1996 年伯克希尔完整年报

1996 ANNUAL REPORT BERKSHIRE HATHAWAY INC. 1996 ANNUAL REPORT TABLE OF CONTENTS Business Activities Corporate Performance vs. the S&P 500 Chairman's Letter* Acquisition Criteria Independent Auditors' Report Consolidated Financial Statements Management's Discussion Selected Financial Data For The Past Five Years Shareholder-Designated Contributions Combined Financial Statements (Unaudited) Owner's Manual Common Stock Data Directors and Officers of the Company *Copyright © 1997 By Warren E. Buffett All Rights Reserved

1996 Cover Page Business Activities Berkshire Hathaway Inc. is a holding company owning subsidiaries

engaged in a number of diverse business activities. The most important of

these is the property and casualty insurance business conducted on both a

direct and reinsurance basis through a number of subsidiaries

collectively referred to in this report as the Berkshire Hathaway

Insurance Group. Included in this group of subsidiaries is GEICO

Corporation, the seventh largest auto insurer in the United States.

Investment portfolios of insurance subsidiaries include meaningful

equity ownership percentages of other publicly traded companies. Such

investments at the end of 1996 include approximately 10.5% of the

outstanding capital stock of American Express Company, approximately 8%

of the capital stock of The Coca-Cola Company, approximately 3.5% of the

capital stock of The Walt Disney Company, approximately 9% of the capital

stock of Federal Home Loan Mortgage Corporation ("Freddie Mac"),

approximately 8.5% of the capital stock of The Gillette Company,

approximately 16% of the capital stock of The Washington Post Company,

approximately 8% of the common stock of Wells Fargo & Company, and common

and convertible preferred stock of Salomon Inc having approximately 18%

of the total voting power of that company. Much information about these

publicly-owned companies is available, including information released

from time to time by the companies themselves.

Additionally, Berkshire Hathaway Inc. publishes the Buffalo News , a

daily and Sunday newspaper in Western New York. Other business activities

conducted by non-insurance subsidiaries include publication and

distribution of encyclopedias and related educational and instructional

material ( World Book and Childcraft products), manufacture and marketing

of home cleaning systems and related accessories (sold principally under

the Kirby name), manufacture and sale of boxed chocolates and other

confectionery products ( See's Candies ), retailing of home furnishings

( Nebraska Furniture Mart and R.C. Willey Home Furnishings ), manufacture

and distribution of uniforms ( Fechheimer Brothers Company ), manufacture,

import and distribution of footwear ( H.H. Brown Shoe Company, Lowell

Shoe, Inc. and Dexter Shoe Company ), retailing of fine jewelry

( Borsheim's and Helzberg's Diamond Shops ) and manufacture and

distribution of air compressors, air tools and painting systems ( Campbell

Hausfeld products ). On December 23, 1996, Berkshire Hathaway completed

its previously announced acquisition of FlightSafety International, Inc.

( FlightSafety ). FlightSafety provides high-technology training to

operators of aircraft and ships throughout the world. Berkshire also owns

a number of other businesses engaged in a variety of activities, as

identified in this report.

Operating decisions for the various Berkshire businesses are made by

managers of the business units. Investment decisions and all other

capital allocation decisions are made for Berkshire and its subsidiaries

by Warren E. Buffett, in consultation with Charles T. Munger. Mr. Buffett

is Chairman and Mr. Munger is Vice Chairman of Berkshire's Board of

Directors.

Corporate Performance Berkshire's Corporate Performance vs. the S&P 500 Annual Percentage Change

------------------------------

in Per-Share in S&P 500

Book Value of with Dividends Relative

Berkshire Included Results

Year (1) (2) (1)-(2)

---- ------------- -------------- -------

1965........... 23.8 10.0 13.8

1966........... 20.3 (11.7) 32.0

1967........... 11.0 30.9 (19.9)

1968........... 19.0 11.0 8.0

1969........... 16.2 (8.4) 24.6

1970........... 12.0 3.9 8.1

1971........... 16.4 14.6 1.8

1972........... 21.7 18.9 2.8

1973........... 4.7 (14.8) 19.5

1974........... 5.5 (26.4) 31.9

1975........... 21.9 37.2 (15.3)

1976........... 59.3 23.6 35.7

1977........... 31.9 (7.4) 39.3

1978........... 24.0 6.4 17.6

1979........... 35.7 18.2 17.5

1980........... 19.3 32.3 (13.0)

1981........... 31.4 (5.0) 36.4

1982........... 40.0 21.4 18.6

1983........... 32.3 22.4 9.9

1984........... 13.6 6.1 7.5

1985........... 48.2 31.6 16.6

1986........... 26.1 18.6 7.5

1987........... 19.5 5.1 14.4

1988........... 20.1 16.6 3.5

1989........... 44.4 31.7 12.7

1990........... 7.4 (3.1) 10.5

1991........... 39.6 30.5 9.1

1992........... 20.3 7.6 12.7

1993........... 14.3 10.1 4.2

1994........... 13.9 1.3 12.6

1995........... 43.1 37.6 5.5

1996........... 31.8 23.0 8.8

Notes: Data are for calendar years with these exceptions: 1965 and 1966,

year ended 9/30; 1967, 15 months ended 12/31.

Starting in 1979, accounting rules required insurance companies to

value the equity securities they hold at market rather than at the

lower of cost or market, which was previously the requirement. In

this table, Berkshire's results through 1978 have been restated to

conform to the changed rules. In all other respects, the results

are calculated using the numbers originally reported.

The S&P 500 numbers are pre-tax whereas the Berkshire numbers are

after-tax. If a corporation such as Berkshire were simply to have

owned the S&P 500 and accrued the appropriate taxes, its results

would have lagged the S&P 500 in years when that index showed a

positive return, but would have exceeded the S&P in years when the

index showed a negative return. Over the years, the tax costs

would have caused the aggregate lag to be substantial.

Chairman's Letter BERKSHIRE HATHAWAY INC. Chairman's Letter To the Shareholders of Berkshire Hathaway Inc.: Our gain in net worth during 1996 was $6.2 billion, or 36.1%. Per-

share book value, however, grew by less, 31.8%, because the number of

Berkshire shares increased: We issued stock in acquiring FlightSafety

International and also sold new Class B shares.* Over the last 32 years

(that is, since present management took over) per-share book value has

grown from $19 to $19,011, or at a rate of 23.8% compounded annually.

• Each Class B share has an economic interest equal to 1/30th of

that possessed by a Class A share, which is the new designation for

the only stock that Berkshire had outstanding before May 1996.

Throughout this report, we state all per-share figures in terms of

"Class A equivalents," which are the sum of the Class A shares

outstanding and 1/30th of the Class B shares outstanding. For technical reasons, we have restated our 1995 financial

statements, a matter that requires me to present one of my less-than-

thrilling explanations of accounting arcana. I'll make it brief.

The restatement was required because GEICO became a wholly-owned

subsidiary of Berkshire on January 2, 1996, whereas it was previously

classified as an investment. From an economic viewpoint - taking into

account major tax efficiencies and other benefits we gained - the value

of the 51% of GEICO we owned at year-end 1995 increased significantly

when we acquired the remaining 49% of the company two days later.

Accounting rules applicable to this type of "step acquisition," however,

required us to write down the value of our 51% at the time we moved to

100%. That writedown - which also, of course, reduced book value -

amounted to $478.4 million. As a result, we now carry our original 51%

of GEICO at a value that is both lower than its market value at the time

we purchased the remaining 49% of the company and lower than the value at

which we carry that 49% itself.

There is an offset, however, to the reduction in book value I have

just described: Twice during 1996 we issued Berkshire shares at a

premium to book value, first in May when we sold the B shares for cash

and again in December when we used both A and B shares as part-payment

for FlightSafety. In total, the three non-operational items affecting

book value contributed less than one percentage point to our 31.8% per-

share gain last year.

I dwell on this rise in per-share book value because it roughly

indicates our economic progress during the year. But, as Charlie Munger,

Berkshire's Vice Chairman, and I have repeatedly told you, what counts at

Berkshire is intrinsic value, not book value. The last time you got that

message from us was in the Owner's Manual, sent to you in June after we

issued the Class B shares. In that manual, we not only defined certain

key terms - such as intrinsic value - but also set forth our economic

principles.

For many years, we have listed these principles in the front of our

annual report, but in this report, on pages 58 to 67, we reproduce the

entire Owner's Manual. In this letter, we will occasionally refer to the

manual so that we can avoid repeating certain definitions and

explanations. For example, if you wish to brush up on "intrinsic value,"

see pages 64 and 65.

Last year, for the first time, we supplied you with a table that

Charlie and I believe will help anyone trying to estimate Berkshire's

intrinsic value. In the updated version of that table, which follows, we

trace two key indices of value. The first column lists our per-share

ownership of investments (including cash and equivalents) and the second

column shows our per-share earnings from Berkshire's operating businesses

before taxes and purchase-accounting adjustments but after all interest

and corporate overhead expenses. The operating-earnings column excludes

all dividends, interest and capital gains that we realized from the

investments presented in the first column. In effect, the two columns

show what Berkshire would have reported had it been broken into two parts.

Pre-tax Earnings Per Share

Investments Excluding All Income from

Year Per Share Investments

---- ----------- -------------------------

1965................................$ 4 $ 4.08

1975................................ 159 (6.48)

1985................................ 2,443 18.86

1995................................ 22,088 258.20

1996................................ 28,500 421.39

Annual Growth Rate, 1965-95......... 33.4% 14.7%

One-Year Growth Rate, 1995-96 ...... 29.0% 63.2%

As the table tells you, our investments per share increased in 1996

by 29.0% and our non-investment earnings grew by 63.2%. Our goal is to

keep the numbers in both columns moving ahead at a reasonable (or, better

yet, unreasonable) pace.

Our expectations, however, are tempered by two realities. First,

our past rates of growth cannot be matched nor even approached:

Berkshire's equity capital is now large - in fact, fewer than ten

businesses in America have capital larger - and an abundance of funds

tends to dampen returns. Second, whatever our rate of progress, it will

not be smooth: Year-to-year moves in the first column of the table above

will be influenced in a major way by fluctuations in securities markets;

the figures in the second column will be affected by wide swings in the

profitability of our catastrophe-reinsurance business.

In the table, the donations made pursuant to our shareholder-

designated contributions program are charged against the second column,

though we view them as a shareholder benefit rather than as an expense.

All other corporate expenses are also charged against the second column.

These costs may be lower than those of any other large American

corporation: Our after-tax headquarters expense amounts to less than two

basis points (1/50th of 1%) measured against net worth. Even so, Charlie

used to think this expense percentage outrageously high, blaming it on my

use of Berkshire's corporate jet, The Indefensible . But Charlie has

recently experienced a "counter-revelation": With our purchase of

FlightSafety, whose major activity is the training of corporate pilots,

he now rhapsodizes at the mere mention of jets.

Seriously, costs matter. For example, equity mutual funds incur

corporate expenses - largely payments to the funds' managers - that

average about 100 basis points, a levy likely to cut the returns their

investors earn by 10% or more over time. Charlie and I make no promises

about Berkshire's results. We do promise you, however, that virtually

all of the gains Berkshire makes will end up with shareholders. We are

here to make money with you, not off you. The Relationship of Intrinsic Value to Market Price In last year's letter, with Berkshire shares selling at $36,000, I

told you: (1) Berkshire's gain in market value in recent years had

outstripped its gain in intrinsic value, even though the latter gain had

been highly satisfactory; (2) that kind of overperformance could not

continue indefinitely; (3) Charlie and I did not at that moment consider

Berkshire to be undervalued.

Since I set down those cautions, Berkshire's intrinsic value has

increased very significantly - aided in a major way by a stunning

performance at GEICO that I will tell you more about later - while the

market price of our shares has changed little. This, of course, means

that in 1996 Berkshire's stock underperformed the business.

Consequently, today's price/value relationship is both much different

from what it was a year ago and, as Charlie and I see it, more

appropriate.

Over time, the aggregate gains made by Berkshire shareholders must

of necessity match the business gains of the company. When the stock

temporarily overperforms or underperforms the business, a limited number

of shareholders - either sellers or buyers - receive outsized benefits at

the expense of those they trade with. Generally, the sophisticated have

an edge over the innocents in this game.

Though our primary goal is to maximize the amount that our

shareholders, in total, reap from their ownership of Berkshire, we wish

also to minimize the benefits going to some shareholders at the expense

of others. These are goals we would have were we managing a family

partnership, and we believe they make equal sense for the manager of a

public company. In a partnership, fairness requires that partnership

interests be valued equitably when partners enter or exit; in a public

company, fairness prevails when market price and intrinsic value are in

sync. Obviously, they won't always meet that ideal, but a manager - by

his policies and communications - can do much to foster equity.

