BERKSHIRE HATHAWAY INC.

1997 Chairman's Letter

To the Sharehol ers o! Ber"shire Hatha#a$ In%.& Our gain in net worth during 1997 was $8.0 billion, which increased the per-share book value of both our lass ! and lass " stock b# $%.1&. Over the last $$ #ears 'that is, since present (anage(ent took over) per-share book value has grown fro( $19 to $*+,%88, a rate of *%.1& co(pounded annuall#.'1)
1. shares, All figures used in this report apply to Berkshire's A

the successor to the only stock that the company had outstanding before 1996. The B shares have an economic interest e ual to 1!"#th that of the A.

,iven our gain of $%.1&, it is te(pting to declare victor# and (ove on. "ut last #ear-s perfor(ance was no great triu(ph. Any investor can chalk up large returns when stocks soar, as the# did in 1997. /n a bull (arket, one (ust avoid the error of the preening duck that 0uacks boastfull# after a torrential rainstor(, thinking that its paddling skills have caused it to rise in the world. ! right-thinking duck would instead co(pare its position after the downpour to that of the other ducks on the pond. 1o what-s our duck rating for 19972 3he table on the facing page shows that though we paddled furiousl# last #ear, passive ducks that si(pl# invested in the 145 /nde6 rose al(ost as fast as we did. Our appraisal of 1997-s perfor(ance, then. 7uack. 8hen the (arket boo(s, we tend to suffer in co(parison with the 145 /nde6. 3he /nde6 bears no ta6 costs, nor do (utual funds, since the# pass through all ta6 liabilities to their owners. 9ast #ear, on the other hand, "erkshire paid or accrued $%.* billion for federal inco(e ta6, or about 18& of our beginning net worth. "erkshire will alwa#s have corporate ta6es to pa#, which (eans it needs to overco(e their drag in order to :ustif# its e6istence. Obviousl#, harlie ;unger, "erkshire-s <ice hair(an and (# partner, and / won-t be able to lick that handicap ever# #ear. "ut we e6pect over ti(e to (aintain a (odest advantage over the /nde6, and that is the #ardstick against which #ou should (easure us. 8e will not ask #ou to adopt the philosoph# of the hicago ubs fan who reacted to a string of lackluster seasons b# sa#ing, =8h# get upset2 >ver#one has a bad centur# now and then.=

,ains in book value are, of course, not the botto( line at "erkshire. 8hat trul# counts are gains in per-share intrinsic business value. Ordinaril#, though, the two (easures tend to (ove roughl# in tande(, and in 1997 that was the case. 9ed b# a blow-out perfor(ance at ,>/ O, "erkshire-s intrinsic value 'which far e6ceeds book value) grew at nearl# the sa(e pace as book value. ?or (ore e6planation of the ter(, intrinsic value, #ou (a# wish to refer to our Owner-s ;anual, reprinted on pages @* to 71. 3his (anual sets forth our ownerrelated business principles, infor(ation that is i(portant to all of "erkshire-s shareholders. /n our last two annual reports, we furnished #ou a table that harlie and / believe is central to esti(ating "erkshire-s intrinsic value. /n the updated version of that table, which follows, we trace our two ke# co(ponents of value. 3he first colu(n lists our per-share ownership of invest(ents 'including cash and e0uivalents) and the second colu(n shows our per-share earnings fro( "erkshire-s operating businesses before ta6es and purchase-accounting ad:ust(ents 'discussed on pages @9 and 70), but after all interest and corporate e6penses. 3he second colu(n e6cludes all dividends, interest and capital gains that we realiAed fro( the invest(ents presented in the first colu(n. /n effect, the colu(ns show what "erkshire would look like were it split into two parts, with one entit# holding our invest(ents and the other operating all of our businesses and bearing all corporate costs.
)nvestments $er (hare , -1 "+. ",91# "/,#-" $re%ta& 'arnings $er (hare '&cluding All )ncome from )nvestments , 1.#9 1..-1#/.1+1+./.

*ear 196+ 19++ 19/+ 199+

5undits who ignore what our $8,000 e(plo#ees contribute to the co(pan#, and instead si(pl# view "erkshire as a de facto invest(ent co(pan#, should stud# the figures in the second colu(n. 8e (ade our first business ac0uisition in 19@7, and since then our pre-ta6 operating earnings have grown fro( $1 (illion to $888 (illion. ?urther(ore, as noted, in this e6ercise we have assigned all of "erkshire-s corporate e6penses -- overhead of $@.@ (illion, interest of $@@.9 (illion and shareholder contributions of $1+.% (illion -- to our business operations, even though a portion of these could :ust as well have been assigned to the invest(ent side. Bere are the growth rates of the two seg(ents b# decade.
(hare from 0ecade 'nding 19++ )nvestments $er (hare .-.61 $re%ta& 'arnings $er '&cluding All )ncome )nvestments .+.61

19/+ 199+ Annual 3ro4th 5ate, 196+%199+

.6.21 .2.21 .2.61

.-.11 .#./1 .-..1

Curing 1997, both parts of our business grew at a satisfactor# rate, with invest(ents increasing b# $9,+%$ per share, or $$.+&, and operating earnings growing b# $*9@.%$ per share, or 70.$&. One i(portant caveat. "ecause we were luck# in our super-cat insurance business 'to be discussed later) and because ,>/ O-s underwriting gain was well above what we can e6pect in (ost #ears, our 1997 operating earnings were (uch better than we anticipated and also (ore than we e6pect for 1998. Our rate of progress in both invest(ents and operations is certain to fall in the future. ?or an#one deplo#ing capital, nothing recedes like success. ;# own histor# (akes the point. "ack in 19+1, when / was attending "en ,raha(-s class at olu(bia, an idea giving (e a $10,000 gain i(proved (# invest(ent perfor(ance for the #ear b# a full 100 percentage points. 3oda#, an idea producing a $+00 (illion pre-ta6 profit for "erkshire adds one percentage point to our perfor(ance. /t-s no wonder that (# annual results in the 19+0s were better b# nearl# thirt# percentage points than (# annual gains in an# subse0uent decade. harlie-s e6perience was si(ilar. 8e weren-t s(arter then, :ust s(aller. !t our present siAe, an# perfor(ance superiorit# we achieve will be (inor. 8e will be helped, however, b# the fact that the businesses to which we have alread# allocated capital -- both operating subsidiaries and co(panies in which we are passive investors -- have splendid long-ter( prospects. 8e are also blessed with a (anagerial corps that is unsurpassed in abilit# and focus. ;ost of these e6ecutives are wealth# and do not need the pa# the# receive fro( "erkshire to (aintain their wa# of life. 3he# are (otivated b# the :o# of acco(plish(ent, not b# fa(e or fortune. 3hough we are delighted with what we own, we are not pleased with our prospects for co((itting inco(ing funds. 5rices are high for both businesses and stocks. 3hat does not (ean that the prices of either will fall -- we have absolutel# no view on that (atter -- but it does (ean that we get relativel# little in prospective earnings when we co((it fresh (one#. Dnder these circu(stances, we tr# to e6ert a 3ed 8illia(s kind of discipline. /n his book The Science of Hitting, 3ed e6plains that he carved the strike Aone into 77 cells, each the siAe of a baseball. 1winging onl# at balls in his =best= cell, he knew, would allow hi( to bat .%00E reaching for balls in his =worst= spot, the low outside corner of the strike Aone, would reduce hi( to .*$0. /n other words, waiting for the fat pitch would (ean a trip to the Ball of ?a(eE swinging indiscri(inatel# would (ean a ticket to the (inors. /f the# are in the strike Aone at all, the business =pitches= we now see are :ust catching the lower outside corner. /f we swing, we will be locked into low returns.

