1. Endowment Fund June 30, 2006

2. Table of Contents Introduction…………………………………….………………......….1 Endowment History………………………………........................…3 Endowment Growth…………………........................................4 Increases by Component……………………………….............5 Endowment Performance….…………………………………….7 NACUBO Comparisons…...……………………………………..…..8 Size & Endowment per FTE Student…………………….........9 Investment Performance……………………..…………..…….12 Asset Allocation……………………………………………….…16 Gift Flow Rate……………….…………………………………....18 Endowment Spending Rate..…………………………….....…21

3. Introduction An endowment fund for an educational institution provides long-term continuous support for various programs and services. Lehigh University recognizes the importance of providing enduring financial support through endowment and desires to enhance its endowment position through the procurement of new endowment contributions and the prudent management of its invested funds. Trustee Responsibilities The University By-Laws provide that one of the general powers of the Board of Trustees is to oversee the management of the University's endowment and investments. The Board has delegated endowment management responsibility to its Finance Committee, which has specific responsibility for endowment and similar funds as defined in the By-Laws as follows: 1. Establish and monitor investment policies and guidelines. 2. Manage investments through the appointment of managers and/or internal management. 3. Review at least annually the investment performance. 4. Establish a policy regarding disbursement of income. Because sound endowment management policy suggests a clear separation between certain functions such as asset allocation decisions and the determination of endowment spending policy, the Finance Committee has established an Investment Subcommittee that has particular responsibilities for the endowment fund. 1

4. Introduction Committee Membership Trustee Finance Committee F. J. Ingrassia, Chair R. L. Brown, III M. K. ChrinW. W. Crouse, III J. H. Glanville A. K. Harkness W. F. Hecht J. R. Perella D. E. Singleton, IIIE. J. Sussman R. C. Tschampion, IIIM. D. Zisman Investment Subcommittee R. C. Tschampion, III, Chair K. L. Clayton A. J. GreenwoodM. F. Hoben P. N. LeitnerJ. W. MacMurrayJ. B. Mc Gowan M. L. PaleyK. R. Parke Annual Reporting The Trustee Finance Committee desires to report annually to the Board of Trustees upon the status of the University's endowment fund. These reports will present the general progress and stewardship of endowment at Lehigh. This report will give specific attention to: 1. Historical changes, 2. Performance and comparative data with other colleges and universities, and 3. Policies and procedures. 2

5. Endowment History The University's Endowment Fund has experienced rapid growth in market value over the past ten years from approximately $439 million at June 30, 1996, to $939 million at June 30, 2006. The value as of March 31, 2007 was over $1 billion reflecting the favorable market conditions since June 30, 2006. The market value increase over the past 10 years can be broken down into the following components: Gifts Realized and Unrealized Gains Reinvested Earnings The following three pages highlight the market growth and the components of that growth over the past 10 years. Lehigh Endowment Fund’s 25-year performance history is provided on page 7. The endowment fund has returned an average total annual return of 13.2% over the 25-year period, which compares favorably to the composite index of 11.6%. 3

6. Lehigh University Endowment Fund Growth History 4

7. Endowment Increase by Components June 30, 1996 through June 30, 2006 5 Bequests and Gifts $160,824,000 29% Investment Performance $715,925,000 Endowment Spending (317,430,000) Net Appreciation 398,495,00071% Increase $559,319,000 100%

8. Lehigh University Endowment Fund Increase by Component June 30, 1996 to June 30, 2006 6

9. Lehigh University Endowment Fund 25 Year Performance History June 30 Total Return 1982 -0.8 198344.5 1984 -1.4 198528.9 198624.3 1987 20.8 1988 3.3 198918.6 1990 8.3 1991 6.1 199213.6 199315.4 1994 2.1 199518.6 199616.9 199721.4 1998 21.8 199912.4 200019.3 2001 -4.6 2002 -5.7 2003 7.2 200416.1 2005 9.5 200612.0 Avg. Annual Return 12.6% Composite Index (65% Equities/35% Bonds) 11.6% Note: Returns for 1986 & after are net of manager fees 7