Of course, the longer a shareholder holds his shares, the more

bearing Berkshire's business results will have on his financial

experience - and the less it will matter what premium or discount to

intrinsic value prevails when he buys and sells his stock. That's one

reason we hope to attract owners with long-term horizons. Overall, I

think we have succeeded in that pursuit. Berkshire probably ranks number

one among large American corporations in the percentage of its shares

held by owners with a long-term view. Acquisitions of 1996 We made two acquisitions in 1996, both possessing exactly the

qualities we seek - excellent business economics and an outstanding

manager.

The first acquisition was Kansas Bankers Surety (KBS), an insurance

company whose name describes its specialty. The company, which does

business in 22 states, has an extraordinary underwriting record, achieved

through the efforts of Don Towle, an extraordinary manager. Don has

developed first-hand relationships with hundreds of bankers and knows

every detail of his operation. He thinks of himself as running a company

that is "his," an attitude we treasure at Berkshire. Because of its

relatively small size, we placed KBS with Wesco, our 80%-owned

subsidiary, which has wanted to expand its insurance operations.

You might be interested in the carefully-crafted and sophisticated

acquisition strategy that allowed Berkshire to nab this deal. Early in

1996 I was invited to the 40th birthday party of my nephew's wife, Jane

Rogers. My taste for social events being low, I immediately, and in my

standard, gracious way, began to invent reasons for skipping the event.

The party planners then countered brilliantly by offering me a seat next

to a man I always enjoy, Jane's dad, Roy Dinsdale - so I went.

The party took place on January 26. Though the music was loud - Why

must bands play as if they will be paid by the decibel? - I just managed

to hear Roy say he'd come from a directors meeting at Kansas Bankers

Surety, a company I'd always admired. I shouted back that he should let

me know if it ever became available for purchase.

On February 12, I got the following letter from Roy: "Dear Warren:

Enclosed is the annual financial information on Kansas Bankers Surety.

This is the company that we talked about at Janie's party. If I can be

of any further help, please let me know." On February 13, I told Roy we

would pay $75 million for the company - and before long we had a deal.

I'm now scheming to get invited to Jane's next party.

Our other acquisition in 1996 - FlightSafety International, the

world's leader in the training of pilots - was far larger, at about $1.5

billion, but had an equally serendipitous origin. The heroes of this

story are first, Richard Sercer, a Tucson aviation consultant, and

second, his wife, Alma Murphy, an ophthalmology graduate of Harvard

Medical School, who in 1990 wore down her husband's reluctance and got

him to buy Berkshire stock. Since then, the two have attended all our

Annual Meetings, but I didn't get to know them personally.

Fortunately, Richard had also been a long-time shareholder of

FlightSafety, and it occurred to him last year that the two companies

would make a good fit. He knew our acquisition criteria, and he thought

that Al Ueltschi, FlightSafety's 79-year-old CEO, might want to make a

deal that would both give him a home for his company and a security in

payment that he would feel comfortable owning throughout his lifetime.

So in July, Richard wrote Bob Denham, CEO of Salomon Inc, suggesting that

he explore the possibility of a merger.

Bob took it from there, and on September 18, Al and I met in New

York. I had long been familiar with FlightSafety's business, and in

about 60 seconds I knew that Al was exactly our kind of manager. A month

later, we had a contract. Because Charlie and I wished to minimize the

issuance of Berkshire shares, the transaction we structured gave

FlightSafety shareholders a choice of cash or stock but carried terms

that encouraged those who were tax-indifferent to take cash. This nudge

led to about 51% of FlightSafety's shares being exchanged for cash, 41%

for Berkshire A and 8% for Berkshire B.

Al has had a lifelong love affair with aviation and actually piloted

Charles Lindbergh. After a barnstorming career in the 1930s, he began

working for Juan Trippe, Pan Am's legendary chief. In 1951, while still

at Pan Am, Al founded FlightSafety, subsequently building it into a

simulator manufacturer and a worldwide trainer of pilots (single-engine,

helicopter, jet and marine). The company operates in 41 locations,

outfitted with 175 simulators of planes ranging from the very small, such

as Cessna 210s, to Boeing 747s. Simulators are not cheap - they can cost

as much as $19 million - so this business, unlike many of our

operations, is capital intensive. About half of the company's revenues

are derived from the training of corporate pilots, with most of the

balance coming from airlines and the military.

Al may be 79, but he looks and acts about 55. He will run

operations just as he has in the past: We never fool with success. I

have told him that though we don't believe in splitting Berkshire stock,

we will split his age 2-for-1 when he hits 100.

An observer might conclude from our hiring practices that Charlie

and I were traumatized early in life by an EEOC bulletin on age

discrimination. The real explanation, however, is self-interest: It's

difficult to teach a new dog old tricks. The many Berkshire managers who

are past 70 hit home runs today at the same pace that long ago gave them

reputations as young slugging sensations. Therefore, to get a job with

us, just employ the tactic of the 76-year-old who persuaded a dazzling

beauty of 25 to marry him. "How did you ever get her to accept?" asked

his envious contemporaries. The comeback: "I told her I was 86."

• * * * * * * * * * * *

And now we pause for our usual commercial: If you own a large

business with good economic characteristics and wish to become associated

with an exceptional collection of businesses having similar

characteristics, Berkshire may well be the home you seek. Our

requirements are set forth on page 21. If your company meets them - and

if I fail to make the next birthday party you attend - give me a call. Insurance Operations - Overview Our insurance business was terrific in 1996. In both primary

insurance, where GEICO is our main unit, and in our "super-cat"

reinsurance business, results were outstanding.

As we've explained in past reports, what counts in our insurance

business is, first, the amount of "float" we generate and, second, its

cost to us. These are matters that are important for you to understand

because float is a major component of Berkshire's intrinsic value that is

not reflected in book value.

To begin with, float is money we hold but don't own. In an

insurance operation, float arises because premiums are received before

losses are paid. Secondly, the premiums that an insurer takes in

typically do not cover the losses and expenses it eventually must pay.

That leaves it running an "underwriting loss," which is the cost of

float. An insurance business has value if its cost of float over time is

less than the cost the company would otherwise incur to obtain funds.

But the business is an albatross if the cost of its float is higher than

market rates for money.

As the numbers in the following table show, Berkshire's insurance

business has been a huge winner. For the table, we have calculated our

float - which we generate in large amounts relative to our premium

volume - by adding loss reserves, loss adjustment reserves, funds held

under reinsurance assumed and unearned premium reserves, and then

subtracting agents' balances, prepaid acquisition costs, prepaid taxes

and deferred charges applicable to assumed reinsurance. Our cost of

float is determined by our underwriting loss or profit. In those years

when we have had an underwriting profit, such as the last four, our cost

of float has been negative. In effect, we have been paid for holding

money.

(1) (2) Yearend Yield

Underwriting Approximat on Long-Term

Loss Average Float Cost of Funds Govt. Bonds

------------ ------------- ---------------- -------------

(In $ Millions) (Ratio of 1 to 2)

1967.......... profit 17.3 less than zero 5.50%

1968.......... profit 19.9 less than zero 5.90%

1969.......... profit 23.4 less than zero 6.79%

1970.......... 0.37 32.4 1.14% 6.25%

1971.......... profit 52.5 less than zero 5.81%

1972.......... profit 69.5 less than zero 5.82%

1973.......... profit 73.3 less than zero 7.27%

1974.......... 7.36 79.1 9.30% 8.13%

1975.......... 11.35 87.6 12.96% 8.03%

1976.......... profit 102.6 less than zero 7.30%

1977.......... profit 139.0 less than zero 7.97%

1978.......... profit 190.4 less than zero 8.93%

1979.......... profit 227.3 less than zero 10.08%

1980.......... profit 237.0 less than zero 11.94%

1981.......... profit 228.4 less than zero 13.61%

1982.......... 21.56 220.6 9.77% 10.64%

1983.......... 33.87 231.3 14.64% 11.84%

1984.......... 48.06 253.2 18.98% 11.58%

1985.......... 44.23 390.2 11.34% 9.34%

1986.......... 55.84 797.5 7.00% 7.60%

1987.......... 55.43 1,266.7 4.38% 8.95%

1988.......... 11.08 1,497.7 0.74% 9.00%

1989.......... 24.40 1,541.3 1.58% 7.97%

1990.......... 26.65 1,637.3 1.63% 8.24%

1991.......... 119.59 1,895.0 6.31% 7.40%

1992.......... 108.96 2,290.4 4.76% 7.39%

1993.......... profit 2,624.7 less than zero 6.35%

1994.......... profit 3,056.6 less than zero 7.88%

1995.......... profit 3,607.2 less than zero 5.95%

1996.......... profit 6,702.0 less than zero 6.64%

Since 1967, when we entered the insurance business, our float has

grown at an annual compounded rate of 22.3%. In more years than not, our

cost of funds has been less than nothing. This access to "free" money has

boosted Berkshire's performance in a major way. Moreover, our acquisition

of GEICO materially increases the probability that we can continue to

obtain "free" funds in increasing amounts. Super-Cat Insurance As in the past three years, we once again stress that the good results

we are reporting for Berkshire stem in part from our super-cat business

having a lucky year. In this operation, we sell policies that insurance

and reinsurance companies buy to protect themselves from the effects of

mega-catastrophes. Since truly major catastrophes are rare occurrences,

our super-cat business can be expected to show large profits in most years

• and to record a huge loss occasionally. In other words, the

attractiveness of our super-cat business will take a great many years to

measure. 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 question is when it will come. I emphasize this lugubrious point because I would not want you to

panic and sell your Berkshire stock upon hearing that some large

catastrophe had cost us a significant amount. If you would tend to react

that way, you should not own Berkshire shares now, just as you should

entirely avoid owning stocks if a crashing market would lead you to panic

and sell. Selling fine businesses on "scary" news is usually a bad

decision. (Robert Woodruff, the business genius who built Coca-Cola over

many decades and who owned a huge position in the company, was once asked

when it might be a good time to sell Coke stock. Woodruff had a simple

answer: "I don't know. I've never sold any.")

In our super-cat operation, our customers are insurers that are

exposed to major earnings volatility and that wish to reduce it. The

product we sell - for what we hope is an appropriate price - is our

willingness to shift that volatility to our own books. Gyrations in

Berkshire's earnings don't bother us in the least: Charlie and I would

much rather earn a lumpy 15% over time than a smooth 12%. (After all, our

earnings swing wildly on a daily and weekly basis - why should we demand

that smoothness accompany each orbit that the earth makes of the sun?) We

are most comfortable with that thinking, however, when we have

shareholder/partners who can also accept volatility, and that's why we

regularly repeat our cautions.

We took on some major super-cat exposures during 1996. At mid-year we

wrote a contract with Allstate that covers Florida hurricanes, and though

there are no definitive records that would allow us to prove this point, we

believe that to have then been the largest single catastrophe risk ever

assumed by one company for its own account. Later in the year, however, we

wrote a policy for the California Earthquake Authority that goes into

effect on April 1, 1997, and that exposes us to a loss more than twice that

possible under the Florida contract. Again we retained all the risk for

our own account. Large as these coverages are, Berkshire's after-tax

"worst-case" loss from a true mega-catastrophe is probably no more than

$600 million, which is less than 3% of our book value and 1.5% of our market

value. To gain some perspective on this exposure, look at the table on

page 2 and note the much greater volatility that security markets have

delivered us.

In the super-cat business, we have three major competitive advantages.

First, the parties buying reinsurance from us know that we both can and

will pay under the most adverse of circumstances. Were a truly cataclysmic

disaster to occur, it is not impossible that a financial panic would

quickly follow. If that happened, there could well be respected reinsurers

that would have difficulty paying at just the moment that their clients

faced extraordinary needs. Indeed, one reason we never "lay off" part of

the risks we insure is that we have reservations about our ability to

collect from others when disaster strikes. When it's Berkshire promising,

insureds know with certainty that they can collect promptly.

Our second advantage - somewhat related - is subtle but important.

After a mega-catastrophe, insurers might well find it difficult to obtain

reinsurance even though their need for coverage would then be particularly

great. At such a time, Berkshire would without question have very

substantial capacity available - but it will naturally be our long-standing

clients that have first call on it. That business reality has made major

insurers and reinsurers throughout the world realize the desirability of

doing business with us. Indeed, we are currently getting sizable "stand-

by" fees from reinsurers that are simply nailing down their ability to get

coverage from us should the market tighten.

Our final competitive advantage is that we can provide dollar

coverages of a size neither matched nor approached elsewhere in the

industry. Insurers looking for huge covers know that a single call to

Berkshire will produce a firm and immediate offering.

A few facts about our exposure to California earthquakes - our largest

risk - seem in order. The Northridge quake of 1994 laid homeowners' losses

on insurers that greatly exceeded what computer models had told them to

expect. Yet the intensity of that quake was mild compared to the "worst-

case" possibility for California. Understandably, insurers became - ahem -

shaken and started contemplating a retreat from writing earthquake coverage

into their homeowners' policies.

