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The GM Building, 767 Fifth Avenue, 18th Floor, New York, NY 10153

Whitney R. Tilson and Glenn H. Tongue phone: 212 386 7160

Managing Partners fax: 240 36

www.T2PartnersLLC.com

October 1, 2010

Dear Partner,

Our fund rose 1.7% net in September vs. 8.9% for the S&P 500, 7.8% for the Dow and 12.1%for the Nasdaq. Year to date, our fund is up 14.1% net vs. 3.9% for the S&P 500, 5.6% for theDow and 5.0% for the Nasdaq.

Had you told us at the beginning of the month that our fund would rise 1.7%, wed have taken itin a heartbeatand we remain very pleased with our funds outperformance this year.Nevertheless, having our short book move against us so much and therefore trailing the market

by such a large margin in September is annoyingbut nothing more than that. It was only threemonths ago, in June, when we outperformed the market by nearly 10 percentage points (+4.5%vs. -5.2%), so its important not to read too much into any one month. Our goal is superiorreturns over multi-year time periods, on both an absolute and relative basis, so month-to-monthvolatility is just noise that we ignoreother than to take advantage of the opportunities presentedby other investors manic behavior. A high degree of market volatility is the friend of true valueinvestors, so we welcome it.

Our long book had a great month, rising even more than the market. Winners of note includeddELiA*s (up 36.5%), Liberty Acquisition Holdings Corp. warrants (30.4%; discussed in lastmonths letter), BP (18.2%), AB InBev (13.0%), Resource America (11.6%), CIT Group

(11.3%), General Growth Properties (10.9%), and a new position, ADP, discussed below (8.9%).The only major position that declined was Iridium (-1.4%; discussed below).

It was ugly for us on the short sidenot surprising since it was the best September for the S&P500 since 1939. The homebuilders and for-profit education companies, which have been veryprofitable shorts for us this year, bounced a bit (a dead-cat bounce, in our opinion). Also hurtingus were DineEquity (+40.9%), Lululemon Athletica (36.0%), Netflix (29.2%), OpenTable(27.9%) and InterOil (16.5%).

Our investment thesis for each of these short positions hasnt changed, so in general we allowedthem to become a larger percentage of our portfolio as they rose since we now believe the risk-

reward equation is even more attractive. That said, we are carefully monitoring each one tomake sure that we havent made a mistake and to manage risk, which we do both by trimming aposition if it becomes too large (no matter how strong our conviction is) and also by using puts,when we believe there is a near-term catalyst.

Overview

Normally when stocks rocket upwards, the driver is unexpected, positive economic newswhich leaves us scratching our heads because the news in September was more of the same

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mixed bag, with some areas of slight strength and others of continued weakness. In particular,the U.S. housing market, which has been a very good leading indicator for both the economy andthe stock market, remains deeply distressedand we think its going to get even worse in thenear future. The weakest season for home sales (winter) is upon us and we think housing pricescould fall 5-7% nationally in the next six months, barring significant new governmentintervention.

We discussed our big-picture views at length two months ago in our Julyletter(user name:tilson; password: funds), so we wont repeat ourselves here, other than to say that we continue tothink that the most likely scenario over the next 2-7 years is a muddle-through economy withweak GDP growth (1-2%), unemployment remaining high (7-9%), and continued governmentdeficits. Under this scenario, the stock market would likely compound at 2-5%.

If youre interested in reading more, weve attached insightful letters by two wise men, BillGross and Jeremy Grantham (see Appendix A and Appendix B). Heres an excerpt from Grosssletter:

Investors are faced with 2.5% yielding bonds and stocks staring straight into new normal realgrowth rates of 2% or less. There is no 8% there for pension funds. There are no stocks for thelong run at 12% returns.

And heres the opening paragraph of the excerpt from Granthams letter:

The idea behind seven lean years is that it is unrealistic to expect to overcome the severalproblems facing most developed countries, including the U.S., in fewer than several years. Thepurpose of this section is to review the negatives that are likely to hamper the global developedeconomy, especially from the viewpoint of how much time may be involved.

