2003

Page 3 of 8 PABRAI INVESTMENT FUND 3 Performance Summary: DJIA NASDAQ S&P 500 PIF3 (net to investors) 2/1/02 – 12/31/02 -13.4% -30.9% -21.1% -5.2% Annualized -14.5% -33.2% -22.8% -5.7% Cumulative -13.4% -30.9% -21.1% -5.2% Comparison of Changes in value of $100,000 invested in PIF3 vs. the Indices (Net to Investors) $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 Feb. 2002 Dec. 2002 PIF3 S&P 500 DJIA Nasdaq The Pabrai Funds are 3½ years old and the performance of the funds has been satisfactory – especially considering that the portfolios are being valued at a substantial discount to my estimate of their intrinsic value. PIFI, the oldest fund, has averaged an annualized rate of return of 21.5% while all the benchmark indices are down substantially. The last 3½ years have been difficult ones for most funds and investors and our vastly superior performance is fully attributable to following the core investing tenets prescribed by The Graham/Buffett/Munger school of investing. PIF2 has averaged an annualized return of 16.6% in the 2¼ years that it has been in existence and again is substantially better than all three indices and nearly all other equity funds. PIF3 is the youngest fund. It is just 11 months old and lost 5.2% of its value in 2002. While this is better than all the benchmark indices, nonetheless investors are in the red. I do believe that the results for all the funds will be very satisfactory over the long term (5-10 years).

Offshore Investors: A $100,000 investment in PIF3 at inception on February 1, 2002 was worth $123,800 as of May 31, 2003 (net to investors). This equates to an annualized return of 17.4% since inception. PABRAI INVESTMENT FUND I Performance Summary: (closed and merged with PIF2 on 12/31/02) DJIA NASDAQ S&P 500 PIFI (net to investors) 7/1/99 - 6/30/00 -3.3% +48.0% +7.2% +50.5% 7/1/00 – 6/30/01 +2.1% -45.4% -14.8% -8.3% 7/1/01 – 6/30/02 -10.3% -32.7% -18.0% +63.6% 7/1/02 – 12/31/02 -8.7% -10.3% -8.5% -12.6% Annualized -6.4% -18.1% -11.2% +21.5% Cumulative -20.7% -50.3% -34.0% +97.9% 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 $250,000.00 Jun-99 Oct-99 Feb-00 Jun-00 Oct-00 Feb-01 Jun-01 Oct-01 Feb-02 Jun-02 Oct-02 PIFI S&P 500 DJIA NASDAQ I just received draft statements for all the PIF2 and PIF3 partners for review from the respective fund administrators and, to be absolutely candid, I was elated. Both the funds are at historic highs – which means that every dollar ever invested in either fund at anytime by any partner is worth more than they invested. And with my having interacted in person with nearly every partner in the funds, it was a very good feeling when I reviewed the data on what you invested and its current value. I like making money for all of you. Having said that, I’d like to express that the annualized performance of 29.8% for PIFI/PIF2 and 17.

At the 2003 Berkshire annual meeting, Buffett and Munger issued what Buffett later called a wake-up call on derivatives. The ballooning and thoughtless use of risky derivatives contracts had, in their joint view, become a systemic danger. Munger's phrasing was characteristically blunt: he told the audience that the derivatives market had become a gathering place for weapons of financial mass destruction. The phrase was deliberately inflammatory, and Munger meant it to be. The argument was structural. Derivatives, in Munger's framing, did not just transfer risk - they magnified it, because the counterparty web was opaque and the mark-to-market process was unreliable. A financial system in which large institutions owed each other enormous notional sums, recorded at model prices rather than transactable prices, was a system in which the failure of one node could cascade unpredictably through the rest. The 1998 LTCM collapse had already shown the pattern; Munger and Buffett were telling the room that the pattern would recur at larger scale. The prescription was avoidance. Berkshire itself used derivatives sparingly and only when it could price them honestly - the equity put writtings of later years were a deliberate exception, undertaken only when the premiums and the structural terms were clearly attractive. For most institutions, Munger's view was that the right answer was to stay out of the contracts entirely, to refuse the short-term earnings boost they offered, and to accept that the apparent opportunity was a fee-generation mirage that would, in some future crisis, become a loss-generation machine.

Pabrai Funds to outperform the best of the three indices over the long haul. I have no idea by how much we will outperform, but am willing to wager that it will be substantially less than the last 4 years. Partners would be best off setting their expectations for The Pabrai Investment Funds to outperform the best of the three indices by a small margin over the long haul. Intrinsic Value and Investment Opportunities PIF2 and PIF3 are up 51% and 42% respectively this year. Some of our positions are approaching their intrinsic value and the market value versus intrinsic value gap has clearly narrowed for both funds. Overtime, these fully valued positions will be replaced again by discounted businesses. When these opportunities show up on the radar is, however, unpredictable. Hence I remain very bullish on the future of the funds. Investment opportunities continue to be very scarce. I have found just one new business to add to the portfolio this year – and over half the year is over. Our future does rest on my ability to find a few great investment ideas periodically. Alignment of Interests On June 30, since we were at a historic high and well above the 6% annualized since the last high, a management fee was paid to the investment manager, Dalal Street, Inc. (wholly owned by me) as follows: PIF3: $93,931.99 PIF2: $891,569.10 Since PIF3 is an offshore fund, I cannot invest in it and am required to take my fee out of the fund.

At the 2003 Wesco annual meeting - held in the same week as the now-famous Berkshire derivatives warning - Munger reflected on what made Berkshire's structure durable. He told the audience that the Berkshire conglomerate model worked because it had almost no corporate bureaucracy. There was practically nobody at headquarters. The people running the operating businesses were sensible people who were left alone to run them. The absence of bureaucracy was, in Munger's view, a huge advantage - not a management fad but a structural property of the conglomerate that compounded year after year. He paired the structural observation with a warning. Bureaucracy, Munger said, breeds failure and stupidity. How could it be otherwise? The point was that bureaucratic organizations systematically destroyed the judgment of the people inside them, because the bureaucratic structure rewarded process over outcome, compliance over insight, and risk-avoidance over capital allocation. A company that allowed a bureaucracy to grow was, in Munger's framing, slowly converting its smartest operators into the kind of people who could not make a real decision even when one was needed. The takeaway for the room was that capital allocation discipline and organizational discipline were the same problem. Berkshire's edge was not just that Buffett and Munger had good judgment; it was that the structure they had built protected the judgment of the operators below them from being bureaucratized away. The same lesson, Munger implied, applied to the smaller Wesco conglomerate - KBS, Wes-FIC, Precision Steel - and to any organization that wanted to compound intrinsic value over decades. Keep the headquarters empty, keep the operators in charge, and refuse to grow the corporate center in the name of oversight.