In a thoughtful response, Chuck Quackenbush, California's insurance

commissioner, designed a new residential earthquake policy to be written by

a state-sponsored insurer, The California Earthquake Authority. This

entity, which went into operation on December 1, 1996, needed large layers

of reinsurance - and that's where we came in. Berkshire's layer of

approximately $1 billion will be called upon if the Authority's aggregate

losses in the period ending March 31, 2001 exceed about $5 billion. (The

press originally reported larger figures, but these would have applied only

if all California insurers had entered into the arrangement; instead only

72% signed up.)

So what are the true odds of our having to make a payout during the

policy's term? We don't know - nor do we think computer models will help

us, since we believe the precision they project is a chimera. In fact,

such models can lull decision-makers into a false sense of security and

thereby increase their chances of making a really huge mistake. We've

already seen such debacles in both insurance and investments. Witness

"portfolio insurance," whose destructive effects in the 1987 market crash

led one wag to observe that it was the computers that should have been

jumping out of windows.

Even if perfection in assessing risks is unattainable, insurers can

underwrite sensibly. After all, you need not know a man's precise age to

know that he is old enough to vote nor know his exact weight to recognize

his need to diet. In insurance, it is essential to remember that virtually

all surprises are unpleasant, and with that in mind we try to price our

super-cat exposures so that about 90% of total premiums end up being

eventually paid out in losses and expenses. Over time, we will find out

how smart our pricing has been, but that will not be quickly. The super-

cat business is just like the investment business in that it often takes a

long time to find out whether you knew what you were doing.

What I can state with certainty, however, is that we have the best

person in the world to run our super-cat business: Ajit Jain, whose value

to Berkshire is simply enormous. In the reinsurance field, disastrous

propositions abound. I know that because I personally embraced all too

many of these in the 1970s and also because GEICO has a large runoff

portfolio made up of foolish contracts written in the early-1980s, able

though its then-management was. Ajit, I can assure you, won't make

mistakes of this type.

I have mentioned that a mega-catastrophe might cause a catastrophe in

the financial markets, a possibility that is unlikely but not far-fetched.

Were the catastrophe a quake in California of sufficient magnitude to tap

our coverage, we would almost certainly be damaged in other ways as well.

For example, See's, Wells Fargo and Freddie Mac could be hit hard. All in

all, though, we can handle this aggregation of exposures.

In this respect, as in others, we try to "reverse engineer" our future

at Berkshire, bearing in mind Charlie's dictum: "All I want to know is

where I'm going to die so I'll never go there." (Inverting really works:

Try singing country western songs backwards and you will quickly regain

your house, your car and your wife.) If we can't tolerate a possible

consequence, remote though it may be, we steer clear of planting its seeds.

That is why we don't borrow big amounts and why we make sure that our

super-cat business losses, large though the maximums may sound, will not

put a major dent in Berkshire's intrinsic value. Insurance - GEICO and Other Primary Operations When we moved to total ownership of GEICO early last year, our

expectations were high - and they are all being exceeded. That is true

from both a business and personal perspective: GEICO's operating chief,

Tony Nicely, is a superb business manager and a delight to work with.

Under almost any conditions, GEICO would be an exceptionally valuable

asset. With Tony at the helm, it is reaching levels of performance that

the organization would only a few years ago have thought impossible.

There's nothing esoteric about GEICO's success: The company's

competitive strength flows directly from its position as a low-cost

operator. Low costs permit low prices, and low prices attract and retain

good policyholders. The final segment of a virtuous circle is drawn when

policyholders recommend us to their friends. GEICO gets more than one

million referrals annually and these produce more than half of our new

business, an advantage that gives us enormous savings in acquisition

expenses - and that makes our costs still lower.

This formula worked in spades for GEICO in 1996: Its voluntary auto

policy count grew 10%. During the previous 20 years, the company's best-

ever growth for a year had been 8%, a rate achieved only once. Better yet,

the growth in voluntary policies accelerated during the year, led by major

gains in the nonstandard market, which has been an underdeveloped area at

GEICO. I focus here on voluntary policies because the involuntary business

we get from assigned risk pools and the like is unprofitable. Growth in

that sector is most unwelcome.

GEICO's growth would mean nothing if it did not produce reasonable

underwriting profits. Here, too, the news is good: Last year we hit our

underwriting targets and then some. Our goal, however, is not to widen our

profit margin but rather to enlarge the price advantage we offer customers.

Given that strategy, we believe that 1997's growth will easily top that of

last year.

We expect new competitors to enter the direct-response market, and

some of our existing competitors are likely to expand geographically.

Nonetheless, the economies of scale we enjoy should allow us to maintain or

even widen the protective moat surrounding our economic castle. We do best

on costs in geographical areas in which we enjoy high market penetration.

As our policy count grows, concurrently delivering gains in penetration, we

expect to drive costs materially lower. GEICO's sustainable cost advantage

is what attracted me to the company way back in 1951, when the entire

business was valued at $7 million. It is also why I felt Berkshire should

pay $2.3 billion last year for the 49% of the company that we didn't then

own.

Maximizing the results of a wonderful business requires management and

focus. Lucky for us, we have in Tony a superb manager whose business focus

never wavers. Wanting also to get the entire GEICO organization

concentrating as he does, we needed a compensation plan that was itself

sharply focused - and immediately after our purchase, we put one in.

Today, the bonuses received by dozens of top executives, starting with

Tony, are based upon only two key variables: (1) growth in voluntary auto

policies and (2) underwriting profitability on "seasoned" auto business

(meaning policies that have been on the books for more than one year). In

addition, we use the same yardsticks to calculate the annual contribution

to the company's profit-sharing plan. Everyone at GEICO knows what counts.

The GEICO plan exemplifies Berkshire's incentive compensation

principles: Goals should be (1) tailored to the economics of the specific

operating business; (2) simple in character so that the degree to which

they are being realized can be easily measured; and (3) directly related to

the daily activities of plan participants. As a corollary, we shun

"lottery ticket" arrangements, such as options on Berkshire shares, whose

ultimate value - which could range from zero to huge - is totally out of

the control of the person whose behavior we would like to affect. In our

view, a system that produces quixotic payoffs will not only be wasteful for

owners but may actually discourage the focused behavior we value in

managers.

Every quarter, all 9,000 GEICO associates can see the results that

determine our profit-sharing plan contribution. In 1996, they enjoyed the

experience because the plan literally went off the chart that had been

constructed at the start of the year. Even I knew the answer to that

problem: Enlarge the chart. Ultimately, the results called for a record

contribution of 16.9% ($40 million), compared to a five-year average of

less than 10% for the comparable plans previously in effect. Furthermore,

at Berkshire, we never greet good work by raising the bar. If GEICO's

performance continues to improve, we will happily keep on making larger

charts.

Lou Simpson continues to manage GEICO's money in an outstanding

manner: Last year, the equities in his portfolio outdid the S&P 500 by 6.2

percentage points. In Lou's part of GEICO's operation, we again tie

compensation to performance - but to investment performance over a four-

year period, not to underwriting results nor to the performance of GEICO as

a whole. We think it foolish for an insurance company to pay bonuses that

are tied to overall corporate results when great work on one side of the

business - underwriting or investment - could conceivably be completely

neutralized by bad work on the other. If you bat .350 at Berkshire, you

can be sure you will get paid commensurately even if the rest of the team

bats .200. In Lou and Tony, however, we are lucky to have Hall-of-Famers

in both key positions.

• * * * * * * * * * * *

Though they are, of course, smaller than GEICO, our other primary

insurance operations turned in equally stunning results last year.

National Indemnity's traditional business had a combined ratio of 74.2 and,

as usual, developed a large amount of float compared to premium volume.

Over the last three years, this segment of our business, run by Don

Wurster, has had an average combined ratio of 83.0. Our homestate

operation, managed by Rod Eldred, recorded a combined ratio of 87.1 even

though it absorbed the expenses of expanding to new states. Rod's three-

year combined ratio is an amazing 83.2. Berkshire's workers' compensation

business, run out of California by Brad Kinstler, has now moved into six

other states and, despite the costs of that expansion, again achieved an

excellent underwriting profit. Finally, John Kizer, at Central States

Indemnity, set new records for premium volume while generating good

earnings from underwriting. In aggregate, our smaller insurance operations

(now including Kansas Bankers Surety) have an underwriting record virtually

unmatched in the industry. Don, Rod, Brad and John have all created

significant value for Berkshire, and we believe there is more to come. Taxes In 1961, President Kennedy said that we should ask not what our

country can do for us, but rather ask what we can do for our country. Last

year we decided to give his suggestion a try - and who says it never hurts

to ask? We were told to mail $860 million in income taxes to the U.S.

Treasury.

Here's a little perspective on that figure: If an equal amount had

been paid by only 2,000 other taxpayers, the government would have had a

balanced budget in 1996 without needing a dime of taxes - income or Social

Security or what have you - from any other American. Berkshire

shareholders can truly say, "I gave at the office."

Charlie and I believe that large tax payments by Berkshire are

entirely fitting. The contribution we thus make to society's well-being is

at most only proportional to its contribution to ours. Berkshire prospers

in America as it would nowhere else. Sources of Reported Earnings The table that follows shows the main sources of Berkshire's reported

earnings. In this presentation, purchase-accounting adjustments are not

assigned to the specific businesses to which they apply, but are instead

aggregated and shown separately. This procedure lets you view the earnings

of our businesses as they would have been reported had we not purchased

them. For the reasons discussed on pages 65 and 66, this form of

presentation seems to us to be more useful to investors and managers than

one utilizing generally-accepted accounting principles (GAAP), which

require purchase-premiums to be charged off business-by-business. The

total earnings we show in the table are, of course, identical to the GAAP

total in our audited financial statements. (in millions)

--------------------------------------

Berkshire's Share

of Net Earnings

(after taxes and

Pre-tax Earnings minority interests) ---------------- -------------------

1996 1995(1) 1996 1995(1)

------- -------- ------- -------

Operating Earnings:

Insurance Group:

Underwriting.....................$ 222.1 $ 20.5 $ 142.8 $ 11.3

Net Investment Income............ 726.2 501.6 593.1 417.7

Buffalo News........................... 50.4 46.8 29.5 27.3

Fechheimer............................. 17.3 16.9 9.3 8.8

Finance Businesses..................... 23.1 20.8 14.9 12.6

Home Furnishings....................... 43.8 29.7(2) 24.8 16.7(2)

Jewelry................................ 27.8 33.9(3) 16.1 19.1(3)

Kirby.................................. 58.5 50.2 39.9 32.1

Scott Fetzer Manufacturing Group....... 50.6 34.1 32.2 21.2

See's Candies.......................... 51.9 50.2 30.8 29.8

Shoe Group............................. 61.6 58.4 41.0 37.5

World Book............................. 12.6 8.8 9.5 7.0

Purchase-Accounting Adjustments........ (75.7) (27.0) (70.5) (23.4)

Interest Expense(4).................... (94.3) (56.0) (56.6) (34.9)

Shareholder-Designated Contributions... (13.3) (11.6) (8.5) (7.0)

Other.................................. 58.8 37.4 34.8 24.4

------- -------- -------- -------

Operating Earnings.......................1,221.4 814.7 883.1 600.2

Sales of Securities......................2,484.5 194.1 1,605.5 125.0

------- -------- -------- -------

Total Earnings - All Entities...........$3,705.9 $1,008.8 $2,488.6 $ 725.2

======= ======== ======== ======= (1) Before the GEICO-related restatement. (3) Includes Helzberg's from

April 30, 1995.

(2) Includes R.C. Willey from June 29, 1995. (4) Excludes interest expense

of Finance Businesses. In this section last year, I discussed three businesses that reported

a decline in earnings - Buffalo News, Shoe Group and World Book. All, I'm

happy to say, recorded gains in 1996.

World Book, however, did not find it easy: Despite the operation's

new status as the only direct-seller of encyclopedias in the country

(Encyclopedia Britannica exited the field last year), its unit volume fell.

Additionally, World Book spent heavily on a new CD-ROM product that began

to take in revenues only in early 1997, when it was launched in association

with IBM. In the face of these factors, earnings would have evaporated had

World Book not revamped distribution methods and cut overhead at

headquarters, thereby dramatically reducing its fixed costs. Overall, the

company has gone a long way toward assuring its long-term viability in both

the print and electronic marketplaces.

Our only disappointment last year was in jewelry: Borsheim's did

fine, but Helzberg's suffered a material decline in earnings. Its expense

levels had been geared to a sizable increase in same-store sales,

consistent with the gains achieved in recent years. When sales were

instead flat, profit margins fell. Jeff Comment, CEO of Helzberg's, is

addressing the expense problem in a decisive manner, and the company's

earnings should improve in 1997.

Overall, our operating businesses continue to perform exceptionally,

far outdoing their industry norms. For this, Charlie and I thank our

managers. If you should see any of them at the Annual Meeting, add your

thanks as well.

