,619,990.80 or $22.54. In other words PIFI is up 125.4% since inception or an annualized rate of 31.1% AFTER all fees and expenses. As I have always done in the past, 100% of my fee is being reinvested back into PIF2 – resulting in 12,383.10 units being issued to Dalal Street. At this point, Dalal Street has 84,833.03 units of PIF2 and 37,993.95 units of PIFI. Based on last published NAV, this stake is worth $1,347,996.85. + $856,383.63 = $2,204,380.

In much reinsurance sold by us, other Berkshire subsidiaries sold several times as much reinsurance to the same customers on the same terms. In certain instances but not always, such subsidiaries have taken from us a 3%-of-premiums ceding commis- sion on premium volume passed through them to Wes-FIC. Excepting this ceding commission, Wes-FIC has had virtually no insurance-acquisition or insurance admin- istration costs. KBS, purchased by Wes-FIC in 1996 for approximately $80 million in cash, contributed $7.4 million to the after-tax operating earnings of the insurance busi- nesses in 2002 and $9.3 million in 2001. The 2001 Ñgure is before goodwill amortization of $.8 million; there was no goodwill amortization for 2002. Prior to 2002 goodwill was amortized mainly on a straight-line basis over 40 years. As explained above, as of the beginning of 2002, Wesco discontinued amortization of goodwill and became subject to other changes in goodwill accounting, as required by the Financial Accounting Standards Board. The results of KBS have been com- bined with those of Wes-FIC, and are included in the table on page 1 in the category of ""insurance businesses.'' KBS was chartered in 1909 to underwrite deposit insurance for Kansas banks. Its oÇces are in Topeka, Kansas. Over the years its service has continued to adapt to the changing needs of the banking industry.

2002 Annual Meeting Reminder: The 2002 Annual Meeting will be held at 4:00 PM on the Saturday Sept. 14, 2002 at: Carlucci’s Restaurant 6111 North River Road Rosemont, Illinois 60018 Tel. +1847.518.0990 (www.carluccirestaurant.com) 4:00 – 6:00 PM Presentation & Q&A 6:00 – 7:00 PM Cocktails 7:00 PM Dinner Attire: Business or Business Casual You should all have received your formal invites in the mail. Kids are welcome. Please RSVP as soon as you know. Many past attendees have expressed a strong desire to attend every year. I hope you can make it and meet your fellow partners and get all your queries on The Pabrai Funds answered candidly.9

PIFI and PIF2 have had mistakes of omission and I had mentioned some of them in the 1/1/02 letter to partners. The mistakes of omission have been the costliest mistakes. They have also have had a few mistakes of “inclusion”.9

in excess of FDIC coverage, KBS oÅers directors and oÇcers indemnity policies, bank employment practices policies, bank annuity and mutual funds indemnity policies, and bank insurance agents professional errors and omissions indemnity policies. Also, KBS has recently begun oÅering Internet banking catastrophe theft insurance. Beginning in 2003, KBS revised the allocation of its reinsurance between a Berkshire insurance subsidiary and a non-aÇliate: Under the previous program, the Berkshire subsidiary and the non-aÇliate each reinsured 50% of the per-occurrence risks of $3 million in excess of $2 million, and the non-aÇliate also reinsured 70% of the per-occurrence risks up to $10 million above $5 million, all for approximately 5% of KBS's premiums. Beginning in 2003, the Berkshire subsidiary has replaced the non-aÇliate on the second layer, and total reinsurance costs are expected to aggregate 10%-12% of premiums. Reinsurance costs have risen greatly throughout the insurance industry, and the revised arrangement is considered fair by all in- volved, all factors considered. (Indeed, we believe that our combined insurance arrangements through Berkshire constitute a net advantage to Wes-FIC that would not be available from Berkshire in the absence of its 80% ownership of Wesco, and such combined insurance arrangements have worked out well so far, even after taking into account our September 11 loss in 2001.) KBS increased the volume of business retained eÅective in 1998.

