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640 Fifth Avenue, 20th Floor New York, NY 10019 T 212 688-2550 F 212 753-2760

August 17, 2010 Performance Since Inception


S&P 500 Index
-20.94% 28.67% 10.87% 4.91% 15.78% 5.49% -36.99% 26.47% -3.59% 3.10% 6.03% 1.58% -7.98% -5.24% -6.64% 7.51% 0.86% Year 2002* Year 2003 Year 2004 Year 2005 Year 2006 Year 2007 Year 2008 Year 2009 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 YTD through Jun-10 Inception to Date Annualized Inception to Date

Owl Creek I, LP* Gross Net


5.14% 60.88% 32.67% 3.95% 25.78% 39.75% -8.44% 20.34% 6.67% -0.48% 5.29% -1.42% -3.77% -5.89% -0.22% 350.82% 19.59% 4.12% 48.70% 26.14% 3.16% 20.63% 31.80% -7.53% 16.94% 5.34% -0.39% 4.28% -1.16% -3.07% -4.81% -0.22% 245.60% 15.88%

Owl Creek II, LP* Gross Net


4.98% 61.00% 32.77% 4.07% 26.17% 39.93% -8.85% 21.91% 6.54% -0.50% 5.36% -1.43% -3.57% -5.74% 0.07% 358.47% 19.83% 3.98% 48.80% 26.22% 3.25% 20.94% 31.94% -7.93% 18.28% 5.23% -0.40% 4.34% -1.17% -2.91% -4.63% 0.07% 250.65% 16.08%

Owl Creek Overseas Fund, Ltd* Gross Net


5.25% 60.69% 33.12% 4.11% 26.94% 40.81% -8.91% 22.25% 6.55% -0.52% 5.20% -1.56% -3.24% -5.74% 0.12% 367.03% 20.10% 4.20% 47.67% 26.50% 3.35% 21.35% 32.42% -10.32% 21.75% 5.28% -0.42% 4.24% -1.28% -2.66% -4.63% 0.14% 253.45% 16.18%

* Inception Date was February 1, 2002 Note: Net performance includes management and incentive allocation/fee. For onshore funds assumes that unrealized gains (if applicable) on special investments would first be offset by any loss recovery account (LRA) and for offshore funds assumes that unrealized gains (if applicable) on special investments would not be offset by any LRA prior to accruing for incentive. Past performance should not be viewed as indicative of future results. Performance herein is reflected for an investor who was invested in Owl Creek since inception and is eligible to invest in new issues. This includes the appreciation/depreciation of the fair value of any special investment. Investors who invest with Owl Creek funds in the middle of a particular year, including after the establishment of a special investment, will have different monthly and yearly performance numbers.

Owl Creek Overseas Fund, Ltd. (the Fund) was down 10.2% gross and 8.4% net for the second quarter of 2010 as compared to the S&P 500, which was down 11.4%. As of the date of this letter, the Fund is roughly flat year-to-date versus the S&P 500 which is down 1%, and the Fund is up approximately 252% net inception-to-date versus the S&P 500 up approximately 14% over the same period. In addition, as of the date of this letter, the Funds net annualized performance since inception is approximately +16% per year versus the S&P 500 at around +2% per year over the same period.

Owl Creek Asset Management, L.P. 640 Fifth Avenue, 20th Floor New York NY 10019 T 212 688-2550 F 212 753-2760