More information about our various businesses is given on pages 36-

46, where you will also find our segment earnings reported on a GAAP

basis. In addition, on pages 51-57, we have rearranged Berkshire's

financial data into four segments on a non-GAAP basis, a presentation

that corresponds to the way Charlie and I think about the company. Our

intent is to supply you with the financial information that we would wish

you to give us if our positions were reversed. "Look-Through" Earnings Reported earnings are a poor measure of economic progress at

Berkshire, in part because the numbers shown in the table presented

earlier include only the dividends we receive from investees - though

these dividends typically represent only a small fraction of the earnings

attributable to our ownership. Not that we mind this division of money,

since on balance we regard the undistributed earnings of investees as

more valuable to us than the portion paid out. The reason is simple:

Our investees often have the opportunity to reinvest earnings at high

rates of return. So why should we want them paid out?

To depict something closer to economic reality at Berkshire than

reported earnings, though, we employ the concept of "look-through"

earnings. As we calculate these, they consist of: (1) the operating

earnings reported in the previous section, plus; (2) our share of the

retained operating earnings of major investees that, under GAAP

accounting, are not reflected in our profits, less; (3) an allowance for

the tax that would be paid by Berkshire if these retained earnings of

investees had instead been distributed to us. When tabulating "operating

earnings" here, we exclude purchase-accounting adjustments as well as

capital gains and other major non-recurring items.

The following table sets forth our 1996 look-through earnings,

though I warn you that the figures can be no more than approximate, since

they are based on a number of judgment calls. (The dividends paid to us

by these investees have been included in the operating earnings itemized

on page 12, mostly under "Insurance Group: Net Investment Income.")

Berkshire's Share

of Undistributed

Berkshire's Approximate Operating Earnings

Berkshire's Major Investees Ownership at Yearend(1) (in millions)(2)

-------------------------------- ----------------------- ------------------

American Express Company........ 10.5% $ 132

The Coca-Cola Company........... 8.1% 180

The Walt Disney Company......... 3.6% 50

Federal Home Loan Mortgage Corp. 8.4% 77

The Gillette Company............ 8.6% 73

McDonald's Corporation.......... 4.3% 38

The Washington Post Company..... 15.8% 27

Wells Fargo & Company........... 8.0% 84

------

Berkshire's share of undistributed earnings of major investees.. 661

Hypothetical tax on these undistributed investee earnings(3).... (93)

Reported operating earnings of Berkshire........................ 954

------

Total look-through earnings of Berkshire..................$1,522

======

(1) Does not include shares allocable to minority interests

(2) Calculated on average ownership for the year

(3) The tax rate used is 14%, which is the rate Berkshire pays on

the dividends it receives Common Stock Investments Below we present our common stock investments. Those with a market

value of more than $500 million are itemized.

12/31/96 Shares Company Cost* Market ----------- --------------------------------- -------- ---------

(dollars in millions)

49,456,900 American Express Company...........$1,392.7 $ 2,794.3

200,000,000 The Coca-Cola Company.............. 1,298.9 10,525.0

24,614,214 The Walt Disney Company............ 577.0 1,716.8

64,246,000 Federal Home Loan Mortgage Corp.... 333.4 1,772.8

48,000,000 The Gillette Company............... 600.0 3,732.0

30,156,600 McDonald's Corporation............. 1,265.3 1,368.4

1,727,765 The Washington Post Company........ 10.6 579.0

7,291,418 Wells Fargo & Company.............. 497.8 1,966.9

Others............................. 1,934.5 3,295.4

-------- ---------

Total Common Stocks................$7,910.2 $27,750.6

======== =========

• Represents tax-basis cost which, in aggregate, is $1.2 billion

less than GAAP cost. Our portfolio shows little change: We continue to make more money

when snoring than when active.

Inactivity strikes us as intelligent behavior. Neither we nor most

business managers would dream of feverishly trading highly-profitable

subsidiaries because a small move in the Federal Reserve's discount rate

was predicted or because some Wall Street pundit had reversed his views

on the market. Why, then, should we behave differently with our minority

positions in wonderful businesses? The art of investing in public

companies successfully is little different from the art of successfully

acquiring subsidiaries. In each case you simply want to acquire, at a

sensible price, a business with excellent economics and able, honest

management. Thereafter, you need only monitor whether these qualities

are being preserved.

When carried out capably, an investment strategy of that type will

often result in its practitioner owning a few securities that will come

to represent a very large portion of his portfolio. This investor would

get a similar result if he followed a policy of purchasing an interest

in, say, 20% of the future earnings of a number of outstanding college

basketball stars. A handful of these would go on to achieve NBA stardom,

and the investor's take from them would soon dominate his royalty stream.

To suggest that this investor should sell off portions of his most

successful investments simply because they have come to dominate his

portfolio is akin to suggesting that the Bulls trade Michael Jordan

because he has become so important to the team.

In studying the investments we have made in both subsidiary

companies and common stocks, you will see that we favor businesses and

industries unlikely to experience major change. The reason for that is

simple: Making either type of purchase, we are searching for operations

that we believe are virtually certain to possess enormous competitive

strength ten or twenty years from now. A fast-changing industry

environment may offer the chance for huge wins, but it precludes the

certainty we seek.

I should emphasize that, as citizens, Charlie and I welcome change:

Fresh ideas, new products, innovative processes and the like cause our

country's standard of living to rise, and that's clearly good. As

investors, however, our reaction to a fermenting industry is much like

our attitude toward space exploration: We applaud the endeavor but

prefer to skip the ride.

Obviously all businesses change to some extent. Today, See's is

different in many ways from what it was in 1972 when we bought it: It

offers a different assortment of candy, employs different machinery and

sells through different distribution channels. But the reasons why

people today buy boxed chocolates, and why they buy them from us rather

than from someone else, are virtually unchanged from what they were in

the 1920s when the See family was building the business. Moreover, these

motivations are not likely to change over the next 20 years, or even 50.

We look for similar predictability in marketable securities. Take

Coca-Cola: The zeal and imagination with which Coke products are sold

has burgeoned under Roberto Goizueta, who has done an absolutely

incredible job in creating value for his shareholders. Aided by Don

Keough and Doug Ivester, Roberto has rethought and improved every aspect

of the company. But the fundamentals of the business - the qualities

that underlie Coke's competitive dominance and stunning economics - have

remained constant through the years.

I was recently studying the 1896 report of Coke (and you think that you are behind in your reading!). At that time Coke, though it was

already the leading soft drink, had been around for only a decade. But

its blueprint for the next 100 years was already drawn. Reporting sales

of $148,000 that year, Asa Candler, the company's president, said: "We

have not lagged in our efforts to go into all the world teaching that

Coca-Cola is the article, par excellence, for the health and good feeling

of all people." Though "health" may have been a reach, I love the fact

that Coke still relies on Candler's basic theme today - a century later.

Candler went on to say, just as Roberto could now, "No article of like

character has ever so firmly entrenched itself in public favor." Sales

of syrup that year, incidentally, were 116,492 gallons versus about 3.2

billion in 1996.

I can't resist one more Candler quote: "Beginning this year about

March 1st . . . we employed ten traveling salesmen by means of which,

with systematic correspondence from the office, we covered almost the

territory of the Union." That's my kind of sales force.

Companies such as Coca-Cola and Gillette might well be labeled "The

Inevitables." Forecasters may differ a bit in their predictions of

exactly how much soft drink or shaving-equipment business these companies

will be doing in ten or twenty years. Nor is our talk of inevitability

meant to play down the vital work that these companies must continue to

carry out, in such areas as manufacturing, distribution, packaging and

product innovation. In the end, however, no sensible observer - not even

these companies' most vigorous competitors, assuming they are assessing

the matter honestly - questions that Coke and Gillette will dominate

their fields worldwide for an investment lifetime. Indeed, their

dominance will probably strengthen. Both companies have significantly

expanded their already huge shares of market during the past ten years,

and all signs point to their repeating that performance in the next

decade.

Obviously many companies in high-tech businesses or embryonic

industries will grow much faster in percentage terms than will The

Inevitables. But I would rather be certain of a good result than hopeful

of a great one.

Of course, Charlie and I can identify only a few Inevitables, even

after a lifetime of looking for them. Leadership alone provides no

certainties: Witness the shocks some years back at General Motors, IBM

and Sears, all of which had enjoyed long periods of seeming

invincibility. Though some industries or lines of business exhibit

characteristics that endow leaders with virtually insurmountable

advantages, and that tend to establish Survival of the Fattest as almost

a natural law, most do not. Thus, for every Inevitable, there are dozens

of Impostors, companies now riding high but vulnerable to competitive

attacks. Considering what it takes to be an Inevitable, Charlie and I

recognize that we will never be able to come up with a Nifty Fifty or

even a Twinkling Twenty. To the Inevitables in our portfolio, therefore,

we add a few "Highly Probables."

You can, of course, pay too much for even the best of businesses.

The overpayment risk surfaces periodically and, in our opinion, may now

be quite high for the purchasers of virtually all stocks, The Inevitables

included. Investors making purchases in an overheated market need to

recognize that it may often take an extended period for the value of even

an outstanding company to catch up with the price they paid.

A far more serious problem occurs when the management of a great

company gets sidetracked and neglects its wonderful base business while

purchasing other businesses that are so-so or worse. When that happens,

the suffering of investors is often prolonged. Unfortunately, that is

precisely what transpired years ago at both Coke and Gillette. (Would

you believe that a few decades back they were growing shrimp at Coke and

exploring for oil at Gillette?) Loss of focus is what most worries

Charlie and me when we contemplate investing in businesses that in

general look outstanding. All too often, we've seen value stagnate in

the presence of hubris or of boredom that caused the attention of

managers to wander. That's not going to happen again at Coke and

Gillette, however - not given their current and prospective managements.

• * * * * * * * * * * *

Let me add a few thoughts about your own investments. Most

investors, both institutional and individual, will find that the best way

to own common stocks is through an index fund that charges minimal fees.

Those following this path are sure to beat the net results (after fees

and expenses) delivered by the great majority of investment

professionals.

Should you choose, however, to construct your own portfolio, there

are a few thoughts worth remembering. Intelligent investing is not

complex, though that is far from saying that it is easy. What an

investor needs is the ability to correctly evaluate selected businesses.

Note that word "selected": You don't have to be an expert on every

company, or even many. You only have to be able to evaluate companies

within your circle of competence. The size of that circle is not very

important; knowing its boundaries, however, is vital.

To invest successfully, you need not understand beta, efficient

markets, modern portfolio theory, option pricing or emerging markets.

You may, in fact, be better off knowing nothing of these. That, of

course, is not the prevailing view at most business schools, whose

finance curriculum tends to be dominated by such subjects. In our view,

though, investment students need only two well-taught courses - How to

Value a Business, and How to Think About Market Prices.

Your goal as an investor should simply be to purchase, at a rational

price, a part interest in an easily-understandable business whose

earnings are virtually certain to be materially higher five, ten and

twenty years from now. Over time, you will find only a few companies

that meet these standards - so when you see one that qualifies, you

should buy a meaningful amount of stock. You must also resist the

temptation to stray from your guidelines: If you aren't willing to own a

stock for ten years, don't even think about owning it for ten minutes.

Put together a portfolio of companies whose aggregate earnings march

upward over the years, and so also will the portfolio's market value.

Though it's seldom recognized, this is the exact approach that has

produced gains for Berkshire shareholders: Our look-through earnings

have grown at a good clip over the years, and our stock price has risen

correspondingly. Had those gains in earnings not materialized, there

would have been little increase in Berkshire's value.

The greatly enlarged earnings base we now enjoy will inevitably

cause our future gains to lag those of the past. We will continue,

however, to push in the directions we always have. We will try to build

earnings by running our present businesses well - a job made easy because

of the extraordinary talents of our operating managers - and by

purchasing other businesses, in whole or in part, that are not likely to

be roiled by change and that possess important competitive advantages. USAir When Richard Branson, the wealthy owner of Virgin Atlantic Airways,

was asked how to become a millionaire, he had a quick answer: "There's

really nothing to it. Start as a billionaire and then buy an airline."

Unwilling to accept Branson's proposition on faith, your Chairman decided

in 1989 to test it by investing $358 million in a 9.25% preferred stock of

USAir.

I liked and admired Ed Colodny, the company's then-CEO, and I still

do. But my analysis of USAir's business was both superficial and wrong.

I was so beguiled by the company's long history of profitable

operations, and by the protection that ownership of a senior security

seemingly offered me, that I overlooked the crucial point: USAir's

revenues would increasingly feel the effects of an unregulated, fiercely-

competitive market whereas its cost structure was a holdover from the

days when regulation protected profits. These costs, if left unchecked,

portended disaster, however reassuring the airline's past record might

be. (If history supplied all of the answers, the Forbes 400 would

consist of librarians.)

To rationalize its costs, however, USAir needed major improvements

in its labor contracts - and that's something most airlines have found it

extraordinarily difficult to get, short of credibly threatening, or

actually entering, bankruptcy. USAir was to be no exception.

Immediately after we purchased our preferred stock, the imbalance between

the company's costs and revenues began to grow explosively. In the 1990-

1994 period, USAir lost an aggregate of $2.4 billion, a performance that

totally wiped out the book equity of its common stock.