48. Thus I have a deep vested interest in the future performance of The Pabrai Funds. When you win, I win. Our interests are completely aligned. TOTAL PIFI units outstanding are 216,049.04. PIFI’s Performance BEFORE and AFTER fees and expenses vs. the Indices. No. of Date PIFI NAV PIFI NAV S&P S&P DJIA DJIA NASDAQ NASDAQ Shares Pre-Fees Post-Fees 500 500 100000 7/1/99 $10.00 $10.00 $10.00 1391.22 $10.00 11,139.24 $10.00 2692.96 164453 6/30/00 $16.25 $15.05 $10.47 1456.60 $9.53 10,613.49 $14.73 3966.11 230480 6/30/01 $14.97 $13.78 $8.80 1224.42 $9.74 10,847.09 $8.02 2160.54 216027 6/30/02 $26.45 $22.54 $7.11 989.82 $8.77 9,773.40 $5.43 1463.21 PIF2 NAV and Performance Fees and Expenses Since Inception. Per the June, 2002 custodian and bank statement, the value of PIF2 assets is $16,218,048.89. Accrued interest on bonds in the portfolio is $173,310.28. The expenses incurred by PIF2 through June are legal, accounting and administrative expenses totaling $43,572.42 plus an estimated $16,000 in accrued expenses and $43,163.8

Decision — Shorted Allied Capital; ran a public forensic campaign; donated profits. Context: FSOPOTAT documents the battle end-to-end; firm’s own dispute page survives in Wayback. Outcome (known): SEC findings vs Allied (BFP valuations); profits donated to charity.

Page 8 of 8 taxes. The NAV before fees and expenses is $16,434,931.59 or $17.25/unit. In other words, PIF2 is up 72.5% since inception twenty one months ago before fees and expenses – or an annualized rate of 36.6% NAV after all expenses is $16,332,195.69 or $15.89/unit. The previous NAV high after fees is $17.43 set on 6/1/02. Since the NAV is below the previous historical high, there is a no fee is payable to Dalal Street (General Partner) at this time. PIF2 is up 58.9% since inception twenty one months ago AFTER all fees and expenses – or an annualized rate of 30.3%. Total units outstanding on 6/30/02 are 1,027,794.97. PIF2’s Performance BEFORE and AFTER fees and expenses vs. the Indices. No. of Date PIF2 NAV PIF2 NAV S&P S&P DJIA DJIA NASDAQNASDAQ Units Pre-Exp. Post- Exp. 500 500 110000 10/1/2000 $10.00 $10.00 $10.00 1436.51 $10.00 10650.92 $10.00 3672.82 330014 6/30/2001 $12.09 $11.74 $8.52 1224.42 $10.46 11140.05 $5.88 2160.54 1027795 6/30/2002 $17.25 $15.89 $6.89 989.82 $8.98 9563.39 $3.98 1463.21 PIF3’s Performance BEFORE and AFTER fees and expenses vs. the Indices. No. of Date PIFI NAV PIFI NAV S&P S&P DJIA DJIA NASDAQ NASDAQ Units Pre-Fees Post- Fees 500 500 65100 1/25/2002 $10.00 $10.00 $10.00 1133.28 $10.00 9840.08 $10.00 1937.70 255836 3/29/2002 $11.39 $11.01 $10.12 1147.39 $10.62 10446.55 $9.52 1845.35 Note: The source for the indices data is Barron’s. The DJIA data includes dividends.

completely masked by the spectacular performance of the rest of the portfolio. The good news is that we have been right about the overwhelming majority of businesses we’ve invested in. Regardless of the obsession with buying businesses with large margins of safety, I am confident that the errors in judgment will continue. However, to paraphrase Buffett, the good news with investing is that one can have good result in the end even with a few mistakes along the way. It is not necessary to be right 100% of the time. I plan to delve more deeply into our mistakes at the Pabrai Investment Funds annual meeting on September 14, 2002. Third Party Administrator (TPA) in Place – Michael J. Liccar & Co., (www.liccar.com) As I had mentioned earlier via email, PIFI and PIF2 are all set with Michael J. Liccar & Co. as the Third Party Administrator. They are based in Chicago and, in addition to their fund administration speciality, are a CPA firm as well. Liccar has dozens of hedge funds and limited partnerships from all over the world as clients and comes highly recommended. They handled most of the subscriptions for the 6/1 closing and I expect all subscriptions, redemptions and additions will be handled directly by them in the future. They will be issuing all the partner statements going forward as well as producing all of your annual K- 1s. The 6/1 statements will likely take longer to get out as they get us into their systems, but should be faster going forward.

Raising the Minimum Amount for new Partners We added 6 new partners - bringing the total US-based partners to 82. We are limited to 100 US partners by law. As the available slots decrease, the minimums continue to increase. Going forward, the new minimum investment to join PIF2 as a new partner will be $400,000. This is effective at the next opening of 10/1/02. Existing partners can add funds in increments of $25,000 (with a $25,000 minimum) at each opening. This does not apply to our offshore investors. PIF3 is setup as an offshore mutual fund limited to non-US accredited investors. The minimum investment for PIF3 is $100,000. Assets under management are about $26 Million. Thanks for your strong vote of confidence! Pabrai Investment Funds Assets Under Management (In Millions of $) 1999 2000 2001 June-02 Assets Under Management Thanks for your continued interest, referrals and support. Warm Regards, Mohnish Pabrai Page 7 of 9

