The Paulson Funds urther Information, contact 1251 Ave, of the Americas, 50" Fl. Investor Relations New York, New York 10020 Ph oN Sete een 2008 YEAR END REPORT In the face of sharply dectining global markets, all of our funds performed well this year with our largest fund, Paulson Advantage Plus, up 37.6% net. The chart below highlights the performance of the offshore Paulson Funds vs. various benchmarks. 2008 Net Performance 40% 10% Advantage Enhanced temational 20% Advantage Plus 50% Source: Hedge Fund Research Table of Contents Merger Arbitrage Pg.2 Bvent Arbitrag Pg.6 The represented indices are unmanaged and considered to be representative of the stock | “tdit Pes market and the respective sectors in general. Performance results described herein are Ps. 19 net of fees and expenses and assume reinvestment of dividends and capital gains for the periods indicated. All material has been obtained from sources believed to be reliable but | a. pee Ped its accuracy is not guaranteed. Past performance is not necessarily indicative of retums | Res! Estat 82 the Funds may achiove in the futur. Paulson & Co PetMerger Arbitrage Our merger funds produced positive retums for the year in the face of steep market declines and numerous deal failures. A properly managed Merger Arbitrage portfolio can protect capital in down markets while showing attractive long term returns. The monthly and annual retums for each fund are shown below. Pa) corey ee ee ee eee eee eee mee ee January February March April May June July August Soptomber October November 2008 Performance The weakening economy in 2008 required an adjustment of our merger arbitrage strategy to a more defensive position. Our strategy in 2008 was to sharply reduce alllocations to the hostile offer area, continue to avoid and in some cases short LBO deals, reduce exposure to the mergerlevent area, fully hedge our market exposure and increase the allocation to the corporate strategic deal spread area. Generally, recessions cause merger volumes to decline, corporate earnings to fall, credit to contract, and stock prices to fall which, in turn, causes the more speculative areas of merger arbitrage to underperform. In 2008, many hostile offers were withdrawn (BHPIRio, Vale/Xstrata, NRG/Calpine, OMV/MOL), leveraged buyouts failed (ApollofHuntsman, Ontario TeachersiBCE, Fortress/Penn Gaming, Blackstone/Alliance Data), and long concentrated activists positions collapsed (Deuschte Bourse, CSX, and Cleveland Cliffs). By minimizing our allocation to these areas and hedging out the market risks we mitigated the impact from these areas on our overall results. The silver lining from losses in these more speculative areas was a sharp rise in the spreads in corporate strategic deals. In fact, spreads in strategic deals widened to the highest rates of retum over the past 20 years. The spread in Inbev's $70 per share all cash acquisition of Anheuser Busch, for example, widened in October to over a 90% annualized rate. The market mispriced the risk of the transaction creating a strong buying opportunity. We aggressively added to our position in October 2008 with our funds becoming the largest shareholder of ‘Anheuser Busch and Anheuser Busch becoming our largest position. When the merger closed in November at the agreed $70 price, the gain represented the largest profit we ever eared on a spread deal in our history. The represented indices are unmanaged and considered (0 be representative ofthe stock market and the respective sectors in ‘general Performance results desenbed herein are nel of fees and expenses and assume reinvestment of dividends and capital ‘ains for the periods indicated. All matenal has bean obiained from sources believed fo be reliable ut is accuracy Is not ‘uarantoed, Past performance isnot necessarlyindcatve of retums the Funds may achive in the future.Qutstanding Spread Opportunities: Budweiser sss.o | eee! $65.0 $62.0 [_yncton $59.0 | $30.0} 22222282888 3 ss § § § Fs § F § § s 28 § € 3 § sg F Source: Bloomberg Even all-stock strategic deals saw spreads widen to highly attractive levels. We set up the all- ‘stock acquisitions of Merrill by Bank of America, National City by PNC and Wachovia by Wells Fargo all at spreads in excess of 40%. The table below summarizes annualized spreads in strategic deals as of mid November. Merger Arbitrage Spreads: Best Since 2000 Pe Source: Paulson as of 11/1008 The above represents @ partial list of secures and is presente for lustative purposes only. There is no guarantee that in the future these securties wil be hold in the Paulson funds. The represented indices are unmanaged and considered to be representative of the stock market. Past performance isnot necessanly Indicative of future performance