"ut if we let all of toda#-s balls go b#, there can be no assurance that the ne6t ones we see will be (ore to our liking. 5erhaps the attractive prices of the past were the aberrations, not the full prices of toda#. Dnlike 3ed, we can-t be called out if we resist three pitches that are barel# in the strike AoneE nevertheless, :ust standing there, da# after da#, with (# bat on (# shoulder is not (# idea of fun. 'n%on(entional Commitments 8hen we can-t find our favorite co((it(ent -- a well-run and sensibl#-priced business with fine econo(ics -- we usuall# opt to put new (one# into ver# short-ter( instru(ents of the highest 0ualit#. 1o(eti(es, however, we venture elsewhere. Obviousl# we believe that the alternative co((it(ents we (ake are (ore likel# to result in profit than loss. "ut we also realiAe that the# do not offer the certaint# of profit that e6ists in a wonderful business secured at an attractive price. ?inding that kind of opportunit#, we know that we are going to (ake (one# -- the onl# 0uestion being when. 8ith alternative invest(ents, we think that we are going to (ake (one#. "ut we also recogniAe that we will so(eti(es realiAe losses, occasionall# of substantial siAe. 8e had three non-traditional positions at #earend. 3he first was derivative contracts for 1%.0 (illion barrels of oil, that being what was then left of a %+.7 (illion barrel position we established in 199%-9+. ontracts for $1.7 (illion barrels were settled in 199+-97, and these supplied us with a pre-ta6 gain of about $@1.9 (illion. Our re(aining contracts e6pire during 1998 and 1999. /n these, we had an unrealiAed gain of $11.@ (illion at #earend. !ccounting rules re0uire that co((odit# positions be carried at (arket value. 3herefore, both our annual and 0uarterl# financial state(ents reflect an# unrealiAed gain or loss in these contracts. 8hen we established our contracts, oil for future deliver# see(ed (odestl# underpriced. 3oda#, though, we have no opinion as to its attractiveness. Our second non-traditional co((it(ent is in silver. 9ast #ear, we purchased 111.* (illion ounces. ;arked to (arket, that position produced a pre-ta6 gain of $97.% (illion for us in 1997. /n a wa#, this is a return to the past for (e. 3hirt# #ears ago, / bought silver because / anticipated its de(onetiAation b# the D.1. ,overn(ent. >ver since, / have followed the (etal-s funda(entals but not owned it. /n recent #ears, bullion inventories have fallen (ateriall#, and last su((er harlie and / concluded that a higher price would be needed to establish e0uilibriu( between suppl# and de(and. /nflation e6pectations, it should be noted, pla# no part in our calculation of silver-s value. ?inall#, our largest non-traditional position at #earend was $%.@ billion, at a(ortiAed cost, of long-ter( Aero-coupon obligations of the D.1. 3reasur#. 3hese securities pa# no interest. /nstead, the# provide their holders a return b# wa# of the discount at which the# are purchased, a characteristic that (akes their (arket prices (ove rapidl# when interest rates change. /f rates rise, #ou lose heavil# with Aeros, and if rates fall, #ou (ake outsiAed gains. 1ince rates fell in 1997, we ended the #ear with an unrealiAed pre-ta6 gain of $+98.8 (illion in our Aeros. "ecause we carr# the securities at (arket value, that gain is reflected in #earend book value.

/n purchasing Aeros, rather than sta#ing with cash-e0uivalents, we risk looking ver# foolish. ! (acro-based co((it(ent such as this never has an#thing close to a 100& probabilit# of being successful. Bowever, #ou pa# harlie and (e to use our best :udg(ent -- not to avoid e(barrass(ent -- and we will occasionall# (ake an unconventional (ove when we believe the odds favor it. 3r# to think kindl# of us when we blow one. !long with 5resident linton, we will be feeling #our pain. 3he ;unger fa(il# has (ore than 90& of its net worth in "erkshire and the "uffetts (ore than 99&. Ho# We Thin" A)o*t +ar"et ,l*%t*ations ! short 0uiA. /f #ou plan to eat ha(burgers throughout #our life and are not a cattle producer, should #ou wish for higher or lower prices for beef2 9ikewise, if #ou are going to bu# a car fro( ti(e to ti(e but are not an auto (anufacturer, should #ou prefer higher or lower car prices2 3hese 0uestions, of course, answer the(selves. "ut now for the final e6a(. /f #ou e6pect to be a net saver during the ne6t five #ears, should #ou hope for a higher or lower stock (arket during that period2 ;an# investors get this one wrong. >ven though the# are going to be net bu#ers of stocks for (an# #ears to co(e, the# are elated when stock prices rise and depressed when the# fall. /n effect, the# re:oice because prices have risen for the =ha(burgers= the# will soon be bu#ing. 3his reaction (akes no sense. Onl# those who will be sellers of e0uities in the near future should be happ# at seeing stocks rise. 5rospective purchasers should (uch prefer sinking prices. ?or shareholders of "erkshire who do not e6pect to sell, the choice is even clearer. 3o begin with, our owners are auto(aticall# saving even if the# spend ever# di(e the# personall# earn. "erkshire =saves= for the( b# retaining all earnings, thereafter using these savings to purchase businesses and securities. learl#, the (ore cheapl# we (ake these bu#s, the (ore profitable our owners- indirect savings progra( will be. ?urther(ore, through "erkshire #ou own (a:or positions in co(panies that consistentl# repurchase their shares. 3he benefits that these progra(s suppl# us grow as prices fall. 8hen stock prices are low, the funds that an investee spends on repurchases increase our ownership of that co(pan# b# a greater a(ount than is the case when prices are higher. ?or e6a(ple, the repurchases that oca- ola, 3he 8ashington 5ost and 8ells ?argo (ade in past #ears at ver# low prices benefitted "erkshire far (ore than do toda#-s repurchases, (ade at loftier prices. !t the end of ever# #ear, about 97& of "erkshire-s shares are held b# the sa(e investors who owned the( at the start of the #ear. 3hat (akes the( savers. 3he# should therefore re:oice when (arkets decline and allow both us and our investees to deplo# funds (ore advantageousl#. 1o s(ile when #ou read a headline that sa#s =/nvestors lose as (arket falls.= >dit it in #our (ind to =Disinvestors lose as (arket falls -- but investors gain.= 3hough writers often forget this truis(, there is a bu#er for ever# seller and what hurts one

necessaril# helps the other. '!s the# sa# in golf (atches. =>ver# putt (akes someone happ#.=) 8e gained enor(ousl# fro( the low prices placed on (an# e0uities and businesses in the 1970s and 1980s. ;arkets that then were hostile to invest(ent transients were friendl# to those taking up per(anent residence. /n recent #ears, the actions we took in those decades have been validated, but we have found few new opportunities. /n its role as a corporate =saver,= "erkshire continuall# looks for wa#s to sensibl# deplo# capital, but it (a# be so(e ti(e before we find opportunities that get us trul# e6cited. Ins*ran%e -.erations // -(er(ie# 8hat does e6cite us, however, is our insurance business. ,>/ O is fl#ing, and we e6pect that it will continue to do so. "efore we e6pound on that, though, let-s discuss =float= and how to (easure its cost. Dnless #ou understand this sub:ect, it will be i(possible for #ou to (ake an infor(ed :udg(ent about "erkshire-s intrinsic value. 3o begin with, float is (one# we hold but don-t own. /n an insurance operation, float arises because pre(iu(s are received before losses are paid, an interval that so(eti(es e6tends over (an# #ears. Curing that ti(e, the insurer invests the (one#. 3#picall#, this pleasant activit# carries with it a downside. 3he pre(iu(s that an insurer takes in usuall# do not cover the losses and e6penses it eventuall# (ust pa#. 3hat leaves it running an =underwriting loss,= which is the cost of float. !n insurance business has value if its cost of float over ti(e is less than the cost the co(pan# would otherwise incur to obtain funds. "ut the business is a le(on if its cost of float is higher than (arket rates for (one#. ! caution is appropriate here. "ecause loss costs (ust be esti(ated, insurers have enor(ous latitude in figuring their underwriting results, and that (akes it ver# difficult for investors to calculate a co(pan#-s true cost of float. >sti(ating errors, usuall# innocent but so(eti(es not, can be huge. 3he conse0uences of these (iscalculations flow directl# into earnings. !n e6perienced observer can usuall# detect large-scale errors in reserving, but the general public can t#picall# do no (ore than accept what-s presented, and at ti(es / have been a(aAed b# the nu(bers that big-na(e auditors have i(plicitl# blessed. !s for "erkshire, harlie and / atte(pt to be conservative in presenting its underwriting results to #ou, because we have found that virtuall# all surprises in insurance are unpleasant ones. !s the nu(bers in the following table show, "erkshire-s insurance business has been a huge winner. ?or the table, we have calculated our float -- which we generate in large a(ounts relative to our pre(iu( volu(e -- b# adding net loss reserves, loss ad:ust(ent reserves, funds held under reinsurance assu(ed and unearned pre(iu( reserves, and then subtracting agents- balances, prepaid ac0uisition costs, prepaid ta6es and deferred charges applicable to assu(ed reinsurance. Our cost of float is deter(ined b# our underwriting loss or profit. /n those #ears when we have had an

underwriting profit, such as the last five, our cost of float has been negative. /n effect, we have been paid for holding (one#.
617 8nder4riting 9oss Average :loat 6.7 Appro&imate ;ost of :unds 65atio of 1 to .7 *earend on 9ong% 3ovt.