It had previously ceded almost half of its premium volume to reinsurers. Now it reinsures only about 5%. As we indicated last year, the increased volume of business retained comes, of course, with increased irregularity in the income stream. The combined ratio of an insurance company represents the percentage that its underwriting losses and expenses bear to its premium revenues. KBS's combined ratio has been much better than average for insurers, at 71.3% for 2002 and 55.1% for 2001, and we continue to expect volatile but favorable long-term eÅects from increased insurance retained. KBS is ably run by Donald Towle, President, assisted by 15 dedicated oÇcers and employees. CORT Business Services Corporation (""CORT'') In February 2000, Wesco purchased CORT Business Services Corporation (""CORT'') for $386 million in cash. CORT is a very long established company that is the country's leader in rentals of furniture that lessees have no intention of buying. In the trade, people call CORT's activity ""rent-to-rent'' to distinguish it from ""lease-to-purchase'' businesses that are, in essence, installment sellers of furniture. However, just as Hertz, as a rent-to-rent auto lessor in short-term arrangements, must be skilled in selling used cars, CORT must be and is skilled in selling used furniture.

CORT's revenues totaled $389 million for calendar 2002, versus $395 million for calendar 2001. Of these amounts, furniture rental revenues were $316 million and $329 million, and furniture sales revenues were $73 million and $66 million. CORT contributed $2.4 million and $13.1 million to Wesco's consolidated operating income for 2002 and 2001, versus $29.0 million for the ten months that we owned it in 2000. These Ñgures are before (1) goodwill amortization of zero for 2002 (see discussion above), $6.0 million for 2001 and $5.1 million for 2000, and (2) realized securities losses of $.7 million in 2000. CORT's after-tax operating income (before goodwill amortization) for the entire calendar year 2000 was $33.4 million compared to only $2.4 million for 2002 and $13.1 million for 2001. 2002 was a terrible year in the ""rent-to-rent'' segment of the furniture rental business. When we purchased CORT early in 2000, its furniture rental business was rapidly growing, reÖecting the strong U.S. economy, phenomenal business expansion and explosive growth of IPOs and the high-tech sector. Beginning late in 2000, however, new business coming into CORT began to decline. With the burst of the dot-com bubble, the events of September 11, and continued weakness in the economy, CORT's operations have been hammered. Obviously, when we purchased CORT we were poor predictors of near-term industry-wide prospects of the ""rent-to- rent'' sector of the furniture business.

The S&P 500 and Nasdaq numbers exclude dividends as Barron’s does not provide historical dividend data for the S&P 500 and Nasdaq Composite. PIFI and PIF3 performance numbers are dated since The Pabrai Investment Funds only releases performance data annually at fiscal year end for all funds. The only exception is whenever there are subscriptions or redemptions for a given fund. Thus PIFI and PIF2 performance is updated and PIF3 is not.

Upgrading to the Big 4 for Audit Services - PriceWaterhouseCoopers We have an every increasing number of partners spread out all over the country and world. While our present auditors, Gleeson, Sklar, Sawyers and Cumpata, LLP (GSSC) are very well recognized in Chicago and do great work, the name means nothing to folks outside Chicago. The annual audit of the funds is a critical function and all partners must be totally comfortable with the auditors. Thus, as much as I’ve enjoyed working with GSSC, as well as my deep sense of loyalty, I found it important to move the audit function to one of the Big 4. Investors anywhere in the world need to immediately recognize the auditors and the integrity they represent. I am planning to move the audit function for PIFI and PIF2 for the next fiscal year (ended 6/30/03) to PriceWaterhouseCoopers (PWC). GSSC will do the audit for PIFI and PIF2 for the year ended 6/30/02. PWC will also handle the audit for PIF3 which will have its first fiscal year-end on 12/31/02. I am working with a terrific PWC team based in Chicago and Milwaukee with a strong specialty in the fund management space. I have had a relationship with Al Lovitsch and his team at GSSC for many years with my previous businesses as well as The Pabrai Funds. I am very grateful for all the excellent advice, guidance and work they’ve always done. Thank you Al!9

