First Quarter 2007 May 14, 2007

100 Crescent Court • Suite 400 • Dallas, Texas 75201

YTD

Jan-07 Feb-07 Mar-07 1Q07 2007WRHE Gross 2.9% -3.7% -1.8% -2.7% -2.7% 43.1%WRHE Class A, Net1 2.2% -3.1% -1.5% -2.4% -2.4% 28.5%WRHE Class B, Net1 2.3% -3.2% -1.6% -2.5% -2.5% 29.7%S&P 500 1.4% -2.2% 1.0% 0.2% 0.2% 27.9%NASDAQ Composite 2.0% -1.9% 0.2% 0.3% 0.3% 20.9%

1 Class A shares are subject to a one year lockup and a 20% performance fee; Class B shares are subject to a three year lockup and a 17% performance fee.

Inception to Date

“Eyes Wide Shut (again)”

Dear Partners: Western Reserve Hedged Equity, LP pulled-back 2.5% in the first quarter amid modest unwinding of the Fund’s material out performance in 2006 (longs ran 25% last year on average versus shorts 4%). The recent lull is due to market dynamics with resurgent momentum in low quality, deep cyclical stocks (despite their deteriorating earnings) creating a hostile environment to qualitative investing again. We don’t believe it will last too long. The first quarter, abridged in order to cut to the chase, reflects temporary poor short/hedge performance, chiefly in low quality industries where the research team accurately identified earnings leverage weakness and where the best defense against further economic climate deterioration exists. To a large degree, the “vanillas” (long-only/mutual funds) and momentum are breaking the “shorties” again as they chase relative performance by bidding-up cyclical industry stocks. However, economically levered stocks are out of touch with reality, and the remainder of the year should become more fundamentally responsive just as it did from May to December last year. Most importantly, the valuation dichotomy between quality growth industries and deep cyclicals has reached proportions similar to the absurd disconnect between technology/aggressive growth and traditional value stocks in early 2000. The Fund’s consistently applied quality and growth focused strategy remains well positioned for a clearly strained growth environment and we have taken advantage of current valuation dislocations for “good businesses” relative commoditized businesses as reflected by our ‘fully invested’ long and short exposure.

(214) 871-6720 Main • (214) 871-6713 Fax info@western-reserve.net

May 14, 2007

The raw earnings power of the Fund’s long portfolio remains comfortably within our high teen to low twenty percent growth mandate, and this will continue to propel the value of the Fund in measured time. The opportunity for material valuation expansion also exists, but we will not need that to produce double digit returns due to the high growth, high recurring nature of the Fund’s long investment approach so central to our strategy. However, it’s becoming increasingly hard to ignore the obvious potential valuation “gravy” imbedded in growth and services stocks. They are underperforming their earnings accumulation (economic value creation) by massive proportion now. Share prices and earnings accumulation will correct any disconnect ultimately. Below is a classic Western Reserve long – Alliance Data Systems (ADS). We have charted the stock price relative to the company’s strong earnings accumulation over the past five years.

Earnings

Stock Price

Source: Baseline As can be observed, ADS’ stock price has under performed its earnings accumulation by an astounding 345%. ADS’ current cash earnings multiple of 10x and cash flow multiple of 8.3x our 2008 estimates compares with ADS’ compound average growth of well over 25%. The services economy stock groups are ripe for material earnings accumulation catch-up in their share prices, while the opposite is true for the market’s favored deep cyclicals. The research team continues to push through a market that is adversarial to qualitative portfolios positioned long quality and short/hedged lower quality stocks. Yet, we aren’t suffering much capital attrition during these extreme junk stock “melt-ups.” Risk management on our part has played a role, but what this really is telling us is that the deep cyclical “value bubble” has limited legs now. Relative performance players are increasingly forced to chase smaller and smaller performance alpha by making bigger and bigger long bets on the now ubiquitous global cyclical thematic trade. All the while, risks are mounting while the returns are thinning as fast as the