Comparison of Changes in value of $100,000 invested in PIF3 vs. the Indices. PIF3: $145,300; Best Index (Dow): $97,000 $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 $140,000 $160,000 Feb-02 Apr-02 Jun-02 Aug-02 Oct-02 Dec-02 Feb-03 Apr-03 Jun-03 Aug-03 PIF3 S&P 500 DJIA Nasdaq Offshore Investors: A $100,000 investment in PIF3 at inception on February 1, 2002 was worth $145,300 as of Sept. 30, 2003 (net to investors). This equates to an annualized return of 25.1% since inception. General Comments The diligent reader will notice that PIF2 and PIF3 are up 54.7% and 53.3% respectively in value for the first 9 months of 2003. Both funds are also at historic highs. While these facts are interesting, investors are best off focusing on long-term performance rather than a few months. Since inception in 1999, PIFI/PIF2 have delivered an annualized return of 30.1%. PIF3 was launched in 2002 and it has delivered an annualized return of 25.1% since then. I’d like to again express that annualized gains of this magnitude are an anomaly and not to be expected going forward. I do expect the Pabrai Funds to outperform the best of the three indices over the long haul. I have no idea by how much we will outperform, but am willing to wager that it will be substantially less than the last 4 years. Partners would be best off setting their expectations for The Pabrai Investment Funds to outperform the best of the three indices by a small margin over the long haul.

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 $250,000.00 Jun-99 Oct-99 Feb-00 Jun-00 Oct-00 Feb-01 Jun-01 Oct-01 Feb-02 Jun-02 Oct-02 PIFI S&P 500 DJIA NASDAQ The diligent reader will notice that PIF2 lost 1.7% in value in the month of July while PIF3 gained 1% during the month. Given the short one month duration that these numbers represent, they are essentially meaningless. Investors are best off fixating on the long term results (5-10 years) that the funds generate. The Pabrai Funds have delivered an annualized return of 30.2% for PIFI/PIF2 and 22.8% for PIF3 since inception. I’d like to again express that annualized gains of of this magnitude are an anomaly and not to be expected going forward. I do expect the Pabrai Funds to outperform the best of the three indices over the long haul. I have no idea by how much we will outperform, but am willing to wager that it will be substantially less than the last 4 years. Partners would be best off setting their expectations for The Pabrai Investment Funds to outperform the best of the three indices by a small margin over the long haul. Investment opportunities continue to be very scarce. Our future does rest on my ability to find a few great investment ideas periodically. Alignment of Interests On July 31, since PIF2 was below its historic high, no management fee is payable.

Page 3 of 8 PABRAI INVESTMENT FUND I Performance Summary: (closed and merged with PIF2 on 12/31/02) DJIA NASDAQ S&P 500 PIFI (net to investors) 7/1/99 - 6/30/00 -3.3% +48.0% +7.2% +50.5% 7/1/00 – 6/30/01 +2.1% -45.4% -14.8% -8.3% 7/1/01 – 6/30/02 -10.3% -32.7% -18.0% +63.6% 7/1/02 – 12/31/02 -8.7% -10.3% -8.5% -12.6% Annualized -6.4% -18.1% -11.2% +21.5% Cumulative -20.7% -50.3% -34.0% +97.9% 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 $250,000.00 Jun-99 Oct-99 Feb-00 Jun-00 Oct-00 Feb-01 Jun-01 Oct-01 Feb-02 Jun-02 Oct-02 PIFI S&P 500 DJIA NASDAQ There is little I have in terms of comments on the aforementioned performance as it is only a month of new data. During the month PIF2 outperformed all three indices while PIF3 outperformed two of the three indices. All the funds have outperformed all the benchmark indices by wide margins since inception. Partners are best off focusing on long term performance results (3, 5, 10 years etc.) without trying to read too much into monthly or annual performance numbers. With the portfolio trading at a substantial discountto its intrinsic value, I remain very bullish on the funds. Thoughts on Macro Events Macro factors like the Iraq situation or terror alerts have substantial short-term market impacts (which we try to take advantage of), but have little to do with our long term results.

Comparison in Changes in Value of PIF4 vs. the Indices. PIF4: $102,300; Best Index (Nasdaq): $109,800 $94,000 $96,000 $98,000 $100,000 $102,000 $104,000 $106,000 $108,000 $110,000 $112,000 Oct-03 Nov-03 PIF4 S&P 500 DJIA NASDAQ General Comments PIF2 and PIF3 are up 86.9% and 75.8% respectively in value for the first 11 months of 2003. I’d like to again express that annualized gains of this magnitude are an anomaly and not to be expected going forward. Before fees, the PIF2 YTD returns are over 100% - and that is amazing to me. I do expect the Pabrai Funds to outperform the best of the three indices over the long haul. I have no idea by how much we will outperform, but am willing to wager that it will be substantially less than the last 4+ years. Partners would be best off setting their expectations for The Pabrai Investment Funds to outperform the best of the three indices by a small margin over the long haul. The Nasdaq was up an amazing 9.8% over the last two months – far outpacing the 2.3% that PIF4’s valued increased over the same period. Due to its newness, PIF4 has a large cash position. There just isn’t much on sale and I’m in no hurry. The money will be put to work as and when good opportunities present themselves. Over the long haul it should outperform the best of the three indices by a small margin after fees and expenses. I believe the market as a whole is overvalued. All markets do eventually get to trading around a fair valuation.

WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: Consolidated net ""operating'' income (i.e., before realized securities gains shown in the table below) for the calendar year 2003 decreased to $39,958,000 ($5.61 per share) from $52,718,000 ($7.40 per share) in the previous year. Consolidated net income increased to $74,711,000 ($10.49 per share) from $52,718,000 ($7.40 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 (""Kansas Bankers''), 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 Warehouse, 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, 2003 December 31, 2002 Per Per Wesco Wesco Amount Share(2) Amount Share(2) Operating earnings: Wesco-Financial and Kansas Bankers insurance businesses Ì Underwriting ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $15,711 $ 2.21 $ 3,829 $ .54 Investment income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 30,925 4.34 45,642 6.

CEO Steve Jobs opened the December 2002 quarter review by reporting that Apple had returned to profitability on the back of the iPod's breakthrough, with CPU shipments up forty percent year over year. Management told the call that the Company had shipped 649,000 iPods in the quarter, more than twice the prior-year quarter, and that the iTunes music store strategy was being designed to drive a multi-year switch in how consumers acquired music rather than to be a standalone revenue line. CFO Fred Anderson walked analysts through the gross-margin recovery, which had expanded more than 700 basis points year over year on the mix shift toward higher-margin consumer products. He flagged that the Company's channel inventory had been brought down to roughly four weeks, a level Apple had not achieved in years, and that operating expenses had been held flat in absolute dollar terms despite the launch of the Apple retail store program. On the Q&A, analysts pressed on whether the iPod could carry Apple's growth beyond the existing Macintosh installed base. Jobs argued that the iPod was the first product that allowed Apple to win over Windows users who had never considered a Mac, and that the strategic value was the door the product opened into the broader digital lifestyle rather than the standalone unit economics of the device itself. He also signalled that the Company would continue to invest aggressively in the retail store rollout despite the near-term operating expense drag. The call closed with management declining to provide forward quarterly revenue guidance beyond directional commentary, citing the volatility of consumer demand and the early stage of the iPod's international rollout.