10. NACUBO Comparisons The NACUBO Endowment Study (NES) is an annual report prepared by TIAA/CREF under the direction of the National Association of College and University Business Officers (NACUBO). The report has been a useful tool for colleges and universities to help evaluate the effectiveness of their endowment policies and investment performance. Lehigh has participated in the NES for over three decades. The 2006 Study reports on over 760 participating institutions of higher education. The following pages compare various aspects of Lehigh's endowment fund with one or more of: a) the universe of all participating colleges and universities; b) participating independent schools; and c) participating institutions of similar endowment size (over $500 million to $1 billion). The latter, when available, is the most useful standard of comparison for Lehigh. 8

11. NACUBO Comparisons Endowment Size and Endowment per FTE Student Page 10 indicates the growth of Lehigh's endowment fund from 1996 to 2006. As of June 30, 2006, the University ranks 70th in endowment size among 765 participating institutions. Lehigh's $154,189 endowment per FTE student compares favorably to the $107,372 for independent institutions over $500 million to $1 billion and $126,357 for all independent institutions. Although we have improved our position compared to these endowment classifications, Lehigh continues to rank in the lower half of the list among institutions with which we compete for students (see page 11). 9

12. NACUBO Comparisons Endowment Size: 6/30/96 6/30/06 Lehigh $438,721,000 $939,473,000 Rank 59 of 472 70 of 765 InstitutionsInstitutions Endowment per FTE Student: 6/30/96 6/30/06 Lehigh $79,464 $154,189 Rank (Independent Institutions) 92 of 319 95 of 517 Average - All Schools $57,966 $49,453 Independent Institutions: Over $500 million to $1 billion $151,475 $107,372 All $79,089 $126,357 10

13. Endowment per FTE Student Lehigh vs. Aspirational Peers June 30, 2006 Market Value FTE Endowment Institution in 000s Students per Student Rice University $3,986,6645,014795,107 Emory University 4,870,019 11,882409,865 University of Notre Dame 4,436,62411,307392,379 Northwestern University 5,140,66816,030320,690 Lafayette College * 648,292 2,278284,588 Brown University 2,166,633 8,080268,148 Vanderbilt University2,946,39211,090265,680 University of Pennsylvania5,313,26821,082252,029 Cornell University4,321,19919,447222,204 University of Rochester1,491,2757,639195,219 LEHIGH UNIVERSITY 939,473 6,093 154,189 Tufts University1,215,4138,814137,896 Carnegie Mellon University939,5819,091103,353 Georgetown University834,49712,74665,471 The George Washington University 963,69719,50949,398 * Lafayette College is included for informational purposes only. 11

14. NACUBO Comparisons Investment Performance Lehigh's endowment returns for the one, five and ten-year periods ending June 30, 2006 ranked in the top third of all endowment pools. Endowment returns for the one, five and ten year time periods meet or exceed Lehigh’s performance objective of top third performance vs. all endowment funds. Performance information can be found on the following three pages. 12

15. Average Annual Return Ending June 30, 2006 for Each Period 10 Yrs 5 Yrs 3 Yrs 1 Year Lehigh University 10.4% 7.6% 12.5% 12.0% All Endowment Funds 8.8% 6.3% 11.9%10.7% LU Rank 72/477 130/589 263/656 236/700 Over $500 million to $1 billion 9.8% 7.4% 13.8% 12.8% LU Rank 13/51 20/55 43/61 40/61 Independent Institutions 9.0% 6.4% 12.0%11.1% LU Equity12.6%8.1% 17.5%16.2% S&P 5008.3% 2.5% 11.2% 8.6% LU Bonds 6.5% 5.8% 3.1%-0.1% LB Aggregate6.2%5.0%2.1%-0.8% LU Composite Benchmark 7.9%3.6%8.0%5.3% Added Value over Benchmark2.5%4.0%4.5%6.7% 13

16. LU Investment Performance vs. All Participating Institutions June 30, 2006 10 Years5 Years3 Years1 Year LEHIGH10.4%7.6%12.5%12.0% High17.2%14.5%21.5%23.0% 1 st Q9.7%7.4%13.6%13.0% 2 nd Q8.7%6.2%12.0%10.8% 3 rd Q7.6%5.0%10.2%8.5% Low3.4%-3.4%-2.3%-2.7% 14