100 Crescent Court • Suite 400 • Dallas, Texas 75201 (214) 871-6720 Main • (214) 871-6713 Fax

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May 14, 2007

earnings power is deteriorating in the market’s leadership groups. Now is not likely the time to place your chips “all-in” the popular trade. Conversely, the opportunity for staying our disciplined course keeps improving in our view and we have to work hard to contain our enthusiasm knowing these compulsive markets can take longer to unwind than logic otherwise demands. Similar to the end of the tech bubble, low quality industry leadership (materials/industrials) is a momentum game now as the fundamentals are clearly on the decline. The excuses now compete for the earnings cuts in quantity within cyclical corners of the market. Investors will reach for and pay anything to have “thematic” exposure to “global infrastructure” in a similar fashion to chasing Internet “infrastructure” or “back-door plays” late into the tech mania. So, patience isn’t easy. But, the Western Reserve team is focused on turning near term qualitative chagrin with this market into risk adjusted performance leverage. While investors and the financial media remain overcommitted to (if not obsessed with) the global growth/foreign exchange trade again, local high growth stocks in services industries such as information technology have become woefully undervalued amid the underinvestment vacuum created by the rampant and narrow momentum in the market. As an indication of depressed pricing, larger capitalization high quality domestic services firms are being hunted by private equity firms now. Recent take-private premiums have been as high as 50% over market for services economy firms such First Data (FDC), Sallie Mae (SLM) and Affiliated Computer (ACS).

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of the stock’s peaks is a dead-on match to asset bubble peaks like LBO/Real Estate in the 1980’s;Venture Capital/Technology in the 1990’s; and now the risk that the current Commodity-Cyclical (hard assets) is a bubble too. When the “mad money” is made, they race to buy priceless art it would appear. But it too is “cyclical.” The accompanying table includes a selection of the Fund’s high growth and “dirt” cheap (actual dirt is very expensive in this stock market) information technology/processing holdings and their relative under valuation to recent going private multiples. The upside might astonish some. Select Information Technology/Processing Holdings Upside to Privatization

EV/Cash Flow(2) Implied % of 2007 2008 Upside PortfolioFDC/SLM/ACS(1) 14.7 14.0 ADS 9.3 8.3 69% 5.2% CKFR 10.6 8.5 65% 4.4% EEFT 9.7 6.9 102% 2.8% EFD 8.7 7.9 77% 2.0% NSTC 8.5 7.3 92% 2.2% ORCC 11.1 8.2 70% 4.2% SINT 8.8 7.5 90% 2.7% TSAI 12.0 10.0 40% 4.5% CLAY 10.0 7.0 100% 3.0% TRAK 14.5 10.2 38% 3.8% 34.8%

(1) Implies EV/Cash Flow valuation average for FDC in the proposed buyout by Kohlberg, Kravis & Roberts (KKR), Sallie Mae by JC Flowers & Co. and Affiliated Computer by Cerberus Capital Management et al.

(2) Western Reserve estimates. Cash Flow is defined as EBITDA less replacement CapEx. While we prefer that these firms stay public as to accrue the long term earnings growth economics to the Fund’s LP’s, the analysis indicates just how under priced services stocks are at present. Put simply, the spot private market value of the Fund’s longs is somewhere between 40% and 70% above prevailing market prices if recent take-private deals announced are the proxy for intrinsic value. Current buyouts actually are a bargain relative to empirical valuations for services stocks. So, one can see why we are adamant that current trends in the market are carelessly bifurcated. Based upon historic valuations and fundamentally superior growth, we believe the Fund is positioned for major positive repricing over the next several years. Privatization multiples normally aren’t 50% above prevailing stock prices. In apparent contrast to prevailing convention, we think America remains of some tangible importance to the investment world. For our bottom-up purposes, an $11 trillion domestic economy is so large that it offers small, undiscovered services firms myriad growth opportunities as productivity and efficiency gains are extracted regardless of raw unit economic growth and especially when said unit growth slows as is the current case. Strategists who are positive on equities point to how reasonably priced the market is at 15x earnings (relative to low inflation and interest rates). While we conditionally agree, what makes stocks look so “reasonably priced” on the surface is not the leadership groups, rather it is the