For much of this period, the company paid us our preferred

dividends, but in 1994 payment was suspended. A bit later, with the

situation looking particularly gloomy, we wrote down our investment by

75%, to $89.5 million. Thereafter, during much of 1995, I offered to

sell our shares at 50% of face value. Fortunately, I was unsuccessful.

Mixed in with my many mistakes at USAir was one thing I got right:

Making our investment, we wrote into the preferred contract a somewhat

unusual provision stipulating that "penalty dividends" - to run five

percentage points over the prime rate - would be accrued on any

arrearages. This meant that when our 9.25% dividend was omitted for two

years, the unpaid amounts compounded at rates ranging between 13.25% and

14%.

Facing this penalty provision, USAir had every incentive to pay

arrearages just as promptly as it could. And in the second half of 1996,

when USAir turned profitable, it indeed began to pay, giving us $47.9

million. We owe Stephen Wolf, the company's CEO, a huge thank-you for

extracting a performance from the airline that permitted this payment.

Even so, USAir's performance has recently been helped significantly by an

industry tailwind that may be cyclical in nature. The company still has

basic cost problems that must be solved.

In any event, the prices of USAir's publicly-traded securities tell

us that our preferred stock is now probably worth its par value of $358

million, give or take a little. In addition, we have over the years

collected an aggregate of $240.5 million in dividends (including $30

million received in 1997).

Early in 1996, before any accrued dividends had been paid, I tried

once more to unload our holdings - this time for about $335 million.

You're lucky: I again failed in my attempt to snatch defeat from the

jaws of victory.

In another context, a friend once asked me: "If you're so rich, why

aren't you smart?" After reviewing my sorry performance with USAir, you

may conclude he had a point. Financings We wrote four checks to Salomon Brothers last year and in each case

were delighted with the work for which we were paying. I've already

described one transaction: the FlightSafety purchase in which Salomon was

the initiating investment banker. In a second deal, the firm placed a

small debt offering for our finance subsidiary.

Additionally, we made two good-sized offerings through Salomon, both

with interesting aspects. The first was our sale in May of 517,500

shares of Class B Common, which generated net proceeds of $565 million.

As I have told you before, we made this sale in response to the

threatened creation of unit trusts that would have marketed themselves as

Berkshire look-alikes. In the process, they would have used our past,

and definitely nonrepeatable, record to entice naive small investors and

would have charged these innocents high fees and commissions.

I think it would have been quite easy for such trusts to have sold

many billions of dollars worth of units, and I also believe that early

marketing successes by these trusts would have led to the formation of

others. (In the securities business, whatever can be sold will be sold.)

The trusts would have meanwhile indiscriminately poured the proceeds of

their offerings into a supply of Berkshire shares that is fixed and

limited. The likely result: a speculative bubble in our stock. For at

least a time, the price jump would have been self-validating, in that it

would have pulled new waves of naive and impressionable investors into

the trusts and set off still more buying of Berkshire shares.

Some Berkshire shareholders choosing to exit might have found that

outcome ideal, since they could have profited at the expense of the

buyers entering with false hopes. Continuing shareholders, however,

would have suffered once reality set in, for at that point Berkshire

would have been burdened with both hundreds of thousands of unhappy,

indirect owners (trustholders, that is) and a stained reputation.

Our issuance of the B shares not only arrested the sale of the

trusts, but provided a low-cost way for people to invest in Berkshire if

they still wished to after hearing the warnings we issued. To blunt the

enthusiasm that brokers normally have for pushing new issues - because

that's where the money is - we arranged for our offering to carry a

commission of only 1.5%, the lowest payoff that we have ever seen in a

common stock underwriting. Additionally, we made the amount of the

offering open-ended, thereby repelling the typical IPO buyer who looks

for a short-term price spurt arising from a combination of hype and

scarcity.

Overall, we tried to make sure that the B stock would be purchased

only by investors with a long-term perspective. Those efforts were

generally successful: Trading volume in the B shares immediately

following the offering - a rough index of "flipping" - was far below the

norm for a new issue. In the end we added about 40,000 shareholders,

most of whom we believe both understand what they own and share our time

horizons.

Salomon could not have performed better in the handling of this

unusual transaction. Its investment bankers understood perfectly what we

were trying to achieve and tailored every aspect of the offering to meet

these objectives. The firm would have made far more money - perhaps ten

times as much - if our offering had been standard in its make-up. But

the investment bankers involved made no attempt to tweak the specifics in

that direction. Instead they came up with ideas that were counter to

Salomon's financial interest but that made it much more certain

Berkshire's goals would be reached. Terry Fitzgerald captained this

effort, and we thank him for the job that he did.

Given that background, it won't surprise you to learn that we again

went to Terry when we decided late in the year to sell an issue of

Berkshire notes that can be exchanged for a portion of the Salomon shares

that we hold. In this instance, once again, Salomon did an absolutely

first-class job, selling $500 million principal amount of five-year notes

for $447.1 million. Each $1,000 note is exchangeable into 17.65 shares

and is callable in three years at accreted value. Counting the original

issue discount and a 1% coupon, the securities will provide a yield of 3%

to maturity for holders who do not exchange them for Salomon stock. But

it seems quite likely that the notes will be exchanged before their

maturity. If that happens, our interest cost will be about 1.1% for the

period prior to exchange.

In recent years, it has been written that Charlie and I are unhappy

about all investment-banking fees. That's dead wrong. We have paid a

great many fees over the last 30 years - beginning with the check we

wrote to Charlie Heider upon our purchase of National Indemnity in 1967 -

and we are delighted to make payments that are commensurate with

performance. In the case of the 1996 transactions at Salomon Brothers,

we more than got our money's worth. Miscellaneous Though it was a close decision, Charlie and I have decided to enter

the 20th Century. Accordingly, we are going to put future quarterly and

annual reports of Berkshire on the Internet, where they can be accessed

via http://www.berkshirehathaway.com. We will always "post" these

reports on a Saturday so that anyone interested will have ample time to

digest the information before trading begins. Our publishing schedule

for the next 12 months is May 17, 1997, August 16, 1997, November 15,

1997, and March 14, 1998. We will also post any press releases that we

issue.

At some point, we may stop mailing our quarterly reports and simply

post these on the Internet. This move would eliminate significant costs.

Also, we have a large number of "street name" holders and have found

that the distribution of our quarterlies to them is highly erratic: Some

holders receive their mailings weeks later than others.

The drawback to Internet-only distribution is that many of our

shareholders lack computers. Most of these holders, however, could

easily obtain printouts at work or through friends. Please let me know

if you prefer that we continue mailing quarterlies. We want your input -

starting with whether you even read these reports - and at a minimum will

make no change in 1997. Also, we will definitely keep delivering the

annual report in its present form in addition to publishing it on the

Internet.

• * * * * * * * * * * *

About 97.2% of all eligible shares participated in Berkshire's 1996

shareholder-designated contributions program. Contributions made were

$13.3 million, and 3,910 charities were recipients. A full description

of the shareholder-designated contributions program appears on pages 48-

49.

Every year a few shareholders miss out on the program because they

don't have their shares registered in their own names on the prescribed

record date or because they fail to get the designation form back to us

within the 60-day period allowed. This is distressing to Charlie and me.

But if replies are received late, we have to reject them because we

can't make exceptions for some shareholders while refusing to make them

for others. To participate in future programs, you must own Class 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 31, 1997,

will be ineligible for the 1997 program. When you get the form, return

it promptly so that it does not get put aside or forgotten. The Annual Meeting Our capitalist's version of Woodstock -the Berkshire Annual Meeting-

will be held on Monday, May 5. Charlie and I thoroughly enjoy this

event, and we hope that you come. We will start at 9:30 a.m., break for

about 15 minutes at noon (food will be available - but at a price, of

course), and then continue talking to hard-core attendees until at least

3:30. Last year we had representatives from all 50 states, as well as

Australia, Greece, Israel, Portugal, Singapore, Sweden, Switzerland, and

the United Kingdom. The annual meeting is a time for owners to get their

business-related questions answered, and therefore Charlie and I will

stay on stage until we start getting punchy. (When that happens, I hope

you notice a change.)

Last year we had attendance of 5,000 and strained the capacity of

the Holiday Convention Centre, even though we spread out over three

rooms. This year, our new Class B shares have caused a doubling of our

stockholder count, and we are therefore moving the meeting to the

Aksarben Coliseum, which holds about 10,000 and also has a huge parking

lot. The doors will open for the meeting at 7:00 a.m., and at 8:30 we

will - upon popular demand - show a new Berkshire movie produced by Marc

Hamburg, our CFO. (In this company, no one gets by with doing only a

single job.)

Overcoming our legendary repugnance for activities even faintly

commercial, we will also have an abundant array of Berkshire products for

sale in the halls outside the meeting room. Last year we broke all

records, selling 1,270 pounds of See's candy, 1,143 pairs of Dexter

shoes, $29,000 of World Books and related publications, and 700 sets of

knives manufactured by our Quikut subsidiary. Additionally, many

shareholders made inquiries about GEICO auto policies. If you would like

to investigate possible insurance savings, bring your present policy to

the meeting. We estimate that about 40% of our shareholders can save

money by insuring with us. (We'd like to say 100%, but the insurance

business doesn't work that way: Because insurers differ in their

underwriting judgments, some of our shareholders are currently paying

rates that are lower than GEICO's.)

An attachment to the proxy material enclosed with this report

explains how you can obtain the card you will need for admission to the

meeting. We expect a large crowd, so get both plane and hotel

reservations promptly. American Express (800-799-6634) will be happy to

help you with arrangements. As usual, we will have buses servicing the

larger hotels to take you to and from the meeting, and also to take you

to Nebraska Furniture Mart, Borsheim's and the airport after it is over.

NFM's main store, located on a 75-acre site about a mile from

Aksarben, is open from 10 a.m. to 9 p.m. on weekdays, 10 a.m. to 6 p.m.

on Saturdays, and noon to 6 p.m. on Sundays. Come by and say hello to

"Mrs. B" (Rose Blumkin). She's 103 now and sometimes operates with an

oxygen mask that is attached to a tank on her cart. But if you try to

keep pace with her, it will be you who needs oxygen. NFM did about $265

million of business last year - a record for a single-location home

furnishings operation - and you'll see why once you check out its

merchandise and prices.

Borsheim's normally is closed on Sunday but will be open for

shareholders from 10 a.m. to 6 p.m. on May 4th. Last year on

"Shareholder Sunday" we broke every Borsheim's record in terms of

tickets, dollar volume and, no doubt, attendees per square inch. Because

we expect a capacity crowd this year as well, all shareholders attending

on Sunday must bring their admission cards. Shareholders who prefer a

somewhat less frenzied experience will get the same special treatment on

Saturday, when the store is open from 10 a.m. to 5:30 p.m., or on Monday

between 10 a.m. and 8 p.m. Come by at any time this year and let Susan

Jacques, Borsheim's CEO, and her skilled associates perform a painless

walletectomy on you.

My favorite steakhouse, Gorat's, was sold out last year on the

weekend of the annual meeting, even though it added an additional seating

at 4 p.m. on Sunday. You can make reservations beginning on April 1st (but not earlier) by calling 402-551-3733. I will be at Gorat's on

Sunday after Borsheim's, having my usual rare T-bone and double order of

hashbrowns. I can also recommend - this is the standard fare when Debbie

Bosanek, my invaluable assistant, and I go to lunch - the hot roast beef

sandwich with mashed potatoes and gravy. Mention Debbie's name and you

will be given an extra boat of gravy.

The Omaha Royals and Indianapolis Indians will play baseball on

Saturday evening, May 3rd, at Rosenblatt Stadium. Pitching in my normal

rotation - one throw a year - I will start.

Though Rosenblatt is normal in appearance, it is anything but: The

field sits on a unique geological structure that occasionally emits short

gravitational waves causing even the most smoothly-delivered pitch to

sink violently. I have been the victim of this weird phenomenon several

times in the past but am hoping for benign conditions this year. There

will be lots of opportunities for photos at the ball game, but you will

need incredibly fast reflexes to snap my fast ball en route to the plate.

Our proxy statement includes information about obtaining tickets to

the game. We will also provide an information packet listing restaurants

that will be open on Sunday night and describing various things that you

can do in Omaha on the weekend. The entire gang at Berkshire looks

forward to seeing you.

Warren E. Buffett

February 28, 1997 Chairman of the Board

Acquisition Criteria BERKSHIRE HATHAWAY INC. ACQUISITION CRITERIA We are eager to hear from principals or their representatives about

businesses that meet all of the following criteria:

(1) Large purchases (at least $25 million of before-tax earnings),

(2) Demonstrated consistent earning power (future projections are of

no interest to us, nor are "turnaround" situations),

(3) Businesses earning good returns on equity while employing little

or no debt,

(4) Management in place (we can't supply it),

(5) Simple businesses (if there's lots of technology, we won't

understand it),

(6) An offering price (we don't want to waste our time or that of the

seller by talking, even preliminarily, about a transaction when

price is unknown).

