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Castle Union LLC

676 N. Michigan Ave, Suite 3605 Chicago, Illinois 60611 (312) 765-7034 | October 8, 2012 Dear Partners, Castle Union Partners, LP was launched on July 1, 2012. Steve and I have had an exciting three months getting the Fund up and running. We understand it takes a leap of faith to invest in a startup hedge fund and we appreciate your confidence in us. We certainly will never forget that you invested with us when we were just two guys with a Bloomberg terminal and no track record. The Fund ended the third quarter up 6.6% on a gross basis and 5.6% on a net basis. Our monthly performance is summarized below: Gross Return Net Return S&P 500 TR July 1.59% 1.44% 1.39% August -2.14% -2.29% 2.55% September 7.19% 7.09% 2.70% Third Quarter 6.56% 5.62% 6.35% The Fund ended the quarter 24.0% net long (30.8% long, 6.8% short, and 76.0% cash). Even with such a large cash balance, you should expect the Funds returns to be lumpy given the concentrated nature of our portfolio. At quarter end, our top three positions accounted for nearly 19% of the Funds assets. Our large positions are, of course, our best ideas, and these ideas typically have the potential to return multiples of our investment upon the occurrence of certain events. Fortunately, our large positions worked well during the third quarter. However, there may be months or quarters when our top positions do very little or move against us. In fact, this is what we expect to happen. Our best ideas are usually found in the obscure backwaters of the investment world, and no one will pay attention until there is a reason for doing so. We only hope others will pay attention at much higher prices than we paid. As such, we do not despair or elate over any particular monthly or quarterly result, and neither should you. Our goal is to generate strong longterm returns, but you should fully expect those returns to come in bunches. Our Large Cash Balance The Fund holds a large cash balance, which is simply an expression of the challenge of finding suitable investments in the current market environment. We would obviously love to have the Fund fully invested, especially when potential investors tell us they see no reason to invest when the Fund is 76% cash. So be it. Steve and I have a substantial portion of our liquid net worth invested with you in the Fund, and we will not expose ourselves and you to the risk of permanent capital loss

simply to say we are fully invested. Whether we are 76% cash or 5% cash does not change whether an idea is suitable for investment. That said, we have a decent pipeline of ideas that we are currently adding to the portfolio. A number of these ideas are illiquid, so we expect it will take some time to build a full position. We hope to be able to discuss these positions with you in future letters. Moreover, the great thing about investing is that you never know what opportunities tomorrow will bring the market is full of surprises. In our experience, an entire years return can be the result of a single days work because, for example, a company happened to file for bankruptcy and we were the only people paying attention. Primary Drivers of Q3 Performance On the positive side, the main drivers of the Funds performance were our long positions in Eagle Hospitality Preferred, Meru Networks, and Repligen. These three positions contributed 10.9% of gain. On the negative side, we have positions in Pulse Electronics and the equity of a bankrupt restaurant (Consumer Long A) that contributed 1.9% of loss. We discuss a few of these positions below. Top 5 Position Eagle Hospitality Meru Networks Repligen Retail Short A Tech Short A Contribution 6.0% 2.8% 2.1% Not Material Not Material Bottom 5 Position Pulse Electronics Consumer Long A Retail Short B Consumer Short A Retail Short C Contribution -1.0% -0.8% -0.3% Not Material Not Material

Eagle Hospitality Preferred We have a stated strategy to invest in obscure securities, and we wasted no time by quickly establishing a position in the preferred stock of Eagle Hospitality. Eagle is a hotel REIT with a portfolio of 13 hotels that Apollo took private at the height of the bubble. The companys $600 million of debt was purchased by Blackstone in May from the Federal Reserve for roughly 75 cents on the dollar. The debt came due at the beginning of September, but we never thought bankruptcy was a viable option for the parties involved given Eagles corporate structure, which would have required a long, complicated bankruptcy, and the bad boy guaranty given by Apollo (i.e., Apollo would be liable for any deficiency on the loan). Indeed, bankruptcy did not come to pass as the company announced Blackstone has agreed to take a meaningful discount on its debt in conjunction with a sales process for Eagles hotels. Blackstone used a $350 million loan from J.P. Morgan and $125 million of equity to buy the Eagle loans, so even if Blackstone took a 90 cent pay off, they would make $65 million -- a fairly nice return on equity in less than a year. Looking at comparable transactions, if Eagle is able to sell its hotels at an

