1997 年伯克希尔完整年报

1997 ANNUAL REPORT BERKSHIRE HATHAWAY INC. 1997 ANNUAL REPORT TABLE OF CONTENTS Business Activities Corporate Performance vs. the S&P 500 Chairman's Letter* Acquisition Criteria Consolidated Financial Statements Independent Auditors' Report Management's Discussion Selected Financial Data For The Past Five Years Shareholder-Designated Contributions Combined Financial Statements--(Unaudited)--for Berkshire Business Groups Owner's Manual Common Stock Data Directors and Officers of the Company *Copyright © 1998 By Warren E. Buffett All Rights Reserved

cover 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. 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. Investments in excess of 5% of the investees outstanding capital stock at the end of 1997 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 9.5% of the capital stock of Federal Home Loan Mortgage Corporation ("Freddie Mac"), approximately 8.5% of the capital stock of The Gillette Company, approximately 16.5% of the capital stock of The Washington Post Company and approximately 8% of the capital stock of Wells Fargo & 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 manufacture and sale of boxed chocolates and other confectionery products ( See's Candies ), manufacture and marketing of home cleaning systems and related accessories (sold principally under the Kirby name), retailing of home furnishings ( Nebraska Furniture Mart, R.C. Willey Home Furnishings and Star Furniture 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 training to operators of aircraft and ships throughout the world ( FlightSafety International ). On January 7, 1998, Berkshire Hathaway completed its previously announced acquisition of International Dairy Queen ( Dairy Queen ). Dairy Queen licenses and services a system of approximately 5,800 Dairy Queen stores which feature hamburgers, hot dogs, various dairy deserts and beverages. 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.

The color of this year's cover is in honor of Tom Osborne and the 1997 Nebraska football team. After leading the Huskers to three national championships in the past four years, Tom elected to retire at the end of 1997. His record as the premier coach in the country is matched by his record in helping boys grow into men.

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

1997........... 34.1 33.4 .7

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.

1997 Chairman's Letter BERKSHIRE HATHAWAY INC. 1997 Chairman's Letter To the Shareholders of Berkshire Hathaway Inc.: Our gain in net worth during 1997

was $8.0 billion, which increased the per-share book value of both our

Class A and Class B stock by 34.1%. Over the last 33 years (that is, since

present management took over) per-share book value has grown from $19 to

$25,488, a rate of 24.1% compounded annually. (1) 1. All figures used in this report apply to Berkshire's A shares,

the successor to the only stock that the company had outstanding

before 1996. The B shares have an economic interest equal to 1/30th

that of the A. Given our gain of 34.1%, it is

tempting to declare victory and move on. But last year's performance was

no great triumph: Any investor can chalk up large returns when stocks

soar, as they did in 1997. In a bull market, one must avoid the error of

the preening duck that quacks boastfully after a torrential rainstorm,

thinking that its paddling skills have caused it to rise in the world.

A right-thinking duck would instead compare its position after the downpour

to that of the other ducks on the pond. So what's our duck rating for 1997?

The table on the facing page shows that though we paddled furiously last

year, passive ducks that simply invested in the S&P Index rose almost

as fast as we did. Our appraisal of 1997's performance, then: Quack . When the market booms, we tend

to suffer in comparison with the S&P Index. The Index bears no tax

costs, nor do mutual funds, since they pass through all tax liabilities

to their owners. Last year, on the other hand, Berkshire paid or accrued

$4.2 billion for federal income tax, or about 18% of our beginning net

worth. Berkshire will always have corporate

taxes to pay, which means it needs to overcome their drag in order to justify

its existence. Obviously, Charlie Munger, Berkshire's Vice Chairman and

my partner, and I won't be able to lick that handicap every year. But we

expect over time to maintain a modest advantage over the Index, and that

is the yardstick against which you should measure us. We will not ask you

to adopt the philosophy of the Chicago Cubs fan who reacted to a string

of lackluster seasons by saying, "Why get upset? Everyone has a bad

century now and then." Gains in book value are, of course,

not the bottom line at Berkshire. What truly counts are gains in per-share

intrinsic business value. Ordinarily, though, the two measures tend to

move roughly in tandem, and in 1997 that was the case: Led by a blow-out

performance at GEICO, Berkshire's intrinsic value (which far exceeds book

value) grew at nearly the same pace as book value. For more explanation of the term,

intrinsic value, you may wish to refer to our Owner's Manual, reprinted

on pages 62 to 71. This manual sets forth our owner-related business principles,

information that is important to all of Berkshire's shareholders. In our last two annual reports,

we furnished you a table that Charlie and I believe is central to estimating

Berkshire's intrinsic value. In the updated version of that table, which

follows, we trace our two key components 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 (discussed

on pages 69 and 70), but after all interest and corporate expenses. The

second column excludes all dividends, interest and capital gains that we

realized from the investments presented in the first column. In effect,

the columns show what Berkshire would look like were it split into two

parts, with one entity holding our investments and the other operating

all of our businesses and bearing all corporate costs. Pre-tax Earnings Per Share

Investments Excluding All Income from Year Per Share Investments 1967 $ 41 $ 1.09

1977 372 12.44

1987 3,910 108.14

1997 38,043 717.82 Pundits who ignore what our 38,000

employees contribute to the company, and instead simply view Berkshire

as a de facto investment company, should study the figures in the second

column. We made our first business acquisition in 1967, and since then

our pre-tax operating earnings have grown from $1 million to $888 million.

Furthermore, as noted, in this exercise we have assigned all of Berkshire's

corporate expenses -- overhead of $6.6 million, interest of $66.9 million

and shareholder contributions of $15.4 million -- to our business operations,

even though a portion of these could just as well have been assigned to

the investment side. Here are the growth rates of the

two segments by decade: Pre-tax Earnings Per Share

Investments Excluding All Income from Decade Ending Per Share Investments 1977 24.6% 27.6%

1987 26.5% 24.1%

1997 25.5% 20.8%

Annual Growth

Rate, 1967-1997 25.6% 24.2% During 1997, both parts of our

business grew at a satisfactory rate, with investments increasing by $9,543

per share, or 33.5%, and operating earnings growing by $296.43 per share,

or 70.3%. One important caveat: Because we were lucky in our super-cat

insurance business (to be discussed later) and because GEICO's underwriting

gain was well above what we can expect in most years, our 1997 operating

earnings were much better than we anticipated and also more than we expect

for 1998. Our rate of progress in both investments

and operations is certain to fall in the future. For anyone deploying

capital, nothing recedes like success. My own history makes the point:

Back in 1951, when I was attending Ben Graham's class at Columbia, an idea

giving me a $10,000 gain improved my investment performance for the year

by a full 100 percentage points. Today, an idea producing a $500 million

pre-tax profit for Berkshire adds one percentage point to our performance.

It's no wonder that my annual results in the 1950s were better by nearly

thirty percentage points than my annual gains in any subsequent decade.

Charlie's experience was similar. We weren't smarter then, just smaller.

At our present size, any performance superiority we achieve will be minor. We will be helped, however, by

the fact that the businesses to which we have already allocated capital

-- both operating subsidiaries and companies in which we are passive investors

-- have splendid long-term prospects. We are also blessed with a managerial

corps that is unsurpassed in ability and focus. Most of these executives

are wealthy and do not need the pay they receive from Berkshire to maintain

their way of life. They are motivated by the joy of accomplishment, not

by fame or fortune. Though we are delighted with what

we own, we are not pleased with our prospects for committing incoming funds.

Prices are high for both businesses and stocks. That does not mean that

the prices of either will fall -- we have absolutely no view on that matter

-- but it does mean that we get relatively little in prospective earnings

when we commit fresh money. Under these circumstances, we try

to exert a Ted Williams kind of discipline. In his book The Science

of Hitting , Ted explains that he carved the strike zone into 77 cells,

each the size of a baseball. Swinging only at balls in his "best"

cell, he knew, would allow him to bat .400; reaching for balls in his "worst"

spot, the low outside corner of the strike zone, would reduce him to .230.

In other words, waiting for the fat pitch would mean a trip to the Hall

of Fame; swinging indiscriminately would mean a ticket to the minors. If they are in the strike zone

at all, the business "pitches" we now see are just catching the

lower outside corner. If we swing, we will be locked into low returns.

But if we let all of today's balls go by, there can be no assurance that

the next ones we see will be more to our liking. Perhaps the attractive

prices of the past were the aberrations, not the full prices of today.

Unlike Ted, we can't be called out if we resist three pitches that are

barely in the strike zone; nevertheless, just standing there, day after

day, with my bat on my shoulder is not my idea of fun. Unconventional Commitments When we can't find our favorite

commitment -- a well-run and sensibly-priced business with fine economics

-- we usually opt to put new money into very short-term instruments of

the highest quality. Sometimes, however, we venture elsewhere. Obviously

we believe that the alternative commitments we make are more likely to

result in profit than loss. But we also realize that they do not offer

the certainty of profit that exists in a wonderful business secured at

an attractive price. Finding that kind of opportunity, we know that

we are going to make money -- the only question being when. With alternative

investments, we think that we are going to make money. But we also

recognize that we will sometimes realize losses, occasionally of substantial

size. We had three non-traditional positions

at yearend. The first was derivative contracts for 14.0 million barrels

of oil, that being what was then left of a 45.7 million barrel position

we established in 1994-95. Contracts for 31.7 million barrels were settled

in 1995-97, and these supplied us with a pre-tax gain of about $61.9 million.

Our remaining contracts expire during 1998 and 1999. In these, we had an

unrealized gain of $11.6 million at yearend. Accounting rules require that

commodity positions be carried at market value. Therefore, both our annual

and quarterly financial statements reflect any unrealized gain or loss

in these contracts. When we established our contracts, oil for future delivery

seemed modestly underpriced. Today, though, we have no opinion as to its

attractiveness. Our second non-traditional commitment

is in silver. Last year, we purchased 111.2 million ounces. Marked to market,

that position produced a pre-tax gain of $97.4 million for us in 1997.

In a way, this is a return to the past for me: Thirty years ago, I bought

silver because I anticipated its demonetization by the U.S. Government.

Ever since, I have followed the metal's fundamentals but not owned it.