Page 4 of 8 The primary driver of our long term results will be how the underlying businesses perform. Macro events would need to be very ugly, broad-based and close to home to have long- term negative impacts on the revenue or cash flow generation engines of more than 20 or 30% of the portfolio. I can certainly envision macro events which would easily dwarf 9/11 and can destroy significant intrinsic value. However, if we had those type of extreme events take place, the health of our respective portfolios would not be high on our list of worries. Hence the peaceful sleep I enjoy everyday. Alignment of Interests To date, I have always reinvested all my fees back into the partnerships. Dalal Street, the investment manager that I own, has 138,019.49 units of PIF2. Based on last published NAV, this stake is worth about $1.97 Million. 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. Talks at Harvard and MIT I recently gave 2 identical talks on February 4 and 5. Both were to the respective Investment Clubs at The Harvard Business School and MIT’s Sloan School of Management in Boston and Cambridge. I am giving below the link to the powerpoint presentation: The Latticework of Mental Models, Worldly Wisdom and Investment Success Most of the speech content and rich Q&A sessions are, unfortunately, not on the slides.

do expect the Pabrai Funds to outperform the best of the three indices over the long haul. I have no idea by how much we will outperform, but am willing to wager that it will be substantially less than the last 4 years. Partners would be best off setting their expectations for The Pabrai Investment Funds to outperform the best of the three indices by a small margin over the long haul. Intrinsic Value and Investment Opportunities Even with the increase in NAV through 5/31/03, the Pabrai Funds continues to be valued at a big discount to my perception of their respective underlying intrinsic value. We own small parts of some very exceptional businesses and we bought our various stakes at great prices. Hence I remain very bullish on the future of the funds. Investment opportunities continue to be very scarce. I have found just one new business to add to the portfolio this year – and nearly half the year is over. Our future does rest on my ability to find a few great investment ideas periodically. If I can find 2-3 great investment ideas annually, our future is assured. However, that is a tall order – and I do hope partners recognize it as such. Alignment of Interests On May 31, since we were at a historic high and well above the 6% annualized since the last high, a management fee was paid to the investment manager, Dalal Street, Inc. (wholly owned by me) as follows: PIF3: $53,719.64 PIF2: $817,076.

Decision — Bought credit-default swaps on subprime RMBS (~$1bn notional via banks). Context: Contemporaneous rationale survives in Scion letters; the defining Big Short trade. Outcome (known): Well-documented win; profiled in VF/The Big Short/FCIC record.

Whether this “correction” takes place over a day, a year or ten years is unpredictable. In the meanwhile, I love crawling through the crevices of inefficiency looking for that rare fat pitch. Alignment of Interests Since all three funds were at historic highs on Nov. 30, management fees were payable. PIF3 was also paid a management fee of $196,403.4

41 CORT furniture rental business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (6,257) (.88) 2,442 .34 Precision Steel businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (860) (.12) 250 .03 All other ""normal'' net operating earnings(3) ÏÏÏÏÏÏ 439 .06 555 .08 39,958 5.61 52,718 7.40 Realized investment gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34,753 4.88 Ì Ì Wesco consolidated net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $74,711 $10.49 $52,718 $7.40 (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) 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. The total consolidated net income shown above is, of course, identical to the total in our audited Ñnancial statements.

Munger extended the derivatives critique into a broader indictment of modern financial engineering. The same incentives that produced the gallbladder surgeon - the man who had convinced himself that removing the organ was the right answer because the procedure paid him - produced the derivatives desk that built the structured product because the structured product paid the desk. The customer's interest and the seller's interest were aligned only at the surface; at the level of incentives, they were routinely in conflict. Munger told the audience to be deeply suspicious of any investment product created by professionals and aggressively merchandised. He tied the point to credit cycles. The derivatives web had grown during the easy-money years because the contracts looked profitable when credit was loose and counterparty risk was underpriced. When credit tightened, those same contracts would re-price violently and the unwinding would itself become a credit event. The derivatives problem and the credit-cycle problem were therefore not separate pathologies; they were two faces of the same pathology. Munger's prescription was to stay liquid, stay simple, and stay out of contracts whose payoffs depended on a counterparty's solvency in a crisis. He closed with a historical note. The Defense Department had, after enough experience with cost-plus-percentage-of-cost contracts, made it a felony for the federal government to write one. Munger took that as proof of concept: when a contract structure was so incentive-misaligned that even the government eventually criminalized it, the private sector's continued use of the same logic - in cost-plus mutual fund fees, in derivatives desks, in private equity carry - was not innovation but recidivism. The investor who recognized the pattern had a structural edge.

PIF4, being mostly cash, is currently valued at a small discount to its intrinsic value. I expect that this discount will rise over the coming years, as I’m able to take advantage of a few good investment ideas annually.3

On the other hand PIF3 was at a historic high and above the 6% annualized return threshold since the last high. Thus a management fee of $5,294.71 was paid to the investment manager, Dalal Street, Inc. (wholly owned by me). Since PIF3 is an offshore fund, I cannot invest in it and am required to take my fee out of the fund. To date, I have always reinvested all my fees back into the PIFI/PIF2 partnerships. Dalal Street has 221,079.85 units of PIF2. This stake is worth about $4.6 Million as of 8/1/03. 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. I am very bullish on the long term future of The Pabrai Funds – as demonstrated by my being the single largest investor in the funds.4

To date, I have always reinvested all my fees back into the PIFI/PIF2 partnerships. Dalal Street has 221,079.85 units of PIF2. This stake is worth about $4.7 Million as of 7/1/03. 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. I wrote an article recently that you might find interesting reading. On July 14, 2003, The Street.com ran Tectonic Shifts in the American Class System. If you are not a subscriber to TheStreet.com, you can read it on the funds’ website. Here is the links to the PDF version: Tectonic Shifts in the American Class System - PDF Version Next Opening – August 1, 2003 There are now 95 investors in PIF2 and recently I received commitments from 5 accredited investors to join PIF2 on August 1, 2003.8

Page 4 of 8 intrinsic value. For these reasons, I do believe that future long-term results will continue to be very satisfactory. I’m bullish on The Pabrai Funds. At the same time good investment ideas continue to be very scarce. I’m content to wait (indefinitely) for them to appear on the horizon. Merger of PIFI and PIF2 The PIFI and PIF2 merger was approved by partners and the funds were merged on12/31/02. The reduced expenses of having one (larger) pool of capital versus two will be better for all of us. PIF2 is the surviving partnership and all PIFI partners got 1.4 partnership units of PIF2 for each partnership unit of PIFI they had. Alignment of Interests To date, I have always reinvested all my fees back into the partnerships. Dalal Street, the investment manager that I own, has 137,979.27 units of PIF2. Based on last published NAV, this stake is worth about $1.95 Million. 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. Articles and Talks I wrote two articles recently that you might find interesting reading. On Dec. 12, The Street.com ran The Danger in Buying the Biggest and on January 2, 2003, TheStreet.com ran What Warren Buffett can Teach Microsoft. If you are not a subscriber to TheStreet.com, you can read both of them on funds’ website.