We always hesitate to write about our big-picture views because we dont want you to thinkweve abandoned our bottoms-up stock and industry analysis that has been (and always will be)the core of what we do. We do, however, adjust our portfolio positioning based on our view ofvaluations and broad economic fundamentals. Our net long exposure has ranged over the pasttwo years from a low of 20% earlier this year (90% long, 70% short) to 90% in early March 2009(120% long, 30% short), and today we are closer to the more conservative end of that spectrumat 40% net long (100% long, 60% short).

Now lets turn to our favorite topic, individual stocks:

Iridium

After bottoming in February at $6.36, Iridiums stock went on a tear, rising more than 70% to$10.87 in July, but has been weak recently, closing September at $8.54. We are not aware of anychange in the companys fundamentals that would explain this decline, but we have heard sometalk about the competitive threat posed by Inmarsats new IsatPhone Pro so we wanted to share areport that Iridium commissioned comparing Inmarsats phone with Iridiums. You can read theentire 14-page reporthereand a summary is attached in Appendix C. Heres the key paragraph:

In Frost & Sullivans testing and analysis, the Iridium 9555 satellite phone was found to be asuperior device to the Inmarsat IsatPhone Pro in all locations. Iridiums satellite network also

http://www.tilsonfunds.com/private/monthlyletter-july10.pdfhttp://www.tilsonfunds.com/private/monthlyletter-july10.pdfhttp://www.tilsonfunds.com/private/monthlyletter-july10.pdfhttp://www.iridium.com/About/IndustryLeadership/SatellitePhoneReport.aspxhttp://www.iridium.com/About/IndustryLeadership/SatellitePhoneReport.aspxhttp://www.iridium.com/About/IndustryLeadership/SatellitePhoneReport.aspxhttp://www.iridium.com/About/IndustryLeadership/SatellitePhoneReport.aspxhttp://www.tilsonfunds.com/private/monthlyletter-july10.pdf

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offered better coverage, including the ability to use a satellite phone in Anchorage, Alaska, wherethe Inmarsat phone was inoperable. The Iridium phone provided better call quality, and was fasterto find the satellite network and make a call. The Iridium phone offered the ability to receive anincoming call with the antenna down - something the Inmarsat phone could not do. The Iridiumphone also offered the ability to use the phone as a modem for a laptop for email or Web access.However, the Inmarsat IsatPhone Pro was less expensive than the Iridium 9555 and also had

lower per minute usage charges.

Because the report was commissioned by Iridium, we of course take it with a grain of salt, butour own research leads us to believe that it is correct. We continue to believe that Iridium hasbright future prospects and that the stock is deeply undervalued, so it remains among our largestpositions.

ADP

We recently added another high-quality blue-chip stock, Automatic Data Processing (ADP), toour portfolio. ADPs core business is payroll processing and we believe that it is one of theworlds great companies. It is more than four times the size of its nearest competitor and thereare very high switching costs for its customers, so ADP has fabulous 20% operating margins andunlevered returns on equity in the mid-20% range. It is such a pillar of financial strength that itis one of only four companies left that still have the highest AAA credit rating (we happen toown the other three, Microsoft, Exxon Mobil and Johnson & Johnson, though only the former inany size). Finally, ADP has excellent management and is very shareholder friendly, returningcash to shareholders via a healthy 3.2% dividend and share repurchases (17% of shares havebeen retired in the past five years).

So whats not to like? Two things: 1) Growth has disappeared (EPS in FY 2010, which ended onJune 30th, declined 9% from the previous year, and the company only expects 1-3% revenue andEPS growth in FY 2011); and 2) The stock doesnt appear particularly cheap, trading at 17.4xtrailing EPS.

ADP historically has been a solid growth storyin the 13 years through FY 2009, for example,earnings per share grew 245% (10.0% annually)so what happened? In short, ADP has beenhit recently by two macroeconomic factors: high unemployment (meaning fewer paychecksbeing processed) and low interest rates, which reduce ADPs earnings from its float.