We used the second quarter as an opportunity on the equity side to exit some positions as well as enter some new ones (although the ratio was weighted towards exiting). The same was true, although to a lesser extent, on the debt side of our portfolio. Our 2010 gross exposure peaked at the end of April, but our net exposure was still going up during May as the market was dropping, which was painful in both May and June. Both our net and gross exposures have continued to move lower, and we now stand at our lowest exposures in over a year. Our winners in the second quarter included a fully-hedged basis trade sourced by our Asia team, an oil and gas equity short, our sovereign CDS positions, and a tech equity short. The losers, unfortunately, were more plentiful, including mostly the stocks of financial, HMO, and insurance companies. Even so, one sector that has been receiving a lot of attention at Owl Creek is healthcare, as the market weighs the impact of reform as well as the weak economy on the whole healthcare sector, including services and pharmaceuticals. We think the market is mispricing the risks in these stocks and providing us the opportunity to own good businesses at depressed valuations. We discuss our investment in Cigna, our largest equity position, in the appendix. Despite our performance during the second quarter, we remind ourselves that our strategy of investing in companies where our bottom-up fundamental research ascertains a differentiated view from most other investors is still intact and quite relevant. Fundamentals will matter again one day as they always have and always will. We cannot let portfolio performance that is representative of markets that have dismissed fundamental analysis and is driven instead by macro concerns and market technicals dictate our way of looking forward. We are contrarian investors, and in uncertain times like today, coupled with an investor-unfriendly administration, it is painful to be investing against the grain. However, we believe our time-tested strategy of doing the work to find value will once again prove to be the right one. Over the past eight-and-a-half years since inception, investors in Owl Creek have outperformed the broader markets by 14% per year net of all fees. We are, of course, very proud of that track record, but we fully understand that the only thing relevant to our investors and ourselves is what is Owl Creek going to do for the next eight-and-a-half years? While historical performance does not guarantee future performance, we believe with the highest amount of conviction that we are better investors today than we were just a few years ago. Not only have we continued to individually learn from both our successes and our failures, but we have also worked very hard to make our team stronger. Across all parts of our business, we have hired the top talent we are able to find, and our investment process is more robust than ever. Even though our investment team has increased substantially over the years, weve largely used the extra resources to increase our conviction across our best ideas. At the end of 2002 (our first year in business), our top ten positions represented 54% of assets, while at the end of 2009 they represented 55% (at the end of June, 2010, they represented about 45% as our overall portfolio exposures were smaller, and they averaged 53% during the first six months of 2010).

Owl Creek Asset Management, L.P. 640 Fifth Avenue, 20th Floor New York NY 10019 T 212 688-2550 F 212 753-2760

In the current environment, we are cautious on the economy and the markets, and it causes us to want to maintain a defensive portfolio. The employment picture is still very weak, lending standards continue to tighten, and it seems to us that sovereign risk is very much still on the table. We are not sitting on our hands, however, and we continue to own good risk/reward ideas in the portfolio. That being said, we have, in this period of volatility, increased our standards of attractiveness for getting a name into the portfolio and reduced the portfolio grosses substantially in order to give us the opportunity to best invest our partners and our own capital when we believe we have better opportunities with better risk reward characteristics. Economic and Political Uncertainty Weigh on Valuations We continue to think that the magnitude of the 2008 economic collapse and its effect on employment and the health of consumers globally will continue to keep the size of any potential recovery in check. While 9.5% unemployment was reached once before in 1983, the drop in payrolls during the current recession is unparalleled over the past 40 years. It has been far more severe and likely longer in duration than recent recessions. The New York Times graphs below highlight the severity of the current recessions effects on the job picture as well as the magnitude of economic recovery that will be required to meaningfully restore employment.

Embedded in the drop in payrolls is the more troubling long-term nature of unemployment. On average, each of Americas 15 million unemployed has been without work for over 7.5 months.

Owl Creek Asset Management, L.P. 640 Fifth Avenue, 20th Floor New York NY 10019 T 212 688-2550 F 212 753-2760

To put this in a historical context, never has the post-WWII economy seen long-term unemployment near the current 4.1%, with the closest peak at 2.6% in 1983.1

To make matters worse, while the unemployment rate has historically fallen as job openings rise, in the past year, job openings have increased by around 25% while unemployment has remained largely unchanged. This relationship could be explained by a structural shift in the labor market where job openings do not match up with todays unemployed. For example, the construction industry which was built up dramatically over the past 5 to 7 years exhibits unemployment above 17%, far beyond the national average, and we do not envision US housing starts mounting a strong and robust recovery anytime soon. These unemployed workers need to be retrained if they want to find jobs in todays environment. This change in composition of our economy represents an immense political and economic challenge for the labor market, and only an exceptionally strong increase in job openings and sustained economic recovery will meaningfully reduce unemployment. In the context of continued weakness in the domestic housing market and low consumer confidence, the long-term unemployed are likely to remain so, placing a lasting downward pressure on global recovery.

Long-term unemployment is defined as greater than 27 weeks in duration.