The 2003 Wesco meeting is also notable as the public precursor to Munger's Psychology of Human Misjudgment speech. Tilson's notes flagged that Munger was, in the meeting, already working through the material that he would shortly deliver at Harvard as the 24 standard causes of human misjudgment. The Wesco audience heard the same psychological framework that the Harvard audience would hear, applied to insurance underwriting, banking, and corporate governance rather than to the general investor. Munger's argument, in both venues, was that the standard survey course in psychology had failed to give investors the tools they needed because the course had badly underweighted incentive-caused bias. He told the Wesco audience that if they read the standard thousand-page psychology text they would find, somewhere in the back, one sentence on incentive bias - and yet incentive bias was, in his experience, the single most powerful driver of bad decisions in business and investing. The prescription was to learn the real list of cognitive biases - the ones Munger had compiled from his own experience - and to apply them as rigorously to one's own decisions as to other people's. He closed with the lollapalooza warning. The really catastrophic failures of judgment, Munger said, came not from any single bias operating alone but from several biases reinforcing each other in the same direction. Incentive bias plus consistency bias plus social proof plus authority bias, all pointing the same way, could produce a decision that no individual bias could have produced on its own. The lollapalooza effect was the reason that crowds of intelligent people could collectively do very stupid things. The defense was the latticework of mental models - to recognize the lollapalooza pattern in real time and refuse to participate in it, even when the social pressure to participate was intense.

Wes-FIC engages in the reinsurance business, occasionally insuring against loss from rare but horrendous ""super-catastrophes.'' 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 commission on premium volume passed through them to Wes-FIC. Excepting this ceding commission, Wes-FIC has had virtually no insurance-acquisition or insurance administration costs. In some cases, other Berkshire subsidiaries act as reinsurers at higher levels than the level at which Wes-FIC is reinsuring; terms of the reinsurance are considered by Wes-FIC to be fair or advantageous to Wes-FIC. Underwriting results of Wes-FIC in 2003 were weirdly favorable, causing the underwriting gain of $15.7 million. Such weirdly favorable results are not to be expected over the long term. It should be recalled that Wes-FIC reported an underwriting loss of $8.1 million as recently as 2001. However, we do try to create some underwriting gain as results are averaged out over many years. Kansas Bankers was purchased by Wes-FIC in 1996 for approximately $80 mil- lion in cash. Its tangible net worth now exceeds its acquisition price, and it has been a very satisfactory acquisition, reÖecting the sound management of President Don Towle and his team. Kansas Bankers was chartered in 1909 to underwrite deposit insurance for Kansas banks.

59 Since PIF3 is an offshore fund, I cannot invest in it and am required to take my fee out of the fund. To date, I have always reinvested all my fees back into the PIFI/PIF2 partnerships. Dalal Street has 179,253.29 units of PIF2. This stake is worth about $3.5 Million as of 6/1/03. 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. I wrote an article recently that you might find interesting reading. On May 16, 2003, The Street.com ran Astronomers, Astronauts and Styles of Investing. If you are not a subscriber to TheStreet.com, you can read it on the funds’ website. Here is the links to the PDF version: Astronomers, Astronauts and Styles of Investing - PDF Version Next Opening – August 1, 2003 There are now 95 investors in PIF2 and, per SEC rules, the fund must close to new investors once we reach a count of 100 investors.8

Here are the links to the PDF Versions: The Danger in Buying the Biggest - PDF Version What Warren Buffett can Teach Microsoft - PDF Version Next Opening – February 1, 2003 The minimum investment to join the funds as a new partner remains unchanged at $400,000. The next opening is 2/1/03. Existing partners can add funds in increments of $25,000 at each opening (with a $25,000 minimum). 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 new PIF3 is always $100,000. Assets under management are about $27.5 Million as of 12/31/02.

10/31/03 and $115,151.75 when it again hit a new high on 11/30/03. Since PIF3 is an offshore fund, I cannot invest in it and am required to take the fee out of the fund. A management fee of $3,038,701.73 was paid by PIF2 on 11/30/03. As I have always done, this fee was reinvested back in PIF2. A management fee of $25,677.25 was paid by PIF4 on 11/30/03. This fee was reinvested into PIF4. Dalal Street, Inc. (wholly owned by me) has 344,049 units of PIF2 and 2510 units of PIF4. This stake was worth about $9.1 Million. 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. I am very bullish on the long-term future of The Pabrai Funds – as demonstrated by my being the single largest investor in the funds. Declining Expense Ratios Pabrai Funds has always focused on minimizing frictional costs for the investor. To that end, I’m very pleased to see that PIF2 is likely to have annual expenses of under 10 basis points (or less than 0.1% of assets) from 2004 onwards. The only thing investors pay for until the fund achieves a 6% annualized return is direct fund expenses like accounting, audit, tax and administration. Getting these down under 10 basis points for all the funds is one of my objectives. While the difference between having expenses of 1% a year versus 0.

investors once we reach a count of 100 investors – so as of now, Pabrai Funds cannot accept anymore US-based accredited investors. PIF4 is in the process of being setup. PIF4 will be limited to qualified investors only (net worth over $5 Million). PIF4 will probably go live on October 1, 2003 with a minimum investment requirement of $250,000. The minimum investment to join the funds as a new partner remains unchanged at $100,000 for PIF3 – which is limited to offshore investors. Existing partners in any of the Pabrai Funds can add funds in increments of $25,000 at each opening (with a $25,000 minimum). Assets under management are about $48 Million as of 7/1/03. Pabrai Investment Funds Assets Under Management (In Millions of $) 1999 2000 2001 2002 2003 Assets Under Management Annual Meetings The annual meeting will be held sequentially at two locations – Chicago and Orange County, California. The Chicago meeting is scheduled to be on Saturday, Sept. 13, 2003 at 4:00 PM at the same venue as the last 2 years: Carlucci’s Restaurant (Auditorium), 6111 North River Road, Rosemont, Illinois 60018 Tel. +1847.518.0990 Carlucci’s is a 3 minutes taxi ride from Chicago’s O’Hare Airport is a adjoining the Marriott Suites and Westin ‘Ohare. Agenda: 4:00 – 4:30 PM: Meet & Greet Page 5 of 8

Next Opening All the 100 slots in PIF2 are spoken for and the fund is now closed to new investors. PIF4 is in the process of being setup. PIF4 will be limited to qualified investors only (folks with investments over $5 Million). PIF4 will go live on October 1, 2003 with a minimum investment of $250,000. The minimum investment to join the funds as a new partner remains unchanged at $100,000 for PIF3 – which is limited to offshore investors. Existing partners in any of the Pabrai Funds can add funds in increments of $25,000 at each opening (with a $25,000 minimum). PIF2 next opening to add funds is Oct. 1, 2003. PIF3’s next opening is Sept. 1, ’03. PIF2 typically opens six times a year to add funds (Feb. 1, April 1, June 1, August 1, Oct. 1 and Dec. 1). PIF3 opens monthly on the 1st day of each month to add funds. Annual Meetings All partners should have received their invites to the Pabrai Funds 2003 Annual Meetings via snail mail. If you didn’t, just let me know and I’ll send another invite over. If you have any friends or family or advisors you’d like to have attend, please let me know and I’ll send them an invite as well. Please send the RSVP cards in by Sept. 6, ’03. The 2003 annual meeting will be held sequentially at two locations – Chicago and Orange County, California. The Chicago meeting is scheduled to be on Saturday, Sept.