100 Crescent Court • Suite 400 • Dallas, Texas 75201 (214) 871-6720 Main • (214) 871-6713 Fax

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May 14, 2007

underinvestment in services economy stock groups at historic trough valuations. The Fund’s long portfolio is pure services growth and is currently valued at just 11.3x forward cash earnings, or roughly half the underlying average growth rate and a steep discount to the market. Clearly, nobody wants to own them. The catalyst to return higher quality businesses to the visibility of the masses is greed, of course, and this may come in the form of continued ‘eye popping’ private equity buyouts in services and thinning returns in deep cyclical based investments. Valuation spreads are at levels hard to ignore now. Deep cyclical is now more expensive than quality growth by our analysis. We are not involved long in either Microsoft (MSFT) or Caterpillar (CAT) because neither firm displays the sustainable growth rates we require, but both are sufficiently well known to make for illustration. MSFT’s 17x trailing operating cash flow (EBITDA less replacement CapEx) versus CAT’s 24x is astonishing to us. Is a dollar of cash flow at CAT really worth 41% more than a MSFT dollar? It’s hard to imagine the affirmative case for such a conclusion. In fact, we (and history) would argue the opposite and that MSFT is the more valuable dollar than CAT because it is far more predictable. MSFT has never experienced a down year in cash flow generation in its operating history while CAT’s cash flows are a virtual economic roller-coaster. The market’s love affair with a CAT versus a MSFT presents a cut and dried example of the “value bubble” gone well too far now… What’s even more puzzling to us is that CAT cannot easily replicate its business model in China (the rationale for paying an unprecedented premium) anytime soon, while MSFT largely can. CAT’s model is heavily leasing and sales finance driven throughout the world via CAT’s captive finance arm (think – GMAC and car sales). There is no credit bureau system and no rule of law in many emerging markets like China. So, it’s very difficult to promote sales through offering financing options (traditional durables model in the west) for high price-point industrial goods. Many dot.com infrastructure firms offered lax financing to promote their sales to emerging Internet firms in the tech bubble. Ramping-up durables sales in new, untested markets and with unqualified participants is neither as riskless as perceived then (tech craze), nor today (emerging market mania). These are just examples in well known stocks. What is taking place in blue chips is magnified in smaller capitalization stocks, and this frames the opportunity we see in our niche at Western Reserve. Smaller capitalization services and growth stocks are at discounts rivaling the opportunities in deep, traditional value investing in 2000. It seems to have gone unnoticed by most market observers that the S&P 600 (smaller capitalization) Pure Value Index now trades at 24x earnings compared to the S&P 600 Pure Growth Index at 18x. So, traditional “value” stocks are 33% more expensive than growth stocks. Specific to our Fund, short investments carry cash flow multiples even higher at nearly 2x that of the long portfolio and with a wide qualitative rift. Margins for the average long investment (sign of the quality of a business) are over 2.7x the average short while returns on invested cash on the long side are 4.5x the Fund’s average short. Put simply, “bad businesses” don’t produce much

100 Crescent Court • Suite 400 • Dallas, Texas 75201 (214) 871-6720 Main • (214) 871-6713 Fax

info@western-reserve.net

May 14, 2007

free cash and certainly not relative to “good businesses,” yet the lower the quality of the business, the higher the valuation for said business in the current marketplace. We see great opportunities to capture highly favorable risk adjusted return leverage as a result of both very good long and short opportunities. The qualitative aspects of a stock are not of great importance to investors in a sort of madness eerily reminiscent of the tech craze right now, but it will reverse itself. Managing the risk of the mania to the Fund is a key challenge and a focus of ours near term, but everything qualitative about an investment, having been turned upside down again, points to a massive reversal building. We are well positioned by our natural qualitative biases. Investors now have more confidence and find less risk in China than in America. Speculative interest betting against the dollar has reached record levels. One fund manager recently opined that emerging market debt spreads of 150bp over US Treasuries (down from 1600bp a few years back) were rational due to lower risk in emerging markets. Perhaps risks are lower, but we don’t think 1.5% excess return to buy anything over the risk-free rate of return on a US Treasury Note makes much sense, let alone the corporate and sovereign debt of historically shaky nations. Western Reserve’s long portfolio currently yields 9.9%. This is more than twice the smaller capitalization industrial stock discount at present and >60% of services privatization yields. We like the opportunities such dislocation presents. The Fund needs neither a “back half” cyclical earnings recovery nor multiple expansion in quality growth stocks to make money from here. That said, we very much expect the next several years to bring rising valuations coupled with superior earnings growth in high quality smaller capitalization services stocks, and this combination provides a rare opportunity to make a great deal of money with substantially reduced risk.

Regards,

Michael P. Durante Managing Partner

100 Crescent Court • Suite 400 • Dallas, Texas 75201 (214) 871-6720 Main • (214) 871-6713 Fax

info@western-reserve.net

May 14, 2007

100 Crescent Court • Suite 400 • Dallas, Texas 75201

LongShortTotal (Gross) Total Class A (Net)2

Total Class B (Net)2

LongShortTotal (Gross) Total Class A (Net)2

Total Class B (Net)2

Jan-07 Feb-07 Mar-07 YTDWRHE Gross 2.9% -3.7% -1.8% -2.7%WRHE Class A Net 2.2% -3.1% -1.5% -2.4%WRHE Class B Net 2.3% -3.2% -1.6% -2.5%S&P 500 1.4% -2.2% 1.0% 0.2%NASDAQ 2.0% -1.9% 0.2% 0.3%

