Sub-Prime Mortgage Exposure in The AERP Trust

Q.Does the AERP Trust own any securities which may be exposed to the risk of loss in value due to sub-prime mortgages?
A.Yes, the trust owns asset-backed securities (ABS) some of which are backed by sub-prime mortgages of relatively high quality. Asset-backed securities and domestic financial sector stocks within the AERP Trust have direct exposure to the risk of loss in value due to sub-prime mortgages.

The AERP Trust is a well diversified portfolio with an asset allocation of 55% common stock, 5% real estate and 40% fixed-income. High quality government bonds, the Trust's primary component within the fixed-income allocation, have been insulated from material risk of loss due to sub-prime mortgages. In addition, the Trust's diversified real estate fund does not hold any single-family residential properties and employs modest leverage.

Q.What is the total mortgage-backed security exposure as a percentage of total AERP Trust assets?
A.7% of total AERP Trust assets are invested in mortgage-backed securities (MBS) and asset-based securities linked to real estate. 0.8% of total AERP Trust assets are rated sub-prime.

Q.What is the average credit rating of mortgage-backed securities held in the AERP Trust?
A.The average credit rating of mortgage-backed securities held in the AERP Trust is AAA. The majority of the mortgage-backed securities held in the AERP Trust are Federal National Mortgage Association(FNMA) agency bonds and Federal Home Loan Mortgage Company (FHLMC) bonds.

Q.What is the projected impact on annual plan performance for the AERP Trust in fiscal year 2008 assuming all sub-prime mortgages held entered default status?
A.While holding all other asset performance constant, the Trust's annualized asset performance may decline by approximately 0.75% to 1% in fiscal year 2008 assuming the extremely low probability of significant sub-prime mortgage default given the sub-prime mortgage exposure is less than one percent. Separately, annual plan performance for AERP in fiscal year 2008 may be indirectly impacted due to the sub-prime mortgage event and housing slump spreading into the broader economy reducing employment and consumer spending thereby stalling GDP growth and weakening the overall stock market. Management will continue to monitor the Trust's sub-prime exposure as securities are revalued in the current market.

06 February 2008

Treasury Directorate

The Aerospace Corporation

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