In recent years, bullion inventories have fallen materially, and last summer

Charlie and I concluded that a higher price would be needed to establish

equilibrium between supply and demand. Inflation expectations, it should

be noted, play no part in our calculation of silver's value. Finally, our largest non-traditional

position at yearend was $4.6 billion, at amortized cost, of long-term zero-coupon

obligations of the U.S. Treasury. These securities pay no interest. Instead,

they provide their holders a return by way of the discount at which they

are purchased, a characteristic that makes their market prices move rapidly

when interest rates change. If rates rise, you lose heavily with zeros,

and if rates fall, you make outsized gains. Since rates fell in 1997, we

ended the year with an unrealized pre-tax gain of $598.8 million in our

zeros. Because we carry the securities at market value, that gain is reflected

in yearend book value. In purchasing zeros, rather than

staying with cash-equivalents, we risk looking very foolish: A macro-based

commitment such as this never has anything close to a 100% probability

of being successful. However, you pay Charlie and me to use our best judgment

-- not to avoid embarrassment -- and we will occasionally make an unconventional

move when we believe the odds favor it. Try to think kindly of us when

we blow one. Along with President Clinton, we will be feeling your pain:

The Munger family has more than 90% of its net worth in Berkshire and the

Buffetts more than 99%. How We Think About Market Fluctuations A short quiz: If you plan to eat

hamburgers throughout your life and are not a cattle producer, should you

wish for higher or lower prices for beef? Likewise, if you are going to

buy a car from time to time but are not an auto manufacturer, should you

prefer higher or lower car prices? These questions, of course, answer themselves. But now for the final exam: If

you expect to be a net saver during the next five years, should you hope

for a higher or lower stock market during that period? Many investors get

this one wrong. Even though they are going to be net buyers of stocks for

many years to come, they are elated when stock prices rise and depressed

when they fall. In effect, they rejoice because prices have risen for the

"hamburgers" they will soon be buying. This reaction makes no

sense. Only those who will be sellers of equities in the near future should

be happy at seeing stocks rise. Prospective purchasers should much prefer

sinking prices. For shareholders of Berkshire who

do not expect to sell, the choice is even clearer. To begin with, our owners

are automatically saving even if they spend every dime they personally

earn: Berkshire "saves" for them by retaining all earnings, thereafter

using these savings to purchase businesses and securities. Clearly, the

more cheaply we make these buys, the more profitable our owners' indirect

savings program will be. Furthermore, through Berkshire

you own major positions in companies that consistently repurchase their

shares. The benefits that these programs supply us grow as prices fall:

When stock prices are low, the funds that an investee spends on repurchases

increase our ownership of that company by a greater amount than is the

case when prices are higher. For example, the repurchases that Coca-Cola,

The Washington Post and Wells Fargo made in past years at very low prices

benefitted Berkshire far more than do today's repurchases, made at loftier

prices. At the end of every year, about

97% of Berkshire's shares are held by the same investors who owned them

at the start of the year. That makes them savers. They should therefore

rejoice when markets decline and allow both us and our investees to deploy

funds more advantageously. So smile when you read a headline

that says "Investors lose as market falls." Edit it in your mind

to " Dis investors lose as market falls -- but investors gain."

Though writers often forget this truism, there is a buyer for every seller

and what hurts one necessarily helps the other. (As they say in golf matches:

"Every putt makes someone happy.") We gained enormously from the low

prices placed on many equities and businesses in the 1970s and 1980s. Markets

that then were hostile to investment transients were friendly to those

taking up permanent residence. In recent years, the actions we took in

those decades have been validated, but we have found few new opportunities.

In its role as a corporate "saver," Berkshire continually looks

for ways to sensibly deploy capital, but it may be some time before we

find opportunities that get us truly excited. Insurance Operations -- Overview What does excite us, however, is

our insurance business. GEICO is flying, and we expect that it will continue

to do so. Before we expound on that, though, let's discuss "float"

and how to measure its cost. Unless you understand this subject, it will

be impossible for you to make an informed judgment about Berkshire's intrinsic

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, an interval that sometimes extends

over many years. During that time, the insurer invests the money. Typically,

this pleasant activity carries with it a downside: The premiums that an

insurer takes in usually 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 a lemon if its cost of float is higher than

market rates for money. A caution is appropriate here:

Because loss costs must be estimated, insurers have enormous latitude in

figuring their underwriting results, and that makes it very difficult for

investors to calculate a company's true cost of float. Estimating errors,

usually innocent but sometimes not, can be huge. The consequences of these

miscalculations flow directly into earnings. An experienced observer can

usually detect large-scale errors in reserving, but the general public

can typically do no more than accept what's presented, and at times I have

been amazed by the numbers that big-name auditors have implicitly blessed.

As for Berkshire, Charlie and I attempt to be conservative in presenting

its underwriting results to you, because we have found that virtually all

surprises in insurance are unpleasant ones. 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 net 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 five, our cost

of float has been negative. In effect, we have been paid for holding money. (1) (2) Yearend Yield

Underwriting Approximate 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%

1997 profit 7,093.1 less than zero 5.92% Since 1967, when we entered the

insurance business, our float has grown at an annual compounded rate of

21.7%. Better yet, it has cost us nothing, and in fact has made us money.

Therein lies an accounting irony: Though our float is shown on our balance

sheet as a liability, it has had a value to Berkshire greater than an equal

amount of net worth would have had. The expiration of several large

contracts will cause our float to decline during the first quarter of 1998,

but we expect it to grow substantially over the long term. We also believe

that our cost of float will continue to be highly favorable. Super-Cat Insurance Occasionally, however, the cost

of our float will spike severely. That will occur because of our heavy

involvement in the super-cat business, which by its nature is the most

volatile of all insurance lines. In this operation, we sell policies that

insurance and reinsurance companies purchase in order to limit their losses

when mega-catastrophes strike. Berkshire is the preferred market for sophisticated

buyers: When the "big one" hits, the financial strength of super-cat

writers will be tested, and Berkshire has no peer in this respect. 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. Last year, we were very lucky in

our super-cat operation. The world suffered no catastrophes that caused

huge amounts of insured damage, so virtually all premiums that we received

dropped to the bottom line. This pleasant result has a dark side, however.

Many investors who are "innocents" -- meaning that they rely

on representations of salespeople rather than on underwriting knowledge

of their own -- have come into the reinsurance business by means of purchasing

pieces of paper that are called "catastrophe bonds." The second

word in this term, though, is an Orwellian misnomer: A true bond obliges

the issuer to pay; these bonds, in effect, are contracts that lay a provisional

promise to pay on the purchaser . This convoluted arrangement came

into being because the promoters of the contracts wished to circumvent

laws that prohibit the writing of insurance by entities that haven't been

licensed by the state. A side benefit for the promoters is that calling

the insurance contract a "bond" may also cause unsophisticated

buyers to assume that these instruments involve far less risk than is actually

the case. Truly outsized risks will exist

in these contracts if they are not properly priced. A pernicious aspect

of catastrophe insurance, however, makes it likely that mispricing, even

of a severe variety, will not be discovered for a very long time. Consider,

for example, the odds of throwing a 12 with a pair of dice -- 1 out of

36. Now assume that the dice will be thrown once a year; that you, the

"bond-buyer," agree to pay $50 million if a 12 appears; and that

for "insuring" this risk you take in an annual "premium"

of $1 million. That would mean you had significantly underpriced the risk.

Nevertheless, you could go along for years thinking you were making money

-- indeed, easy money. There is actually a 75.4% probability that you would

go for a decade without paying out a dime. Eventually, however, you would

go broke. In this dice example, the odds

are easy to figure. Calculations involving monster hurricanes and earthquakes

are necessarily much fuzzier, and the best we can do at Berkshire is to

estimate a range of probabilities for such events. The lack of precise

data, coupled with the rarity of such catastrophes, plays into the hands

of promoters, who typically employ an "expert" to advise the

potential bond-buyer about the probability of losses. The expert puts no

money on the table. Instead, he receives an up-front payment that is forever

his no matter how inaccurate his predictions. Surprise: When the stakes

are high, an expert can invariably be found who will affirm -- to return

to our example -- that the chance of rolling a 12 is not 1 in 36, but more

like 1 in 100. (In fairness, we should add that the expert will probably

believe that his odds are correct, a fact that makes him less reprehensible

-- but more dangerous.) The influx of "investor"

money into catastrophe bonds -- which may well live up to their name --

has caused super-cat prices to deteriorate materially. Therefore, we will

write less business in 1998. We have some large multi-year contracts in

force, however, that will mitigate the drop. The largest of these are two

policies that we described in last year's report -- one covering hurricanes

in Florida and the other, signed with the California Earthquake Authority,

covering earthquakes in that state. Our "worst-case" loss remains

about $600 million after-tax, the maximum we could lose under the CEA policy.

Though this loss potential may sound large, it is only about 1% of Berkshire's

market value. Indeed, if we could get appropriate prices, we would be willing

to significantly increase our "worst-case" exposure. Our super-cat business was developed

from scratch by Ajit Jain, who has contributed to Berkshire's success in

a variety of other ways as well. Ajit possesses both the discipline to

walk away from business that is inadequately priced and the imagination

to then find other opportunities. Quite simply, he is one of Berkshire's

major assets. Ajit would have been a star in whatever career he chose;

fortunately for us, he enjoys insurance. Insurance -- GEICO (1-800-555-2756) and Other Primary Operations Last year I wrote about GEICO's

Tony Nicely and his terrific management skills. If I had known then what

he had in store for us in 1997, I would have searched for still greater

superlatives. Tony, now 54, has been with GEICO for 36 years and last year

was his best. As CEO, he has transmitted vision, energy and enthusiasm

to all members of the GEICO family -- raising their sights from what has been achieved to what can be achieved. We measure GEICO's performance

by first, the net increase in its voluntary auto policies (that is, not

including policies assigned us by the state) and, second, the profitability

of "seasoned" auto business, meaning policies that have been

with us for more than a year and are thus past the period in which acquisition

costs cause them to be money-losers. In 1996, in-force business grew 10%,

and I told you how pleased I was, since that rate was well above anything

we had seen in two decades. Then, in 1997, growth jumped to 16%. Below are the new business and

in-force figures for the last five years: New Voluntary Voluntary Auto Years Auto Policies Policies in Force 1993 354,882 2,011,055

1994 396,217 2,147,549

1995 461,608 2,310,037

1996 617,669 2,543,699

1997 913,176 2,949,439 Of course, any insurer can grow

rapidly if it gets careless about underwriting. GEICO's underwriting profit

for the year, though, was 8.1% of premiums, far above its average. Indeed,

that percentage was higher than we wish it to be: Our goal is to pass on

most of the benefits of our low-cost operation to our customers, holding

ourselves to about 4% in underwriting profit. With that in mind, we reduced

our average rates a bit during 1997 and may well cut them again this year.