However, the interested reader could glean much of that by reading the following: 1. In the Appendix of Charlie Munger’s biography (entitled “Damn Right!”), is an essay by Munger on the thesis behind Berkshire’s investment in Coca Cola. Buffett and Munger almost never provide such a descriptive of the analytics behind their various brilliant investment decisions, so this writeup is a rare treat. It is a wonderful window into how Munger’s remarkable latticework mind works. 2. I’ve written three articles in the past that encapsulate most of the thesis of the talk. They are: Buffett Succeeds at Nothing (The Motley Fool, Oct.2003

were a year ago, but both are presently valued at a 25% or higher discount to my conservative estimate of their respective intrinsic values. I believe the market as a whole is overvalued. It is very hard to find good investment ideas in these euphoric markets, but I’m in no particular hurry. All markets do eventually get to trading around a fair valuation. Whether this “correction” takes place over a day, a year or ten years is unpredictable. In the meanwhile, I love to crawl through the crevices of inefficiency that exist in all markets to find that rare fat pitch. Alignment of Interests On Sept. 30, since PIF2 and PIF3 were at historic highs, management fees were payable. PIF3 paid a management fee of $98,842.50 when it hit a historic high on 8/31/03 and $17,159.87 when it again hit a new high on 9/30/03. Since PIF3 is an offshore fund, I cannot invest in it and am required to take the fee out of the fund. A management fee of $171,708.34 was paid (wholly owned by me) by PIF2 on 10/1/03. As I have always done, this fee was reinvested in PIF2 on 10/1/03. Dalal Street has 228,935 units of PIF2. This stake was worth about $5 Million as of 10/1/03. 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. I am very bullish on the long-term future of The Pabrai Funds – as demonstrated by my being the single largest investor in the funds.

Next Opening – December 1, 2004 for US Investors There are 2 funds open to new investors to add funds - PIF3 and PIF4. To invest in PIF3, one needs to be a non-US accredited offshore investor. The minimum investment to join PIF3 as a new partner is $100,000 and the next opening is on November 1, 2003. The next opening for PIF4 is on December 1, 2004. The minimum investment is $250,000 and one needs to be a “qualified investor” as defined by the SEC. The offering and subscription documents for PIF4 have details on who is considered a qualified investor. Please refer to those documents for the precise definition. Simplistically, individual investors are considered qualified if they are accredited investors (at least a $1 Million net worth) and have at least $5 Million in investments. If, for example, a person owned $5 Million worth of commercial real estate with a $4 Million mortgage on it, she would be considered a qualified investor as she has at least a $1 Million net worth and $5 Million in investments. Existing partners in any of the Pabrai Funds can add funds in increments of $25,000 at each opening (with a $25,000 minimum). PIF2/PIF4’s next opening to add funds is December 1, 2003. PIF3’s next opening is November 1, ’03.4

Its oÇces are in Topeka, Kansas. Over the years its service has continued to adapt to the changing needs of the banking industry. Today its customer base, consisting mostly of small and medium-sized community banks, is spread throughout 28 mainly midwestern states. In addition to bank deposit guaranty bonds which insure deposits in excess of FDIC coverage, KBS oÅers directors and oÇcers indemnity policies, bank employment practices policies, bank insurance agents professional errors and omissions indemnity policies and Internet banking catastrophe theft insurance. KBS increased the volume of business retained eÅective in 1998. It had previously ceded almost half of its premium volume to reinsurers. Now it reinsures only about 11%. 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 65.0% for 2003 and 71.3% for 2002. We continue to expect volatile but favorable long-term eÅects from increased insurance retained. CORT Business Services Corporation (""CORT'') In February 2000, Wesco purchased CORT Business Services Corporation (""CORT'') for $386 million in cash.

Page 5 of 8 Pabrai Investment Funds Assets Under Management (In Millions of $) 1999 2000 2001 2002 Assets Under Management Finally, with this update I am making two changes to the reporting format. The first is the addition of dividend data for all three indices. Earlier, I was unable to find a good source for historical dividend data on the S&P 500 and the Nasdaq Composite. I’m grateful to the folks at Merrill Lynch for providing this information. This will provide precise apples to apples comparison with all three indices. Secondly, I am eliminating reporting of the Pre-expense Performance Data. For a detailed narrative on the reasoning, please see Appendix B. Thanks for your continued interest, referrals and support. Happy New Year! Warm Regards, Mohnish Pabrai

Page 5 of 8 The minimum investment to join the funds as a new partner remains unchanged at $400,000 for US Investors and $100,000 for offshore investors. The next opening is on 4/1/03. Existing partners can add funds in increments of $25,000 at each opening (with a $25,000 minimum). Assets under management are about $28.5 Million as of 2/1/03. Pabrai Investment Funds Assets Under Management (In Millions of $) 1999 2000 2001 2002 2003 Assets Under Management Meeting the San Francisco Bay Area Partners: On March 18 and 19, I am in the San Francisco Bay area meeting a number of partners who I’ve never met. It’s long overdue. Am also meeting a number of folks who have an interest in learning more. On March 18, I am hosting a dinner for partners and friends in a private room at: Gaylord Restaurant 1706 El Camino Real, Menlo Park, CA 94025 Tel. (415) 326-8761 6:30 – 7:30 PM: Cocktails & Appetizers 7:30 – 9:30 PM: Dinner If you find yourself in the SF Bay area on 3/18 and would like to attend, just call or email me. Also, I am in Los Angeles during the week of February 24, if any of you are in LA during that week and would like to meet up.

process of setting up PIF4. PIF4 will be limited to qualified investors only (net worth over $5 Million), but have the ability to have upto 500 partners. PIF4 will likely start with a minimum investment requirement of $250,000. The minimum investment to join the funds as a new partner remains unchanged at $100,000 for PIF3 – which is limited to offshore investors. The next openings for PIF3 are on July 1, 2003 and August 1, 2003. Existing partners in either fund can add funds in increments of $25,000 at each opening (with a $25,000 minimum). Assets under management are about $43 Million as of 6/1/03. Pabrai Investment Funds Assets Under Management (In Millions of $) 1999 2000 2001 2002 2003 Assets Under Management Pabrai Funds Relocated to Lake Forest, California – June 1, 2003 As I mentioned in my last letter, Pabrai Funds is now based in Lake Forest, California. Here are our new coordinates: Pabrai Investment Funds 17 Spectrum Pointe Drive Suite 503 Lake Forest, CA 92630 Tel. +1949.275.5652 Fax. +1949.457.9394 mpabrai@pabraifunds.com www.pabraifunds.com My new Executive Administrative Assistant/Office Manager is Chris Saludo-Perkins. You can reach her at csaludo@pabraifunds.com or +1949.457.9391. Feel free to visit us at your Page 5 of 8