The larger the company, the greater will be our interest: We would

like to make an acquisition in the $3-5 billion range. We are not

interested, however, in receiving suggestions about purchases we might

make in the general stock market. We will not engage in unfriendly takeovers. We can promise complete

confidentiality and a very fast answer - customarily within five minutes

• as to whether we're interested. We prefer to buy for cash, but will

consider issuing stock when we receive as much in intrinsic business

value as we give.

Charlie and I frequently get approached about acquisitions that don't

come close to meeting our tests: We've found that if you advertise an

interest in buying collies, a lot of people will call hoping to sell you

their cocker spaniels. A line from a country song expresses our feeling

about new ventures, turnarounds, or auction-like sales: "When the phone

don't ring, you'll know it's me."

INDEPENDENT AUDITORS' REPORT INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders

Berkshire Hathaway Inc.

We have audited the accompanying consolidated balance sheets of

Berkshire Hathaway Inc. and subsidiaries as of December 31, 1996 and

1995, and the related consolidated statements of earnings and cash

flows for each of the three years in the period ended December 31,

1996. These financial statements are the responsibility of the

Company's management. Our responsibility is to express an opinion on

these financial statements based on our audits.

We conducted our audits in accordance with generally accepted

auditing standards. Those standards require that we plan and perform

the audit to obtain reasonable assurance about whether the financial

statements are free of material misstatement. An audit includes

examining, on a test basis, evidence supporting the amounts and

disclosures in the financial statements. An audit also includes

assessing the accounting principles used and significant estimates

made by management, as well as evaluating the overall financial

statement presentation. We believe that our audits provide a

reasonable basis for our opinion.

In our opinion, such consolidated financial statements present

fairly, in all material respects, the financial position of Berkshire

Hathaway Inc. and subsidiaries as of December 31, 1996 and 1995, and

the results of their operations and their cash flows for each of the

three years in the period ended December 31, 1996 in conformity with

generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Omaha, Nebraska

March 7, 1997

CONSOLIDATED FINANCIAL STATEMENTS BERKSHIRE HATHAWAY INC. CONSOLIDATED FINANCIAL STATEMENTS BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(dollars in millions except per share amounts) December 31,

----------------------

1996 1995*

ASSETS ---------- ----------

Cash and cash equivalents..............................$ 1,339.8 $ 2,703.8

Investments:

Securities with fixed maturities..................... 6,446.9 1,423.2

Equity securities.................................... 27,750.6 21,017.6

Receivables............................................ 1,523.2 718.9

Inventories............................................ 619.6 601.1

Assets of finance businesses........................... 968.9 756.7

Property, plant and equipment.......................... 1,034.2 333.3

Goodwill of acquired businesses........................ 3,110.3 672.0

Other assets........................................... 616.0 484.8

---------- ----------

$43,409.5 $28,711.4

========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY

Losses and loss adjustment expenses....................$ 6,274.4 $ 3,698.6

Unearned premiums...................................... 1,183.5 374.1

Accounts payable, accruals and other liabilities....... 2,556.8 1,039.1

Income taxes, principally deferred..................... 6,837.6 4,849.5

Borrowings under investment agreements and other debt.. 1,944.4 1,061.7

Liabilities of finance businesses...................... 851.4 685.2

---------- ----------

19,648.1 11,708.2

---------- ----------

Minority shareholders' interests....................... 335.1 264.5

---------- ----------

Shareholders' equity:

Common Stock: **

Class A Common Stock, $5 par value, 1,376,188

and 1,381,308 shares issued; 1,206,120 and

1,193,512 shares outstanding................... 6.9 6.9

Class B Common Stock, $0.1667 par value, 783,755

shares issued and outstanding in 1996.......... 0.1 --

Capital in excess of par value....................... 2,274.1 1,001.7

Unrealized appreciation of investments, net.......... 12,143.9 9,220.7

Retained earnings.................................... 9,032.7 6,544.1

---------- ----------

23,457.7 16,773.4

Less: Cost of 170,068 and 187,796 Class A common

shares in treasury............................... 31.4 34.7

---------- ----------

Total shareholders' equity................. 23,426.3 16,738.7

---------- ----------

$43,409.5 $28,711.4

========== ==========

• Restated - See Notes to Consolidated Financial Statements.

** Class B Common Stock has economic rights equal to one-thirtieth

(1/30) of the economic rights of Class A Common Stock. Accordingly,

on an equivalent Class A Common Stock basis, there are 1,232,245

shares outstanding at December 31, 1996 versus 1,193,512 outstanding

at December 31, 1995. See accompanying Notes to Consolidated Financial Statements BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

(dollars in millions except per share amounts) Year Ended December 31,

1996 1995 * 1994 *

-------- -------- --------

Revenues:

Insurance premiums earned.........................$4,117.8 $ 957.5 $ 923.2

Sales and service revenues........................ 3,061.2 2,755.9 2,351.9

Interest, dividend and other investment income.... 811.9 629.2 519.0

Income from finance businesses.................... 25.3 26.6 24.9

Realized investment gain.......................... 2,484.1 194.1 91.3

-------- -------- --------

10,500.3 4,563.3 3,910.3

-------- -------- --------

Cost and expenses:

Insurance losses and loss adjustment expenses..... 3,089.5 612.0 565.3

Insurance underwriting expenses................... 797.6 325.0 228.0

Cost of products and services sold................ 1,884.0 1,706.7 1,450.0

Selling, general and administrative expenses...... 861.9 759.6 599.6

Goodwill amortization............................. 61.7 16.3 13.8

Interest expense.................................. 99.7 59.3 60.1

Other-than-temporary decline in value of

investment in USAir Group, Inc. Preferred Stock.. -- -- 268.5

-------- -------- --------

6,794.4 3,478.9 3,185.3

-------- -------- --------

Earnings before income taxes and minority interest. 3,705.9 1,084.4 725.0

Income taxes...................................... 1,196.8 276.2 163.3

Minority interest................................. 20.5 13.3 8.7

-------- -------- --------

Net earnings.......................................$2,488.6 $ 794.9 $ 553.0

======== ======== ========

Average shares outstanding **....................1,205,257 1,187,102 1,177,750

Net earnings per share ** ........................ $2,065 $670 $470

====== ==== ====

• Restated - See Notes to Consolidated Financial Statements.

** Average shares outstanding for 1996 include average Class A Common

shares and average Class B Common shares determined on an equivalent

Class A Common Stock basis. Net earnings per share shown above

represents net earnings per Class A Common share. Net earnings per

Class B Common share is equal to one-thirtieth (1/30) of such amount

or $69 per share for 1996. See accompanying Notes to Consolidated Financial Statements BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in millions) Year Ended December 31,

1996 1995 1994

--------- --------- ---------

Cash flows from operating activities:

Net income.............................................. $ 2,488.6 $ 794.9 $ 553.0

Adjustments to reconcile net income to cash flows

from operating activities:

Realized investment gain.............................. (2,484.1) (194.1) (91.3)

Other-than-temporary decline in value of investment

in USAir Group, Inc. Preferred Stock............. -- -- 268.5

Depreciation and amortization......................... 151.6 75.7 62.5

Changes in assets and liabilities before effects from

business acquisitions:

Losses and loss adjustment expenses................. 352.1 268.6 274.1

Deferred charges re reinsurance assumed............. 51.8 51.0 25.3

Unearned premiums................................... (8.8) 66.9 (8.5)

Receivables......................................... (127.1) (35.4) (49.8)

Accounts payable, accruals and other liabilities.... 558.3 228.2 210.5

Income taxes........................................ 221.9 (29.9) (252.4)

Other................................................. 55.7 (98.0) (62.8)

Net cash flows from operating activities.......... 1,260.0 1,127.9 929.1

---------- --------- ---------

Cash flows from investing activities:

Purchases of securities with fixed maturities........... (2,464.7) (273.9) (2,485.8)

Purchases of equity securities.......................... (1,423.4) (1,459.9) (3,050.0)

Proceeds from sales of securities with fixed maturities. 277.5 669.7 1,772.1

Proceeds from redemptions and maturities of securities

with fixed maturities................................. 791.9 954.6 85.9

Proceeds from sales of equity securities................ 1,531.0 1,352.7 1,466.8

Loans and investments originated in finance businesses.. (577.1) (381.2) (246.8)

Principal collection on loans and investments

originated in finance businesses...................... 351.5 363.0 332.4

Acquisitions of businesses, net of cash acquired........ (1,975.3) -- --

Other................................................... (19.2) (11.4) (23.2)

Net cash flows from investing activities.......... (3,507.8) 1,213.6 (2,148.6)

---------- --------- ---------

Cash flows from financing activities:

Proceeds from borrowings of finance businesses.......... 285.1 265.7 208.6

Proceeds from other borrowings.......................... 1,604.3 1,232.7 1,225.3

Repayments of borrowings of finance businesses.......... (427.3) (232.1) (390.5)

Repayments of other borrowings.......................... (1,170.0) (1,151.7) (1,387.7)

Net proceeds from issuance of Class B Common Stock...... 565.0 -- --

Other................................................... (3.5) (1.5) (0.9)

---------- --------- ---------

Net cash flows from financing activities.......... 853.6 113.1 (345.2)

---------- --------- ---------

Increase (decrease) in cash and cash equivalents.. (1,394.2) 2,454.6 (1,564.7)

Cash and cash equivalents at beginning of year........... 2,744.5 289.9 1,854.6

---------- --------- ---------

Cash and cash equivalents at end of year *............... $1,350.3 $2,744.5 $ 289.9

========== ========= =========

• Cash and cash equivalents at end of year are

comprised of the following:

Finance businesses...............................$ 10.5 $ 40.7 $ 16.0

Other............................................ 1,339.8 2,703.8 273.9

---------- --------- ---------

$1,350.3 $ 2,744.5 $ 289.9

========== ========= ========= See accompanying Notes to Consolidated Financial Statements BERKSHIRE HATHAWAY INC.

and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 1996 (1) Significant accounting policies and practices (a) Nature of operations and basis of consolidation Berkshire Hathaway Inc. ("Berkshire" or "Company") is a holding

company owning subsidiaries engaged in a number of diverse

business activities. The most important of these is the

property and casualty insurance business conducted on both a

direct and reinsurance basis. Further information regarding this

business and Berkshire's other reportable business segments is

contained in Note 15.

The accompanying Consolidated Financial Statements include the

accounts of Berkshire consolidated with accounts

of all its subsidiaries. Intercompany accounts and transactions

have been eliminated. The accompanying prior year financial

statements have been restated from the amounts previously

reported in the Company's Consolidated Financial Statements

included in its Annual Report for the year ended December 31,

1995. See 1(b) below for further information. (b) Restatement As more fully discussed in Note 2, on January 2, 1996, GEICO

Corporation ("GEICO") became a wholly-owned

subsidiary of Berkshire. Prior to January 2, 1996, Berkshire

owned approximately 51% of the outstanding common stock of

GEICO. Previously the investment in GEICO common stock had been

classified as an available-for-sale security and was carried in

Berkshire's Consolidated Balance Sheet at fair value.

Generally accepted accounting principles require that prior year

financial statements be restated when control of

a business is obtained on a "step-by-step" basis. Accordingly,

the accompanying Consolidated Financial Statements for 1995 and

1994 have been restated to account for Berkshire's previous

investment in GEICO common stock under the equity method.

Berkshire's proportionate share of GEICO's net income reduced

by amortization of related goodwill is included in the

Consolidated Statements of Earnings as a component of interest,

dividends and other investment income. The principal effect of

the restatement was to decrease shareholders' equity as of

December 31, 1995, by $478.4 million from the amount reported

in Berkshire's Consolidated Financial Statements included in

its Annual Report for the year ended December 31, 1995. (c) Use of estimates in preparation of financial statements The preparation of the consolidated financial statements in

conformity with generally accepted accounting principles requires

management to make estimates and assumptions that affect the reported

amount of assets and liabilities at the date of the financial statements

and the reported amount of revenues and expenses during the period.

Actual results may differ from the estimates and assumptions used in

preparing the consolidated financial statements. (d) Cash equivalents Cash equivalents consist of funds invested in money market

accounts and in investments with a maturity of three months or

less when purchased. (e) Investments Management determines the appropriate classifications of

investments in securities with fixed maturities and equity

securities at the time of purchase and reevaluates such

designations as of each balance sheet date. Investments in

securities with fixed maturities, except for such securities held

by finance businesses, are classified as available-for-sale.

Securities with fixed maturities held by finance businesses are

classified as held-to-maturity. Investments in equity securities

are classified as available-for-sale. Securities with fixed

maturities are deemed to be held-to-maturity securities when the

Company has the ability and positive intent to hold them to

maturity.

Held-to-maturity securities are carried at amortized cost.

