Letter from the Executive Management

Intermediate Term Fund Performance for the Fiscal Year 2007
The ITF returned 10.6% during the fiscal year, well ahead of its 6.0% objective and well ahead of returns that would have been earned on cash-like investments. The ITF is invested similarly as the PUF and GEF, with the exclusion of private market investments and, as mentioned earlier, we are also pleased with the first full year's performance of the ITF. The ITF, which totaled over $3.7 billion at the end of August, provided these higher returns while maintaining substantial liquidity.

The University of Texas at Brownsville

While this level of returns cannot be guaranteed, we are optimistic about the ITF's ability to produce returns in excess of cash-like investment on a consistent basis.

The introduction and implementation of the ITF was smooth and seamless and much credit belongs to UT System personnel across the institutions for their vision and hard work.

2007 Market Overview and 2008 Market Outlook
As noted above, Fiscal Year 2007 capital markets provided an environment for strong returns. That said, the positive and relatively benign environment for the first ten and a half months of the fiscal year came to an abrupt halt in the second half of July.

Despite a string of rate increases on the part of the United States Federal Reserve System (the "Fed"), long rates remained stable resulting in a relatively flat yield curve hovering just under 5% through mid July. Fears of sub-prime mortgage losses and 'contagion' resulted in extremely volatile fixed income markets during the final 45 days of the fiscal year. Short-term U.S. Treasury yields plummeted and LIBOR skyrocketed. At the time of this writing, the Fed's easing appears to have calmed the fixed income markets, at least for now.

European fixed income markets were not dissimilar from the U.S. markets, although Japanese fixed income yields remained quite low in the face of continued anemic domestic economic growth. Emerging market fixed income spreads remained historically low as these economies appear to have transformed themselves from net borrowers to net lenders.

The University of Texas at Arlington

Riding on the benign fixed income markets, equity markets posted strong gains as economic expansion continued and inflation appeared tame. As mentioned above, the U.S. equity markets gained 15%, non-U.S. developed market equities increased 19% and emerging market equities returned a whopping 44% for the year. Private equity buyout activity was strong, generating healthy distributions through recapitalizations and sales while plentiful debt funded new investment activity. While the end of the fiscal year brought about an abrupt slowdown to private equity activity, the public equity markets staggered, but then recovered, and appear to be yet again reaching new heights.

Energy prices traded a bit down for the year (albeit arguably at high levels) while other commodities ranging from metals and minerals to agriculture and livestock continued their upward trend in the face of strong global demand and constrained supplies.

Conflicting cross-currents make the coming year a difficult one to predict. On a strategic level, the entrance of three billion participants in the world economy (e.g., China, India, Russia, etc.) is still in the early stages. This fundamental increase in productive capability, and consequently consumer demand, should propel global economic growth forward. Countering this, the U.S. economy appears to be slowing as consumption in excess of production can only continue for so long before the party must wind down. Together with the aging populations in the U.S., Europe and Japan, and the continuing relative impediments to market competition in Europe and Japan, headwinds exist.

The depth and breadth of contractions in liquidity in certain markets, which was initiated by the sub-prime mortgage losses triggering a switch from 'greed' to 'fear' (more elegantly referred to as the 're-pricing of risk') - but being battled by the Fed's interest rate easing - remains to be seen.

Although the coming year is difficult to predict, the implications for UTIMCO appear clearer. We remain long term investors with a deep belief in a diversified portfolio. We remain committed to identifying and investing with the best fund managers across the globe. We believe volatility presents opportunities and continue to be opportunistic: looking to be cautious when others are not and to provide liquidity - at the right price and terms - when others will not.

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