Our rate changes varied, of course, depending on the policyholder and where

he lives; we strive to charge a rate that properly reflects the loss expectancy

of each driver. GEICO is not the only auto insurer

obtaining favorable results these days. Last year, the industry recorded

profits that were far better than it anticipated or can sustain. Intensified

competition will soon squeeze margins very significantly. But this is a

development we welcome: Long term, a tough market helps the low-cost operator,

which is what we are and intend to remain. Last year I told you about the

record 16.9% profit-sharing contribution that GEICO's associates had earned

and explained that two simple variables set the amount: policy growth and

profitability of seasoned business. I further explained that 1996's performance

was so extraordinary that we had to enlarge the chart delineating the possible

payouts. The new configuration didn't make it through 1997: We enlarged

the chart's boundaries again and awarded our 10,500 associates a profit-sharing

contribution amounting to 26.9% of their base compensation, or $71 million.

In addition, the same two variables -- policy growth and profitability

of seasoned business -- determined the cash bonuses that we paid to dozens

of top executives, starting with Tony. At GEICO, we are paying in a way

that makes sense for both our owners and our managers. We distribute merit

badges, not lottery tickets: In none of Berkshire's subsidiaries do we

relate compensation to our stock price, which our associates cannot affect

in any meaningful way. Instead, we tie bonuses to each unit's business

performance, which is the direct product of the unit's people. When that

performance is terrific -- as it has been at GEICO -- there is nothing

Charlie and I enjoy more than writing a big check. GEICO's underwriting profitability

will probably fall in 1998, but the company's growth could accelerate.

We're planning to step on the gas: GEICO's marketing expenditures this

year will top $100 million, up 50% from 1997. Our market share today is

only 3%, a level of penetration that should increase dramatically in the

next decade. The auto insurance industry is huge -- it does about $115

billion of volume annually -- and there are tens of millions of drivers

who would save substantial money by switching to us.

• * * * * * * * * * * *

In the 1995 report, I described

the enormous debt that you and I owe to Lorimer Davidson. On a Saturday

early in 1951, he patiently explained the ins and outs of both GEICO and

its industry to me -- a 20-year-old stranger who'd arrived at GEICO's headquarters

uninvited and unannounced. Davy later became the company's CEO and has

remained my friend and teacher for 47 years. The huge rewards that GEICO

has heaped on Berkshire would not have materialized had it not been for

his generosity and wisdom. Indeed, had I not met Davy, I might never have

grown to understand the whole field of insurance, which over the years

has played such a key part in Berkshire's success. Davy turned 95 last year, and it's

difficult for him to travel. Nevertheless, Tony and I hope that we can

persuade him to attend our annual meeting, so that our shareholders can

properly thank him for his important contributions to Berkshire. Wish us

luck.

• * * * * * * * * * * *

Though they are, of course, far

smaller than GEICO, our other primary insurance operations turned in results

last year that, in aggregate, were fully as stunning. National Indemnity's

traditional business had an underwriting profit of 32.9% 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 a profit of 24.3%. Our homestate operation, managed by Rod Eldred,

recorded an underwriting profit of 14.1% even though it continued to absorb

the expenses of geographical expansion. Rod's three-year record is an amazing

15.1%. Berkshire's workers' compensation business, run out of California

by Brad Kinstler, had a modest underwriting loss in a difficult environment;

its three-year underwriting record is a positive 1.5%. John Kizer, at Central

States Indemnity, set a new volume record while generating good underwriting

earnings. At Kansas Bankers Surety, Don Towle more than lived up to the

high expectations we had when we purchased the company in 1996. In aggregate, these five operations

recorded an underwriting profit of 15.0%. The two Dons, along with Rod,

Brad and John, have created significant value for Berkshire, and we believe

there is more to come. 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 69 and 70, 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) 1997 1996 1997 1996 Operating Earnings:

Insurance Group:

Underwriting -- Other Reinsurance. . . . (155.2) (174.8) (100.1) (112.4)

Scott Fetzer(excluding finance operation). 118.9 121.7 77.3 81.6

Purchase-Accounting Adjustments. . . . . . (104.9) (75.7) (97.0) (70.5)

Shareholder-Designated Contributions . . . (15.4) (13.3) (9.9) (8.5)

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

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

======== ======== ======== ======== (1) From date of acquisition,

December 23, 1996. (2) Includes Star

Furniture from July 1, 1997. (3) Excludes interest

expense of Finance Businesses. Overall, our operating businesses

continue to perform exceptionally well, far outdoing their industry norms.

We are particularly pleased that profits improved at Helzberg's after a

disappointing 1996. Jeff Comment, Helzberg's CEO, took decisive steps early

in 1997 that enabled the company to gain real momentum by the crucial Christmas

season. In the early part of this year, as well, sales remained strong. Casual observers may not appreciate

just how extraordinary the performance of many of our businesses has been:

If the earnings history of, say, Buffalo News or Scott Fetzer is compared

to the records of their publicly-owned peers, their performance might seem

to have been unexceptional. But most public companies retain two-thirds

or more of their earnings to fund their corporate growth. In contrast,

those Berkshire subsidiaries have paid 100% of their earnings to us, their

parent company, to fund our growth. In effect, the records of the public

companies reflect the cumulative benefits of the earnings they have retained,

while the records of our operating subsidiaries get no such boost. Over

time, however, the earnings these subsidiaries have distributed have created

truly huge amounts of earning power elsewhere in Berkshire. The News, See's

and Scott Fetzer have alone paid us $1.8 billion, which we have gainfully

employed elsewhere. We owe their managements our gratitude for much more

than the earnings that are detailed in the table. Additional information about our

various businesses is given on pages 36 - 50, where you will also find

our segment earnings reported on a GAAP basis. In addition, on pages 55

• 61, 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 1997 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 11, 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 10.7% $161

The Coca-Cola Company 8.1% 216

The Walt Disney Company 3.2% 65

Freddie Mac 8.6% 86

The Gillette Company 8.6% 82

The Washington Post Company 16.5% 30

Wells Fargo & Company 7.8% 103

------

Berkshire's share of undistributed earnings of major investees 743

Hypothetical tax on these undistributed investee earnings(3) (105)

Reported operating earnings of Berkshire 1,292

------

Total look-through earnings of Berkshire $1,930

======

(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 Acquisitions of 1997 In 1997, we agreed to acquire Star

Furniture and International Dairy Queen (a deal that closed early in 1998).

Both businesses fully meet our criteria: They are understandable; possess

excellent economics; and are run by outstanding people. The Star transaction has an interesting

history. Whenever we buy into an industry whose leading participants aren't

known to me, I always ask our new partners, "Are there any more at

home like you?" Upon our purchase of Nebraska Furniture Mart in 1983,

therefore, the Blumkin family told me about three outstanding furniture

retailers in other parts of the country. At the time, however, none was

for sale. Many years later, Irv Blumkin learned

that Bill Child, CEO of R.C. Willey -- one of the recommended three --

might be interested in merging, and we promptly made the deal described

in the 1995 report. We have been delighted with that association -- Bill

is the perfect partner. Furthermore, when we asked Bill about industry

standouts, he came up with the remaining two names given me by the Blumkins,

one of these being Star Furniture of Houston. But time went by without

there being any indication that either of the two was available. On the Thursday before last year's

annual meeting, however, Bob Denham of Salomon told me that Melvyn Wolff,

the long-time controlling shareholder and CEO of Star, wanted to talk.

At our invitation, Melvyn came to the meeting and spent his time in Omaha

confirming his positive feelings about Berkshire. I, meanwhile, looked

at Star's financials, and liked what I saw. A few days later, Melvyn and I

met in New York and made a deal in a single, two-hour session. As was the

case with the Blumkins and Bill Child, I had no need to check leases, work

out employment contracts, etc. I knew I was dealing with a man of integrity

and that's what counted. Though the Wolff family's association

with Star dates back to 1924, the business struggled until Melvyn and his

sister Shirley Toomin took over in 1962. Today Star operates 12 stores

-- ten in Houston and one each in Austin and Bryan -- and will soon move

into San Antonio as well. We won't be surprised if Star is many times its

present size a decade from now. Here's a story illustrating what

Melvyn and Shirley are like: When they told their associates of the sale,

they also announced that Star would make large, special payments to those

who had helped them succeed -- and then defined that group as everyone

in the business. Under the terms of our deal, it was Melvyn and Shirley's

money, not ours, that funded this distribution. Charlie and I love it when

we become partners with people who behave like that. The Star transaction closed on

July 1. In the months since, we've watched Star's already-excellent sales

and earnings growth accelerate further. Melvyn and Shirley will be at the

annual meeting, and I hope you get a chance to meet them. Next acquisition: International

Dairy Queen. There are 5,792 Dairy Queen stores operating in 23 countries

-- all but a handful run by franchisees -- and in addition IDQ franchises

409 Orange Julius operations and 43 Karmelkorn operations. In 190 locations,

"treat centers" provide some combination of the three products. For many years IDQ had a bumpy

history. Then, in 1970, a Minneapolis group led by John Mooty and Rudy

Luther took control. The new managers inherited a jumble of different franchising

agreements, along with some unwise financing arrangements that had left

the company in a precarious condition. In the years that followed, management

rationalized the operation, extended food service to many more locations,

and, in general, built a strong organization. Last summer Mr. Luther died, which

meant his estate needed to sell stock. A year earlier, Dick Kiphart of

William Blair & Co., had introduced me to John Mooty and Mike Sullivan,

IDQ's CEO, and I had been impressed with both men. So, when we got the

chance to merge with IDQ, we offered a proposition patterned on our FlightSafety

acquisition, extending selling shareholders the option of choosing either

cash or Berkshire shares having a slightly lower immediate value. By tilting

the consideration as we did, we encouraged holders to opt for cash, the

type of payment we by far prefer. Even then, only 45% of IDQ shares elected

cash. Charlie and I bring a modicum of

product expertise to this transaction: He has been patronizing the Dairy

Queens in Cass Lake and Bemidji, Minnesota, for decades, and I have been

a regular in Omaha. We have put our money where our mouth is. A Confession I've mentioned that we strongly

prefer to use cash rather than Berkshire stock in acquisitions. A study

of the record will tell you why: If you aggregate all of our stock-only

mergers (excluding those we did with two affiliated companies, Diversified

Retailing and Blue Chip Stamps), you will find that our shareholders are

slightly worse off than they would have been had I not done the transactions.