Available-for-sale securities are stated at fair value, with

unrealized gains and losses, net of tax, reported in a

separate component of shareholders' equity. Realized gains and

losses, which arise when investments are sold (as determined on

a specific identification basis), other-than-temporarily

impaired or in certain situations when investments are marked-

to-market, are included in the Consolidated Statements of

Earnings. (f) Goodwill of acquired businesses Goodwill of acquired businesses represents the difference between

purchase cost and the fair value of the net

assets of acquired businesses and is being amortized on a

straight line basis over forty years. The Company continually

reviews the recoverability of the carrying value of goodwill of

acquired businesses using the methodology prescribed by

Statement of Financial Accounting Standards No. 121 "Accounting

for the impairment of Long-Lived Assets and for Long-Lived

Assets to be Disposed Of." (g) Insurance premium acquisition costs For financial reporting purposes, certain costs of acquiring

insurance premiums are deferred, subjectto ultimate

recoverability, and charged to income as the premiums are earned.

Generally, the ultimate recoverability of premium acquisition

costs is determined without regard to investment income. The

unamortized balance of deferred premium acquisition costs is

included in other assets. (h) Deferred charges re reinsurance assumed The excess of estimated liabilities for claims and claim costs

ultimately payable by the Insurance Groupover consideration received with

respect to retroactive property/casualty reinsurance contracts that

provide for indemnification of insurance risk, other than structured

settlements, is established as a deferred charge at inception of such

contracts. The deferred charges are subsequently amortized using the

interest method over the expected settlement periods of the claim

liabilities. The unamortized balance is included in other assets and was

$337.9 million at December 31, 1996 and $389.7 million at December 31,

1995. (j) Losses and loss adjustment expenses Liability for unpaid losses and loss adjustment expenses

represents the aggregate of such obligations ofmembers of the Insurance

Group with respect to: (i) prospective property/casualty insurance and

reinsurance contracts, (ii) retroactive property/casualty reinsurance

contracts that provide for indemnification of insurance risk, other than

structured settlements, and (iii) reinsurance contracts providing for

periodic payments with respect to settled claims ("structured

settlements"). Except for structured settlement liabilities which are

stated at discounted present values, the liability for unpaid losses and

loss adjustment expenses is at the aggregate of estimated ultimate

payment amounts.

Ultimate payment amounts with respect to prospective contracts

are determined from (i) individual caseestimates, (ii) estimates of

incurred but not reported losses, based on past experience, and (iii)

reports of losses from ceding insurers.

Ultimate payment amounts with respect to retroactive reinsurance

contracts that provide forindemnification of insurance risk, other than

structured settlements, are established for financial reporting purposes

at maximum limits of indemnification under the contracts. (See also 1(h)

above related to deferred charges re reinsurance assumed.)

Liabilities under structured settlement contracts are established

when the contracts are entered into, at the then

present value of the actuarially determined ultimate payment

amount discounted at the prevailing market interest rate.

Annual accretions to the liabilities are charged to losses

incurred. This accounting policy also applies to annuity

reserves and policyholder liabilities which are included in the

liabilities of finance businesses. (k) Insurance premiums Insurance premiums for prospective insurance and non-property

catastrophe reinsurance policies are recognized

as revenues ratably over their terms with unearned premiums

computed on a monthly or daily pro rata basis. Premiums for

catastrophe excess of loss reinsurance coverages are deferred

until the earlier of a loss occurrence or policy expiration.

Consideration received for structured settlements is accounted

for as premiums earned at the inception of the contracts.

Premiums earned are stated net of amounts ceded to reinsurers. (m) Reinsurance Provisions for losses and loss adjustment expenses are reported

in the accompanying consolidated statements of

earnings after deducting estimates of amounts that will be

recoverable under reinsurance contracts. Such recoverables

totalled $47 million, $14 million, and $61 million for 1996,

1995 and 1994, respectively. Reinsurance contracts do not

relieve the Insurance Group Members of their obligations to

indemnify policyholders with respect to the underlying

insurance and reinsurance contracts. Losses and loss adjustment

expenses recoverable under reinsurance contracts are included

in receivables. (2) Business acquisitions - 1996 During 1996, Berkshire consummated mergers with GEICO Corporation

("GEICO") and FlightSafety International, Inc. ("FlightSafety"). Each of

these mergers was accounted for by the purchase method. The excess of the

purchase cost of each business over the fair value of net assets acquired

as of the respective merger dates is recorded as goodwill of acquired

businesses and will subsequently be amortized over forty years. The

aggregate amount of goodwill applicable to these acquisitions was

approximately $2.5 billion. Additional information concerning each merger

is provided below. (a) GEICO On January 2, 1996, GEICO became a wholly-owned subsidiary as a

result of the merger of an indirect wholly-owned subsidiary

of Berkshire with and into GEICO. GEICO, through its

subsidiaries, is a multiple line property and casualty insurer,

the principal business of which is underwriting private

passenger automobile insurance.

The merger was consummated pursuant to an Agreement and Plan of

Merger (the "GEICO Agreement") dated August 25, 1995. Pursuant

to the GEICO Agreement, each issued and outstanding common share

of GEICO, except shares held by Berkshire subsidiaries and

GEICO, was converted into the right to receive $70 per share,

or an aggregate amount of $2.3 billion. The amount of the

merger consideration was based upon 33,284,733 outstanding shares

held by the public on the merger date.

As of the merger date, subsidiaries of Berkshire owned 34,250,000

common shares of GEICO, which were acquired in years prior to

1981 at an aggregate cost of $45.7 million. Up to the merger

date, neither Berkshire nor its subsidiaries had acquired any

shares of GEICO common stock since 1980. However, Berkshire's

ownership percentage, due to intervening stock repurchases

by GEICO, gradually increased from about 33% in 1980 to almost

51% immediately prior to the merger date. (b) FlightSafety On December 23, 1996, FlightSafety became a wholly-owned

subsidiary as a result of the merger of FlightSafety

with and into a subsidiary of Berkshire. FlightSafety provides

high technology training to operators of aircraft and ships

throughout the world.

The merger was consummated pursuant to an Agreement and Plan

of Merger dated October 14, 1996 (the "FlightSafety Agreement")

between Berkshire and FlightSafety. Pursuant to the FlightSafety

Agreement, aggregate consideration of approximately $1.5 billion

was paid to FlightSafety shareholders consisting of $769.0 million

in cash, 17,728 shares of Berkshire's Class A common stock and

112,655 shares of Berkshire's Class B common stock.

The results of operations for each of these entities are included in

Berkshire's consolidated results of operations from the effective dates

of each of the mergers (GEICO - January 2, 1996 and FlightSafety -

December 23, 1996). The following table sets forth certain consolidated

statement of earnings data for the years ended December 31, 1996 and

1995, as if the GEICO and FlightSafety mergers had been consummated on

the same terms at the beginning of 1995. Dollar amounts are in millions,

except per share amounts.

1996 1995

--------- ---------

Insurance premiums earned.......................$ 4,117.8 $ 3,744.5

Sales and service revenues...................... 3,416.5 3,081.6

Total revenues.................................. 10,823.5 7,640.9

Net income...................................... 2,515.0 833.8

Earnings per equivalent Class A common share.... 2,051 690 (3) Business acquisitions - 1995 During 1995, the Company consummated mergers with Helzberg's Diamond

Shops, Inc. ("Helzberg's") and R.C. Willey Home Furnishings ("R.C.

Willey") by reissuing 15,762 shares of its common stock (subsequently

redesignated Class A Common Stock) held in treasury in exchange for 100%

of the common stock of each of these companies. Helzberg's consists of a

chain of 181 jewelry stores operating in 28 states and R.C. Willey,

through its seven locations, is the dominant retailer of home furnishings

in Utah.

Each of these mergers was accounted for by the purchase method and,

accordingly, the operating results of these businesses are included in

the Company's consolidated results of operations from the effective dates

of the mergers (Helzberg's - April 30, 1995; R.C. Willey - June 29,

1995). Had the results of these businesses been included commencing with

operations at the beginning of 1994, the reported results would not have

been materially affected. (4) Investments in securities with fixed maturities The amortized cost and estimated fair values as of December 31, 1996

and 1995, of investments in securities with fixed maturities are as

follows (in millions):

December 31, 1996 Gross Gross Estimated

Amortized Unrealized Unrealized Fair

Cost Gains Losses Value

-------- -------- -------- --------

Bonds:

U.S. Treasury securities and obligations of

U.S. government corporations and agencies.... $2,618.8 $ 4.0 $ (5.7) $2,617.1

Obligations of states, municipalities

and political subdivisions................... 2,502.0 32.4 (1.8) 2,532.6

Corporate bonds................................ 22.0 -- -- 22.0

Redeemable preferred stocks...................... 584.3 275.9 (4.3) 855.9

Mortgage-backed securities....................... 415.2 6.1 (2.0) 419.3

-------- -------- -------- --------

$6,142.3 $ 318.4 $ (13.8) $6,446.9

======== ======== ======== ========

December 31, 1995 Gross Gross Estimated

Amortized Unrealized Unrealized Fair

Cost Gains Losses Value

-------- -------- -------- --------

Bonds:

U.S. Treasury securities and obligations of

U.S. government corporations and agencies....$ 80.9 $ 2.2 $ -- $ 83.1

Obligations of states, municipalities

and political subdivisions................... 346.4 17.2 (0.5) 363.1

Redeemable preferred stocks...................... 682.5 153.4 (2.9) 833.0

Mortgage-backed securities....................... 138.3 5.9 (0.2) 144.0

-------- -------- -------- --------

$ 1,248.1 $ 178.7 $ (3.6) $1,423.2

======== ======== ======== ======== Amounts above exclude securities with fixed maturities held by finance businesses. See note 7. Redeemable preferred stocks include 358,000 shares of USAir Group,

Inc. Series A Cumulative Convertible Preferred Stock ("USAir Preferred

Shares"). The USAir Preferred Shares were acquired in 1989 for $358

million. If not called or converted prior to August 7, 1999, the USAir

Preferred Shares are mandatorily redeemable by USAir Group, Inc.

("USAir") at $1,000 per share ($358 million in the aggregate), plus

accrued dividends.

During the five years ended December 31, 1994, USAir reported

aggregate losses of approximately $2.4 billion. In 1994, USAir announced

it was suspending the payment of dividends. Consequently, prior to the

end of 1994, Berkshire management concluded that an other-than-temporary

decline in the value of USAir Preferred shares had arisen. The 1994

Consolidated Statement of Earnings includes a pre-tax charge of $268.5

million to reflect the decline.

While USAir returned to profitability during 1995, it continued the

suspension of dividends until the second half of 1996 when dividend

payments of $47 million were received. Such amount is included in the

1996 Consolidated Statement of Earnings under the caption "Interest,

dividend and other investment income." An additional dividend payment of

$30 million was received in January, 1997 and dividends of approximately

$17 million remain in arrears.

Berkshire management has estimated the fair value of USAir Preferred

shares to be $322.2 million at December 31, 1996. The increase of $232.7

million in the estimated fair value over the amount recorded at December

31, 1994, is included as a component of the increases during 1995 and

1996 in unrealized appreciation of investments.

Shown below are the amortized cost and estimated fair values of the

above securities at December 31, 1996, by contractual maturity dates.

Actual maturities will differ from contractual maturities because issuers

of certain of the securities retain early call or prepayment rights.

Amounts are in millions.

Estimated

Amortized Fair

Cost Value

-------- ---------

Due in one year or less................... $2,073.2 $2,085.0

Due after one year through five years..... 2,481.9 2,750.5

Due after five years through ten years.... 1,022.8 1,039.8

Due after ten years....................... 149.2 152.3

-------- ---------

5,727.1 6,027.6

Mortgage-backed securities................ 415.2 419.3

-------- ---------

$6,142.3 $ 6,446.9

======== ========= (5) Investments in equity securities Aggregate data with respect to the consolidated investment in equity

securities are shown below (in millions):

December 31, 1996

Unrealized Carrying

Cost Gains Value ***

-------- --------- ---------

Common stock of:

American Express Company (a).............$1,392.7 $ 1,401.6 $ 2,794.3

The Coca-Cola Company.................... 1,298.9 9,226.1 10,525.0

The Walt Disney Company.................. 1,533.2 183.6 1,716.8

Federal Home Loan Mortgage Corporation... 449.7 1,323.1 1,772.8

The Gillette Company..................... 600.0 3,132.0 3,732.0

McDonald's Corporation................... 1,265.3 103.1 1,368.4

Wells Fargo & Company.................... 553.9 1,413.0 1,966.9

All other equity securities................ 2,058.3 1,816.1* 3,874.4

-------- --------- ---------

$9,152.0 $18,598.6 $27,750.6

======== ========= =========

December 31, 1995

Unrealized Carrying

Cost Gains Value ***

-------- --------- ---------

Common stock of:

American Express Company (a).............$1,392.7 $ 653.6 $ 2,046.3

Capital Cities/ABC, Inc. (b)............. 345.0 2,122.5 2,467.5

The Coca-Cola Company.................... 1,298.9 6,126.1 7,425.0

Federal Home Loan Mortgage Corporation... 260.1 783.9 1,044.0

GEICO Corporation (c).................... 1,175.8 -- 1,175.8

The Gillette Company..................... 600.0 1,902.0 2,502.0

Wells Fargo & Company.................... 423.7 1,043.2 1,466.9

All other equity securities................ 1,680.0 1,210.1** 2,890.1

-------- --------- ---------

$7,176.2 $13,841.4 $21,017.6

======== ========= =========

• Represents gross unrealized gains $1,838.5 less gross

unrealized losses $22.4.