*ield Term Bonds

6)n , <illions7

196+ 196/ 1969 19+# 19+1 19+. 19+" 19+19+2 19+6 19++ 19+/ 19+9 19/# 19/1 19/. 19/" 19/19/2 19/6 19/+ 19// 19/9 199# 1991 199. 199" 1991992 1996 199+

profit profit profit #."+ profit profit profit +."6 11."2 profit profit profit profit profit profit .1.26 ""./+ -/.#6 --.." 22./22.-" 11.#/ .-.-# .6.62 119.29 1#/.96 profit profit profit profit profit

1+." 19.9 ."."..2..2 69.2 +"." +9.1 /+.6 1#..6 1"9.# 19#...+." ."+.# ../...#.6 ."1." .2".. "9#.. +9+.2 1,.66.+ 1,-9+.+ 1,2-1." 1,6"+." 1,/92.# .,.9#..,6.-.+ ",#26.6 ",6#+.. 6,+#..# +,#9".1

less than =ero less than =ero less than =ero 1.1-1 less than =ero less than =ero less than =ero 9."#1 1..961 less than =ero less than =ero less than =ero less than =ero less than =ero less than =ero 9.++1 1-.6-1 1/.9/1 11."-1 +.##1 -."/1 #.+-1 1.2/1 1.6"1 6."11 -.+61 less than =ero less than =ero less than =ero less than =ero less than =ero

2.2#1 2.9#1 6.+91 6..21 2./11 2./.1 +..+1 /.1"1 /.#"1 +."#1 +.9+1 /.9"1 1#.#/1 11.9-1 1".611 1#.6-1 11./-1 11.2/1 9."-1 +.6#1 /.921 9.##1 +.9+1 /..-1 +.-#1 +."91 6."21 +.//1 2.921 6.6-1 2.9.1

1ince 19@7, when we entered the insurance business, our float has grown at an annual co(pounded rate of *1.7&. "etter #et, it has cost us nothing, and in fact has (ade us (one#. 3herein lies an accounting iron#. 3hough our float is shown on our balance sheet as a liabilit#, it has had a value to "erkshire greater than an e0ual a(ount of net worth would have had. 3he e6piration of several large contracts will cause our float to decline during the first 0uarter of 1998, but we e6pect it to grow substantiall# over the long ter(. 8e

also believe that our cost of float will continue to be highl# favorable. S*.er/Cat Ins*ran%e Occasionall#, however, the cost of our float will spike severel#. 3hat will occur because of our heav# involve(ent in the super-cat business, which b# its nature is the (ost volatile of all insurance lines. /n this operation, we sell policies that insurance and reinsurance co(panies purchase in order to li(it their losses when (egacatastrophes strike. "erkshire is the preferred (arket for sophisticated bu#ers. 8hen the =big one= hits, the financial strength of super-cat writers will be tested, and "erkshire has no peer in this respect. 1ince trul# (a:or catastrophes are rare occurrences, our super-cat business can be e6pected to show large profits in (ost #ears -- and to record a huge loss occasionall#. /n other words, the attractiveness of our super-cat business will take a great (an# #ears to (easure. What you must understand, however, is that a truly terrible year in the super-cat business is not a possibility -- it s a certainty! The only "uestion is when it will come! 9ast #ear, we were ver# luck# in our super-cat operation. 3he world suffered no catastrophes that caused huge a(ounts of insured da(age, so virtuall# all pre(iu(s that we received dropped to the botto( line. 3his pleasant result has a dark side, however. ;an# investors who are =innocents= -- (eaning that the# rel# on representations of salespeople rather than on underwriting knowledge of their own -have co(e into the reinsurance business b# (eans of purchasing pieces of paper that are called =catastrophe bonds.= 3he second word in this ter(, though, is an Orwellian (isno(er. ! true bond obliges the issuer to pa#E these bonds, in effect, are contracts that la# a provisional pro(ise to pa# on the purchaser. 3his convoluted arrange(ent ca(e into being because the pro(oters of the contracts wished to circu(vent laws that prohibit the writing of insurance b# entities that haven-t been licensed b# the state. ! side benefit for the pro(oters is that calling the insurance contract a =bond= (a# also cause unsophisticated bu#ers to assu(e that these instru(ents involve far less risk than is actuall# the case. 3rul# outsiAed risks will e6ist in these contracts if the# are not properl# priced. ! pernicious aspect of catastrophe insurance, however, (akes it likel# that (ispricing, even of a severe variet#, will not be discovered for a ver# long ti(e. onsider, for e6a(ple, the odds of throwing a 1* with a pair of dice -- 1 out of $@. Fow assu(e that the dice will be thrown once a #earE that #ou, the =bond-bu#er,= agree to pa# $+0 (illion if a 1* appearsE and that for =insuring= this risk #ou take in an annual =pre(iu(= of $1 (illion. 3hat would (ean #ou had significantl# underpriced the risk. Fevertheless, #ou could go along for #ears thinking #ou were (aking (one# -indeed, eas# (one#. 3here is actuall# a 7+.%& probabilit# that #ou would go for a decade without pa#ing out a di(e. >ventuall#, however, #ou would go broke. /n this dice e6a(ple, the odds are eas# to figure. alculations involving (onster hurricanes and earth0uakes are necessaril# (uch fuAAier, and the best we can do at

"erkshire is to esti(ate a range of probabilities for such events. 3he lack of precise data, coupled with the rarit# of such catastrophes, pla#s into the hands of pro(oters, who t#picall# e(plo# an =e6pert= to advise the potential bond-bu#er about the probabilit# of losses. 3he e6pert puts no (one# on the table. /nstead, he receives an up-front pa#(ent that is forever his no (atter how inaccurate his predictions. 1urprise. 8hen the stakes are high, an e6pert can invariabl# be found who will affir( -- to return to our e6a(ple -- that the chance of rolling a 1* is not 1 in $@, but (ore like 1 in 100. '/n fairness, we should add that the e6pert will probabl# believe that his odds are correct, a fact that (akes hi( less reprehensible -- but (ore dangerous.) 3he influ6 of =investor= (one# into catastrophe bonds -- which (a# well live up to their na(e -- has caused super-cat prices to deteriorate (ateriall#. 3herefore, we will write less business in 1998. 8e have so(e large (ulti-#ear contracts in force, however, that will (itigate the drop. 3he largest of these are two policies that we described in last #ear-s report -- one covering hurricanes in ?lorida and the other, signed with the alifornia >arth0uake !uthorit#, covering earth0uakes in that state. Our =worst-case= loss re(ains about $@00 (illion after-ta6, the (a6i(u( we could lose under the >! polic#. 3hough this loss potential (a# sound large, it is onl# about 1& of "erkshire-s (arket value. /ndeed, if we could get appropriate prices, we would be willing to significantl# increase our =worst-case= e6posure. Our super-cat business was developed fro( scratch b# !:it Gain, who has contributed to "erkshire-s success in a variet# of other wa#s as well. !:it possesses both the discipline to walk awa# fro( business that is inade0uatel# priced and the i(agination to then find other opportunities. 7uite si(pl#, he is one of "erkshire-s (a:or assets. !:it would have been a star in whatever career he choseE fortunatel# for us, he en:o#s insurance. Ins*ran%e // 0EIC- 11/233/444/57467 an -ther 8rimar$ -.erations 9ast #ear / wrote about ,>/ O-s 3on# Ficel# and his terrific (anage(ent skills. /f / had known then what he had in store for us in 1997, / would have searched for still greater superlatives. 3on#, now +%, has been with ,>/ O for $@ #ears and last #ear was his best. !s >O, he has trans(itted vision, energ# and enthusias( to all (e(bers of the ,>/ O fa(il# -- raising their sights fro( what has been achieved to what can be achieved. 8e (easure ,>/ O-s perfor(ance b# first, the net increase in its voluntar# auto policies 'that is, not including policies assigned us b# the state) and, second, the profitabilit# of =seasoned= auto business, (eaning policies that have been with us for (ore than a #ear and are thus past the period in which ac0uisition costs cause the( to be (one#-losers. /n 199@, in-force business grew 10&, and / told #ou how pleased / was, since that rate was well above an#thing we had seen in two decades. 3hen, in 1997, growth :u(ped to 1@&. "elow are the new business and in-force figures for the last five #ears.