Though it hurts me to say it, when I've issued stock, I've cost you money. Be clear about one thing: This

cost has not occurred because we were misled in any way by sellers

or because they thereafter failed to manage with diligence and skill. On

the contrary, the sellers were completely candid when we were negotiating

our deals and have been energetic and effective ever since. Instead, our problem has been that

we own a truly marvelous collection of businesses, which means that trading

away a portion of them for something new almost never makes sense. When

we issue shares in a merger, we reduce your ownership in all of our businesses

-- partly-owned companies such as Coca-Cola, Gillette and American Express,

and all of our terrific operating companies as well. An example from sports

will illustrate the difficulty we face: For a baseball team, acquiring

a player who can be expected to bat .350 is almost always a wonderful event

-- except when the team must trade a .380 hitter to make the deal. Because our roster is filled with

.380 hitters, we have tried to pay cash for acquisitions, and here our

record has been far better. Starting with National Indemnity in 1967, and

continuing with, among others, See's, Buffalo News, Scott Fetzer and GEICO,

we have acquired -- for cash -- a number of large businesses that have

performed incredibly well since we bought them. These acquisitions have

delivered Berkshire tremendous value -- indeed, far more than I anticipated

when we made our purchases. We believe that it is almost impossible

for us to "trade up" from our present businesses and managements.

Our situation is the opposite of Camelot's Mordred, of whom Guenevere commented,

"The one thing I can say for him is that he is bound to marry well.

Everybody is above him." Marrying well is extremely difficult for

Berkshire. So you can be sure that Charlie

and I will be very reluctant to issue shares in the future. In those cases

when we simply must do so -- when certain shareholders of a desirable acquiree

insist on getting stock -- we will include an attractive cash option in

order to tempt as many of the sellers to take cash as is possible. Merging with public companies presents

a special problem for us. If we are to offer any premium to the

acquiree, one of two conditions must be present: Either our own stock must

be overvalued relative to the acquiree's, or the two companies together

must be expected to earn more than they would if operated separately. Historically,

Berkshire has seldom been overvalued. In this market, moreover, undervalued

acquirees are almost impossible to find. That other possibility -- synergy

gains -- is usually unrealistic, since we expect acquirees to operate after

we've bought them just as they did before. Joining with Berkshire does

not normally raise their revenues nor cut their costs. Indeed, their reported costs (but

not their true ones) will rise after they are bought by Berkshire

if the acquiree has been granting options as part of its compensation packages.

In these cases, "earnings" of the acquiree have been overstated

because they have followed the standard -- but, in our view, dead wrong

-- accounting practice of ignoring the cost to a business of issuing options.

When Berkshire acquires an option-issuing company, we promptly substitute

a cash compensation plan having an economic value equivalent to that of

the previous option plan. The acquiree's true compensation cost is thereby

brought out of the closet and charged, as it should be, against earnings. The reasoning that Berkshire applies

to the merger of public companies should be the calculus for all

buyers. Paying a takeover premium does not make sense for any acquirer

unless a) its stock is overvalued relative to the acquiree's or b) the

two enterprises will earn more combined than they would separately. Predictably,

acquirers normally hew to the second argument because very few are willing

to acknowledge that their stock is overvalued. However, voracious buyers

-- the ones that issue shares as fast as they can print them -- are tacitly

conceding that point. (Often, also, they are running Wall Street's version

of a chain-letter scheme.) In some mergers there truly are

major synergies -- though oftentimes the acquirer pays too much to obtain

them -- but at other times the cost and revenue benefits that are projected

prove illusory. Of one thing, however, be certain: If a CEO is enthused

about a particularly foolish acquisition, both his internal staff and his

outside advisors will come up with whatever projections are needed to justify

his stance. Only in fairy tales are emperors told that they are naked. Common Stock Investments Below we present our common stock

investments. Those with a market value of more than $750 million are itemized. 12/31/97 Shares Company Cost* Market (dollars in millions) 49,456,900 American Express Company $1,392.7 $ 4,414.0

200,000,000 The Coca-Cola Company 1,298.9 13,337.5

21,563,414 The Walt Disney Company 381.2 2,134.8

63,977,600 Freddie Mac 329.4 2,683.1

48,000,000 The Gillette Company 600.0 4,821.0

23,733,198 Travelers Group Inc. 604.4 1,278.6

1,727,765 The Washington Post Company 10.6 840.6

6,690,218 Wells Fargo & Company 412.6 2,270.9

Others 2,177.1 4,467.2

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

Total Common Stocks $7,206.9 $ 36,247.7

======== ========== * Represents tax-basis cost which, in aggregate, is $1.8 billion less than

GAAP cost. We made net sales during the year

that amounted to about 5% of our beginning portfolio. In these, we significantly

reduced a few of our holdings that are below the $750 million threshold

for itemization, and we also modestly trimmed a few of the larger positions

that we detail. Some of the sales we made during 1997 were aimed at changing

our bond-stock ratio moderately in response to the relative values that

we saw in each market, a realignment we have continued in 1998. Our reported positions, we should

add, sometimes reflect the investment decisions of GEICO's Lou Simpson.

Lou independently runs an equity portfolio of nearly $2 billion that may

at times overlap the portfolio that I manage, and occasionally he makes

moves that differ from mine. Though we don't attempt to predict

the movements of the stock market, we do try, in a very rough way, to value

it. At the annual meeting last year, with the Dow at 7,071 and long-term

Treasury yields at 6.89%, Charlie and I stated that we did not consider

the market overvalued if 1) interest rates remained where they were

or fell, and 2) American business continued to earn the remarkable returns

on equity that it had recently recorded. So far, interest rates have fallen

-- that's one requisite satisfied -- and returns on equity still remain

exceptionally high. If they stay there -- and if interest rates hold near

recent levels -- there is no reason to think of stocks as generally overvalued.

On the other hand, returns on equity are not a sure thing to remain at,

or even near, their present levels. In the summer of 1979, when equities

looked cheap to me, I wrote a Forbes article entitled "You

pay a very high price in the stock market for a cheery consensus."

At that time skepticism and disappointment prevailed, and my point was

that investors should be glad of the fact, since pessimism drives down

prices to truly attractive levels. Now, however, we have a very cheery

consensus. That does not necessarily mean this is the wrong time to buy

stocks: Corporate America is now earning far more money than it was just

a few years ago, and in the presence of lower interest rates, every dollar

of earnings becomes more valuable. Today's price levels, though, have materially

eroded the "margin of safety" that Ben Graham identified as the

cornerstone of intelligent investing.

• * * * * * * * * * * *

In last year's annual report, I

discussed Coca-Cola, our largest holding. Coke continues to increase its

market dominance throughout the world, but, tragically, it has lost the

leader responsible for its outstanding performance. Roberto Goizueta, Coke's

CEO since 1981, died in October. After his death, I read every one of the

more than 100 letters and notes he had written me during the past nine

years. Those messages could well serve as a guidebook for success in both

business and life. In these communications, Roberto

displayed a brilliant and clear strategic vision that was always aimed

at advancing the well-being of Coke shareholders. Roberto knew where he

was leading the company, how he was going to get there, and why this path

made the most sense for his owners -- and, equally important, he had a

burning sense of urgency about reaching his goals. An excerpt from one

handwritten note he sent to me illustrates his mind-set: "By the way,

I have told Olguita that what she refers to as an obsession, you call focus.

I like your term much better." Like all who knew Roberto, I will miss

him enormously. Consistent with his concern for

the company, Roberto prepared for a seamless succession long before it

seemed necessary. Roberto knew that Doug Ivester was the right man to take

over and worked with Doug over the years to ensure that no momentum would

be lost when the time for change arrived. The Coca-Cola Company will be

the same steamroller under Doug as it was under Roberto. Convertible Preferreds Two years ago, I gave you an update

on the five convertible preferreds that we purchased through private placements

in the 1987-1991 period. At the time of that earlier report, we had realized

a small profit on the sale of our Champion International holding. The four

remaining preferred commitments included two, Gillette and First Empire

State, that we had converted into common stock in which we had large unrealized

gains, and two others, USAir and Salomon, that had been trouble-prone.

At times, the last two had me mouthing a line from a country song: "How

can I miss you if you won't go away?" Since I delivered that report,

all four holdings have grown significantly in value. The common stocks

of both Gillette and First Empire have risen substantially, in line with

the companies' excellent performance. At yearend, the $600 million we put

into Gillette in 1989 had appreciated to $4.8 billion, and the $40 million

we committed to First Empire in 1991 had risen to $236 million. Our two laggards, meanwhile, have

come to life in a very major way. In a transaction that finally rewarded

its long-suffering shareholders, Salomon recently merged into Travelers

Group. All of Berkshire's shareholders -- including me, very personally

-- owe a huge debt to Deryck Maughan and Bob Denham for, first, playing

key roles in saving Salomon from extinction following its 1991 scandal

and, second, restoring the vitality of the company to a level that made

it an attractive acquisition for Travelers. I have often said that I wish

to work with executives that I like, trust and admire. No two fit that

description better than Deryck and Bob. Berkshire's final results from

its Salomon investment won't be tallied for some time, but it is safe to

say that they will be far better than I anticipated two years ago. Looking

back, I think of my Salomon experience as having been both fascinating

and instructional, though for a time in 1991-92 I felt like the drama critic

who wrote: "I would have enjoyed the play except that I had an unfortunate

seat. It faced the stage." The resuscitation of US Airways

borders on the miraculous. Those who have watched my moves in this investment

know that I have compiled a record that is unblemished by success. I was

wrong in originally purchasing the stock, and I was wrong later, in repeatedly

trying to unload our holdings at 50 cents on the dollar. Two changes at the company coincided

with its remarkable rebound: 1) Charlie and I left the board of directors

and 2) Stephen Wolf became CEO. Fortunately for our egos, the second event

was the key: Stephen Wolf's accomplishments at the airline have been phenomenal. There still is much to do at US

Airways, but survival is no longer an issue. Consequently, the company

made up the dividend arrearages on our preferred during 1997, adding extra

payments to compensate us for the delay we suffered. The company's common

stock, furthermore, has risen from a low of $4 to a recent high of $73. Our preferred has been called for

redemption on March 15. But the rise in the company's stock has given our

conversion rights, which we thought worthless not long ago, great value.

It is now almost certain that our US Airways shares will produce a decent

profit -- that is, if my cost for Maalox is excluded -- and the gain could

even prove indecent. Next time I make a big, dumb decision,

Berkshire shareholders will know what to do: Phone Mr. Wolf .