Float? ADP isnt an insurance company, so why does it have float? Allow us to explain: as apayroll processor, ADP collects cash from its customers and then issues paychecks, makesdeposits in retirement accounts, and transfers funds for taxes. All of this happens quickly, but atany given time, ADP is sitting on more than $18 billion of cash, on which it can earn interest (itappears as a liability on the balance sheet under Client funds obligations, offset by an assetcalled Funds held for clients). Each dollar that comes in goes out very quickly, but is replacedwith another dollar, so this is, in effect, perpetual (and growing) float.

Of course ADP invests these funds very conservativelythis isnt long-term float like much ofBerkshire Hathaways that can be invested in stocksso ADPs earnings from this float arehighly dependent on short-term interest rates. Today, one-month Treasuries are paying amicroscopic 0.15% vs. 5.05% only 38 months ago on August 1, 2007 (my, how the world haschanged!).

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Of course ADP isnt investing all of its float in one-month Treasuriesits laddered such thatthe company generated $543 million of revenues in FY 2010 from Interest on funds held forclients. ADPs float averaged $17.1 billion in FY 2010, so it earned a 3.2% return. Imaginethat interest rates rise 300 basis points over time to more normal (although still low) levelsthiswould translate into an extra $540 million in pre-tax profits for ADP, boosting earnings by nearly

30%. In addition, someday employers in this country will begin to hire again, which will alsofuel ADPs growth. For both of these reasons, we think ADPs earnings are depressed rightnow, making the stock cheaper than it appears.

While we think robust economic growth and a rise in interest rates is unlikely in the near term,when the economy eventually recovers, ADP should have turbocharged earnings growth. Weare prepared to be patient, collecting a healthy dividend, because we believe the stock is worth atleast $60, more than 40% above current levels, in even a remotely normal economicenvironment.

Quarterly Conference Call

We will be hosting our Q3 conference call from 1:00-2:30pm EST on Tuesday, October 26th.The call-in number is (712) 432-1601 and the access code is 1023274#. As always, we willmake a recording of the call available to you shortly afterward.

Conclusion

In their latest Kiplingers column,Know When to Bail on Your Stock Picks, John Heins andWhitney share some tips on when to sell a stock, using AB InBev, Microsoft and BP as casestudies.

We are moving to new offices in mid-October in the GM Building (above the Apple Store) on767 Fifth Avenue, 18

thFloor, New York, NY 10153. Our phone numbers will remain

unchanged.

Thank you for your continued confidence in us and the fund. As always, we welcome yourcomments or questions, so please dont hesitate to call us at (212) 386-7160.

Sincerely yours,

Whitney Tilson and Glenn Tongue

http://www.kiplinger.com/columns/discovering/archives/know-when-to-bail-on-your-stock-picks.htmlhttp://www.kiplinger.com/columns/discovering/archives/know-when-to-bail-on-your-stock-picks.htmlhttp://www.kiplinger.com/columns/discovering/archives/know-when-to-bail-on-your-stock-picks.htmlhttp://www.kiplinger.com/columns/discovering/archives/know-when-to-bail-on-your-stock-picks.html

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The unaudited return for the T2 Accredited Fund versus major benchmarks (including reinvesteddividends) is:

September Q3 Year-to-Date Since Inception

T2 Accredited Fundgross 2.0% 4.4% 17.6% 275.9%

T2 Accredited Fundnet 1.7% 3.6% 14.1% 203.7%

S&P 500 8.9% 11.3% 3.9% 14.2%Dow 7.8% 11.1% 5.6% 53.4%

NASDAQ 12.1% 12.5% 5.0% 11.2%Past performance is not indicative of future results. Please refer to the disclosure section at the end of this letter. The T2Accredited Fund was launched on 1/1/99. Gains and losses among private placements are only reflected in the returns sinceinception.