4:30 – 6:00 PM: Presentation and Q&A 6:00 – 7:00 PM: Cocktail Hour 7:00 – 9:00 PM: Dinner The Orange County, California meeting will be on Saturday, Sept. 20, 2003 at 4:00 PM at: McCormick & Schmick’s Seafood Restaurant (Private Dining Room) 2000 Main Street Irvine, CA 92614 Tel. +1949.756.0505 McCormick & Schmick’s is a 3 minutes taxi ride from Orange County Airport and is adjoining The Embassy Suites Hotel in Irvine. Agenda: 4:00 – 4:30 PM: Meet & Greet 4:30 – 6:00 PM: Presentation and Q&A 6:00 – 7:00 PM: Cocktail Hour 7:00 – 9:00 PM: Dinner I do hope I see you in Rosemont or Irvine in September. Thanks for your continued interest, referrals and support. Feel free to call me at +1949.275.5652 or email me at mpabrai@pabraifunds.com with any queries or comments. Warm Regards, Mohnish Pabrai Page 6 of 8

13, 2003 at 4:00 PM at the same venue as the last 2 years: Carlucci’s Restaurant (Auditorium), 6111 North River Road, Rosemont, Illinois 60018 Tel. +1847.518.0990 Carlucci’s is a 3 minutes taxi ride from Chicago’s O’Hare Airport is a adjoining the Marriott Suites and Westin ‘Ohare. The Orange County, California meeting will be on Saturday, Sept. 20, 2003 at 4:00 PM at: McCormick & Schmick’s Seafood Restaurant (Private Dining Room) 2000 Main Street Irvine, CA 92614 Tel. +1949.756.5

1% many not seem like much in a year when we’re up over 80%, it is very meaningful in down years (yes, we’ll see a few of those) or even years when we barely eke out a positive return. These expense ratio declines have been accomplished while upgrading our service providers to best in class – like engaging PricewaterhouseCoopers to do the audit and tax work. As assets under management rise, PIF3 and PIF4 will get to 10 basis points as well. As a comparison, the wonderful Vanguard S&P 500 Index Fund has over $66 Billion in assets and an expense ratio of 0.18% - nearly double of PIF2. PIF2 is cheaper than Vanguard’s fund until we get to a return above about 6.3% for investors. With virtually all other mutual funds and hedge funds, Pabrai Funds is cheaper until annualized returns are above 10%. With the 1/20 structure of most hedge funds, Pabrai Funds has lower fees and expenses until annualized returns are over 50% a year. Next Opening – February 1, 2004 for US Investors There are 2 funds open to new investors to add funds - PIF3 and PIF4. To invest in PIF3, one needs to be a non-US accredited offshore investor. Tax-exempt accounts like IRAs, Roth IRAs and US Family Foundations can now invest in PIF3 as well. The minimum investment to join PIF3 as a new partner is $100,000 and the next opening is on January 1, 2004.5

McCormick & Schmick’s is a 3 minutes taxi ride from Orange County Airport and is next to The Embassy Suites Hotel in Irvine. Agenda (for both meetings): 4:00 – 4:30 PM: Meet & Greet 4:30 – 6:00 PM: Presentation and Q&A 6:00 – 7:00 PM: Cocktail Hour 7:00 – 9:00 PM: Dinner I do hope I see you in Rosemont or Irvine in September. Assets Under Management There is about $49 Million in assets under management between PIF2 and PIF3 (as of 8/1/03). Thanks for your continued interest, referrals and support. Pabrai Investment Funds Assets Under Management (In Millions of $) 1999 2000 2001 2002 2003 Assets Under Management Feel free to call me at +1949.275.5652 or email me at mpabrai@pabraifunds.com with any queries or comments. Warm Regards, Mohnish Pabrai Page 6 of 6

Page 8 of 8 Appendix B Reporting Format Change Going forward, the Pre-expense Performance Data will no longer be reported in my bi- monthly letters. Expense detail will be listed as usual in the annual audit report. I had provided this data for a few reasons that have now become irrelevant. Some of these reasons were: 1. To provide greater transparency on the fund NAV calculations. For the first three years these calculations were done by me. Now this function is handled by professional fund administrators who are independent third-parties with high-integrity. In addition all the funds are being audited by PriceWaterhouse Coopers. 2. Investors have often commented that they only care about the net returns to them. The expense details are not so relevant. They are right. The annual audit report does detail all fund expenses, so the simpler reporting will make it easier for investors to gauge fund performance. 3. At the outset, we had $1 Million under management. Today it’s north of $27 Million. At $1 Million in assets, our expense ratios were relatively high because of the very limited assets to amortize them over. While we are still very small, expenses now get amortized over a bigger asset base which is good for all of us. I wanted investors to be able to see how the funds were doing without the distorting effects of the relatively large expense ratios. As we scaled this has become less relevant.

convenience. We’d love to give you a tour of the entire 711 sq. ft. out of which we run the funds. Annual Meetings Going forward, I plan to hold the annual meeting sequentially at two locations – Chicago and Orange County, California. The Chicago meeting is scheduled to be on Saturday, Sept. 13, 2003 at 4:00 PM at the same venue as the last 2 years: Carlucci’s Restaurant, 6111 North River Road, Rosemont, Illinois 60018 Tel. +1847.518.0990 Agenda: 4:00 – 6:00 PM: Presentation and Q&A 6:00 – 7:00 PM: Cocktail Hour 7:00 – 9:00 PM: Dinner The Orange County, California meeting will be on Saturday, Sept. 20, 2003 at 4:00 PM at a yet to be determined location. Thanks for your continued interest, referrals and support. Feel free to call me at +1949.275.5652 or email me at mpabrai@pabraifunds.com with any queries or comments. Warm Regards, Mohnish Pabrai Page 6 of 8

The next opening for PIF4 is on February 1, 2004. The minimum investment is $250,000 and one needs to be a “qualified investor” as defined by the SEC. The offering and subscription documents for PIF4 have details on who is considered a qualified investor. Please refer to those documents for the precise definition. Simplistically, individual investors are considered qualified if they are accredited investors (at least a $1 Million net worth) and have at least $5 Million in investments. If, for example, a person owned $5 Million worth of commercial real estate with a $4 Million mortgage on it, she would be considered a qualified investor as she has at least a $1 Million net worth and $5 Million in investments. Existing partners in any of the Pabrai Funds can add funds in increments of $25,000 at each opening (with a $25,000 minimum). PIF2/PIF4’s next opening to add funds is February 1, 2004. PIF3’s next opening is January 1, 2004. PIF2 and PIF4 typically open six times a year to add funds (Feb. 1, April 1, June 1, August 1, Oct. 1 and Dec. 1). PIF3 opens monthly on the 1st day of each month to add funds. Musings on Probabilities, Uncertainties and Investing I’m in the midst of reading In an Uncertain World: Tough Choices from Wall Street to Washington by Robert E. Rubin and thoroughly enjoying it. Formerly Secretary of the Treasury, Rubin is a gifted writer. He comes across as a very low-ego matter-of-fact likeable individual.