• * * * * * * * * * * *

In addition to the convertible

preferreds, we purchased one other private placement in 1991, $300 million

of American Express Percs. This security was essentially a common stock

that featured a tradeoff in its first three years: We received extra dividend

payments during that period, but we were also capped in the price appreciation

we could realize. Despite the cap, this holding has proved extraordinarily

profitable thanks to a move by your Chairman that combined luck and skill

-- 110% luck, the balance skill. Our Percs were due to convert into

common stock in August 1994, and in the month before I was mulling whether

to sell upon conversion. One reason to hold was Amex's outstanding CEO,

Harvey Golub, who seemed likely to maximize whatever potential the company

had (a supposition that has since been proved -- in spades). But the size

of that potential was in question: Amex faced relentless competition from

a multitude of card-issuers, led by Visa. Weighing the arguments, I leaned

toward sale. Here's where I got lucky. During

that month of decision, I played golf at Prouts Neck, Maine with Frank

Olson, CEO of Hertz. Frank is a brilliant manager, with intimate knowledge

of the card business. So from the first tee on I was quizzing him about

the industry. By the time we reached the second green, Frank had convinced

me that Amex's corporate card was a terrific franchise, and I had decided

not to sell. On the back nine I turned buyer, and in a few months Berkshire

owned 10% of the company. We now have a $3 billion gain in

our Amex shares, and I naturally feel very grateful to Frank. But George

Gillespie, our mutual friend, says that I am confused about where my gratitude

should go. After all, he points out, it was he who arranged the game and

assigned me to Frank's foursome. Quarterly Reports to Shareholders In last year's letter, I described

the growing costs we incur in mailing quarterly reports and the problems

we have encountered in delivering them to "street-name" shareholders.

I asked for your opinion about the desirability of our continuing to print

reports, given that we now publish our quarterly and annual communications

on the Internet, at our site, www.berkshirehathaway.com. Relatively few

shareholders responded, but it is clear that at least a small number who

want the quarterly information have no interest in getting it off the Internet.

Being a life-long sufferer from technophobia, I can empathize with this

group. The cost of publishing quarterlies,

however, continues to balloon, and we have therefore decided to send printed

versions only to shareholders who request them. If you wish the quarterlies,

please complete the reply card that is bound into this report. In the meantime,

be assured that all shareholders will continue to receive the annual report in printed form. Those of you who enjoy the computer

should check out our home page. It contains a large amount of current information

about Berkshire and also all of our annual letters since 1977. In addition,

our website includes links to the home pages of many Berkshire subsidiaries.

On these sites you can learn more about our subsidiaries' products and

-- yes -- even place orders for them. We are required to file our quarterly

information with the SEC no later than 45 days after the end of each quarter.

One of our goals in posting communications on the Internet is to make this

material information -- in full detail and in a form unfiltered by the

media -- simultaneously available to all interested parties at a time when

markets are closed. Accordingly, we plan to send our 1998 quarterly information

to the SEC on three Fridays, May 15, August 14, and November 13, and on

those nights to post the same information on the Internet. This procedure

will put all of our shareholders, whether they be direct or "street-name,"

on an equal footing. Similarly, we will post our 1998 annual report on

the Internet on Saturday, March 13, 1999, and mail it at about the same

time. Shareholder-Designated Contributions About 97.7% of all eligible shares

participated in Berkshire's 1997 shareholder-designated contributions program.

Contributions made were $15.4 million, and 3,830 charities were recipients.

A full description of the program appears on pages 52 - 53. Cumulatively, over the 17 years

of the program, Berkshire has made contributions of $113.1 million pursuant

to the instructions of our shareholders. The rest of Berkshire's giving

is done by our subsidiaries, which stick to the philanthropic patterns

that prevailed before they were acquired (except that their former owners

themselves take on the responsibility for their personal charities). In

aggregate, our subsidiaries made contributions of $8.1 million in 1997,

including in-kind donations of $4.4 million. Every year a few shareholders miss

out on our contributions 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. Charlie

and I regret this. 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, 1998, will be ineligible for the 1998 program.

When you get the contributions form from us, return it promptly so that

it does not get put aside or forgotten. The Annual Meeting Woodstock Weekend at Berkshire

will be May 2-4 this year. The finale will be the annual meeting, which

will begin at 9:30 a.m. on Monday, May 4. Last year we met at Aksarben

Coliseum, and both our staff and the crowd were delighted with the venue.

There was only one crisis: The night before the meeting, I lost my voice,

thereby fulfilling Charlie's wildest fantasy. He was crushed when I showed

up the next morning with my speech restored. Last year about 7,500 attended

the meeting. They represented all 50 states, as well as 16 countries, including

Australia, Brazil, Israel, Saudi Arabia, Singapore and Greece. Taking into

account several overflow rooms, we believe that we can handle more than

11,000 people, and that should put us in good shape this year even though

our shareholder count has risen significantly. Parking is ample at Aksarben;

acoustics are excellent; and seats are comfortable. The doors will open at 7 a.m. on

Monday and at 8:30 we will again feature the world premiere of a movie

epic produced by Marc Hamburg, our CFO. The meeting will last until 3:30,

with a short break at noon. This interval will permit the exhausted to

leave unnoticed and allow time for the hardcore to lunch at Aksarben's

concession stands. Charlie and I enjoy questions from owners, so bring

up whatever is on your mind. Berkshire products will again be for sale in the halls outside the meeting room. Last year -- not

that I pay attention to this sort of thing -- we again set sales records,

moving 2,500 pounds of See's candy, 1,350 pairs of Dexter shoes, $75,000

of World Books and related publications, and 888 sets of Quikut knives.

We also took orders for a new line of apparel, featuring our Berkshire

logo, and sold about 1,000 polo, sweat, and T-shirts. At this year's meeting,

we will unveil our 1998 collection. GEICO will again be on hand with

a booth staffed by star associates from its regional offices. Find out

whether you can save money by shifting your auto insurance to GEICO. About

40% of those who check us out learn that savings are possible. The proportion

is not 100% because insurers differ in their underwriting judgments, with

some favoring drivers who live in certain geographical areas and work at

certain occupations more than we do. We believe, however, that we more

frequently offer the low price than does any other national carrier selling

insurance to all comers. In the GEICO informational material that accompanies

this report, you will see that in 38 states we now offer a special discount

of as much as 8% to our shareholders. We also have applications pending

that would extend this discount to drivers in other states. An attachment to the proxy material

that is 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 plane, hotel and car reservations promptly. American Express (800-799-6634)

will be happy to help you with arrangements. As usual, we will have buses

at the larger hotels that will take you to and from the meeting and also

deliver you to Nebraska Furniture Mart, Borsheim's and the airport after

its conclusion. You are likely, however, to find a car handy. 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.

During the period from May 1 to May 5, shareholders who present NFM with

the coupon that will accompany their meeting ticket will be entitled to

a discount that is otherwise restricted to its employees. Borsheim's normally is closed on

Sunday but will be open for shareholders from 10 a.m. to 6 p.m. on May

3rd. Last year was our second-best shareholder's day, exceeded only by

1996's. I regard this slippage as an anomaly and hope that you will prove

me right this year. Charlie will be available for autographs. He smiles,

however, only if the paper he signs is a Borsheim's sales ticket. Shareholders

who wish to visit on Saturday (10 a.m. to 5:30 p.m.) or on Monday (10 a.m.-8

p.m.) should be sure to identify themselves as Berkshire owners so that

Susan Jacques, Borsheim's CEO, can make you especially welcome. Susan,

I should add, had a fabulous year in 1997. As a manager, she is everything

that an owner hopes for. On Sunday afternoon we will also

have a special treat for bridge players in the mall outside of Borsheim's.

There, Bob Hamman -- a legend of the game for more than three decades --

will take on all comers. Join in and dazzle Bob with your skill. My favorite steakhouse, Gorat's,

opens one Sunday a year -- for Berkshire shareholders on the night before

the annual meeting. Last year the restaurant started serving at 4 p.m.

and finished about 1:30 a.m, an endurance trial that was the result of

taking 1,100 reservations vs. a seating capacity of 235. If you make a

reservation and then can't attend, be sure to let Gorat's know promptly,

since it goes to great effort to help us and we want to reciprocate. You

can make reservations beginning on April 1st ( but not before ) by

calling 402-551-3733. Last year I had to leave Gorat's a little early because

of my voice problem, but this year I plan to leisurely savor every bite

of my rare T-bone and double order of hash browns. After this warmup, Charlie and

I will head for the Dairy Queen on 114th, just south of Dodge. There are

12 great Dairy Queens in metropolitan Omaha, but the 114th Street location

is the best suited to handle the large crowd that we expect. South of the

property, there are hundreds of parking spaces on both sides of the street.

Also, this Dairy Queen will extend its Sunday hours to 11 p.m. in order

to accommodate our shareholders. The 114th Street operation is now

run by two sisters, Coni Birge and Deb Novotny, whose grandfather put up

the building in 1962 at what was then the outer edge of the city. Their

mother, Jan Noble, took over in 1972, and Coni and Deb continue as third

generation owner-managers. Jan, Coni and Deb will all be on hand Sunday

evening, and I hope that you meet them. Enjoy one of their hamburgers if

you can't get into Gorat's. And then, around eight o'clock, join me in

having a Dusty Sundae for dessert. This item is a personal specialty --

the Dairy Queen will furnish you a copy of my recipe -- and will be offered

only on Shareholder Sunday. The Omaha Royals and Albuquerque

Dukes will play baseball on Saturday evening, May 2nd, at Rosenblatt Stadium.

As usual, your Chairman, shamelessly exploiting his 25% ownership of the

team, will take the mound. But this year you will see something new. In past games, much to the bafflement

of the crowd, I have shaken off the catcher's first call. He has consistently

asked for my sweeping curve, and I have just as regularly resisted. Instead,

I have served up a pathetic fast ball, which on my best day was clocked

at eight miles per hour (with a following wind). There's a story behind my unwillingness

to throw the curve ball. As some of you may know, Candy Cummings invented

the curve in 1867 and used it to great effect in the National Association,

where he never won less than 28 games in a season. The pitch, however,

drew immediate criticism from the very highest of authorities, namely Charles

Elliott, then president of Harvard University, who declared, "I have

heard that this year we at Harvard won the baseball championship because

we have a pitcher who has a fine curve ball. I am further instructed that

the purpose of the curve ball is to deliberately deceive the batter. Harvard

is not in the business of teaching deception." (I'm not making this

up.) Ever since I learned of President

Elliott's moral teachings on this subject, I have scrupulously refrained

from using my curve, however devastating its effect might have been on

hapless batters. Now, however, it is time for my karma to run over Elliott's

dogma and for me to quit holding back. Visit the park on Saturday night

and marvel at the majestic arc of my breaking ball. Our proxy statement includes information

about obtaining tickets to the game. We will also provide an information

packet describing the local hot spots, including, of course, those 12 Dairy

Queens. Come to Omaha -- the cradle of

capitalism -- in May and enjoy yourself. Warren E. Buffett

February 27, 1998 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 $5-10 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."