T2 Accredited Fund Performance (Net) Since Inception

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0

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Feb-99 Oct-99 Jun-00 Feb-01 Oct-01 Jun-02 Feb-03 Oct-03 Jun-04 Feb-05 Oct-05 Jun-06 Feb-07 Oct-07 Jun-08 Feb-09 Oct-09 Jun-10

(%)

T2 Accredited Fund S&P 500

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Appendix A: Bill Grosss October 2010 Letter

Investment OutlookWilliam H. Gross | October 2010www.pimco.com/Pages/StanDruckenmillerisLeaving.aspx?WT.svl=hero_IO

Stan Druckenmiller is Leaving

The New Normal has a new set of rules. What once pumped asset prices and favored theproduction of paper, as opposed to things, is now in retrograde.

The hard cold reality from Stan Druckenmillers old normal is that prosperity andoverconsumption was driven by asset inflation that in turn was leverage and interest ratecorrelated.

Investors are faced with 2.5% yielding bonds and stocks staring straight into new normalreal growth rates of 2% or less. There is no 8% there for pension funds. There are nostocks for the long run at 12% returns.

So the hedgies are in retreat and, in some cases, on the run. Ken Griffin at Citadel is consideringcutting fees, and Stan Druckenmiller at Duquesne/ex-Soros is packing his bags for the golfcourse. Frustrated at his inability to replicate the accustomed 30% annualized returns that hisbusiness model and expertise produced over the past several decades, Stan is throwing in thetowel. Whos to blame him? I dont. I respect him, not only for his financial wizardry, but hisphilanthropy which includes not only writing big checks, but spending lots of time with personalcauses such as the Harlem Childrens Zone. And at 57, hes certainly learned how to smell moreroses, pick more daisies, and replace more divots than yours truly has at the advancing age of 66.So way to go Stan. Enjoy.

But his departure and Mr. Griffins price-cutting are more than personal anecdotes. They arereflective of a broader trend in the capital markets, one which saw the availability of cheapfinancing drive asset prices to unsustainable heights during the dotcom and housing bubble of thepast decade, and then suffered the slings and arrows of a liquidity crisis in 2008 to date.Similarly, liquidity at a discount drove lots of other successful business models over the past 25years: housing, commercial real estate, investment banking, goodnessdare I say, investmentmanagementbut for them, its destination is more likely to be a semi-permanent rest stop than afreeway. The New Normal has a new set of rules. What once pumped asset prices and favoredthe production of paper, as opposed to things, is now in retrograde. Leverage and deregulationare fading from the horizon and their polar opposites are in the ascendant. Some characterize it inbiblical termsseven fat years to be followed by seven years of lean. Others like Michael Mooreand Oliver Stone describe it in terms of social justicegreed no longer is good. And the hedgieswell, they just take their ball and go home. What, after all, is the use of competing if you cantplay by the old rules?

Whoevers slant or side you choose to take in this transition from the old to the new normal,the unmistakable fact is that future investment returns will be far lower than historical averages.If a levered Druckenmiller, Soros, or Griffin could deliver double-digit returns in the past, then aless levered hedge fund community with a lower yielding menu will likely resign themselves to ahigh single-digit future. If a stocks for the long run Jeremy Siegel grew used to historically

http://www.pimco.com/Pages/BillGross.aspxhttp://www.pimco.com/Pages/StanDruckenmillerisLeaving.aspx?WT.svl=hero_IOhttp://www.pimco.com/Pages/StanDruckenmillerisLeaving.aspx?WT.svl=hero_IOhttp://www.pimco.com/Pages/StanDruckenmillerisLeaving.aspx?WT.svl=hero_IOhttp://www.pimco.com/Pages/BillGross.aspx

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validated 9 to 10% returns from stocks prior to writing his bestseller in the late 1990s, then theexperience of the last decade should at least temper his confidence that the market will deliverany sort of magical high single-digit return over the long-term future. And, if bond investorsbelieve that the resplendent and abundant capital gains of the past 25 years will be duplicatedfrom yield levels of 2 to 3%well, they just havent been to Japan, have they?