** Represents gross unrealized gains $1,302.1 less gross

unrealized losses $92.0.

*** Represents market value for all investments in equity

securities except for GEICO Corporation.

See footnote (c) which follows.

(a) American Express Company Common shares of American Express Company ("AXP") owned by

Berkshire and its subsidiaries possessed approximately 10.5% of the

voting rights of all AXP shares outstanding at December 31, 1996. The

shares are held subject to various agreements with certain insurance

and banking regulators which, among other things, prohibit Berkshire

from (i) seeking representation on the Board of Directors of AXP

(Berkshire may agree, if it so desires, at the request of management

or the Board of Directors of AXP to have no more than one

representative stand for election to the Board of Directors of AXP)

and (ii) acquiring or retaining shares that would cause its ownership

of AXP voting securities to equal or exceed 17% of the amount

outstanding (should Berkshire have a representative on the board of

directors, such amount is limited to 15%). In connection therewith,

Berkshire has entered into an agreement with AXP which became

effective when Berkshire's ownership interest in AXP voting

securities reached 10% and will remain effective so long as Berkshire

owns 5% or more of AXP's voting securities. The agreement obligates

Berkshire, so long as Harvey Golub is chief executive officer of AXP,

to vote its shares in accordance with the recommendations of AXP's

Board of Directors. Additionally, subject to certain exceptions,

Berkshire has agreed not to sell AXP common shares to any person who

owns 5% or more of AXP voting securities or seeks to control AXP,

without the consent of AXP. (b) Capital Cities/ABC, Inc. On January 4, 1996, shareholders of Capital Cities/ABC, Inc.

("Capital Cities") and The Walt Disney Company

("Disney") approved an agreement and plan of merger by and

between Disney and Capital Cities. In March 1996, Berkshire

received approximately 21 million shares of Disney common stock

and $1.2 billion in cash in exchange for the common shares of

Capital Cities. (c) GEICO Corporation The cost and carrying value of the investment in GEICO common

stock as of December 31, 1995 represents

Berkshire's cost plus its share of GEICO's undistributed

accumulated earnings and unrealized appreciation on

investments. See Notes 1(b) and 2 for additional information. (6) Realized investment gains (losses) Realized gains (losses) from sales and redemptions of investments are

summarized below (in millions):

1996 1995 1994

Equity securities - --------- -------- --------

Gross realized gains............. $2,379.1 * $ 109.9 $ 185.7

Gross realized losses............ (36.4) (14.2) (96.9)

Securities with fixed maturities

and other investments -

Gross realized gains............. 144.6 100.8 6.8

Gross realized losses............ (3.2) (2.4) (4.3)

-------- -------- --------

$2,484.1 $ 194.1 $ 91.3

======== ======== ========

• In March 1996 Disney completed its acquisition of Capital Cities.

Subsidiaries of Berkshire received aggregate consideration of $2.5

billion, which included cash of $1.2 billion and common shares of

Disney with a value of $1.3 billion. Gross realized gains from sales of

equity securities includes a gain of $2.2 billion relating to Disney's

acquisition of Capital Cities. (7) Finance businesses Berkshire's finance businesses are comprised of commercial and

consumer finance companies and an annuity business. Assets and

liabilities of Berkshire's finance businesses are summarized below (in

millions):

Dec. 31, Dec. 31,

1996 1995

-------- -------- Assets Cash and cash equivalents.......................$ 10.5 $ 40.7

Installment loans and other receivables......... 215.9 185.9

Fixed maturity investments (a).................. 742.4 529.4

Other........................................... 0.1 0.7

-------- --------

$ 968.9 $ 756.7

======== ======== Liabilities Borrowings under investment agreements (b)......$ 281.8 $ 403.6

6.75% Notes, due 2001........................... 99.5 --

8.125% Notes, payable in 1996................... -- 120.0

Annuity reserves and policyholder liabilities... 434.8 116.7

Other........................................... 35.3 44.9

-------- --------

$ 851.4 $ 685.2

======== ======== (a) At December 31, 1996 and 1995, mortgage-backed securities of

$601.6 and $336.0 respectively were included in this caption.

Estimated fair values and gross unrealized gains and losses as of

December 31, 1996 and 1995, are as follows (in millions): Gross Gross Estimated

Amortized Unrealized Unrealized Fair

Cost Gains Losses Value

--------- ---------- ---------- ---------

1996 $742.4 $ 25.2 $ (4.8) $762.8

1995 529.4 29.0 (1.0) 557.4 (b) Borrowings under investment agreements are made pursuant to

contracts with terms generally ranging from six months to thirty

years and at fixed interest rates ranging from 4% to 7%. Payments

of amounts outstanding at December 31, 1996, are expected to be

required no earlier than as follows (in millions): 1997 1998 1999 2000 2001 After 2001

------ ------ ------ ------ ------ ----------

$211.9 $2.0 $3.3 -- -- $ 64.6

Income from finance businesses for each of the past three years is

summarized below (in millions):

1996 1995 1994

------- ------- ------- Revenues Interest on loans.....................$ 38.8 $ 38.4 $ 37.4

Interest and dividend income.......... 54.4 39.2 34.8

Annuity premiums earned............... 259.5 75.2 36.0

------- ------- -------

352.7 152.8 108.2

------- ------- ------- Cost and expenses Interest expense...................... 30.3 28.9 31.7

Annuity benefits and expenses......... 276.7 80.8 37.6

General and administrative expenses... 20.4 16.5 14.0

------- ------- -------

327.4 126.2 83.3

------- ------- -------

$ 25.3 $ 26.6 $ 24.9

======= ======= ======= (8) Unpaid losses and loss adjustment expenses Supplemental data with respect to unpaid losses and loss adjustment

expenses of property/casualty insurance subsidiaries (in millions):

1996 1995 1994

-------- -------- --------

Unpaid losses and loss adjustment expenses:

Balance at beginning of year..................$5,923.9* $3,430.0 $3,155.9

Less ceded liabilities and deferred charges... 645.0* 573.9 597.9

-------- -------- --------

Net balance................................... 5,278.9* 2,856.1 2,558.0

-------- -------- --------

Incurred losses recorded:

Current accident year......................... 3,179.7 556.5 505.1

All prior accident years...................... (90.2) 55.5 60.2

-------- -------- --------

Total incurred losses......................... 3,089.5 612.0 565.3

-------- -------- --------

Payments with respect to:

Current accident year......................... 1,484.9 43.6 50.9

All prior accident years...................... 1,194.9 246.2 216.3

-------- -------- --------

Total payments................................ 2,679.8 289.8 267.2

-------- -------- --------

Unpaid losses and loss adjustment expenses:

Net balance at end of year.................... 5,688.6 3,178.3 2,856.1

Plus ceded liabilities and deferred charges... 585.8 520.3 573.9

-------- -------- --------

Balance at end of year **......................$6,274.4 $3,698.6 $3,430.0

======== ======== ========

• Includes GEICO balances as of the acquisition date.

** Unpaid losses and loss adjustment expenses include liabilities

established with respect to retroactive reinsurance contracts that

provide for indemnification of insurance risk. These liabilities

aggregated $1,263.6, $1,283.5, and $1,296.0 at December 31, 1996,

1995 and 1994 respectively. Related deferred charges were established

with respect to these contracts and are reported as other assets.

Also included in unpaid losses and loss adjustment expenses are

discounted structured settlement reinsurance liabilities, which

totalled $217.2, $221.7, and $231.3 at December 31, 1996, 1995 and

1994 respectively. Incurred losses "all prior accident years" reflects the amount of

estimation error charged or credited to earnings in each year. In

addition, this amount includes amortization of deferred charges re

reinsurance assumed and accretion of discounted structured settlement

liabilities. The use of estimates is inherent in the process of

establishing unpaid losses and loss expenses. Additional information will

be revealed over time and those estimates and assumptions will be revised

resulting in gains or losses in the period made. (9) Borrowings under investment agreements and other debt Liabilities reflected for this balance

sheet caption are as follows (in millions):

Dec. 31, Dec. 31,

1996 1995

-------- --------

Borrowings under investment agreements..... $ 865.3 $ 878.9

1% Senior Exchangeable Notes Due 2001...... 454.6 --

Other debt................................. 624.5 182.8

-------- --------

$1,944.4 $1,061.7

======== ========

Borrowings under investment agreements are made pursuant to contracts

with terms generally ranging from three months to forty years and calling

for interest payable, normally semiannually, at fixed rates ranging from

3% to 9% per annum. The borrowings are senior unsecured debt obligations

of the Company.

On December 2, 1996, Berkshire received net proceeds of $447.1

million from the issuance of $500 million principal amount of 1% Senior

Exchangeable Notes, due December 2, 2001 (the "Exchange Notes"). Under

certain conditions, on the last trading day of January, April, July and

October from January 1997 through July 2001, each $1,000 principal amount

Exchange Note, is convertible at the option of the holder into 17.65

shares of Salomon Inc common stock ("Salomon Stock"). Upon such

conversion, Berkshire, at its option, may elect to redeem the Exchange

Notes for an equivalent cash value of the Salomon Stock. Beginning on

December 2, 1999, under certain conditions, the Exchange Notes are

convertible into 17.65 shares of Salomon Stock at the option of the

Company. Upon conversion, Berkshire may elect to redeem the Exchange

Notes for an equivalent cash value of the Salomon Stock. In all other

circumstances, Berkshire will pay the principal amount at maturity. At

December 31, 1996, Berkshire subsidiaries owned common and preferred

stock of Salomon possessing about 18% of the total voting power of that

company.

No materially restrictive covenants are included in any of the

various debt agreements. Payments of amounts outstanding at December 31,

1996, are expected to be required no earlier than as follows (in

millions):

1997 1998 1999 2000 2001 After 2001

------ ------ ------ ------ ------ ----------

$130.8 $125.1 $ 54.3 $ 15.8 $474.0 $1,144.4 (10) Income taxes The liability for income taxes as reflected in the accompanying

Consolidated Balance Sheets represent estimates of liabilities as follows

(in millions):

Dec. 31, Dec. 31,

1996 1995

-------- --------

Payable currently.......$ (41.1) $ 86.8

Deferred................ 6,878.7 4,762.7

-------- --------

$6,837.6 $4,849.5

======== ========

The Consolidated Statements of Earnings reflect charges for income

taxes as shown below (in millions):

1996 1995 1994

-------- -------- --------

Federal...........$1,169.9 $ 252.3 $ 138.1

State............. 26.1 22.6 22.1

Foreign........... 0.8 1.3 3.1

-------- -------- --------

$1,196.8 $ 276.2 $ 163.3

======== ======== ========

Current...........$ 818.9 $ 331.0 $ 188.5

Deferred.......... 377.9 (54.8) (25.2)

-------- -------- --------

$1,196.8 $ 276.2 $ 163.3

======== ======== ========

The tax effects of temporary differences that give rise to

significant portions of deferred tax assets and deferred tax liabilities

at December 31, 1996 and 1995, are shown below (in millions):

1996 1995

-------- --------

Deferred tax liabilities:

Relating to unrealized appreciation of investments...$6,620.6 $4,908.5

Other................................................ 860.9 157.0

-------- --------

7,481.5 5,065.5

Deferred tax assets.................................... (602.8) (302.8)

-------- --------

Net deferred tax liability.............................$6,878.7 $4,762.7

======== ========

Charges for income taxes are reconciled to hypothetical amounts

computed at the federal statutory rate in the table shown below (in

millions):

1996 1995 1994

-------- -------- --------

Net earnings before income taxes......................$3,705.9 $1,084.4 $ 725.0

======== ======== ========

Hypothetical amounts applicable to above

computed at the federal statutory rate..............$1,297.1 $ 379.5 $ 253.8

Decreases, resulting from:

Tax-exempt interest income.......................... (41.7) (10.6) (14.6)

Dividends received deduction........................ (90.3) (86.3) (81.2)

Goodwill amortization................................. 21.6 5.7 4.8

State income taxes, less federal income tax benefit... 17.0 14.7 14.4

Other differences, net................................ (6.9) (26.8) (13.9)

-------- -------- --------

Total income taxes....................................$1,196.8 $ 276.2 $ 163.3

======== ======== ======== (11) Shareholders' equity accounts Changes in capital accounts of the Company during the two years ended

December 31, 1996, are shown in the table below. Dollar amounts are in

millions, except per share amounts.

Capital in

Class A Common Class B Common in Excess of Class A Common