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 $360 million for calendar 2003, versus $389 million for calendar 2002. Of these amounts, furniture rental revenues were $276 million and $309 million, furniture sales revenues were $68 million and $73 million, and apartment locator fees of Relocation Central Corporation, a subsidiary CORT started up in 2001, were $16 million and $7 million. CORT operated at an after-tax loss of $6.3 million for 2003; it contributed $2.4 million and $13.1 million to Wesco's consolidated operating income for 2002 and 2001. These Ñgures are signiÑcantly worse than CORT's $29 million of after-tax operating proÑts for the ten months that we owned it in 2000. Recent years were terrible in the ""rent-to-rent'' segment of the furniture rental business. The Ñgures are before (1) goodwill amortization of zero for 2003 and 2002 (see discussion below), $6.0 million for 2001 and $5.1 million for 2000, and (2) realized securities losses of $.

times a year to add funds (Feb. 1, April 1, June 1, August 1, Oct. 1 and Dec. 1). PIF3 opens monthly on the 1st day of each month to add funds. Annual Meetings Slides & Transcript Both the Chicago and Orange County annual meetings for Pabrai Funds, held on 9/13 and 9/20 respectively, went off smoothly. There were about 80 attendees in Chicago and about 25 in Irvine, California. I’d like to thank all the partners, potential partners and their families who took time out of their busy schedules on a Saturday afternoon to attend. Also thanks to Pabrai Funds Office Manager, Julie Shiposh, for organizing the various facets of the meeting and transcribing the presentation and Q&A session. I have posted the 2003 Annual Meeting Presentation Slides and the Transcript including the rich Q&A session on the Pabrai Funds website. Presentation to TiE Seattle on Sept. 18. 2003 The Seattle chapter of The Indus Entrepreneurs (www.tie.org; www.tie-seattle.org) invited me to speak to their members on Sept. 18, 2003. The slides of the talk entitled, “Entrepreneurship and Value Investing: Two Sides of the Same Coin.”, are on the Pabrai Funds website. I tend to use PowerPoint slides as a prompter for organizing my thoughts. Thus most of the content of the talk and the rich Q&A are, unfortunately, not on the slides. The best way to learn is to teach. Preparing and giving the talk were terrific learning experiences.

California Summer Reading The time I get to read books is inversely proportional to the level of the Dow Jones index. When we have times like 2003 when markets are very overvalued, I find myself with more time for general reading and if we were to witness markets like 1974 again, then general reading would go out the window. I’m periodically questioned on the contents of my bookshelf on the website and specifically where I would suggest getting started. It’s a difficult question to answer as it depends on one’s aptitudes and interests. However, I decided that I’d periodically discuss a few books read recently and in the not too distant past to help folks decide for themselves if they are likely to enjoy certain books over others. The best book on Warren Buffett (in my opinion) is The Making of an American Capitalist by Roger Lowenstein. It’s a good book to get started on Buffett. Following Lowenstein’s book, I’d recommend reading Buffett’s Letters to Shareholders from 1977 to 2002. You can also get a hard copy of the letters (3 bound books) by sending proof of shareholding or a check for $35 to Berkshire Hathaway, Inc. 3555 Farnam Street, Suite 1440, Omaha, NE 68131.5

7 million in 2000, but include Relocation Central's after-tax losses, less minority interest, of $9.0 million for 2003, $8.3 million for 2002 and $7.0 million for 2001. Excluding the operating losses of Relocation Central, CORT, at the parent company level, contributed $2.7 million to Wesco's consolidated after-tax operating earnings for 2003, versus $10.7 million for 2002 and $20.1 million for 2001. 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 of job growth 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. Moreover, CORT started up a new subsidiary during 2001, Relocation Central Corporation, which has developed a virtual call center and 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.

Rubin thinks that there are no absolute certainties in life and one has to make decisions based on varying degrees of uncertainty and incomplete datasets. His perspectives resonate very well with me – especially as applied to investing in equities. The future of even the best business on the planet is far from assured. And when one invests in any business one needs to make some objective assessments about the manner in which one expects the future to unfold. The key is to only make bets when the odds are heavily in favor of your thesis. No single investment of mine has ever been a guaranteed winner at the time the investment was made, but all of them were made with perceived odds being heavily in my favor. The results have been quite acceptable thus far – even as a few bets have gone against me – as they are going to from time to time. At the Blackjack table in a casino, depending on the rules, the house has a 1-2% odds advantage. It’s usually 48:50 odds against you. Even with those slim odds against you and even betting a small sum on each bet, the house is likely to wipe out a fairly large bankroll in a matter of hours. With investing, there are times when the odds are 80:20 or 90:10 in the investor’s favor of generating a 30% (or higher) annual return. One needs to fully capitalize on these opportunities. The trick is to make bets very sparingly – only when the odds are heavily in your favor. Few Bets…Big Bets…Infrequent Bets – that’s the simple mantra.6

Additionally, with the merger of PIFI and PIF2, we now have a single fund with over $23 million in assets and growing which makes the expense ratio very reasonable. As we scale, it will decline further (as a % of the assets in the fund). 4. Investors with investments in other funds etc. can do an apples to apples comparison more easily.

There was about $81 Million in assets under management between all the funds as of December 1, 2003. Thanks for your continued interest, referrals and support. Pabrai Investment Funds Assets Under Management (In Millions of $) 1999 2000 2001 2002 2003 Assets Under Management Feel free to call me at +1949.275.5652 or email me at mpabrai@pabraifunds.com with any queries or comments. Warm Regards, Mohnish Pabrai Page 7 of 7

The letters should be read and re-read a few times. For $35 one would get a far better education on business (and life in general) than spending 2 years and $100,000 getting a Harvard MBA. Over the summer, I read two books on games that I have no competency in – baseball and poker. That didn’t stop me from learning a few things and thoroughly enjoyed both books. The first, on baseball, is Moneyball: The Art of Winning an Unfair Game by Michael Lewis and the second, on poker, is Positively Fifth Street: Murderers, Cheetahs, and Binion's World Series of Poker by James McManus. Moneyball is a terrific book that’s really all about value investing and leveraging Munger’s Latticework of Mental Models to exploit glaring inefficiencies in major league baseball salaries vs. talent. When the author of a book on poker references some of my favorite books like Why Is Sex Fun?, Guns, Germs and Steel (both by Jared Diamond) and How the Mind Works by Steven Pinker (one that’s arrived, but not yet read), my curiosity was piqued. McManus and Lewis are very talented writers and I loved the candid writing style. Both books are very entertaining and I found myself laughing out loud on more than one occasion. This was my first summer in Southern California and I thoroughly enjoyed it. A special unexpected bonus is the amazing cool Mediterranean weather at nights with zero humidity and zero bugs!