There are all sizes and shapes ofinvestors out there who have not correctly visualized thelower return world of the New Normal. The New York Times just last week described theprevious balancing act that pension fundsboth corporate and state-orientedare nowattempting to perform. Their article describes their predicament as the illusion of savings, acondition which features the assumption that asset returns on their investment portfolios willaverage 8% over the long-term future. No matter that returns for the past 10 years have averaged3%. They remain stuck on the notion that the 25-year history shown in Chart 1 is the appropriatemeasure. Sort of a stocks for the long run parody in pension space one would assume. Yetcommonsense would only conclude that a 60/40 allocation of stocks and bonds would requirenearly a 12% return from stocks in order to get there. The last time I checked, the investmentgrade bond market yielded only 2.5% and a combination of the two classic asset classes would

require 12% from stocks to hit the magical 8% pool ball. That requires a really long cue stickdear reader, or what they call a bridge in pool hall parlance. Best of luck.

The predicament, of course, is mimicked by all institutions with underfunded liability

structures

insurance companies, Social Security, and perhaps least acknowledged orrespected, households. If a family is expecting to earn a high single-digit return on their 401(k)to fund retirement, or a similar result from their personal account to pay for college, there willlikely not be enough in the piggy bank at times end to pay the bills. If stocks are required to dothe heavy lifting because of rather anemic bond yields, it should be acknowledged that bondyields are rather anemic because of extremely low new normal expectations for growth andinflation in developed economies. Even the wildest bulls on Wall Street and worldwide bourseswould be hard-pressed to manufacture 12% equity returns from nominal GDP growth of 2 to 3%.The hard cold reality from Stan Druckenmillers old normal is that prosperity and

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overconsumption was driven by asset inflation that in turn was leverage and interest rate

correlated. With deleveraging the fashion du jour, and yields about as low as they are going

to go, prosperity requires another foundation.

What might that be? Well, let me be the first to acknowledge that the best route to prosperity isthe good old-fashioned route (no, not the dated Paine Webber road map utilizing hoped for paper

gains of 12%+) but good old-fashioned investment in production. If we are to EARN ITthebest way is to utilize technology and elbow grease to make products that the rest of the worldwants to buy. Perhaps we can, but it would take a long time and an increase in political couragenot seen since Ronald Reagan or FDR.

What is more likely is a policy resort to reflation on a multitude of policy fronts: low

interest rates and quantitative easing from the Federal Reserve, near double-digit deficits

as a percentage of GDP from Washington. What the U.S. economy needs to do in order toreturn to the old normal is to recreate nominal GDP growth of 5%, the majority of which likelycomes from inflation. Inflation is the classic coin shaving technique of government since theRoman Empire. In modern parlance, you print money faster than required, pray that the private

sector will spend it to generate investment and consumption, and then worry about theconsequences in a later decade. Ditto for deficits and fiscal policy. Its that prayer, however,which the financial markets are now doubting, resembling circumstances which in part arereminiscent of the lost decades in Japan since the early 1990s. If the private sectorthroughundue caution and braking demographic influencesrefuses to take the bait, the reflationary trapwill never snap shut.

Investors will likely not know whether the mouse has grabbed for the cheese for several yearsforward. In the meantime, they are faced with 2.5% yielding bonds and stocks staringstraight into new normal real growth rates of 2% or less. There is no 8% there for pension

funds. There are no stocks for the long run at 12% returns. And the most likely

consequence of stimulative government policies that strain to get us there will be adeclining dollar and a lower standard of living. Stan Druckenmiller is leaving, and with goodreason. A future of low investment returns, and a heap of trouble for those expecting more, iswhat lies ahead.

William H. GrossManaging Director

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Appendix B: Excerpt from Jeremy Granthams July 2010 Letter

The entire letter is posted at:www.gmo.com/websitecontent/JGLetter_SummerEssays_2Q10.pdf

Seven Lean Years Revisited

The idea behind seven lean years is that it is unrealistic to expect to overcome the severalproblems facing most developed countries, including the U.S., in fewer than several years. Thepurpose of this section is to review the negatives that are likely to hamper the global developedeconomy, especially from the viewpoint of how much time may be involved.

