Letter from the Executive Management

Bruce Zimmerman, Chief Executive Officer and Chief Investment Officer
Cathy Iberg, President and Deputy Chief Investment Officer

Fiscal Year 2007
We are pleased to report strong investment returns for the fiscal year ended August, 2007.

The Permanent University Fund (the "PUF") earned 15.3% for the year and ended with $11.7 billion of assets. The General Endowment Fund (the "GEF") earned 15.9% for the year and ended with $6.4 billion of assets. The staff is particularly proud that these returns were 196 and 252 basis points, respectively, above their policy portfolio benchmarks which resulted in $340 million of value added over the policy portfolio. Importantly, risk-adjusted returns were very strong and among the best for public and private endowments with assets of $1 billion or greater, although it is the case that the absolute level of returns lagged other endowments that chose to take more risk.

The Intermediate Term Fund (the "ITF") returned 10.6% during the fiscal year, well ahead of its objective thereby creating $175 million of value-add.

Fund Performance for Fiscal Year 2007
The PUF and GEF (together, the "Funds") assets remain approximately 40% invested in global public equities, with about half of this exposure in U.S. domiciled companies and a quarter each in non-U.S. developed countries and emerging market countries. During our fiscal year, the U.S. equity markets delivered a 15% return, the non-U.S. developed country markets returned 19% and emerging markets generated 44% returns. The Funds benefited from a slightly overweight position in emerging markets relative to their policy portfolio benchmark. However, the value-add from the Funds' active managers in non-U.S. developed countries and emerging markets was disappointing. These are areas we will be focusing on in the coming year.

Approximately 25% of the Funds assets are invested in directional and absolute return hedge funds which produced investment returns of 16.2%, with relatively low volatility and low correlation with the underlying asset classes in which they are investing. The Funds' hedge fund portfolio performance was especially strong given that the average hedge fund across the industry produced only a 6.2% return during this period.

Fixed income investments - including nominal and real bonds across the maturity spectrum - are targeted at 15% of the Funds' assets. The Funds remained slightly underweight in these assets, as well as invested in durations shorter than the benchmarks. Altogether, the Funds' fixed income returns were close to the policy portfolio benchmark.

Private market investments including venture capital, buyouts, distressed and opportunistic strategies and energy-related strategies totaled just over 10% of the Funds' investments, which was lower than the 15% policy portfolio target due to accelerated distributions. Private investments returned 28.6% for the year in the PUF and 31.9% for the year in the GEF, which surpassed the average returns for private investment funds by 5.3% and 8.6% respectively.

Finally, the Funds had approximately 8% of their assets invested in commodities and REITS. REIT returns were positive for the year, and our managers delivered positive performance versus their benchmarks. Commodity returns - largely driven by the price of oil - were negative for the year.

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