Moreover, CORT started up a new subsidiary during 2001, Relocation Central Corporation, whose operations should be considered as still in a ""start-up'' phase and, so far, have generated pre-tax losses amounting to $12.8 million in 2002 and $10.8 million in 2001. The results of its operations have been consolidated with those reported for CORT, shown above. Relocation Central has developed a virtual call center which carries out an Internet- based furniture and apartment leads operation (www.relocationcentral.com), and it markets CORT's furniture rental services to real estate investment trusts, owners of many major apartment communities. As a result of the acquisition of its largest competitor in December 2002, Relocation Central operates in 20 metropolitan cities in sixteen states. CORT is hopeful that, through Relocation Central, it will ultimately become the principal source of rental furniture to the apartment industry, but this outcome is far from certain. We expect to report in due course that all CORT operations have become more satisfactory, but prospects for 2003 do not seem good. However, there is good news along with bad. CORT has operated at a positive cash Öow and the general distress in its Ñeld permitted various small expansions. During the past two years it invested $57 million in business expansion through acquisitions of several small businesses and reduced its line-of-credit debt by $30 million.

We added 5 new partners - bringing the total US-based partners to 76. We are limited to 100 US partners by law. As the available slots decrease, the minimum will increase. Going forward, the new minimum investment to join the funds as a new partner will be $350,000. This is effective at the next opening of 8/1/02. Existing partners can add funds in increments of $25,000 at each opening. This does not apply to our offshore investors. PIF3 is setup as an offshore mutual fund limited to non-US accredited investors. The minimum investment for PIF3 is $100,000. Assets under management are about $28 Million – up from $1 Million less than 3 years ago. Thanks for your strong vote of confidence! Pabrai Investment Funds Assets Under Management (In Millions of $) 1999 2000 2001 June-02 Assets Under Management Warm Regards, Mohnish Pabrai Page 7 of 9

When Wesco paid $386 million for CORT, about 60% of the purchase price was attributable to goodwill, an intangible balance sheet asset. Wesco's consolidated balance sheet now contains about $266 million in good- will (including $27 million from Wesco's 1996 purchase of KBS). The Financial Accounting Standards Board recently adopted a rule which became eÅective in 2002 that no longer requires automatic amortization of acquired goodwill. Thus, earnings we report more closely reÖect microeconomic reality as we appraise it. As above shown in the Ñrst page of this letter, Wesco's reported earnings were reduced by about $7 million of mostly-non-tax-deductible amortization of goodwill for 2001, versus no such amortization for 2002. More details with respect to CORT are contained throughout this annual report, to which your careful attention is directed. CORT has long been headed by Paul Arnold, age 56, who is a star executive as is convincingly demonstrated by his long record as CEO of CORT. We are absolutely delighted to have Paul and CORT within Wesco, and are pleased with CORT's progress under his leadership, despite adverse developments in 2001 and 2002. We continue to expect a considerable expansion of CORT's business and earnings at some future time. Precision Steel Warehouse, Inc. (""Precision Steel'') The businesses of Wesco's Precision Steel subsidiary, headquartered in the outskirts of Chicago at Franklin Park, Illinois, contributed $.

3 million to Wesco's net operating earnings in 2002, down from $.4 million in 2001 and $1.3 million in 2000. Had it not been for LIFO inventory accounting adjustments, Precision Steel would have reported $.1 million for 2002 and no income at all for the year 2001, versus $1.7 million for 2000. Last year we reported that the U.S. steel industry was generally a disaster in 2000, and that Precision Steel suÅered worse eÅects than occurred for it in previous general declines in the U.S. steel business. The year 2001 was much worse. The absence of Precision Steel's operating earnings for 2001, before the eÅect of the LIFO adjustment, was due principally to a signiÑcant reduction in demand for steel, combined with intensiÑed competition above the Ñerce level encountered in the prior year. This resulted in a 29.7% decrease in pounds of product sold. Sales revenues declined 25.6%. We do not regard earnings changes from LIFO accounting adjustments, up or down, as material in predicting future earning power. Terry Piper, who became Precision Steel's President and Chief Executive OÇcer late in 1999, has done an excellent job in leading Precision Steel through diÇcult years.

Tag Ends from Savings and Loan Days All that now remains outside Wes-FIC but within Wesco as a consequence of Wesco's former involvement with Mutual Savings, Wesco's long-held savings and loan subsidiary, is a small real estate subsidiary, MS Property Company, that holds tag ends of real estate assets with a net book value of about $5.8 million, consisting mainly of the nine-story commercial oÇce building in downtown Pasadena, where Wesco is headquartered. MS Property Company's results of operations, immaterial versus Wesco's present size, are included in the breakdown of earnings on page 1 within ""other operating earnings.'' Other Operating Earnings Other operating earnings, net of interest paid and general corporate expenses, amounted to $.6 million in both 2002 and 2001. Sources were (1) rents ($3.3 mil- lion gross in 2002) from Wesco's Pasadena oÇce property (leased almost entirely to outsiders, including Citibank as the ground Öoor tenant), and (2) interest and dividends from cash equivalents and marketable securities held outside the insur- ance subsidiaries, less (3) general corporate expenses plus minor expenses involving tag-end real estate. Corporate Governance Two of our long-standing directors, Jim Gamble and Dave Robinson, are not standing for reelection. At practically no pay, they have been wise and honorable protectors of Wesco shareholders for many decades going back to a time before Berkshire Hathaway had any interest in Wesco.