*ears 199" 1991992 1996 199+

>e4 ?oluntary Auto $olicies "2-,//. "96,.1+ -61,6#/ 61+,669 91",1+6

?oluntary Auto $olicies in :orce .,#11,#22 .,1-+,2-9 .,"1#,#"+ .,2-",699 .,9-9,-"9

Of course, an# insurer can grow rapidl# if it gets careless about underwriting. ,>/ O-s underwriting profit for the #ear, though, was 8.1& of pre(iu(s, far above its average. /ndeed, that percentage was higher than we wish it to be. Our goal is to pass on (ost of the benefits of our low-cost operation to our custo(ers, holding ourselves to about %& in underwriting profit. 8ith that in (ind, we reduced our average rates a bit during 1997 and (a# well cut the( again this #ear. Our rate changes varied, of course, depending on the polic#holder and where he livesE we strive to charge a rate that properl# reflects the loss e6pectanc# of each driver. ,>/ O is not the onl# auto insurer obtaining favorable results these da#s. 9ast #ear, the industr# recorded profits that were far better than it anticipated or can sustain. /ntensified co(petition will soon s0ueeAe (argins ver# significantl#. "ut this is a develop(ent we welco(e. 9ong ter(, a tough (arket helps the low-cost operator, which is what we are and intend to re(ain. 9ast #ear / told #ou about the record 1@.9& profit-sharing contribution that ,>/ O-s associates had earned and e6plained that two si(ple variables set the a(ount. polic# growth and profitabilit# of seasoned business. / further e6plained that 199@-s perfor(ance was so e6traordinar# that we had to enlarge the chart delineating the possible pa#outs. 3he new configuration didn-t (ake it through 1997. 8e enlarged the chart-s boundaries again and awarded our 10,+00 associates a profitsharing contribution a(ounting to *@.9& of their base co(pensation, or $71 (illion. /n addition, the sa(e two variables -- polic# growth and profitabilit# of seasoned business -- deter(ined the cash bonuses that we paid to doAens of top e6ecutives, starting with 3on#. !t ,>/ O, we are pa#ing in a wa# that (akes sense for both our owners and our (anagers. 8e distribute (erit badges, not lotter# tickets. /n none of "erkshire-s subsidiaries do we relate co(pensation to our stock price, which our associates cannot affect in an# (eaningful wa#. /nstead, we tie bonuses to each unit-s business perfor(ance, which is the direct product of the unit-s people. 8hen that perfor(ance is terrific -- as it has been at ,>/ O -- there is nothing harlie and / en:o# (ore than writing a big check. ,>/ O-s underwriting profitabilit# will probabl# fall in 1998, but the co(pan#-s growth could accelerate. 8e-re planning to step on the gas. ,>/ O-s (arketing e6penditures this #ear will top $100 (illion, up +0& fro( 1997. Our (arket share toda# is onl# $&, a level of penetration that should increase dra(aticall# in the ne6t decade. 3he auto insurance industr# is huge -- it does about $11+ billion of volu(e annuall# -- and there are tens of (illions of drivers who would save substantial (one# b# switching to us.

HHHHHHHHHHHH /n the 199+ report, / described the enor(ous debt that #ou and / owe to 9ori(er Cavidson. On a 1aturda# earl# in 19+1, he patientl# e6plained the ins and outs of both ,>/ O and its industr# to (e -- a *0-#ear-old stranger who-d arrived at ,>/ O-s head0uarters uninvited and unannounced. Cav# later beca(e the co(pan#-s >O and has re(ained (# friend and teacher for %7 #ears. 3he huge rewards that ,>/ O has heaped on "erkshire would not have (aterialiAed had it not been for his generosit# and wisdo(. /ndeed, had / not (et Cav#, / (ight never have grown to understand the whole field of insurance, which over the #ears has pla#ed such a ke# part in "erkshire-s success. Cav# turned 9+ last #ear, and it-s difficult for hi( to travel. Fevertheless, 3on# and / hope that we can persuade hi( to attend our annual (eeting, so that our shareholders can properl# thank hi( for his i(portant contributions to "erkshire. 8ish us luck. HHHHHHHHHHHH 3hough the# are, of course, far s(aller than ,>/ O, our other pri(ar# insurance operations turned in results last #ear that, in aggregate, were full# as stunning. Fational /nde(nit#-s traditional business had an underwriting profit of $*.9& and, as usual, developed a large a(ount of float co(pared to pre(iu( volu(e. Over the last three #ears, this seg(ent of our business, run b# Con 8urster, has had a profit of *%.$&. Our ho(estate operation, (anaged b# Iod >ldred, recorded an underwriting profit of 1%.1& even though it continued to absorb the e6penses of geographical e6pansion. Iod-s three-#ear record is an a(aAing 1+.1&. "erkshire-s workersco(pensation business, run out of alifornia b# "rad Jinstler, had a (odest underwriting loss in a difficult environ(entE its three-#ear underwriting record is a positive 1.+&. Gohn JiAer, at entral 1tates /nde(nit#, set a new volu(e record while generating good underwriting earnings. !t Jansas "ankers 1uret#, Con 3owle (ore than lived up to the high e6pectations we had when we purchased the co(pan# in 199@. /n aggregate, these five operations recorded an underwriting profit of 1+.0&. 3he two Cons, along with Iod, "rad and Gohn, have created significant value for "erkshire, and we believe there is (ore to co(e. So*r%es o! Re.orte Earnin9s 3he table that follows shows the (ain sources of "erkshire-s reported earnings. /n this presentation, purchase-accounting ad:ust(ents are not assigned to the specific businesses to which the# appl#, but are instead aggregated and shown separatel#. 3his procedure lets #ou view the earnings of our businesses as the# would have been reported had we not purchased the(. ?or the reasons discussed on pages @9 and 70, this for( of presentation see(s to us to be (ore useful to investors and (anagers than one utiliAing generall#-accepted accounting principles ',!!5), which re0uire purchase-pre(iu(s to be charged off business-b#-business. 3he total earnings we

show in the table are, of course, identical to the ,!!5 total in our audited financial state(ents.
millions) Berkshire's Share Net Earnings (after taxes and minority interests) Pre-Tax Earnings 1997 199 1997 199 @perating 'arningsA )nsurance 3roupA 8nder4riting %% (uper%;at. . . . . . . ., ./".# , 16+.# , 1/..+ , 1#+.8nder4riting %% @ther 5einsurance. . . . 6122..7 61+-./7 61##.17 611..-7 8nder4riting %% 3');@. . . . . . . . . . ./#.+ 1+1.1/1.1 11#.. 8nder4riting %% @ther $rimary. . . . . . 2..9 2/.2 "-.1 "+.6 >et )nvestment )ncome. . . . . . . . . . //.." +.6.. +#".6 29".1 Buffalo >e4s . . . . . . . . . . . . . . . 22.9 2#."..+ .9.2 :inance Businesses . . . . . . . . . . . . ./.1 .".1 1/.# 1-.9 :light(afety . . . . . . . . . . . . . . . 1"9.2 ".1617 /-.1.9617 Bome :urnishings . . . . . . . . . . . . . 26./6.7 -"./ "...6.7 .-./ Ce4elry. . . . . . . . . . . . . . . . . . "1.6 .+./ 1/." 16.1 (cott :et=er6e&cluding finance operation7. 11/.9 1.1.+ ++." /1.6 (ee's ;andies. . . . . . . . . . . . . . . 2/.6 21.9 "2.# "#./ (hoe 3roup . . . . . . . . . . . . . . . . -/./ 61.6 "... -1.# $urchase%Accounting AdDustments. . . . . . 61#-.97 6+2.+7 69+.#7 6+#.27 )nterest '&pense6"7. . . . . . . . . . . . 61#6.67 69-."7 66+.17 626.67 (hareholder%0esignated ;ontributions . . . 612.-7 61"."7 69.97 6/.27 @ther. . . . . . . . . . . . . . . . . . . 6#.+ +".# "+.# -... %%%%%%%% %%%%%%%% %%%%%%%% %%%%%%%% @perating 'arnings . . . . . . . . . . . . . 1,+12.+ 1,..1.1,19-.2 //".1 ;apital 3ains from )nvestments . . . . . . . 1,111.9 .,-/-.2 +#+.1 1,6#2.2 %%%%%%%% %%%%%%%% %%%%%%%% %%%%%%%% of (in

Total 'arnings % All 'ntities. . . . . . . .,.,/.+.6 ,1,9#1.6 ,.,-//.6 EEEEEEEE EEEEEEEE EEEEEEEE
#$% #'%

,",+#2.9 EEEEEEEE

&rom date of ac"uisition, December '(, $))*! +ncludes Star &urniture from ,uly $, $))-! #(% ./cludes interest e/pense of &inance 0usinesses!