First, one of the causes of the financial crisis was the over-indebtedness of consumers in certaincountries, including the U.S., the U.K., and several European countries. As of today, althoughthey have stopped increasing consumer debtwhich itself is unprecedented and has eaten intoconsumptionthe total improvement in personal debt levels is still minimal. It would take atleast seven years of steady reduction to reach a more normal level. Anything more rapid than this

would make it nearly impossible for the economy to grow anywhere near its normal rate or,perhaps, at all.

There is in the situation today a nerve-wracking creative tension. At one extreme, massivestimulus induces government debt to rise to levels that cause a real problem in servicing the debtinterest and repaymentor at least a crisis of confidence. At the other extreme, a draconianattempt to hold debt levels while the economy is still fragile runs the risk of causing a severesecondary economic decline. Deciding which horn of this dilemma to favor will probably proveto be the central economic policy choice of our time. I am sympathetic to those in power. This isnot an easy choice. My guess, though, is that the best course is less debt reduction now and alonger, slower reduction later. Overdoing it now may well cause an economic setback for an

already tender and vulnerable global economy that might easily be enough to more than undo allof the benefits of debt reduction. Indeed, with a weaker economy leading to lower governmentincome, it might sadly cause debt levels to rise after all. This need for time to cure all ills is onereason why I picked a seven-lean-year recovery over a more normal and rapid one. The badnews, though, is that in the end, by hook or by crook, debt levels must be lowered at every level,especially governmental. There is almost no way that this process will be pleasant or quick.

Second, and the most immediately frightening aspect of the seven-lean-year scenario, is thatalthough the credit crisis was caused by too much credit on too sloppy a basis, the cure was toincrease aggregate debt by flooding economies with government debt. Dangerously excessivefinancial system debt was moved across, with additions, to become dangerously excessive

government debt, with levels of debt to GDP not seen outside of major wars, and seldom then.Increasingly the cure seems more like a stay of execution. With bank crises, there is thebackstop of the central government. For minor countries, the IMF may be a net help, but formajor countries in trouble, the IMF seems outgunned and, if several major countries have a debtcrisis simultaneously, the IMF is clearly irrelevant.

Third, we have lost a series of artificial stimuli that came out of the steady increases in debtlevels and the related asset bubbles. For example, the artificial lift to consumers attitudesresulting from steadily rising house prices is unlikely to return soon. In fact, some further price

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decline in house prices in the U.S. is probably more than a 50/50 bet, and in the U.K. andAustralia is nearly certain. For sure, that feeling of supreme confidence counting on theinevitability of further steady rises in house prices, which was baked into average U.S. opinionby 2006 (including Bernankes, unfortunately)is long gone. The direct shot in the arm to theeconomy from the rise in economic activity from an abnormally high rate of home constructionand the services associated with an abnormally high turnover rate of existing houses (more

realtors, etc.) is also a distant memory here. So the stimulus from rising prices has gone, andstock prices, although they have made a strong recovery everywhere in the developed world, arestill way down from their highs of 10 years ago and, notably in the U.S., are still overpriced.Both the market and house price declines have also reduced confidence in the nest eggs thatpeople felt they could count on for retirement as well as a little more spending on the way there.Now consumers are readjusting to a greater need to save and, perhaps unfortunately, a greaterneed to work longer. Unprecedentedly, they are paying down some consumer debt. Thesechanged attitudes will surely last for years.

Fourth, although the financial system has passed its point of maximum stress in the U.S., very

bad things may lie ahead in Europe. And the leverage in the system and the chances of further

write-downs (yet more housing defaults and private equity write-downs, for example) leavebanks undercapitalized and reluctant to lend. Any more shoes dropping here or in Europe, orelsewhere for that matter, will tend to keep them nervous. The growth in the total U.S. GDPcaused by previous rapid increases in the size of the financial sector has also disappeared, and

with any luck will stay disappeared, for it was not healthy growth in my opinion.