CONSOLIDATED FINANCIAL STATEMENTS BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED BALANCE SHEETS (dollars in millions except per share amounts) December 31,

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

1997 1996 ASSETS ----------- -----------

Cash and cash equivalents ........................... $ 1,002.4 $ 1,339.8

Investments:

Securities with fixed maturities .................. 10,297.8 6,446.9

Equity securities ................................. 36,247.7 27,750.6

Receivables ......................................... 1,711.5 1,523.2

Inventories ......................................... 639.0 619.6

Assets of finance businesses ........................ 1,248.8 968.8

Property, plant and equipment ....................... 1,056.5 1,034.2

Goodwill of acquired businesses ..................... 3,066.5 3,110.3

Other assets ........................................ 840.7 616.0

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

$ 56,110.9 $ 43,409.4

========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Losses and loss adjustment expenses ................. $ 6,850.5 $ 6,274.4

Unearned premiums ................................... 1,273.7 1,183.5

Accounts payable, accruals and other liabilities .... 2,202.3 2,556.8

Income taxes, principally deferred .................. 10,538.8 6,837.6

Borrowings under investment agreements and other debt 2,266.7 1,944.4

Liabilities of finance businesses ................... 1,067.2 851.3

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

24,199.2 19,648.0

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

Minority shareholders' interests .................... 456.5 335.1

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

Shareholders' equity:

Common Stock: *

Class A Common Stock, $5 par value, 1,366,090

and 1,376,188 shares issued; 1,197,888

and 1,206,120 shares outstanding .............. 6.8 6.9

Class B Common Stock, $0.1667 par value,

1,087,156 and 783,755 shares issued

and outstanding ............................... 0.2 0.1

Capital in excess of par value .................... 2,347.1 2,274.1

Unrealized appreciation of investments ............ 18,197.9 12,143.9

Retained earnings ................................. 10,934.3 9,032.7

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

31,486.3 23,457.7

Less: Cost of 168,202 and 170,068 Class A

common shares in treasury ....................... 31.1 31.4

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

Total shareholders' equity .................... 31,455.2 23,426.3

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

$ 56,110.9 $ 43,409.4

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

• 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 1,234,127

shares outstanding at December 31, 1997 versus 1,232,245 outstanding

at December 31, 1996. 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,

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

1997 1996 1995

Sales and service revenues .................... 3,577.5 3,061.2 2,755.9

Interest, dividend and other investment income 953.3 811.9 629.2

Income from finance businesses ................ 31.8 25.3 26.6

Realized investment gain ...................... 1,106.3 2,484.1 194.1

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

10,430.0 10,500.3 4,563.3

--------- --------- --------- Cost and expenses: Insurance losses and loss adjustment expenses 3,420.1 3,089.5 612.0

Insurance underwriting expenses ............... 879.6 797.6 325.0

Cost of products and services sold ............ 2,186.9 1,884.0 1,706.7

Selling, general and administrative expenses .. 920.8 861.9 759.6

Goodwill amortization ......................... 83.1 61.7 16.3

Interest expense .............................. 111.9 99.7 59.3

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

7,602.4 6,794.4 3,478.9

--------- --------- --------- Earnings before income taxes

and minority interest....................... 2,827.6 3,705.9 1,084.4

Income taxes .................................. 897.7 1,196.8 276.2

Minority interest ............................. 28.3 20.5 13.3

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

Net earnings .................................... $ 1,901.6 $ 2,488.6 $ 794.9

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

Average common shares outstanding * ........... 1,233,192 1,205,257 1,187,102

Net earnings per common share * ................. $ 1,542 $ 2,065 $ 670

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

• Average shares outstanding for 1997 and 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 common share

shown above represents net earnings per equivalent Class A Common share.

Net earnings per Class B Common share is equal to one-thirtieth (1/30)

of such amount or $51 per share for 1997 and $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,

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

1997 1996 1995

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

Cash flows from operating activities:

Net earnings .......................................... $ 1,901.6 $ 2,488.6 $ 794.9

Adjustments to reconcile net earnings to cash flows

from operating activities:

Realized investment gain ............................ (1,106.3) (2,484.1) (194.1)

Depreciation and amortization ....................... 227.3 151.6 75.7

Changes in assets and liabilities before effects

from business acquisitions:

Losses and loss adjustment expenses ............... 576.1 352.1 268.6

Deferred charges re reinsurance assumed ........... (142.3) 51.8 51.0

Unearned premiums ................................. 90.2 (8.8) 66.9

Receivables ....................................... (120.2) (127.1) (35.4)

Accounts payable, accruals and other liabilities .. 547.4 558.3 228.2

Income taxes ...................................... 382.8 221.9 (29.9)

Other ............................................... (21.0) 55.7 (98.0)

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

Net cash flows from operating activities .......... 2,335.6 1,260.0 1,127.9

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

Cash flows from investing activities:

Purchases of securities with fixed maturities ......... (6,837.3) (2,464.7) (273.9)

Purchases of equity securities ........................ (714.3) (1,423.4) (1,459.9)

Proceeds from sales of securities with fixed maturities 3,397.5 277.5 669.7

Proceeds from redemptions and maturities

of securities with fixed maturities ................. 779.6 791.9 954.6

Proceeds from sales of equity securities .............. 2,015.6 1,531.0 1,352.7

Loans and investments originated in finance businesses (491.1) (577.1) (381.2)

Principal collection on loans and investments

originated in finance businesses .................... 276.0 351.5 363.0

Acquisitions of businesses, net of cash acquired ...... (774.9) (1,975.3) --

Other ................................................. (182.3) (19.2) (11.4)

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

Net cash flows from investing activities .......... (2,531.2) (3,507.8) 1,213.6

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

Cash flows from financing activities:

Proceeds from borrowings of finance businesses ........ 157.5 285.1 265.7

Proceeds from other borrowings ........................ 1,073.6 1,604.3 1,232.7

Repayments of borrowings of finance businesses ........ (214.1) (427.3) (232.1)

Repayments of other borrowings ........................ (1,111.8) (1,170.0) (1,151.7)

Net proceeds from issuance of Class B Common Stock .... -- 565.0 --

Other ................................................. (1.4) (3.5) (1.5)

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

Net cash flows from financing activities .......... (96.2) 853.6 113.1

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

Increase (decrease) in cash and cash equivalents .. (291.8) (1,394.2) 2,454.6

Cash and cash equivalents at beginning of year .......... 1,350.3 2,744.5 289.9

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

Cash and cash equivalents at end of year * .............. $ 1,058.5 $ 1,350.3 $ 2,744.5

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

• Cash and cash equivalents at end of year are

comprised of the following:

Finance businesses .................................. $ 56.1 $ 10.5 $ 40.7

Other ............................................... 1,002.4 1,339.8 2,703.8

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

$ 1,058.5 $ 1,350.3 $ 2,744.5

========= ========= ========= See accompanying Notes to Consolidated Financial Statements BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (dollars in millions) Unrealized

Par Value Capital in Appreciation Class A Common Stock Excess of of Retained Treasury

Class A Class B Par Value Investments Earnings Stock

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

Net earnings ..................... -- -- -- -- 794.9 --

Increase in unrealized appreciation

included in carrying value of

investments .................... -- -- -- 6,177.1 -- --

Increase in deemed applicable

deferred income taxes .......... -- -- -- (2,176.2) -- --

Increase in minority interest in

unrealized appreciation ........ -- -- -- (57.1) -- --

Common stock issued in connection

with acquisitions of businesses -- -- 345.6 -- -- (2.9)

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

Balance December 31, 1995 ........ 6.9 -- 1,001.7 9,220.7 6,544.1 34.7

Net earnings ..................... -- -- -- -- 2,488.6 --

Increase in unrealized appreciation

included in carrying value of

investments .................... -- -- -- 4,604.0 -- --

Increase in deemed applicable

deferred income taxes .......... -- -- -- (1,629.1) -- --

Increase in minority interest in

unrealized appreciation ........ -- -- -- (51.7) -- --

Common stock issued in connection

with acquisition of business ... -- -- 707.5 -- -- (3.3)

Issuance of Class B Common stock -- 0.1 564.9 -- -- --

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

Net earnings ..................... -- -- -- -- 1,901.6 --

Increase in unrealized appreciation

included in carrying value of

investments .................... -- -- -- 9,468.2 -- --

Increase in deemed applicable

deferred income taxes .......... -- -- -- (3,318.9) -- --

Increase in minority interest in

unrealized appreciation ....... -- -- -- (95.3) -- --

Common stock issued in connection

with acquisition of business ... -- -- 72.7 -- -- (0.3)

Other ............................ (0.1) 0.1 0.3 -- -- --

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

======= ======= ========== ============ ========== ======== See accompanying Notes to Consolidated Financial Statements BERKSHIRE HATHAWAY INC. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 (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. (b) Use of estimates in preparation of financial statements The preparation of the consolidated financial statements in conformity with

generally accepted accounting principles ("GAAP") 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. (c) Accounting pronouncements to be adopted in 1998 During 1997, the Financial Accounting Standards Board issued the following

Statements of Financial Accounting Standards ("SFAS") that are effective

for periods beginning after December 15, 1997 and will be adopted by the

Company during 1998. The Company does not expect that adoption of these

Standards will have a material effect on its financial position, results

of operations or on disclosures within the financial statements.

(1) SFAS No. 130 -- "Reporting Comprehensive Income", which establishes

standards for the reporting and display of comprehensive income and its

components.

(2) SFAS No. 131 -- "Disclosures about Segments of an Enterprise and Related

Information", which establishes new standards for reporting information

about operating segments in interim and annual 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 equity securities are classified as available-for-sale.

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. 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.