Overall, our operating businesses continue to perfor( e6ceptionall# well, far outdoing their industr# nor(s. 8e are particularl# pleased that profits i(proved at BelAberg-s after a disappointing 199@. Geff o((ent, BelAberg-s >O, took decisive steps earl# in 1997 that enabled the co(pan# to gain real (o(entu( b# the crucial hrist(as season. /n the earl# part of this #ear, as well, sales re(ained strong. asual observers (a# not appreciate :ust how e6traordinar# the perfor(ance of (an# of our businesses has been. /f the earnings histor# of, sa#, "uffalo Fews or 1cott ?etAer is co(pared to the records of their publicl#-owned peers, their perfor(ance (ight see( to have been une6ceptional. "ut (ost public co(panies retain two-thirds or (ore of their earnings to fund their corporate growth. /n contrast, those "erkshire subsidiaries have paid 100& of their earnings to us, their parent co(pan#, to fund our growth. /n effect, the records of the public co(panies reflect the cu(ulative benefits of the earnings the# have retained, while the records of our operating subsidiaries get no such boost. Over ti(e, however, the earnings these subsidiaries have distributed have created trul# huge a(ounts of earning power elsewhere in "erkshire. 3he Fews, 1ee-s and 1cott ?etAer have alone paid us $1.8 billion, which we have gainfull# e(plo#ed elsewhere. 8e owe their (anage(ents our gratitude for (uch (ore than the earnings that are detailed in the table. !dditional infor(ation about our various businesses is given on pages $@ - +0, where #ou will also find our seg(ent earnings reported on a ,!!5 basis. /n addition, on pages ++ - @1, we have rearranged "erkshire-s financial data into four seg(ents on a non-,!!5 basis, a presentation that corresponds to the wa# harlie and / think about the co(pan#. Our intent is to suppl# #ou with the financial infor(ation that we would wish #ou to give us if our positions were reversed. Loo"/Thro*9h Earnin9s Ieported earnings are a poor (easure of econo(ic progress at "erkshire, in part because the nu(bers shown in the table presented earlier include onl# the dividends we receive fro( investees -- though these dividends t#picall# represent onl# a s(all fraction of the earnings attributable to our ownership. Fot that we (ind this division of (one#, since on balance we regard the undistributed earnings of investees as (ore valuable to us than the portion paid out. 3he reason is si(ple. Our investees often

have the opportunit# to reinvest earnings at high rates of return. 1o wh# should we want the( paid out2 3o depict so(ething closer to econo(ic realit# at "erkshire than reported earnings, though, we e(plo# the concept of =look-through= earnings. !s we calculate these, the# consist of. '1) the operating earnings reported in the previous section, plusE '*) our share of the retained operating earnings of (a:or investees that, under ,!!5 accounting, are not reflected in our profits, lessE '$) an allowance for the ta6 that would be paid b# "erkshire if these retained earnings of investees had instead been distributed to us. 8hen tabulating =operating earnings= here, we e6clude purchaseaccounting ad:ust(ents as well as capital gains and other (a:or non-recurring ite(s. 3he following table sets forth our 1997 look-through earnings, though / warn #ou that the figures can be no (ore than appro6i(ate, since the# are based on a nu(ber of :udg(ent calls. '3he dividends paid to us b# these investees have been included in the operating earnings ite(iAed on page 11, (ostl# under =/nsurance ,roup. Fet /nvest(ent /nco(e.=)
Berkshire's of Berkshire's Appro&imate @4nership at *earend617 1#.+1 /.11 "..1 /.61 /.61 16.21 +./1 @perating 6in

(hare 8ndistributed 'arnings Berkshire's <aDor )nvestees millions76.7 American '&press ;ompany The ;oca%;ola ;ompany The Falt 0isney ;ompany :reddie <ac The 3illette ;ompany The Fashington $ost ;ompany Fells :argo G ;ompany

,161 .16 62 /6 /. "# 1#" %%%%%% Berkshire's share of undistributed earnings of maDor investees +-" Bypothetical ta& on these undistributed investee earnings6"7 61#27 5eported operating earnings of Berkshire 1,.9. %%%%%% Total look%through earnings of Berkshire ,1,9"# EEEEEE

617 0oes not include shares allocable to minority interests 6.7 ;alculated on average o4nership for the year 6"7 The ta& rate used is 1-1, 4hich is the rate Berkshire pays on the dividends it receives

A%:*isitions o! 1997

/n 1997, we agreed to ac0uire 1tar ?urniture and /nternational Cair# 7ueen 'a deal that closed earl# in 1998). "oth businesses full# (eet our criteria. 3he# are understandableE possess e6cellent econo(icsE and are run b# outstanding people. 3he 1tar transaction has an interesting histor#. 8henever we bu# into an industr# whose leading participants aren-t known to (e, / alwa#s ask our new partners, =!re there an# (ore at ho(e like #ou2= Dpon our purchase of Febraska ?urniture ;art in 198$, therefore, the "lu(kin fa(il# told (e about three outstanding furniture retailers in other parts of the countr#. !t the ti(e, however, none was for sale. ;an# #ears later, /rv "lu(kin learned that "ill hild, >O of I. . 8ille# -- one of the reco((ended three -- (ight be interested in (erging, and we pro(ptl# (ade the deal described in the 199+ report. 8e have been delighted with that association -"ill is the perfect partner. ?urther(ore, when we asked "ill about industr# standouts, he ca(e up with the re(aining two na(es given (e b# the "lu(kins, one of these being 1tar ?urniture of Bouston. "ut ti(e went b# without there being an# indication that either of the two was available. On the 3hursda# before last #ear-s annual (eeting, however, "ob Cenha( of 1alo(on told (e that ;elv#n 8olff, the long-ti(e controlling shareholder and >O of 1tar, wanted to talk. !t our invitation, ;elv#n ca(e to the (eeting and spent his ti(e in O(aha confir(ing his positive feelings about "erkshire. /, (eanwhile, looked at 1tar-s financials, and liked what / saw. ! few da#s later, ;elv#n and / (et in Few Kork and (ade a deal in a single, two-hour session. !s was the case with the "lu(kins and "ill hild, / had no need to check leases, work out e(plo#(ent contracts, etc. / knew / was dealing with a (an of integrit# and that-s what counted. 3hough the 8olff fa(il#-s association with 1tar dates back to 19*%, the business struggled until ;elv#n and his sister 1hirle# 3oo(in took over in 19@*. 3oda# 1tar operates 1* stores -- ten in Bouston and one each in !ustin and "r#an -- and will soon (ove into 1an !ntonio as well. 8e won-t be surprised if 1tar is (an# ti(es its present siAe a decade fro( now. Bere-s a stor# illustrating what ;elv#n and 1hirle# are like. 8hen the# told their associates of the sale, the# also announced that 1tar would (ake large, special pa#(ents to those who had helped the( succeed -- and then defined that group as ever#one in the business. Dnder the ter(s of our deal, it was ;elv#n and 1hirle#-s (one#, not ours, that funded this distribution. harlie and / love it when we beco(e partners with people who behave like that. 3he 1tar transaction closed on Gul# 1. /n the (onths since, we-ve watched 1tar-s alread#-e6cellent sales and earnings growth accelerate further. ;elv#n and 1hirle# will be at the annual (eeting, and / hope #ou get a chance to (eet the(. Fe6t ac0uisition. /nternational Cair# 7ueen. 3here are +,79* Cair# 7ueen stores operating in *$ countries -- all but a handful run b# franchisees -- and in addition /C7 franchises %09 Orange Gulius operations and %$ Jar(elkorn operations. /n 190 locations, =treat centers= provide so(e co(bination of the three products.

?or (an# #ears /C7 had a bu(p# histor#. 3hen, in 1970, a ;inneapolis group led b# Gohn ;oot# and Iud# 9uther took control. 3he new (anagers inherited a :u(ble of different franchising agree(ents, along with so(e unwise financing arrange(ents that had left the co(pan# in a precarious condition. /n the #ears that followed, (anage(ent rationaliAed the operation, e6tended food service to (an# (ore locations, and, in general, built a strong organiAation. 9ast su((er ;r. 9uther died, which (eant his estate needed to sell stock. ! #ear earlier, Cick Jiphart of 8illia( "lair 4 o., had introduced (e to Gohn ;oot# and ;ike 1ullivan, /C7-s >O, and / had been i(pressed with both (en. 1o, when we got the chance to (erge with /C7, we offered a proposition patterned on our ?light1afet# ac0uisition, e6tending selling shareholders the option of choosing either cash or "erkshire shares having a slightl# lower i((ediate value. "# tilting the consideration as we did, we encouraged holders to opt for cash, the t#pe of pa#(ent we b# far prefer. >ven then, onl# %+& of /C7 shares elected cash. harlie and / bring a (odicu( of product e6pertise to this transaction. Be has been patroniAing the Cair# 7ueens in ass 9ake and "e(id:i, ;innesota, for decades, and / have been a regular in O(aha. 8e have put our (one# where our (outh is. A Con!ession /-ve (entioned that we strongl# prefer to use cash rather than "erkshire stock in ac0uisitions. ! stud# of the record will tell #ou wh#. /f #ou aggregate all of our stockonl# (ergers 'e6cluding those we did with two affiliated co(panies, Civersified Ietailing and "lue hip 1ta(ps), #ou will find that our shareholders are slightl# worse off than the# would have been had / not done the transactions. 3hough it hurts (e to sa# it, when /-ve issued stock, /-ve cost #ou (one#. "e clear about one thing. 3his cost has not occurred because we were (isled in an# wa# b# sellers or because the# thereafter failed to (anage with diligence and skill. On the contrar#, the sellers were co(pletel# candid when we were negotiating our deals and have been energetic and effective ever since. /nstead, our proble( has been that we own a trul# (arvelous collection of businesses, which (eans that trading awa# a portion of the( for so(ething new al(ost never (akes sense. 8hen we issue shares in a (erger, we reduce #our ownership in all of our businesses -- partl#-owned co(panies such as oca- ola, ,illette and !(erican >6press, and all of our terrific operating co(panies as well. !n e6a(ple fro( sports will illustrate the difficult# we face. ?or a baseball tea(, ac0uiring a pla#er who can be e6pected to bat .$+0 is al(ost alwa#s a wonderful event -- e/cept when the tea( (ust trade a .$80 hitter to (ake the deal. "ecause our roster is filled with .$80 hitters, we have tried to pa# cash for ac0uisitions, and here our record has been far better. 1tarting with Fational /nde(nit# in 19@7, and continuing with, a(ong others, 1ee-s, "uffalo Fews, 1cott ?etAer and ,>/ O, we have ac0uired -- for cash -- a nu(ber of large businesses that have perfor(ed incredibl# well since we bought the(. 3hese ac0uisitions have delivered