Fifth, the runaway costs in the public sector, particularly at the state and city levels, whereaverage salaries and pensions ran far above private sector equivalents in a mere 15 years (why,that would make a good report by itself!), have run into a brick wall of reduced taxes. State andother municipalities are incredibly dependent on real estate taxes, which are down over 30%from falling real estate prices and defaults, and also on capital gains rates, which have been hit

by falling asset prices generally. Their legal need to stay balanced is leading to painful costcutting, which in turn puts pressure on an economy that is coming to the end of much of thestimulus. With many of the artificial stimuli of the 90s and 2000s gone, their revenues areunlikely to bounce back in one or two years, and a double-dip in the economy or new asset pricedeclines would move their recovery back further.

Sixth, unemployment is high and will also suffer from the loss of those kickers related to assetbubbles. The U.S. economy appears to have an oddly hard time producing enough jobs to getahead of the natural yearly increases in the workforce. (At least for a while, one long-termeconomic dragslowing longer-term growth of the U.S. labor forcebecomes an intermediate-term help in reducing unemployment, but beyond five years, it too will work to reduce GDP

growth, as it has already done in the last 10 years.) Needless to say, unemployment works tokeep consumer confidence and, hence, corporate willingness to invest, below normal.

Seventh, another longer-term problem for the global economy is trade imbalances. The U.S. inparticular cannot continue to run large trade imbalances. In a world growing nervous about thequality of sovereign debteven that of the U.S.domestic sovereign debt levels have exploded.The added complication and threat to the dollar from accumulating foreign debts just adds riskand doubts to the system. This is similar to the accumulating surpluses of the Chinese.

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Imbalances destabilize the system. The trick, though, is to reduce these imbalances so that theprocess does not reduce global growth. This necessary rebalancing will not be quick or easy.

Eighth, there is a related but different problem with the euro: incompetent management in Spain,Greece, Portugal, Ireland, and Italy allowed the local competitiveness of their manufacturedgoods to become 20% or more uncompetitive with those of Germany. It was never going to be

an easy matter to head this process off, and doing so would have taken some tough actions withuncomfortable short-term consequences. But they could see the problem building up likeclockwork at about 2% to 3% a year, year after year. This did not result from the banking crisis,and it was never going to be easy to solve with a fixed currency. The difficulty was implicit inthe structure of the euro from the beginning. Indeed, my friend and former partner, PaulWoolley,

1believed, and let everyone know it, that from day one this was a fatal flaw nearly

certain to bring the euro down under stress. But one might have hoped for better evasive actionor better survival instincts.

Greece in particular has two largely independent problems. First, it has approximately 22%overpriced labor (complete with 14 months salary and retirement in ones 50s), which can only

be cured by reducing their pay by 22%. This would be tough for any government that does nothave an exceptionally well-established social contracta commitment from individuals that theyhave obligations to help the whole society to prosper or, in this case, muddle through. TheGreeks probably do not have it. Perhaps the U.S. does not either. Would we take being told thatordinary workers would have to earn 22% less when there are so many other people to blame forour current problems? The Japanese, in contrast, probably do, but may well have other offsettingdisadvantages.

The second problem for the Greeks is that they have accumulated too many government debtsrelative to their ability to pay and, as the doubts rise, so do the rates they must pay such that theirability to pay falls and the doubts rise further. Temporary bailouts are postponements of a

necessary restructuring. Should the system get out of control, there is the problem of the Greekdebt that is stuffed into other European banks. (My colleague, Edward Chancellor, is writing onthis topic.) I merely want to make the point that these twin Greek problems, which affect, tovarying intensity, the other PIGS, have become an intrinsic part of the seven lean years, moreor less guaranteeing slower than normal GDP growth and a long workout period.

Ninth, the general rising levels of sovereign debt and the particular problems facing the euro blocand Japan are leading to the systematic loss of confidence in our faith-based currencies. It isbecoming a fragile system that will increasingly limit governments choices in terms of dealingwith low growth and excessive credit.

Finally, and possibly most important of all, on a long horizon there is a very long-term problemthat will overlap with the seven-year workout and make the period even tougher: widespreadover-commitments to pensions and health benefits, which is covered in the next section.

1Paul Woolley started a center for the study of Capital Market Dysfunctionality at the London School ofEconomics.

