Review and Outlook NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE December 2002

Economic Situation Fears of the economy veering back toward another round of contraction were generally alleviated in November as the preponderance of evidence showed the economy to be stronger than initially thought. Third quarter GDP was revised upward to a 4 percent annual growth rate, and while fourth quarter growth has slowed from that pace the majority of fourth quarter data suggest the economy is continuing to move forward. Specifically, housing starts declined in October but building permits made a strong advance and both new and existing home sales were strong. The manufacturing sector stabilized and initial claims for unemployment insurance continued to trend downward in November. A gradually improving employment picture, low interest rates, stable energy prices and an improving level of corporate earnings provide considerable support for economic growth to move forward at a moderate pace. But the economy continues to face a number of headwinds, including little in the way of pent up consumer demand, low industrial capacity utilization rates which are likely to restrain investment in commercial structures, and weak foreign demand which undercuts the outlook for U.S. exports. These constraints will likely prevent the economy from growing at an above trend rate for any sustained period of time in the coming year.

Economic, Rates, and Earnings Forecast

THE STATE OF THE MARKET 4 Consumer Expenditures Consumer spending was the driving force of the economy through the third quarter, but it slowed as the fourth quarter began. Consumer confidence plunged in October but staged a rally in November and indicators suggest that consumer spending improved in November as well. Gradual improvement in labor market conditions, low rates and stable oil prices all provide support for continued moderate consumer spending growth. Source: Conference BoardSource: Department of Commerce Source: Federal Reserve

THE STATE OF THE MARKET 5 Production and Investment The ISM manufacturing index improved to 49.2 in October. The level indicates flat conditions in the manufacturing sector, but is consistent with modest overall economic growth. Housing starts fell in October, but building permits moved significantly higher and both existing and new home sales were strong, suggesting continued relative strength in the housing sector. Source: National Association of RealtorsSource: Department of Commerce Source: Institute for Supply ManagementSource: Federal Reserve Board

THE STATE OF THE MARKET 6 International Trade Trade continued to detract from GDP growth in the third quarter. U.S. demand growth has outpaced that of the world’s other major economies, leading imports to grow faster than exports. Sluggish economies abroad suggest that export growth will continue to be hampered by relatively weak demand, though slower import growth may result from slower consumer spending growth in the fourth quarter. Source: Department of Commerce Source: Bloomberg

THE STATE OF THE MARKET 7 Labor Market Conditions The unemployment rate ticked up to 5.7% in October as job growth continued to be stagnant. The unemployment rate has generally been stable for the past year. The build up of slack within the labor market has led to slowing wage gains. But average hourly earnings are up 3.0 percent from a year ago, indicating that real incomes continue to grow and should support moderate growth in consumer spending. Initial Jobless claims have fallen throughout November, suggesting gradually improving job market conditions. Source: Bureau of Labor Statistics

THE STATE OF THE MARKET 8 Inflation and Monetary Policy The Fed unexpectedly cut its target lending rate to 1.25% at its November 6 FOMC meeting and at the same time adopted a neutral risk assessment between economic growth and inflationary risks. Inflationary pressures remain low and provide the Fed with the flexibility to maintain an accommodative monetary policy stance to ensure a sustainable economic recovery continues to develop. Source: Department of CommerceSource: Federal Reserve Source: Bureau of Labor StatisticsSource: Bloomberg

Fixed Income Market Conditions and Outlook The Fed cut is overnight lending rate by 50 basis points at the November 6 FOMC meeting, a bigger move than markets expected but at the same time shifted its risk assessment between economic growth and inflation to balanced. Longer term interest rates have moved higher since the Fed move as the subsequent economic data have generally been more favorable, leading to improved expectations for growth. As a result, the yield curve has become more steep from 3 months to 30 years. In addition to the effect on the shape of the yield curve, the more stimulative monetary environment and evidence of better than expected economic conditions led riskier assets to outperform Treasuries. Corporate bonds, and high yield bonds in particular, experienced very strong performance in conjunction with strong gains made in equity markets. Treasuries are currently near where our models put their fair value based on the current level of inflation and economic activity. Over the coming year it’s likely that Treasury yields will drift modestly higher as economic growth progresses and the building of slack resources abates. Riskier fixed income assets, corporate and high yield bonds in particular, are likely to outperform Treasuries in this environment given their yield advantage and the potential for price appreciation through further spread tightening.

THE STATE OF THE MARKET 10 Fixed Income Market Treasury bonds came under pressure in November as the Fed eased and a number of economic indicators signaled better than expected growth. The improved growth outlook had a very positive impact on both the stock market and corporate bonds. Our outlook is for a relatively stable interest rate environment and a gradual narrowing of credit spreads over the coming year. Source: Bloomberg Source: Lehman BrothersSource: Yield Book

Equity Market Conditions and Outlook The major equity indices all continued to move further from their October 9th lows during November. The Dow, S&P 500, and Nasdaq all finished November more than 20 percent above their respective levels on October 9th. The sectors of the market which have led the indices are those that typically have the greatest sensitivity to general economic conditions. Corporate earnings reported for the third quarter to date have generally met expectations, and should continue to move higher as the economic expansion moves forward. While multiples have modestly expanded with the confirmation of third quarter earnings, the earnings yields on the major stock indices generally remain below parity with bond yields. Equity risk premiums remain elevated, reflecting the heightened level of geopolitical and terrorist risks. It’s likely that equity risk premiums will remain at a somewhat elevated level as the war on terrorism and geopolitical risks are unlikely to be resolved in the near term. Near term, both revenue growth and cyclical margin expansion should continue to push earnings growth forward at a pace faster than our outlook for nominal GDP growth. Longer term, earnings growth is likely to be constrained by the low nominal GDP growth environment. A low and generally stable interest rate environment should help support equity valuations.

THE STATE OF THE MARKET 12 Equity Market The major equity indices all continued to move further from their October 9th lows during November. While multiples have moderately expanded with the confirmation of third quarter earnings, the earnings yields on the major stock indices generally remain below parity with bond yields. Equity risk premiums remain elevated, reflecting the heightened level of geopolitical and terrorist risks. Source: BloombergSource:Factset Source: Bloomberg

THE STATE OF THE MARKET 13 Disclosure This information is not intended to provide specific advice or to be construed as an offering of securities or a recommendation to invest. The factual information has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. Please consult an investment professional for advice concerning your particular circumstances. U.S. Bancorp Asset Management, Inc., is a registered investment advisor and subsidiary of U.S. Bank National Association.