Mar-07 Feb-07 Jan-07 Dec-06 Nov-06 Oct-06 Sep-06 Aug-06 Jul-06 Jun-06 May-06 Apr-06 TTMInception To Date3

WRHE Gross -1.8% -3.7% 2.9% 2.3% 2.0% 4.2% 6.3% -0.1% -2.6% -0.2% -2.3% 0.7% 7.5% 43.1%WRHE Class A Net -1.5% -3.1% 2.2% 1.7% 1.5% 3.3% 5.0% -0.2% -2.2% -0.3% -1.9% 0.4% 4.8% 28.5%WRHE Class B Net -1.6% -3.2% 2.3% 1.8% 1.6% 3.4% 5.2% -0.2% -2.3% -0.3% -2.0% 0.4% 5.0% 29.7%S&P 500 1.0% -2.2% 1.4% 1.3% 1.6% 3.2% 2.5% 2.1% 0.5% 0.0% -3.1% 1.2% 9.7% 27.9%NASDAQ 0.2% -1.9% 2.0% -0.7% 2.7% 4.8% 3.4% 4.4% -3.7% -0.3% -6.2% -0.7% 3.5% 20.9%

Sector Long Short Gross NetBusiness Services 8% 7% 14% 1% Lazard Ltd. LongConsumer 18% 1% 19% 16% GFI GroupFinancial Institutions 4% 2% 6% 2% Alliance DataFinancial Services 0% 2% 2% -2% Transaction Systems Arch.Healthcare 27% 11% 38% 16% NNN Realty AdvisorsIndustrial 0% 17% 17% -17%Technology 9% 2% 11% 7%Technology Services 14% 9% 23% 5% Long ShortReal Estate 24% 6% 30% 18% Top 5 49% 28%

129% 64% 193% 64% 87% 47%

5.0% 68%

7.5% 168%4.8% 68%

Average Exposure1

12.2% 118%-4.8% 50%

Quarter EndedMarch 31, 2007

Performance Ending Exposure1

Summary for the Quarter EndedMarch 31, 2007

Western Reserve Hedged Equity, LP

10.9%-1.8%

129%64%

8.9%6.8%

193%64%

7.1% 64%

Trailing Twelve Months (TTM)

Performance

Key Positions

Year to Date Comparative Returns2

CyberSource Sirius Satellite

GEO Group Harley DavidsonGFI Group LaBranche & Co.

Trailing Twelve Months Comparative Returns2

Composition by Sector (% of Capital)

Percent of Capital

Largest Long Positions1

Top 10 Positions

Online Resources

Top 5 Winners YTD1

ShortJones Lang LaSalle W.P. Stewart

CACI

Western Reserve Hedged Equity, LP Cumulative Performance Since Inception (Gross)

-9%-5%-1%4%8%

12%16%20%24%28%32%36%40%44%48%52%56%60%

Dec Feb Apr Jun

Aug OctDec Feb Apr Ju

nAug Oct

Dec Feb Apr Jun

Aug OctDec Feb

Western ReserveS&P 500NASDAQ

12 Freely tradable securities. Immaterial position sizes omitted.Class A shares are subject to a one year lock-up and a 20% performance fee; Class B shares are subject to a three year lock-up and a 17% performance fee.

3 Western Reserve Hedged Equity, LP's inception date is January 1, 2004.

Please be advised that the past performance of Western Reserve Hedged Equity, LP (the “Fund) is not necessarily indicative of future results. Depending on the timing of a person’s investment in one of the Funds, actual investment returns in the Fund may vary from the returns stated herein. Performance results are estimated, based on both audited and unaudited results, net of management and performance fees and operating expenses. Such performance results assume that a partner invested in the Fund at the inception of the Fund and has not made additional contributions or withdrawals. There is no assurance that at any time the securities held by the Fund will be securities which comprise any of the indices listed above, and the Fund may have substantial cash balances and investments in relatively illiquid securities at any time when compared to the securities comprising a listed index. This report is provided for informational purposes only and is not authorized for use as an offer of sale or a solicitation of an offer to purchase investments in the Fund or any affiliated entity. This report is qualified in its entirety by the more complete information contained in the Fund’s Confidential Private Placement Memorandum and related subscription materials. This report is confidential and may not be reproduced for any purpose. Western Reserve Capital Management, LP serves as the Fund’s investment manager. Its Form ADV Part II and Privacy Policy are available to investors upon request.

(214) 871-6720 Main • (214) 871-6713 Fax info@western-reserve.net