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. Held-to-maturity securities are carried at amortized cost. 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

periodically reviews the recoverability of the carrying value of goodwill

of acquired businesses using the methodology prescribed by SFAS No. 121

"Accounting for the Impairment of Long-Lived Assets and for Long-Lived

Assets to be Disposed Of." (g) Insurance premium acquisition costs Certain costs of acquiring insurance premiums are deferred, subject to ultimate

recoverability, and charged to income as the premiums are earned. 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 Group over 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 $480.2 million at December 31,

1997 and $337.9 million at December 31, 1996. (j) Losses and loss adjustment expenses Liability for unpaid losses and loss adjustment expenses represents the aggregate

of such obligations of members 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 case estimates, (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 for indemnification 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 liabilities of finance

businesses. (k) Insurance premiums Insurance premiums for prospective insurance and reinsurance policies are earned

in proportion to the level of insurance protection provided. In most cases,

premiums are recognized as revenues ratably over their terms with unearned

premiums computed on a monthly or daily pro rata basis. Consideration

received for retroactive reinsurance policies 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 amounts

recovered and estimates of amounts that will be ultimately recoverable under

reinsurance contracts. Reinsurance contracts do not relieve the Insurance

Group members of their obligations to indemnify policyholders with respect

to the underlying insurance and reinsurance contracts. Estimated losses and

loss adjustment expenses recoverable under reinsurance contracts are included

in receivables. (2) Business acquisitions 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 each merger date was recorded as goodwill of acquired

businesses and is being 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 dated

August 25, 1995 (the "GEICO Agreement"). 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.

As of the merger date, subsidiaries of Berkshire owned 34,250,000 common shares

of GEICO, which were acquired 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"). 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 fully included in

Berkshire's Consolidated Statements of Earnings beginning on the effective dates of

each of the mergers (GEICO -- January 2, 1996 and FlightSafety -- December 23, 1996).

In the accompanying Consolidated Statement of Earnings for 1995, Berkshire's previous

investment in GEICO was accounted for under the equity method. Berkshire's

proportionate share of GEICO's net earnings, reduced by amortization of goodwill,

is included as a component of interest, dividends, and other investment income.

The following table sets forth certain unaudited condensed consolidated 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

Earnings per equivalent Class A common share. . . 2,051 690

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 over 180 jewelry stores operating in 28 states and

R.C. Willey, through its several 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 Statements of Earnings from the effective dates of the mergers

(Helzberg's -- April 30, 1995; R.C. Willey -- June 29, 1995).

On October 21, 1997, Berkshire and International Dairy Queen, Inc. ("Dairy Queen")

executed a definitive Merger Agreement pursuant to which Berkshire would acquire Dairy

Queen through the merger of Dairy Queen with and into a wholly-owned subsidiary of

Berkshire. The Merger Agreement provided that, subject to certain limitations and

conditions, the holders of Dairy Queen Class A and Class B common stock could receive

either $27.00 cash or $26.00 of Berkshire Class A or Class B common stock for each Dairy

Queen share. The total merger consideration was approximately $587.8 million consisting

of $264.5 million in cash and the remainder in Class A and Class B common stock. The

merger was completed on January 7, 1998.

Dairy Queen develops, licenses and services a system of approximately 5,800 Dairy

Queen stores located throughout the United States, Canada and other foreign countries,

which feature hamburgers, hot dogs, various dairy desserts and beverages. Dairy Queen

also develops, licenses and services other stores and shops operating under the names

of Orange Julius and Karmelkorn, which feature blended fruit drinks, popcorn and other

snacks. (3) Investments in securities with fixed maturities The amortized cost and estimated fair values of investments in securities with

fixed maturities as of December 31, 1997 and 1996 are as follows (in millions): December 31, 1997 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. . .$ 5,890.4 $ 600.8 $ (0.6) $ 6,490.6

Obligations of states, municipalities

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

$ 9,113.2 $ 1,185.4 $ (0.8) $10,297.8

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

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

$ 6,142.3 $ 318.4 $ (13.8) $ 6,446.9

========= ========== ========== ========= Amounts above exclude securities with fixed maturities held by finance businesses.

See Note 7. Shown below are the amortized cost and estimated fair values of the above

securities at December 31, 1997, 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 after one year through five years . . . . . . 2,151.6 2,183.1

Due after five years through ten years. . . . . . 781.4 818.4

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

8,840.4 10,014.1

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

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

$ 9,113.2 $10,297.8

========= ========= (4) Investments in equity securities Data with respect to the consolidated investment in equity securities

are shown below. Individual investments whose fair values exceed ten percent

of consolidated shareholders' equity at December 31, 1997 and 1996 are listed

separately. Amounts are in millions. December 31, 1997 Unrealized Fair Cost Gains Value ---------- ---------- ----------

Common stock of:

The Coca-Cola Company. . . . . 1,298.9 12,038.6 13,337.5

The Gillette Company . . . . . 600.0 4,221.0 4,821.0

All other equity securities. . . 5,725.1 7,950.1* 13,675.2

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

$ 9,016.7 $27,231.0 $36,247.7

========== ========== ========== December 31, 1996 Unrealized Fair Cost Gains Value ---------- ---------- ----------

Common stock of:

The Coca-Cola Company. . . . . 1,298.9 9,226.1 10,525.0

The Gillette Company . . . . . 600.0 3,132.0 3,732.0

All other equity securities. . . 5,860.4 4,838.9** 10,699.3

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

$ 9,152.0 $18,598.6 $27,750.6

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

• Represents gross unrealized gains $7,995.9 less gross unrealized

losses $45.8. ** Represents gross unrealized gains $4,861.3 less gross unrealized

losses $22.4. 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, 1997. 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. (5) Realized investment gains (losses) Realized gains (losses) from sales and redemptions of investments are summarized

below (in millions): 1997 1996 1995 -------- -------- -------

Equity securities --

Securities with fixed maturities and other investments --

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

$1,106.3 $2,484.1 $ 194.1

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

In November 1997, the merger of Salomon Inc ("Salomon") with and into a subsidiary

of Travelers Group Inc. ("Travelers") was completed. Berkshire subsidiaries received

common and preferred stock of Travelers in exchange for common and preferred shares of

Salomon then owned. The value of the Travelers shares received was approximately $1.8

billion. Realized investment gains for 1997 include $677.9 million with respect to the

transaction. The gain is net of a charge of $298.4 million for the contingent value

associated with Berkshire's Exchange Notes. See Note 9 for additional information

regarding the Exchange Notes.

In March 1996, The Walt Disney Company ("Disney") completed its acquisition of

Capital Cities/ABC, Inc. ("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

include a gain of $2.2 billion relating to Disney's acquisition of Capital Cities. (6) Commitment to purchase silver During 1997, the Company entered into several forward contracts to purchase silver

during the first quarter of 1998. As of December 31, 1997, the Company had committed to

purchase 111.2 million ounces of silver which had an estimated fair value of about

$665 million. Subsequent to year end, the Company committed to purchase an additional

18.5 million ounces of silver. The Consolidated Statement of Earnings for 1997 includes

a pre-tax gain of $97.4 million representing the excess of fair value over net cost of

the commitments. (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, 1997 1996 Assets --------- --------

Installment loans and other receivables. . . . . . 221.8 215.9

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

$ 1,248.8 $ 968.8

========= ======== Liabilities Borrowings under investment agreements and

Annuity reserves and policyholder liabilities. . . 697.4 434.8

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

$ 1,067.2 $ 851.3

========= ======== (a) At December 31, 1997 and 1996, mortgage-backed securities of $857.3 and

$601.6 respectively were included in this caption. Estimated fair values

and gross unrealized gains and losses as of December 31, 1997 and 1996,

are as follows (in millions): Gross Gross Estimated

Unrealized Unrealized Fair

Amortized Cost Gains Losses Value

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

1997. . . $970.9 $111.7 $ (0.2) $ 1,082.4

1996. . . 742.4 25.2 (4.8) 762.8 (b) Borrowings under investment agreements and other debt are made pursuant

to contracts with terms generally ranging from six months to thirty years

and at fixed interest rates ranging from 5.0% to 7.2%. Payments of

principal amounts expected during the next five years are as follows

(in millions): 1998 1999 2000 2001 2002

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

$ 76.9 $ 3.3 -- -- --

Income from finance businesses for each of the past three years is

summarized below (in millions):

1997 1996 1995

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

359.3 352.7 152.8

Annuity benefits and expenses. . . . . . 286.6 276.7 80.8

General and administrative expenses. . . 21.0 20.4 16.5

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

327.5 327.4 126.2

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

$ 31.8 $ 25.3 $ 26.6

====== ====== ====== (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):

1997 1996 1995

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

Unpaid losses and loss adjustment expenses:

Less ceded liabilities and deferred charges. . . 585.8 645.0* 573.9

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

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

Incurred losses recorded:

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

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

Payments with respect to:

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

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

Unpaid losses and loss adjustment expenses:

Plus ceded liabilities and deferred charges. . . 754.2 585.8 520.3

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

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

• 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 $1,398.1, $1,263.6, and $1,283.5

at December 31, 1997, 1996 and 1995 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 $212.3, $217.2, and $221.7 at

December 31, 1997, 1996 and 1995 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, 1997 1996 -------- --------

Borrowings under investment agreements. . .$ 816.2 $ 865.3

1% Senior Exchangeable Notes Due 2001 . . . 805.9 454.6

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

$2,266.7 $1,944.4

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

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 exchangeable at the option of the holder into

29.92 shares of Travelers Group Inc. common stock ("Travelers Stock"). (Prior to

November 28, 1997, each Exchange Note was exchangeable into 17.65 shares of Salomon

Inc common stock.) Beginning on December 2, 1999, under certain conditions, the

Exchange Notes are exchangeable into 29.92 shares of Travelers Stock at the option of

the Company. Upon such exchange, Berkshire may elect to redeem the Exchange Notes

for the equivalent cash value of the underlying Travelers Stock. In all other

circumstances, Berkshire will pay the principal amount at maturity.

The Exchange Notes are carried at accreted value plus an additional amount

(the "contingent value") representing the excess, if any, of the value of the

underlying Travelers Stock over the accreted value of the Notes. The contingent

value of the Exchange Notes is initially charged to unrealized appreciation of

investments. The contingent value amount is subsequently recognized in the

Consolidated Statements of Earnings as a charge against realized investment gains

on the earliest of the (i) dates that the Exchange Notes mature or are exchanged

or otherwise redeemed or (ii) the date the related underlying stock is otherwise

no longer owned by the Company. As of December 31, 1997, the contingent value

component of the aggregate carrying value of the Exchange Notes was $342.6

million. There was no contingent value associated with the Exchange Notes at

year end 1996.