Owl Creek Asset Management, L.P. 640 Fifth Avenue, 20th Floor New York NY 10019 T 212 688-2550 F 212 753-2760

Given the severity of the economic problems our country faces, we would expect that our government would be putting populist rhetoric aside and doing what is right for our country. Instead, their actions and policies are overreaching, wrongly directed, anti-business, and poorly timed. This overhang has created valuation declines in a number of industries, and that negative sentiment has permeated to other unrelated industries as well, as the markets try to guess which industry will next be in Washingtons crosshairs. This has created an inability for companies to make corporate investment decisions. In addition, the uncertain economic recovery outlook, an already-bloated government balance sheet, and a zero-interest rate policy that hampers any further help from the Fed, creates a perfect storm for a negative outlook. Unfortunately, we also have all this in an election year, which amplifies the conflict of interest between solving longterm problems and getting reelected in the near-term. As we have said in the past, kicking the can down the road is not a solution. What we need is an actual restructuring of balance sheets, certainty surrounding tax policies, and an intellectually honest effort at reform that promotes economic growth over the long run. Off-Balance Sheet Obligations We are certainly not the first people to point out the large, contingent obligation owed by our country and American corporations to future retirees in the form of pensions and healthcare benefits. The numbers are mind-boggling, but the story has been told so often that, frankly, Americans have become desensitized to the shock value of hearing them. Add to that the fact that the analysis usually extends for decades, and most people agree to worry about this potential time bomb later. We, thus, wont bore you with our own recount of that story but would rather focus on the story that unfolds between now and then. We believe that as average Americans begin to realize that a lot of the promises made to them over the past few decades cannot be kept, they will spend less and save more now. In other words, the crisis for valuations is a near-term story, not a long-term story. Weve already seen the savings rate move higher (see graph on the following page), and some think it will more than double to over 10% in the years ahead. Not only is the employment picture in this country still bad, as discussed above, but even those who still have jobs must be beginning to worry about higher taxes and lower benefits in the future.

Owl Creek Asset Management, L.P. 640 Fifth Avenue, 20th Floor New York NY 10019 T 212 688-2550 F 212 753-2760

US Savings Rate Past 40 Years

Source: Bureau of Economic Analysis; Bloomberg.

For example, we cover a company that generates annual EBITDA somewhere in the vicinity of zero but has approximately $7 billion of pension related obligations. The secured bank debt is trading at deeply distressed levels, and there is virtually no realistic way for this company to grow its way out of its legacy problems. The company employs tens of thousands of workers, but because the company is the largest single contributor into several multiemployer pension plans, its safe to say that many more people than that, probably in the hundreds of thousands, rely on this companys solvency, since the multiemployer plans will probably eventually fail if this company fails (and might fail regardless). As companies that participate in the multiemployer pension plan go under, the burden of financing all of the pension and OPEB obligations falls on the remaining members. In the case of this companys largest multiemployer plan, of the 50 largest contributing companies in 1980, only 4 are still in business today. The tragic human element we are talking about here is that if this company fails, tens or possibly hundreds of thousands of people may come to realize that the plans they had for a comfortable retirement were illusory, because even the federally backstopped amount which would be covered by the Pension Benefit Guaranty Corporation (PBGC) is much lower than the current plans benefits. And if the company survives, it will probably only be with the benefit of hundreds of millions of dollars of annual savings from legacy commitments (money that those same people dont get). Since this story is unfolding many times over in the United States and other countries, what this phenomenon means for corporate P&L statements and market

Owl Creek Asset Management, L.P. 640 Fifth Avenue, 20th Floor New York NY 10019 T 212 688-2550 F 212 753-2760

valuations is that we cannot rely on the consumer to return to the freewheeling habits of prior years if they increasingly become disabused of their belief in a comfortable retirement. Ordinary citizens will be forced to continue to find ways to cut spending for many years to come. Europe In our first quarter letter, we discussed the risks that we saw for members of the eurozone in the form of graphs that depict budget deficits, public debt, private debt, unemployment, etc. We wont rehash those points now, but we will mention that we have not seen anything come out of the region that mitigates the concern we have. It might be our credit backgrounds, but we dont see any easy ways out over the long term, since eventually all debts must either be repaid or canceled. Ignoring continued deficit financing (which is a good assumption, since rolling ones debt is not a solution, its merely putting off the issue for another day), the possible paths we see are: 1. Economies grow their way out of their problems, 2. A country defaults, making bondholders share the pain, 3. A country prints money and devalues its currency, making bondholders share the pain, albeit in a different way (note, this is not an option for any single eurozone country, although it is an option for the region as a whole), 4. Budget spending goes down, which is the fiscally responsible thing to do but causes severe pain for the populace, or 5. Taxes go higher, which is just as painful as #4 in absolute dollars, but allows politicians to spread the pain around as they see fit. Right now, leaders in Europe are preaching #4, but we wonder if those leaders will stay in power long enough to follow through on this strategy, since #2 or #3 could be viewed as an easier pill to swallow and might be the platform on which an opposition party is thrust into power. In the United States, we are probably on the path to #5. Of all the graphs, bar charts, and tables weve put in our letters over the years, perhaps the scariest is shown on the following page.