"erkshire tre(endous value -- indeed, far (ore than / anticipated when we (ade our purchases. 8e believe that it is al(ost i(possible for us to =trade up= fro( our present businesses and (anage(ents. Our situation is the opposite of a(elot-s ;ordred, of who( ,uenevere co((ented, =3he one thing / can sa# for hi( is that he is bound to (arr# well. >ver#bod# is above hi(.= ;arr#ing well is e6tre(el# difficult for "erkshire. 1o #ou can be sure that harlie and / will be ver# reluctant to issue shares in the future. /n those cases when we si(pl# (ust do so -- when certain shareholders of a desirable ac0uiree insist on getting stock -- we will include an attractive cash option in order to te(pt as (an# of the sellers to take cash as is possible. ;erging with public co(panies presents a special proble( for us. /f we are to offer any pre(iu( to the ac0uiree, one of two conditions (ust be present. >ither our own stock (ust be overvalued relative to the ac0uiree-s, or the two co(panies together (ust be e6pected to earn (ore than the# would if operated separatel#. Bistoricall#, "erkshire has seldo( been overvalued. /n this (arket, (oreover, undervalued ac0uirees are al(ost i(possible to find. 3hat other possibilit# -- s#nerg# gains -- is usuall# unrealistic, since we e6pect ac0uirees to operate after we-ve bought the( :ust as the# did before. Goining with "erkshire does not nor(all# raise their revenues nor cut their costs. /ndeed, their reported costs 'but not their true ones) will rise after the# are bought b# "erkshire if the ac0uiree has been granting options as part of its co(pensation packages. /n these cases, =earnings= of the ac0uiree have been overstated because the# have followed the standard -- but, in our view, dead wrong -- accounting practice of ignoring the cost to a business of issuing options. 8hen "erkshire ac0uires an optionissuing co(pan#, we pro(ptl# substitute a cash co(pensation plan having an econo(ic value e0uivalent to that of the previous option plan. 3he ac0uiree-s true co(pensation cost is thereb# brought out of the closet and charged, as it should be, against earnings. 3he reasoning that "erkshire applies to the (erger of public co(panies should be the calculus for all bu#ers. 5a#ing a takeover pre(iu( does not (ake sense for an# ac0uirer unless a) its stock is overvalued relative to the ac0uiree-s or b) the two enterprises will earn (ore co(bined than the# would separatel#. 5redictabl#, ac0uirers nor(all# hew to the second argu(ent because ver# few are willing to acknowledge that their stock is overvalued. Bowever, voracious bu#ers -- the ones that issue shares as fast as the# can print the( -- are tacitl# conceding that point. 'Often, also, the# are running 8all 1treet-s version of a chain-letter sche(e.) /n so(e (ergers there trul# are (a:or s#nergies -- though oftenti(es the ac0uirer pa#s too (uch to obtain the( -- but at other ti(es the cost and revenue benefits that are pro:ected prove illusor#. Of one thing, however, be certain. /f a >O is enthused about a particularl# foolish ac0uisition, both his internal staff and his outside advisors will co(e up with whatever pro:ections are needed to :ustif# his stance. Onl# in fair#

tales are e(perors told that the# are naked. Common Sto%" In(estments "elow we present our co((on stock invest(ents. 3hose with a (arket value of (ore than $7+0 (illion are ite(iAed.
1!"#1"97 Shares -9,-26,9## .##,###,### .1,26",-16",9++,6## -/,###,### .",+"",19/ 1,+.+,+62 6,69#,.1/ $om%any American '&press ;ompany The ;oca%;ola ;ompany The Falt 0isney ;ompany :reddie <ac The 3illette ;ompany Travelers 3roup )nc. The Fashington $ost ;ompany Fells :argo G ;ompany @thers Total ;ommon (tocks $ost& 'arket (dollars in millions) ,1,"9..+ 1,.9/.9 "/1.. ".9.6##.# 6#-.1#.6 -1..6 .,1++.1 %%%%%%%% ,+,.#6.9 EEEEEEEE , -,-1-.# 1",""+.2 .,1"-./ .,6/".1 -,/.1.# 1,.+/.6 /-#.6 .,.+#.9 -,-6+.. %%%%%%%%%% , "6,.-+.+ EEEEEEEEEE

; Iepresents ta6-basis cost which, in aggregate, is $1.8 billion less than ,!!5 cost. 8e (ade net sales during the #ear that a(ounted to about +& of our beginning portfolio. /n these, we significantl# reduced a few of our holdings that are below the $7+0 (illion threshold for ite(iAation, and we also (odestl# tri((ed a few of the larger positions that we detail. 1o(e of the sales we (ade during 1997 were ai(ed at changing our bond-stock ratio (oderatel# in response to the relative values that we saw in each (arket, a realign(ent we have continued in 1998. Our reported positions, we should add, so(eti(es reflect the invest(ent decisions of ,>/ O-s 9ou 1i(pson. 9ou independentl# runs an e0uit# portfolio of nearl# $* billion that (a# at ti(es overlap the portfolio that / (anage, and occasionall# he (akes (oves that differ fro( (ine. 3hough we don-t atte(pt to predict the (ove(ents of the stock (arket, we do tr#, in a ver# rough wa#, to value it. !t the annual (eeting last #ear, with the Cow at 7,071 and long-ter( 3reasur# #ields at @.89&, harlie and / stated that we did not consider the (arket overvalued if 1) interest rates re(ained where the# were or fell, and *) !(erican business continued to earn the re(arkable returns on e0uit# that it had recentl# recorded. 1o far, interest rates have fallen -- that-s one re0uisite satisfied -- and returns on e0uit# still re(ain e6ceptionall# high. /f the# sta# there -- and if interest rates hold near recent levels -- there is no reason to think of stocks as

generall# overvalued. On the other hand, returns on e0uit# are not a sure thing to re(ain at, or even near, their present levels. /n the su((er of 1979, when e0uities looked cheap to (e, / wrote a &orbes article entitled =Kou pa# a ver# high price in the stock (arket for a cheer# consensus.= !t that ti(e skepticis( and disappoint(ent prevailed, and (# point was that investors should be glad of the fact, since pessi(is( drives down prices to trul# attractive levels. Fow, however, we have a ver# cheer# consensus. 3hat does not necessaril# (ean this is the wrong ti(e to bu# stocks. orporate !(erica is now earning far (ore (one# than it was :ust a few #ears ago, and in the presence of lower interest rates, ever# dollar of earnings beco(es (ore valuable. 3oda#-s price levels, though, have (ateriall# eroded the =(argin of safet#= that "en ,raha( identified as the cornerstone of intelligent investing. HHHHHHHHHHHH /n last #ear-s annual report, / discussed oca- ola, our largest holding. oke continues to increase its (arket do(inance throughout the world, but, tragicall#, it has lost the leader responsible for its outstanding perfor(ance. Ioberto ,oiAueta, oke-s >O since 1981, died in October. !fter his death, / read ever# one of the (ore than 100 letters and notes he had written (e during the past nine #ears. 3hose (essages could well serve as a guidebook for success in both business and life. /n these co((unications, Ioberto displa#ed a brilliant and clear strategic vision that was alwa#s ai(ed at advancing the well-being of oke shareholders. Ioberto knew where he was leading the co(pan#, how he was going to get there, and wh# this path (ade the (ost sense for his owners -- and, e0uall# i(portant, he had a burning sense of urgenc# about reaching his goals. !n e6cerpt fro( one handwritten note he sent to (e illustrates his (ind-set. ="# the wa#, / have told Olguita that what she refers to as an obsession, #ou call focus. / like #our ter( (uch better.= 9ike all who knew Ioberto, / will (iss hi( enor(ousl#. onsistent with his concern for the co(pan#, Ioberto prepared for a sea(less succession long before it see(ed necessar#. Ioberto knew that Coug /vester was the right (an to take over and worked with Coug over the #ears to ensure that no (o(entu( would be lost when the ti(e for change arrived. 3he oca- ola o(pan# will be the sa(e stea(roller under Coug as it was under Ioberto. Con(erti)le 8re!erre s 3wo #ears ago, / gave #ou an update on the five convertible preferreds that we purchased through private place(ents in the 1987-1991 period. !t the ti(e of that earlier report, we had realiAed a s(all profit on the sale of our ha(pion /nternational holding. 3he four re(aining preferred co((it(ents included two, ,illette and ?irst >(pire 1tate, that we had converted into co((on stock in which we had large unrealiAed gains, and two others, D1!ir and 1alo(on, that had been trouble-prone. !t ti(es, the last two had (e (outhing a line fro( a countr# song. =Bow can / (iss #ou if #ou won-t go awa#2=