As a result of the acquisition of its largest competitor in December 2002, followed by some oÇce closures, Relocation Central operates in 15 metropolitan cities in fourteen 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. Its operations should be considered as still in a ""start-up'' phase.its

I do most of my reading after the kids go to bed and it’s been very nice to have the doors open – letting in a gentle breeze off the Pacific while settling in with a good book. Some of the other good reads this summer included Investment Biker and Adventure Capitalist (both by Jim Rogers). Rogers went around the world on a motorcycle about a decade ago and then he did the same trip at the turn of the millennium in a car. He’s been a very successful investor (and a partner of George Soros) for decades and both books are worth reading for their uniqueness. You can’t find any other book that in one paragraph describes the beauty of the Victoria Falls and in the next goes into the diverse investing climate in the two countries on either side of the falls. While I don’t agree with some of Jim’s investing perspectives, he’s clearly a smart value guy and one can learn a lot from him about the world we live in. The only person who comes to mind as being more adventuresome and a better capitalist than Rogers is Richard Branson. His biography, Losing My Virginity, is another terrific read. I highly recommend Branson’s book for its candor and insights on starting and growing businesses. Branson reinforces Amar Bhide’s (author of The Origin and Evolution of New Businesses) thesis that most startups are low-risk ventures. My talk on Sept. 18 to TiE- Seattle focused on how entrepreneurship and investing are closely related with both being low-risk arbitrage oriented vocations.

facilities into CORT's, withdrawing from markets having unsatisfactory potential, and aggressively trimming its expenses, in an attempt to improve its operations, which so far have not been satisfactory. The results of its operations have been consolidated with those reported for CORT, shown above. We expect to report in due course that all CORT operations have become more satisfactory. CORT has operated at a positive cash Öow and the general distress in its Ñeld has permitted various small expansions. During the past three years it invested $61 million in business expansion through acquisitions of several small businesses and reduced its line-of-credit and other debt by $50 million. CORT remains the national leader in its market segment and would not be making these acquisitions if we believed its furniture rental business prospects were permanently impaired. 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 $267 million in good- will (including $27 million from Wesco's 1996 purchase of KBS). The Financial Accounting Standards Board adopted a rule which became eÅective in 2002 that no longer requires automatic amortization of acquired goodwill.

mistake randomness for a set of determinate patterns. Well worth reading, even for a value investor. Assets Under Management There was about $59 Million in assets under management between all the funds as of October 1, 2003. Thanks for your continued interest, referrals and support. Pabrai Investment Funds Assets Under Management (In Millions of $) 1999 2000 2001 2002 2003 Assets Under Management Feel free to call me at +1949.275.5652 or email me at mpabrai@pabraifunds.com with any queries or comments. Warm Regards, Mohnish Pabrai Page 7 of 7

(The requirement for such amortization has been replaced by a standard that requires an annual assess- ment to determine whether the value of goodwill has been impaired, in which event the intangible would be written down or written oÅ, as appropriate.) The earnings we have reported for 2002 and 2003, without deduction of any goodwill amortiza- tion, more closely reÖect microeconomic reality as we appraise it. 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 57, 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. We continue to expect a considera- ble 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, operated at an after-tax loss of $.9 million in 2003, versus an after-tax proÑt of $.3 million in 2002. The 2003 Ñgure reÖects $.7 million, after taxes, expensed in connection with environmental cleanup of an industrial park where a Precision Steel subsidiary has operated alongside approximately 15 other manufacturers for many years.

Had it not been for the environmental matter or for LIFO inventory accounting adjustments, Precision Steel would have reported an operating loss of $.2 million, after taxes, for 2003, versus after-tax proÑts of $.1 million for 2002. We do not regard earnings changes from environmental cleanup or LIFO accounting adjustments, up or down, as material in predicting future earning power.

The U.S. steel industry has generally been a disaster since 2000, and Precision Steel has suÅered worse eÅects than occurred for it in previous general declines in the U.S. steel business. Precision Steel has suÅered a signiÑcant reduction in demand for steel combined with intensiÑed competition above the Ñerce level encountered in each prior year. Some of the sales reduction is caused by customers' (or former customers') unsuccessful competition with manufacturers outside the United States. The severity of the domestic downturn is demonstrated by the fact that Precision Steel's average annual steel service revenues for the years 2001 through 2003 were down 27% from those reported for 1998 through 2000. It has not reported satisfactory operating results in recent years; ignoring environmental-cleanup costs and LIFO adjustments, its approximately-break-even operations for 2002 and 2003 compare very unfavora- bly with operating proÑts which averaged $2.3 million, after taxes, for the years 1998 through 2000. Very recently, the cost of Precision Steel's raw materials rose sharply in price. Supplies of steel, which have generally been available to Precision Steel, are no longer easy to obtain. The market has drifted into near chaos caused by shortages. It is not clear how this is going to work out. Early in 2004, prices and proÑts are higher at Precision Steel, but longer-term eÅects are far from clear.

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 appreciated real estate assets with a net book value of about $6.4 million, consisting mainly of the nine-story commercial oÇce building in downtown Pasadena, where Wesco is headquartered. MS Property Company's results of opera- tions, 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 $.4 million in 2003 and $.6 million in 2002. Sources were (1) rents ($3.2 million gross in 2003) 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 insurance subsidiaries, less (3) general corporate expenses plus minor expenses involving tag-end real estate.

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 $2.1 billion ($292 per Wesco share) at yearend 2003 from $1.96 billion ($275 per Wesco share) at yearend 2002. The main cause of increase was net income after deduction of dividends paid to shareholders. The foregoing $292-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. This interest-free ""loan'' from the government is at this moment working for Wesco shareholders and amounted to about $32 per Wesco share at yearend 2003. 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 $32 per Wesco share.

Instead, the present value of Wesco's shareholders' advantage must logically be much lower than $32 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 unchanged one year after Warren BuÅett wrote the following, in his 2002 annual report to shareholders of our parent company: ""We continue to do little in equities.

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 ®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 6 1 /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. But occasionally successful investing requires inactivity.'' In fact, the one thing that should interest Wesco shareholders most with respect to 2003 is that, as in 2002 and 2001, Wesco found no new common stocks for our insurance companies to buy. The Board of Directors recently increased Wesco's regular dividend from 331 /2 cents per share to 341 /2 cents per share, payable March 3, 2004, to shareholders of record as of the close of business on February 4, 2004.

Decision — Ran the crisis hedging program (>80% equity hedges, T-bills, ~$18B CDS). Context: 2007–2009 letters/ARs; “1-in-50-year storm” deployment framing. Outcome (known): 2008 CDS windfall (US$2.1B+ realized/unrealized); 2009 deployment.

Wesco now has a website: www.wescoÑnancial.com. Shareholders can there access much Wesco information, including printed annual reports, earnings releases, SEC Ñlings, and the websites of Wesco's subsidiaries and parent, Berkshire Hathaway. 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.2004