Owl Creek Asset Management, L.P. 640 Fifth Avenue, 20th Floor New York NY 10019 T 212 688-2550 F 212 753-2760

We agree with the conventional wisdom that budget deficits in a recessionary environment are a good way to smooth out an economic cycle. The dilemma we are now facing, however, is that weve had budget deficits in this country for way too much of the past four decades, thus putting pressure on any plan to spend our way out of our current problems. We dont think the base case outcome is that US government bonds collapse, but we appreciate why a lot of people (in Washington, no less) are starting to wonder aloud about how much longer we can press our luck, especially in light of what has been going on recently in Europe. Deficits today are nothing more than taxes in the future. Thats a mathematical certainty if you believe in the classical economic theory that GDP over the long term is influenced only by labor growth and productivity. If its true that we are destined to pay higher taxes in the future to avoid the unspeakably bad outcome, then the question becomes how much higher? Lets remember that a lot of us reading this letter have spent our entire working lives in a relatively low-tax environment. So to think of marginal tax rates as high or low requires a much longer-term perspective, such as in the graph above. In Conclusion All of the above makes us want to have a smaller portfolio with more event driven and short duration, yield-oriented investments so as to have the ammunition available when we see significant asymmetric investment opportunities that are less affected by the markets. As we mentioned above, our portfolio is trimmed down to include our highest conviction ideas in which we believe we have the best risk-reward payoff, and our gross and net exposures are significantly smaller than they were at the beginning of the year.

Owl Creek Asset Management, L.P. 640 Fifth Avenue, 20th Floor New York NY 10019 T 212 688-2550 F 212 753-2760

On the operational front, weve added three analysts to our team over the past few months, one in New York and two in Hong Kong. Also, one of our MDs, Jeff Lee, has temporarily moved over to the Hong Kong office to continue his focus on Asia from the region. Fred Steindler joined us in May from Halcyon Asset Management, where he had been working for four years mostly on distressed debt investments as well as some special situations equity investments. Fred has a BA from Cornell and an MBA from Columbia. He has been a friend of the firm for a long time, and we are fortunate to have him. Karyo Oh joined our Hong Kong office in July as a senior analyst responsible for Japan. Karyo comes from Fidelity, where he had been a top-ranked analyst for the past five years out of both their Tokyo and Boston offices. Karyo grew up in Shanghai, went to college at Kyoto University and is fluent in both Japanese and Mandarin. He also received an MBA from Columbia and was a member of the value investing program there. Dennis Lim joined our Hong Kong office in August as a senior analyst from Robeco where he was a China portfolio manager. Before Robeco, he was an analyst at Horizon Capital Management, a Hong Kong-based hedge fund. Dennis, who is fluent in Mandarin, will focus his time on China and industries that have global supply chains driven by China. He is a graduate of (you guessed it) Columbia University. As the summer winds down, wed also like to thank our summer interns, Andrew Chang, Josh Kovler, Patrick Lally, and Erica Schechter, for their help over the past few months. They are all not only extremely talented, but also have a great work-ethic and attitude. Wed like to thank you for your continued support in our team and our process. As mentioned above, given the emotion (and volatility) in the markets today, we are as confident as ever that our bottom-up approach to stock and credit picking is the best way to invest money, and we are grateful to have investors who share that belief.

Sincerely,

Jeff Altman
Jeffrey A. Altman

Daniel Krueger
Daniel E. Krueger

Jeff Lee
Jeffrey F. Lee

Shai Tambor
Shai S. Tambor

and the rest of the Owl Creek Team.


This information is intended only for the person to whom it has been delivered. This information is not an offer or solicitation with respect to the purchase or sale of any security. Any investment decision in connection with Owl Creek I, L.P., Owl Creek II, L.P., Owl Creek Overseas Fund, Ltd., Owl Creek Socially Responsible Investment Fund, Ltd., Owl Creek Asia I, L.P., Owl Creek Asia II, L.P., and Owl Creek Asia Fund, Ltd. should be made based on the information contained in the Confidential Memorandum for the applicable Fund which will be made available upon request. This information is strictly confidential and may not be reproduced or redistributed in whole or in part nor may its contents be disclosed to any other person under any circumstances. This Brochure is not intended to constitute legal, tax, or accounting advice or investment recommendations. Past performance should not be viewed as indicative of future results.

Owl Creek Asset Management, L.P. 640 Fifth Avenue, 20th Floor New York NY 10019 T 212 688-2550 F 212 753-2760

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