1ince / delivered that report, all four holdings have grown significantl# in value. 3he co((on stocks of both ,illette and ?irst >(pire have risen substantiall#, in line with the co(panies- e6cellent perfor(ance. !t #earend, the $@00 (illion we put into ,illette in 1989 had appreciated to $%.8 billion, and the $%0 (illion we co((itted to ?irst >(pire in 1991 had risen to $*$@ (illion. Our two laggards, (eanwhile, have co(e to life in a ver# (a:or wa#. /n a transaction that finall# rewarded its long-suffering shareholders, 1alo(on recentl# (erged into 3ravelers ,roup. !ll of "erkshire-s shareholders -- including (e, ver# personall# -- owe a huge debt to Cer#ck ;aughan and "ob Cenha( for, first, pla#ing ke# roles in saving 1alo(on fro( e6tinction following its 1991 scandal and, second, restoring the vitalit# of the co(pan# to a level that (ade it an attractive ac0uisition for 3ravelers. / have often said that / wish to work with e6ecutives that / like, trust and ad(ire. Fo two fit that description better than Cer#ck and "ob. "erkshire-s final results fro( its 1alo(on invest(ent won-t be tallied for so(e ti(e, but it is safe to sa# that the# will be far better than / anticipated two #ears ago. 9ooking back, / think of (# 1alo(on e6perience as having been both fascinating and instructional, though for a ti(e in 1991-9* / felt like the dra(a critic who wrote. =/ would have en:o#ed the pla# e6cept that / had an unfortunate seat. /t faced the stage.= 3he resuscitation of D1 !irwa#s borders on the (iraculous. 3hose who have watched (# (oves in this invest(ent know that / have co(piled a record that is unble(ished b# success. / was wrong in originall# purchasing the stock, and / was wrong later, in repeatedl# tr#ing to unload our holdings at +0 cents on the dollar. 3wo changes at the co(pan# coincided with its re(arkable rebound. 1) harlie and / left the board of directors and *) 1tephen 8olf beca(e >O. ?ortunatel# for our egos, the second event was the ke#. 1tephen 8olf-s acco(plish(ents at the airline have been pheno(enal. 3here still is (uch to do at D1 !irwa#s, but survival is no longer an issue. onse0uentl#, the co(pan# (ade up the dividend arrearages on our preferred during 1997, adding e6tra pa#(ents to co(pensate us for the dela# we suffered. 3he co(pan#-s co((on stock, further(ore, has risen fro( a low of $% to a recent high of $7$. Our preferred has been called for rede(ption on ;arch 1+. "ut the rise in the co(pan#-s stock has given our conversion rights, which we thought worthless not long ago, great value. /t is now al(ost certain that our D1 !irwa#s shares will produce a decent profit -- that is, if (# cost for ;aalo6 is e6cluded -- and the gain could even prove indecent. Fe6t ti(e / (ake a big, du(b decision, "erkshire shareholders will know what to do. 1hone 2r! Wolf. HHHHHHHHHHHH

/n addition to the convertible preferreds, we purchased one other private place(ent in 1991, $$00 (illion of !(erican >6press 5ercs. 3his securit# was essentiall# a co((on stock that featured a tradeoff in its first three #ears. 8e received e6tra dividend pa#(ents during that period, but we were also capped in the price appreciation we could realiAe. Cespite the cap, this holding has proved e6traordinaril# profitable thanks to a (ove b# #our hair(an that co(bined luck and skill -- 110& luck, the balance skill. Our 5ercs were due to convert into co((on stock in !ugust 199%, and in the (onth before / was (ulling whether to sell upon conversion. One reason to hold was !(e6-s outstanding >O, Barve# ,olub, who see(ed likel# to (a6i(iAe whatever potential the co(pan# had 'a supposition that has since been proved -- in spades). "ut the siAe of that potential was in 0uestion. !(e6 faced relentless co(petition fro( a (ultitude of card-issuers, led b# <isa. 8eighing the argu(ents, / leaned toward sale. Bere-s where / got luck#. Curing that (onth of decision, / pla#ed golf at 5routs Feck, ;aine with ?rank Olson, >O of BertA. ?rank is a brilliant (anager, with inti(ate knowledge of the card business. 1o fro( the first tee on / was 0uiAAing hi( about the industr#. "# the ti(e we reached the second green, ?rank had convinced (e that !(e6-s corporate card was a terrific franchise, and / had decided not to sell. On the back nine / turned bu#er, and in a few (onths "erkshire owned 10& of the co(pan#. 8e now have a $$ billion gain in our !(e6 shares, and / naturall# feel ver# grateful to ?rank. "ut ,eorge ,illespie, our (utual friend, sa#s that / a( confused about where (# gratitude should go. !fter all, he points out, it was he who arranged the ga(e and assigned (e to ?rank-s fourso(e. <*arterl$ Re.orts to Sharehol ers /n last #ear-s letter, / described the growing costs we incur in (ailing 0uarterl# reports and the proble(s we have encountered in delivering the( to =street-na(e= shareholders. / asked for #our opinion about the desirabilit# of our continuing to print reports, given that we now publish our 0uarterl# and annual co((unications on the /nternet, at our site, www.berkshirehathawa#.co(. Ielativel# few shareholders responded, but it is clear that at least a s(all nu(ber who want the 0uarterl# infor(ation have no interest in getting it off the /nternet. "eing a life-long sufferer fro( technophobia, / can e(pathiAe with this group. 3he cost of publishing 0uarterlies, however, continues to balloon, and we have therefore decided to send printed versions onl# to shareholders who re0uest the(. /f #ou wish the 0uarterlies, please co(plete the repl# card that is bound into this report. /n the (eanti(e, be assured that all shareholders will continue to receive the annual report in printed for(. 3hose of #ou who en:o# the co(puter should check out our ho(e page. /t contains a large a(ount of current infor(ation about "erkshire and also all of our annual letters since 1977. /n addition, our website includes links to the ho(e pages of (an# "erkshire subsidiaries. On these sites #ou can learn (ore about our subsidiariesproducts and -- #es -- even place orders for the(.

8e are re0uired to file our 0uarterl# infor(ation with the 1> no later than %+ da#s after the end of each 0uarter. One of our goals in posting co((unications on the /nternet is to (ake this (aterial infor(ation -- in full detail and in a for( unfiltered b# the (edia -- si(ultaneousl# available to all interested parties at a ti(e when (arkets are closed. !ccordingl#, we plan to send our 1998 0uarterl# infor(ation to the 1> on three ?rida#s, ;a# 1+, !ugust 1%, and Fove(ber 1$, and on those nights to post the sa(e infor(ation on the /nternet. 3his procedure will put all of our shareholders, whether the# be direct or =street-na(e,= on an e0ual footing. 1i(ilarl#, we will post our 1998 annual report on the /nternet on 1aturda#, ;arch 1$, 1999, and (ail it at about the sa(e ti(e. Sharehol er/=esi9nate Contri)*tions !bout 97.7& of all eligible shares participated in "erkshire-s 1997 shareholderdesignated contributions progra(. ontributions (ade were $1+.% (illion, and $,8$0 charities were recipients. ! full description of the progra( appears on pages +* - +$. u(ulativel#, over the 17 #ears of the progra(, "erkshire has (ade contributions of $11$.1 (illion pursuant to the instructions of our shareholders. 3he rest of "erkshire-s giving is done b# our subsidiaries, which stick to the philanthropic patterns that prevailed before the# were ac0uired 'e6cept that their for(er owners the(selves take on the responsibilit# for their personal charities). /n aggregate, our subsidiaries (ade contributions of $8.1 (illion in 1997, including in-kind donations of $%.% (illion. >ver# #ear a few shareholders (iss out on our contributions progra( because the# don-t have their shares registered in their own na(es on the prescribed record date or because the# fail to get the designation for( back to us within the @0-da# period allowed. harlie and / regret this. "ut if replies are received late, we have to re:ect the( because we can-t (ake e6ceptions for so(e shareholders while refusing to (ake the( for others. To participate in future programs, you must own 3lass A shares that are registered in the name of the actual owner, not the nominee name of a broker, bank or depository! Shares not so registered on August ($, $))4, will be ineligible for the $))4 program! When you get the contributions form from us, return it promptly so that it does not get put aside or forgotten! The Ann*al +eetin9 8oodstock 8eekend at "erkshire will be ;a# *-% this #ear. 3he finale will be the annual (eeting, which will begin at 9.$0 a.(. on ;onda#, ;a# %. 9ast #ear we (et at !ksarben oliseu(, and both our staff and the crowd were delighted with the venue. 3here was onl# one crisis. 3he night before the (eeting, / lost (# voice, thereb# fulfilling harlie-s wildest fantas#. Be was crushed when / showed up the ne6t (orning with (# speech restored.