During their long tenure the value of Wesco stock appreciated about 5,000 percent. We will much miss their directorial service, but will not lose touch. They both retain oÇces in our building and will surely be in our oÇces from time to time. Consolidated Balance Sheet and Related Discussion Wesco carries its investments at market value, with unrealized appreciation, after income tax eÅect, included as a separate component of shareholders' equity, and related taxes included in income taxes payable, in its consolidated balance sheet. As indicated in the accompanying Ñnancial statements, Wesco's net worth, as accountants compute it under their conventions, increased to $1.96 billion ($275 per Wesco share) at yearend 2002 from $1.91 billion ($269 per Wesco share) at yearend 2001. The main cause of increase was net income after deduction of dividends paid to shareholders. The foregoing $275-per-share book value approximates liquidation value assum- ing that all Wesco's non-security assets would liquidate, after taxes, at book value. Of course, so long as Wesco does not liquidate, and does not sell any appreciated securities, it has, in eÅect, an interest-free ""loan'' from the government equal to its deferred income taxes on the unrealized gains, subtracted in determining its net worth.moment

working for Wesco shareholders and amounted to about $28 per Wesco share at yearend 2002. However, some day, parts of the interest-free ""loan'' may be removed as securities are sold. Therefore, Wesco's shareholders have no perpetual advantage creating value for them of $28 per Wesco share. Instead, the present value of Wesco's shareholders' advantage must logically be much lower than $28 per Wesco share. Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway. Wesco is not an equally-good-but-smaller version of Berkshire Hathaway, better because its small size makes growth easier. Instead, each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway. Moreover, the quality disparity in book value's intrinsic merits has, in recent years, continued to widen in favor of Berkshire Hathaway. All that said, we make no attempt to appraise relative attractiveness for invest- ment of Wesco versus Berkshire Hathaway stock at present stock-market quotations. To progress from this point at a satisfactory rate, Wesco plainly needs more favorable investment opportunities, recognizable as such by its management, prefer- ably in whole companies, but, alternatively, in marketable securities to be purchased by Wesco's insurance subsidiaries.

Our views regarding the general prospects for investment in common stocks are contained in the following excerpt from Warren BuÅett's recent letter to shareholders of our parent company: ""We continue to do little in equities. ®We© are increasingly comfortable with our holdings in ®our© major investees because most of them have in- creased their earnings while their valuations have decreased. But we are not inclined to add to them. Though these enterprises have good prospects, we don't yet believe their shares are undervalued. ""In our view, the same conclusion Ñts stocks generally. Despite three years of falling prices, which have signiÑcantly improved the attractiveness of com- mon stocks, we still Ñnd very few that even mildly interest us. That dismal fact is testimony to the insanity of valuations reached during The Great Bubble. Unfortunately, the hangover may prove to be proportional to the binge. ""The aversion to equities that ®we© exhibit today is far from congenital. We love owning common stocks Ì if they can be purchased at attractive prices. In ®(Warren states:) my© 61 years of investing, 50 or so years have oÅered that kind of opportunity. There will be years like that again. Unless, however, we see a very high probability of at least 10% pre-tax returns (which translates to /2-7% after corporate tax), we will sit on the sidelines. With short-term money returning less than 1% after-tax, sitting it out is no fun.

In fact, the one thing that should interest Wesco shareholders most with respect to 2002 is that, as in 2001, Wesco found no new common stocks for our insurance companies to buy. The Board of Directors recently increased Wesco's regular dividend from 321 /2 cents per share to 331 /2 cents per share, payable March 5, 2003, to shareholders of record as of the close of business on February 5, 2003. This annual report contains Form 10-K, a report Ñled with the Securities and Exchange Commission, and includes detailed information about Wesco and its subsidiaries as well as audited Ñnancial statements bearing extensive footnotes. As usual, your careful attention is sought with respect to these items. Charles T. Munger Chairman of the Board March 6, 2003

Decision — Bought Costco (~3.1%) and re-underwritten it (“Deconstructing the Business case”). Context: EDLP 14% markup; membership loyalty; “as perfect a growth stock as we have found.” Outcome (known): Scale-economics-shared thesis fully articulated by the 2008 letter; held to liquidation.