No materially restrictive covenants are included in any of the various

debt agreements. Payments of principal amounts expected during the next five

years are as follows (in millions):

1998 1999 2000 2001 2002

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

$200.4 $ 61.7 $ 13.4 $829.6 $ 24.6 (10) Income taxes The liability for income taxes as reflected in the accompanying Consolidated

Balance Sheets is as follows (in millions): Dec. 31, Dec. 31, 1997 1996 --------- ---------

Payable currently. . . .$ 138.5 $ (41.1)

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

$10,538.8 $ 6,837.6

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

The Consolidated Statements of Earnings reflect charges for income taxes as

shown below (in millions): 1997 1996 1995 -------- -------- --------

Federal. . . . . .$ 864.8 $1,169.9 $ 252.3

Foreign. . . . . . 0.8 0.8 1.3

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

$ 897.7 $1,196.8 $ 276.2

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

Current. . . . . .$ 691.4 $ 818.9 $ 331.0

Deferred . . . . . 206.3 377.9 (54.8

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

$ 897.7 $1,196.8 $ 276.2

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

The tax effects of temporary differences that give rise to significant portions

of deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996,

are shown below (in millions): 1997 1996 --------- --------

Deferred tax liabilities:

Relating to unrealized appreciation of investments. . .$ 9,940.5 $6,620.6

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

11,108.6 7,481.5

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

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

Charges for income taxes are reconciled to hypothetical amounts computed at the

federal statutory rate in the table shown below (in millions): 1997 1996 1995 -------- -------- --------

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

Hypothetical amounts applicable to above

Decreases, resulting from:

State income taxes, less federal income tax benefit. . . 20.8 17.0 14.7

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

======== ======== ======== (11) Common stock Changes in issued and outstanding common stock of the Company during the three

years ended December 31, 1997, are shown in the table below.

Class A Common, $5 Par Value Class B Common

--------------------------------- $0.1667 Par Value

Shares Treasury Shares Shares Issued and

Issued Shares Outstanding Outstanding

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

Common stock issued in connection

with acquisitions of businesses. . . -- (15,762) 15,762 --

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

Issuance of Class B common stock. . . . -- -- -- 517,500

Common stock issued in connection

with acquisition of business . . . . -- (17,728) 17,728 112,655

Conversions of Class A common stock

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

Common stock issued in connection

with acquisition of business . . . . -- (1,866) 1,866 165

Conversions of Class A common stock

to Class B common stock and other. . (10,098) -- (10,098) 303,236

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

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

On May 6, 1996, Berkshire shareholders approved a recapitalization plan which

created a new class of common stock, designated as Class B Common Stock. In connection

therewith, Berkshire's then existing common stock was redesignated as Class A Common

Stock. Each share of Class A Common Stock is convertible, at the option of the holder,

into thirty shares of Class B Common Stock. Class B Common Stock is not convertible

into Class A Common Stock. Each share of Class B Common Stock possesses voting rights

equivalent to one-two-hundredth (1/200) of the voting rights of a share of Class A

Common Stock.

On May 8, 1996, Berkshire completed an initial public offering of 517,500 shares

of Class B Common Stock. Berkshire received net proceeds from the offering of $565.0

million. Since the Class B Common shares are equivalent to one-thirtieth (1/30) of the

economic rights of Class A Common shares, the issuance of the Class B Common Stock was

equivalent to the issuance of 17,250 Class A Common shares or approximately 1.4% of

Class A Common shares outstanding at the time of the issuance of Class B Common

shares. (12) Dividend restrictions - Insurance subsidiaries Payments of dividends by Insurance Group members are restricted by insurance

statutes and regulations. Without prior regulatory approval in 1998, Berkshire can

receive up to approximately $3.5 billion as dividends from insurance subsidiaries.

Combined shareholders' equity of insurance subsidiaries determined pursuant

to statutory accounting rules (Statutory Surplus as Regards Policyholders) was

approximately $37.2 billion at December 31, 1997. This amount exceeded by approximately

$7.8 billion the corresponding amount determined on the basis of GAAP. The major

differences between statutory basis accounting and GAAP are that deferred income tax

assets and liabilities, deferred charges re reinsurance assumed, and unrealized gains

and losses on investments in securities with fixed maturities are recognized under

GAAP but not for statutory reporting purposes. In addition, goodwill of acquired

businesses is subject to a shorter amortization period under statutory accounting rules

than is permitted under GAAP. (13) Fair values of financial instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" requires

certain fair value disclosures. Fair value disclosures are required for most

investment securities as well as other contractual assets and liabilities. Certain

financial instruments, including insurance contracts, are excluded from SFAS 107

disclosure requirements due to perceived difficulties in measuring fair value.

Accordingly, an estimation of fair value was not made with respect to unpaid losses

and loss adjustment expenses.

In determining fair value, the Company used quoted market prices when available.

For instruments where quoted market prices were not available, the Company used

independent pricing services or appraisals by the Company's management. Those services

and appraisals reflected the estimated present values utilizing current risk adjusted

market rates of similar instruments.

Considerable judgement is necessarily required in interpreting market data

used to develop the estimates of fair value. Accordingly, the estimates presented

herein are not necessarily indicative of the amounts the Company could realize in

a current market exchange. The use of different market assumptions and/or estimation

methodologies may have a material effect on the estimated fair value.

The carrying values of cash and cash equivalents, receivables and accounts

payable, accruals and other liabilities are deemed to be reasonable estimates of

their fair values. The estimated fair values of the Company's other financial

instruments as of December 31, 1997 and 1996, are as follows (in millions):

Carrying Value Estimated Fair Value

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

1997 1996 1997 1996

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

Investments in securities with fixed

Investments in equity securities. . . . . . 36,247.7 27,750.6 36,247.7 27,750.6

Borrowings under investment agreements

Liabilities of finance businesses . . . . . 1,067.2 851.3 1,149.4 851.9 (14) Quarterly data A summary of revenues and earnings by quarter for each of the last two years

is presented in the following table. This information is unaudited. Dollars are in

millions, except per share amounts.

1st 2nd 3rd 4th

1997 Quarter Quarter Quarter Quarter

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

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

Earnings:

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

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

Earnings per equivalent Class A common share:

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

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

• Includes $427.3 million ($346.47/share), net of taxes, related to gain arising

from Travelers Group Inc.'s acquisition of Salomon Inc. See Note 5. 1st 2nd 3rd 4th

1996 Quarter Quarter Quarter Quarter

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

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

Earnings:

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

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

Earnings per equivalent Class A common share:

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

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

• Includes $1.4 billion ($1,143.68/share), net of taxes, related to gain arising

from The Walt Disney Company's acquisition of Capital Cities/ABC, Inc. See Note 5. (15) Business Segment Data Berkshire identified seven business segments for purposes of 1997 reporting

pursuant to SFAS No. 14. These include the property and casualty insurance business

(The Insurance Segment) conducted on both a direct and reinsurance basis through a

number of subsidiaries. Included in this segment is GEICO Corporation, the seventh

largest auto insurer in the United States and National Indemnity Company, one of the

world's leading providers of catastrophe excess of loss reinsurance. Berkshire's six

separately conducted non-insurance business segments are as follows:

Business identity and headquarters Segment Activity FlightSafety International Aviation training High technology training to operators of

Flushing, NY aircraft and ships

See's Candies Candy Manufacture and distribution at retail

South San Francisco, CA and by catalog solicitation

Kirby, Douglas and

Cleveland Wood Divisions

of The Scott Fetzer Company Home cleaning systems Manufacture and sale principally to distributors

Cleveland, OH

Nebraska Furniture Mart and Home furnishings Retailing

R.C. Willey Home Furnishings

and Star Furniture Company

Omaha, NE, Salt Lake

City, UT and Houston, TX

Buffalo News Newspaper Publication of a daily and Sunday newspaper

Buffalo, NY

H. H. Brown Shoe Co.,

Lowell Shoe, Inc. and

Dexter Shoe Companies Shoes Manufacture, importing and distribution at wholesale

Greenwich, CT, Hudson, and retail

NH and Dexter, ME

The business segments identified above were responsible in 1997 for 86% of

Berkshire's consolidated revenues. Other businesses activities that contributed

for 1997, in the aggregate, 13% of Berkshire's consolidated revenues, were as follows: Business identity Product/Service/Activity Adalet - PLM Explosion proof electrical enclosures, cable couplers and terminations

BHR Real estate management

Berkshire Hathaway

Credit Corporation Commercial financing

Berkshire Hathaway Life

Insurance Co. Annuities and other financial products

Blue Chip Stamps Marketing motivational services

Borsheim's Retailing fine jewelry

Campbell Hausfeld Air compressors, air tools, painting systems, pressure washers, welders and generators

Carefree Comfort and convenience products for the recreational vehicle industry

Fechheimer Bros. Co. Uniforms and accessories

France Appliance controls; ignition and sign transformers

Halex Zinc die cast conduit fittings and other electrical construction materials

Helzberg's Diamond Shops Retailing fine jewelry

Kingston Appliance controls

Meriam Pressure and flow measurement devices

Northland Fractional horsepower electric motors

Powerwinch Marine and general purpose winches, windlasses, and hoists

Precision Steel Products Steel service center

Quikut Cutlery for home and sporting goods markets

ScottCare Cardiopulmonary rehabilitation and monitoring equipment

Scott Fetzer Financial Group Commercial and consumer finance companies

Scot Labs Cleaning and maintenance chemicals

Stahl Custom service bodies, flatbed bodies, cranes and tool boxes for trucks

Wayne Combustion Systems Oil and gas burners for residential and commercial furnaces and water heaters

Wayne Pumps Sump, utility and sewage pumps

Wesco Financial Real estate management

Western Enterprises Medical and industrial compressed gas fittings and regulators

Western Plastics Molded plastic components

World Book Printed and multimedia encyclopedias and other reference materials

A disaggregation of Berkshire's consolidated data for each of the three most

recent years is presented in the tables which follow on this and the following page.

Amounts are in millions. Revenues Operating profit before taxes 1997 1996 1995 1997 1996 1995 --------- --------- --------- --------- --------- ---------

Identified Segments:

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

8,993.2 8,945.4 3,332.9 2,738.6 3,449.2 1,002.3

Other than identified segments . . . 1,436.8 1,554.9 1,230.4 194.2 349.7 138.1

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

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

• Amounts of interest expense represent those for borrowings under investment

agreements and other debt exclusive of that of finance businesses and interest

allocated to certain identified segments. Insurance Segment Revenues Operating profit before taxes 1997 1996 1995 1997 1996 1995 -------- -------- -------- -------- -------- --------

Premiums earned: *

Reinsurance assumed. . . . 968.4 764.0 718.4

Reinsurance ceded. . . . . (85.8) (79.1) (48.2)

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

4,761.1 4,117.8 957.5

Goodwill amortization . . . . (42.9) (42.6)