9ast #ear about 7,+00 attended the (eeting. 3he# represented all +0 states, as well as 1@ countries, including !ustralia, "raAil, /srael, 1audi !rabia, 1ingapore and ,reece. 3aking into account several overflow roo(s, we believe that we can handle (ore than 11,000 people, and that should put us in good shape this #ear even though our shareholder count has risen significantl#. 5arking is a(ple at !ksarbenE acoustics are e6cellentE and seats are co(fortable. 3he doors will open at 7 a.(. on ;onda# and at 8.$0 we will again feature the world pre(iere of a (ovie epic produced b# ;arc Ba(burg, our ?O. 3he (eeting will last until $.$0, with a short break at noon. 3his interval will per(it the e6hausted to leave unnoticed and allow ti(e for the hardcore to lunch at !ksarben-s concession stands. harlie and / en:o# 0uestions fro( owners, so bring up whatever is on #our (ind. "erkshire products will again be for sale in the halls outside the (eeting roo(. 9ast #ear -- not that / pa# attention to this sort of thing -- we again set sales records, (oving *,+00 pounds of 1ee-s cand#, 1,$+0 pairs of Ce6ter shoes, $7+,000 of 8orld "ooks and related publications, and 888 sets of 7uikut knives. 8e also took orders for a new line of apparel, featuring our "erkshire logo, and sold about 1,000 polo, sweat, and 3-shirts. !t this #ear-s (eeting, we will unveil our 1998 collection. ,>/ O will again be on hand with a booth staffed b# star associates fro( its regional offices. ?ind out whether #ou can save (one# b# shifting #our auto insurance to ,>/ O. !bout %0& of those who check us out learn that savings are possible. 3he proportion is not 100& because insurers differ in their underwriting :udg(ents, with so(e favoring drivers who live in certain geographical areas and work at certain occupations (ore than we do. 8e believe, however, that we (ore fre0uentl# offer the low price than does an# other national carrier selling insurance to all co(ers. /n the ,>/ O infor(ational (aterial that acco(panies this report, #ou will see that in $8 states we now offer a special discount of as (uch as 8& to our shareholders. 8e also have applications pending that would e6tend this discount to drivers in other states. !n attach(ent to the pro6# (aterial that is enclosed with this report e6plains how #ou can obtain the card #ou will need for ad(ission to the (eeting. 8e e6pect a large crowd, so get plane, hotel and car reservations pro(ptl#. !(erican >6press '800-799@@$%) will be happ# to help #ou with arrange(ents. !s usual, we will have buses at the larger hotels that will take #ou to and fro( the (eeting and also deliver #ou to Febraska ?urniture ;art, "orshei(-s and the airport after its conclusion. Kou are likel#, however, to find a car hand#. F?;-s (ain store, located on a 7+-acre site about a (ile fro( !ksarben, is open fro( 10 a.(. to 9 p.(. on weekda#s, 10 a.(. to @ p.(. on 1aturda#s, and noon to @ p.(. on 1unda#s. Curing the period fro( ;a# 1 to ;a# +, shareholders who present F?; with the coupon that will acco(pan# their (eeting ticket will be entitled to a discount that is otherwise restricted to its e(plo#ees. "orshei(-s nor(all# is closed on 1unda# but will be open for shareholders fro( 10 a.(. to @ p.(. on ;a# $rd. 9ast #ear was our second-best shareholder-s da#, e6ceeded onl# b# 199@-s. / regard this slippage as an ano(al# and hope that #ou will

prove (e right this #ear. harlie will be available for autographs. Be s(iles, however, onl# if the paper he signs is a "orshei(-s sales ticket. 1hareholders who wish to visit on 1aturda# '10 a.(. to +.$0 p.(.) or on ;onda# '10 a.(.-8 p.(.) should be sure to identif# the(selves as "erkshire owners so that 1usan Gac0ues, "orshei(-s >O, can (ake #ou especiall# welco(e. 1usan, / should add, had a fabulous #ear in 1997. !s a (anager, she is ever#thing that an owner hopes for. On 1unda# afternoon we will also have a special treat for bridge pla#ers in the (all outside of "orshei(-s. 3here, "ob Ba((an -- a legend of the ga(e for (ore than three decades -- will take on all co(ers. Goin in and daAAle "ob with #our skill. ;# favorite steakhouse, ,orat-s, opens one 1unda# a #ear -- for "erkshire shareholders on the night before the annual (eeting. 9ast #ear the restaurant started serving at % p.(. and finished about 1.$0 a.(, an endurance trial that was the result of taking 1,100 reservations vs. a seating capacit# of *$+. /f #ou (ake a reservation and then can-t attend, be sure to let ,orat-s know pro(ptl#, since it goes to great effort to help us and we want to reciprocate. Kou can (ake reservations beginning on !pril 1st 'but not before) b# calling %0*-++1-$7$$. 9ast #ear / had to leave ,orat-s a little earl# because of (# voice proble(, but this #ear / plan to leisurel# savor ever# bite of (# rare 3-bone and double order of hash browns. !fter this war(up, harlie and / will head for the Cair# 7ueen on 11%th, :ust south of Codge. 3here are 1* great Cair# 7ueens in (etropolitan O(aha, but the 11%th 1treet location is the best suited to handle the large crowd that we e6pect. 1outh of the propert#, there are hundreds of parking spaces on both sides of the street. !lso, this Cair# 7ueen will e6tend its 1unda# hours to 11 p.(. in order to acco((odate our shareholders. 3he 11%th 1treet operation is now run b# two sisters, oni "irge and Ceb Fovotn#, whose grandfather put up the building in 19@* at what was then the outer edge of the cit#. 3heir (other, Gan Foble, took over in 197*, and oni and Ceb continue as third generation owner-(anagers. Gan, oni and Ceb will all be on hand 1unda# evening, and / hope that #ou (eet the(. >n:o# one of their ha(burgers if #ou can-t get into ,orat-s. !nd then, around eight o-clock, :oin (e in having a Cust# 1undae for dessert. 3his ite( is a personal specialt# -- the Cair# 7ueen will furnish #ou a cop# of (# recipe -- and will be offered onl# on 1hareholder 1unda#. 3he O(aha Io#als and !lbu0uer0ue Cukes will pla# baseball on 1aturda# evening, ;a# *nd, at Iosenblatt 1tadiu(. !s usual, #our hair(an, sha(elessl# e6ploiting his *+& ownership of the tea(, will take the (ound. "ut this #ear #ou will see so(ething new. /n past ga(es, (uch to the baffle(ent of the crowd, / have shaken off the catcher-s first call. Be has consistentl# asked for (# sweeping curve, and / have :ust as regularl# resisted. /nstead, / have served up a pathetic fast ball, which on (# best da# was clocked at eight (iles per hour 'with a following wind). 3here-s a stor# behind (# unwillingness to throw the curve ball. !s so(e of #ou (a# know, and# u((ings invented the curve in 18@7 and used it to great effect in the Fational !ssociation, where he never won less than *8 ga(es in a season. 3he

pitch, however, drew i((ediate criticis( fro( the ver# highest of authorities, na(el# harles >lliott, then president of Barvard Dniversit#, who declared, =/ have heard that this #ear we at Barvard won the baseball cha(pionship because we have a pitcher who has a fine curve ball. / a( further instructed that the purpose of the curve ball is to deliberatel# deceive the batter. Barvard is not in the business of teaching deception.= '/-( not (aking this up.) >ver since / learned of 5resident >lliott-s (oral teachings on this sub:ect, / have scrupulousl# refrained fro( using (# curve, however devastating its effect (ight have been on hapless batters. Fow, however, it is ti(e for (# kar(a to run over >lliott-s dog(a and for (e to 0uit holding back. <isit the park on 1aturda# night and (arvel at the (a:estic arc of (# breaking ball. Our pro6# state(ent includes infor(ation about obtaining tickets to the ga(e. 8e will also provide an infor(ation packet describing the local hot spots, including, of course, those 1* Cair# 7ueens. o(e to O(aha -- the cradle of capitalis( -- in ;a# and en:o# #ourself.

:ebruary .+, 199/

Farren '. Buffett ;hairman of the Board