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Appendix V: Frost & Sullivan Report

Frost & Sullivan Evaluates Features and Performance of Satellite PhonesDate Published: 21 Sep 2010

Iridium Proves Its Value

MOUNTAIN VIEW, Calif. September 21, 2010Individuals and organizations routinelyrequire global, 24x7 access to communications even when a wireless network or a wirelinephone isnt available. These users include emergency first responders, maritime users, remoteoil and gas workers, disaster recovery personnel, military and government agents, and countlessothers.

In an effort to provide satellite phone users with information on two of the handset productscurrently available in the market, and provide an independent evaluation of their service quality,Frost & Sullivan conducted an exhaustive study of the differences between satellite phonedevices and services and detailed those in a report published September 21, 2010. Frost &Sullivans intent is to aid those end users and decision makers responsible for purchasing,deploying, or using personal satellite communications devices.

Frost & Sullivan found it valuable to compare the features and performance of the latest industrymodel, Inmarsats IsatPhone Pro, with those of the market leader and industry standard, theIridium 9555 satellite phone. Frost & Sullivan also compared Iridiums network of 66 low-Earth orbit satellites to that of Inmarsats constellation of three geosynchronous orbit satellites.Both qualitative and quantitative analyses were conducted.

For the qualitative portion of this analysis, the following features for each phone were evaluated:

1. Size and weight2. Keyboard3. Display4. Antenna5. Battery use and charge life6. Battery charger7. Construction and overall feel

For the quantitative section of the analysis, test locations were selected in order to understand thevariations in performance referenced in the FAQ section on an Inmarsat reseller website. Theselocations included Anchorage, Alaska; Fort Lauderdale, Florida and Fort McMurray, Canada.

In Frost & Sullivans testing and analysis, the Iridium 9555 satellite phone was found to be asuperior device to the Inmarsat IsatPhone Pro in all locations. Iridiums satellite network alsooffered better coverage, including the ability to use a satellite phone in Anchorage, Alaska,where the Inmarsat phone was inoperable. The Iridium phone provided better call quality, andwas faster to find the satellite network and make a call. The Iridium phone offered the ability toreceive an incoming call with the antenna down - something the Inmarsat phone could not do.The Iridium phone also offered the ability to use the phone as a modem for a laptop for email or

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Web access. However, the Inmarsat IsatPhone Pro was less expensive than the Iridium 9555 andalso had lower per minute usage charges.

Frost & Sullivan recommends that heavy users of satellite phones, and first responders who relyon satellite phones for emergency communications, select the Iridium phone and service,advises James Brehm, Frost & Sullivan senior consultant and project leader. We believe that

Iridium is a proven and reliable service that works well in all locations and, therefore, justifiesthe added premium for the hardware and service.

If you are interested in receiving a copy of the satellite phone comparison report, please send ane-mail to Jake Wengroff, Global Director, Corporate Communications, atjake.wengroff@frost.comwith the following information: your full name, company name, title,company telephone number, company e-mail address, city, state, and country.

About Frost & Sullivan

Frost & Sullivan, the Growth Partnership Company, enables clients to accelerate growth and

achieve best-in-class positions in growth, innovation and leadership. The companys GrowthPartnership Service provides the CEO and the CEOs Growth Team with disciplined researchand best-practice models to drive the generation, evaluation, and implementation of powerfulgrowth strategies. Frost & Sullivan leverages over 45 years of experience in partnering withGlobal 1000 companies, emerging businesses and the investment community from 40 offices onsix continents. To join our Growth Partnership, please visithttp://www.frost.com.

Contact:Jake Wengroff210.247.3806jake.wengroff@frost.com

mailto:jake.wengroff@frost.commailto:jake.wengroff@frost.comhttp://www.frost.com/http://www.frost.com/http://www.frost.com/http://www.frost.com/prod/servlet/press-en-contacts.paghttp://www.frost.com/prod/servlet/press-en-contacts.pagmailto:jake.wengroff@frost.commailto:jake.wengroff@frost.commailto:jake.wengroff@frost.comhttp://www.frost.com/prod/servlet/press-en-contacts.paghttp://www.frost.com/mailto:jake.wengroff@frost.com

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