8% cap rate, or a roughly $160,000/key, the preferred would recover $15/share. Our cost basis is $1.95/share. I do want to quickly note the Wall Street cycle of life here with Eagle. Eagle was a bubble-vintage LBO lead by private equity firm Apollo with loans from Bear Stearns. As we all know, Bear failed and was taken over by J.P. Morgan. The Eagle loans were too toxic for J.P. Morgan, so they wound up at the New York Fed in the Maiden Lane portfolio. Five years later, another private equity firm, Blackstone, gets a loan from J.P. Morgan to buy the Eagle loans from the Fed, and thus the cycle of life is complete. Meru Networks Meru is what we would classify as a special situation investment and one where some serendipitous events gave us special insight into the company. Enterprises use Merus products to provide WiFi connectivity. Given the proliferation of WiFi devices (i.e., smartphones, tablets, laptops, etc...), the enterprise WiFi market has been growing nicely (20%+ annually). Meru was once a hot IPO that peaked at $27/share in early 2011. The company experienced severe margin pressure, however, as it grew its sales force given the lag between hiring sales people (expenses) and when those sales people starting producing revenue. Over the course of the last 18 months, Meru became universally hated and the stock fell to ~$1.50/share. In March, Meru announced it was bringing on a new CEO, Bami Bastani. I got to know Bami through the Trident Microsystems bankruptcy case, where I am involved as chairman of the equity holders committee and Bami was Tridents CEO. Given my opinion on Bamis strengths as a CEO, I believe Bami was brought in to groom the company for an eventual sale. In addition, Meru closed on $12mm of financing and as part of the loan, the lender is entitled to a $2mm success fee upon a change of control. Couple these factors with heavy insider buying on the open market, and all signs point toward an eventual sale of the company. Meru would be much more valuable as part of a larger organization such as Dell or HP because these companies already have large sales and distribution channels. A little math: Meru does annual revenue of $100mm with 65% gross margins. Dell, for example, could pay a multiple of Meru's $65mm gross profit because it could rip out all the operating costs (Dell already has all the SG&A, R&D infrastructure). Thus, Meru's gross profit would fall directly to the bottom line. A 5x multiple would be 5 * $65mm = $325mm / 18mm shares = $18/share. Meru's end market is growing robustly and Dell could ramp revenues quickly given its existing distribution. I have seen this movie before as an owner of Isilon, which was another hot tech IPO that bottomed out at close to $1 with the same sales force expansion issue (they also threw in an accounting restatement to make sure people really hated the stock). Isilon was eventually bought out by EMC for $33/share. We also saw this happen with 3Par (acquired by HP) and Data Domain (acquired by

EMC). The high gross margin, single product in a hot market, broken tech IPO is a repeatable and profitable investment template. Consumer Long A This was one of the first positions we purchased in the Fund and were not disclosing the identity of this investment because we are still out in the market purchasing shares. This is a bankrupt restaurant company with a current equity market capitalization of a little over $3mm. We believe this is an attractive price to pay for a company with $11mm of equity in its owned restaurant locations and operations that generate $3.5mm of EBITDA. This position fits squarely into our playbook for a distressed equity investment. The company filed bankruptcy not because it was insolvent, but because illiquid and faced litigation from a few irrational creditors. The company has used the bankruptcy process to restructure and the reorganization plan leaves the equity intact. There are a few creditors that have objected to the plan, but with the secured lender on board as an impaired accepting class, we believe the plan meets all the requirements of the Bankruptcy Code. A plan approval hearing is scheduled for later this month and we expect the plan to be crammed down on the objecting creditors. The company should emerge from bankruptcy shortly thereafter. New Investments As I mentioned earlier, we are building our positions in a number of investments that we hope to discuss in future letters. We have a new 5% position in a technology company that is in the process of selling itself. There is likely very little downside at current prices and given the companys assets and the intense competition among the interested bidders, there may be substantial upside once the auction is done. Another investment that we are particularly excited about requires proof of share ownership be sent to the company to obtain financials and the shares trade only in physical certificate form. We have received an education in the settlement of physical certificates. The shares trade for a small fraction of par because the market perception, assuming that any investors are paying attention at all, is that this entity is insolvent. We have reason to believe the entity is entirely solvent and we hope to make this a large position in the Fund. We would not be going through the trouble of locating and trading physical certificates if we did not believe the opportunity was unusually attractive. Unfortunately, there is the possibility that we will not be able to acquire as many shares as we want.


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Fund Update The Fund now has $5 million of assets under management and were pleased with our momentum on the capital raising front. We are hopeful we can reach the $10 million mark by year end. Thank you again for your support and we look forward to updating you again next quarter. As always, please contact us with any questions or comments. Sincerely,

Toan Tran (312) 765-7032

Stephen White (312) 765-7033


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