17. 10 Years5 Years3 Years1 Year LEHIGH10.4%7.6%12.5%12.0% High13.1%11.8%18.7%20.0% 1 st Q10.4%7.9%15.0%14.0% 2 nd Q9.5%6.9%13.4%13.0% 3 rd Q8.6%6.2%12.0%11.0% Low6.9%4.4%8.1%5.6% LU Investment Performance vs. Large Endowments June 30, 2006 15

18. NACUBO Comparisons Asset Allocation The asset allocation of Lehigh's endowment fund at June 30, 2006 tends to reflect the average of all participating institutions with exception of under weightings in domestic equities and cash and over weightings in non-U.S. equities and fixed income. The following page indicates asset allocation data as of June 30, 1996 and 2006. 16

19. Asset Allocation June 30, 2006 6/30/96 6/30/06 LU Average LU Average Equity – U.S.45.0% 51.6% 37.1%42.5% Equity – Global/Foreign - 2.1% 21.4% 15.2% Fixed Income 32.7% 28.0% 17.5% 20.2% Cash 19.8% 10.7% 1.5% 3.4% Private Equity/Venture Capital1.8% 1.1% 2.7% 2.8% Hedge Funds - - 10.8% 9.5% Natural Resources- - - 1.5% Real Estate 0.4% 4.0% 0.1% 3.5% Other 0.3% 2.5% 8.9% 1.4% TOTAL 100.0% 100.0% 100.0%100.0% 17

20. NACUBO Comparisons Endowment Gift Flow Rate The endowment gift flow rate measures the percent of the market value increase at June 30 related to gifts received during the year. The percentage can fluctuate significantly depending on the gift activity, such as endowment campaign gifts and large bequests received, in a particular year. The year by year gift flow rate is charted on the following page. Fiscal year 1996 Fiscal year 2006 Lehigh University 1.8%3.1% Average - All Institutions 5.4%3.3% Over $1 billionN/A2.7% Over $500 million to $1 billion N/A 3.5% Over $100 million to $400 million 4.9% N/A Independent Institutions 3.7% 2.6% 18

21. Gift Flow Rate Fiscal Year 1996-2006 19

22. NACUBO Comparisons Endowment Growth and Gifts Year to year endowment growth is influenced by gifts and investment performance. The university has experienced a period of exceptional investment performance over the past 10 years. This has added to the value of the endowment fund resulting in additional income for the university’s educational mission. While we are pleased with the success of the investment results, we recognize that future returns are forecasted to be modest. For example, long term rates of return in the 8% range are expected to be the norm in the coming years. With the endowment spending of roughly 5% annually, the remaining 3% will help keep pace with the inflation rate and hopefully maintain the purchasing power of the endowment fund. If we are to meet the challenge of endowment growth relative to our peers, gifts to endowment will be the key. A significant portion (60%) of Shine Forever: The Campaign for Lehigh, our current comprehensive campaign, is focused on endowment, particularly for endowed scholarships and endowed chairs. While Lehigh maintains a strong planned giving program to encourage testamentary gifts to endowment, the campaign provides an opportunity to emphasize current gifts to endowment from alumni and friends. These gifts will be the cornerstone to future growth of the endowment fund. 20

23. NACUBO Comparisons Endowment Spending Rate Below are details of Lehigh's spending as a percentage of the current year’s average market value. Lehigh’s spending rate in 2006 was below the NACUBO average for all endowments, the average for endowments over $500 million to $1 billion, and the independent institution average. Further information regarding Lehigh’s spending policy and historic spending rates can be found on following two pages. FISCAL YEAR 1996 2006 Lehigh University4.7%4.4% Average - All Institutions 4.4%4.6% Over $500 million to $1 billion N/A 4.5% Over $100 million to $400 million 4.3% 4.6% Independent Institutions 4.5% 4.8% 21

24. Endowment Spending Rate 1997 - 2006 22

25. NACUBO Comparisons Endowment Fund Spending Policy In fiscal year 1990-91, the University implemented a market value based spending policy that was adopted by the Finance Committee and the Board of Trustees at its April 1989 meeting. This policy provided for annual spending based on 5% of a three-year moving average market value (using quarterly market values) with a minimum increase of 3% per year and a maximum increase of 6% per year over prior year’s spending rate. The policy minimum and maximum increases were changed to 0% and 10%, respectively, in fiscal year 2001. 23