Review and Outlook

NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

December2002

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

2002 Blue Chip 2003 Blue Chip2001 2002(E) 2003(F) Consensus** Consensus**

Real GDP (Q4/Q4) 0.1% 2.5% - 3.5% 2.5% - 3.5% 3.0% 3.3% Personal Consumption Expenditures 2.8% 2.2% - 3.2% 2.5% - 3.5% 2.7% 2.9% Investment -15.1% 5.5% - 11.5% 0.0% - 5.0% Net Exports ($) -$418.5B -$491B -$515B Government Spending 5.1% 2.7% - 3.7% 2.0% - 3.0%Unemployment Rate* 5.6% 6.0% 6.1% 5.8% 5.8%

CPI* 1.6% 0.5% -2.0% 1.0% - 2.0% 1.6% 2.2%CPI Excluding Food & Energy* 2.7% 0.5% -2.5% 1.0% - 2.0%

Fed Funds* 1.75% 1.25% 1.25% - 2.50%10 Year Treasury* 5.05% 4.00% - 5.00% 4.00% - 5.00% 4.60% 4.50%

Corporate Earnings (S&P Operating) $45.22 $48.35 $54.00 $48.69*** $55.71***Trade Weighted Dollar* 117.0 105-115 100-110

* End of Period Level

**Blue Chip Economic Indicators - Nov 10, 2002

***Thompson Financial Bottom Up Consensus

THE STATE OF THE MARKET4

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 Board Source: Department of Commerce

Source: Department of Commerce Source: Federal Reserve

Real Income vs. Consumer SpendingYear-Ago Percent Change

3-month Average

-2.0%

0.0%

2.0%

4.0%

6.0%

1990 1992 1994 1996 1998 2000 2002

10/2002DisposableIncome

Consumer Spending

Consumer CreditYear-Ago Percent Change

3-month Average

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1990 1992 1994 1996 1998 2000 2002

Revolving

Total

9/2002

Consumer Confidence Index1985 = 100

40

60

80

100

120

140

1990 1992 1994 1996 1998 2000 2002

11/2002

Retail SalesYear-Ago Percent Change

3-month Average

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

1990 1992 1994 1996 1998 2000 2002

11/2002

Ex-Autos

Total

THE STATE OF THE MARKET5

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 Realtors Source: Department of Commerce

Source: Institute for Supply Management Source: Federal Reserve Board

New and Existing Home Sales Thousands, Annual Rate

3-month Average

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

1990 1992 1994 1996 1998 2000 2002

400

600

800

1000New(right)

Existing(left)

10/2002

Total Housing Starts Thousands, Annual Rate

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1990 1992 1994 1996 1998 2000 2002

10/2002

ISM SurveyComposite Index

35

40

45

50

55

60

1990 1992 1994 1996 1998 2000 2002

11/2002

Industrial Production IndexYear-Ago Percent Change

3-month Average

-8.0%

-6.0%

-4.0%-2.0%

0.0%

2.0%

4.0%6.0%

8.0%

10.0%

1990 1992 1994 1996 1998 2000 2002

10/2002

THE STATE OF THE MARKET6

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: Department of Commerce

Source: Bloomberg Source: Bloomberg

Industrial ProductionYear Ago Percent Change

3-month Average

-15

-10

-5

0

5

10

15

1990 1992 1994 1996 1998 2000 2002

European Union Industrial Production

J apanese Industrial Production 10/2002

U.S. Imports & ExportsYear-Ago Percent Change

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

1994 1996 1998 2000 2002

9/2002

Imports

Exports

-40000

-35000

-30000

-25000

-20000

-15000

-10000

-5000

0

5000

1994 1996 1998 2000 2002

9/2002

U.S. Trade Balance $ Millions - Seasonally Adjusted

Foreign Exchange Rates

80

90

100

110

120

130

140

150

160

1990 1992 1994 1996 1998 2000 2002

0.80

1.00

1.20

1.40

1.60

11/30/2002yen/$(left scale)

$/Euro(right scale)

THE STATE OF THE MARKET7

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 Source: Bureau of Labor Statistics

Source: Bureau of Labor Statistics Source: Bureau of Labor Statistics

Employment Cost IndexCompensation for Civilian Workers

Year-Ago Percent Change

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Q3 2002ECI Rises 0.8% From Q2

U.S. Unemployment RatePercent

3.0

4.0

5.0

6.0

7.0

8.0

1990 1992 1994 1996 1998 2000 2002

10/2002

Nonfarm PayrollsMonthly Change (Thousands)

3-month Average

-400

-300

-200-100

0

100

200300

400

500

1990 1992 1994 1996 1998 2000 2002

10/2002

Average Hourly EarningsYear-Ago Percent Change

3-month Average

2.0%

3.0%

4.0%

5.0%

1990 1992 1994 1996 1998 2000 2002

10/2002

THE STATE OF THE MARKET8

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 Commerce Source: Federal Reserve

Source: Bureau of Labor Statistics Source: Bloomberg

Chain Weighted GDP DeflatorQuarterly Percent Change

Seasonally Adjusted Annual Rate

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

1993 1994 19951996 1997 19981999 2000 2001 2002

Industrial Capacity Utilization Rate3-month Average

747576777879808182838485

1990 1992 1994 1996 1998 2000 2002

10/2002

Consumer Price IndexYear-Ago Percent Change

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

1990 1992 1994 1996 1998 2000 2002

core

total

10/2002

Goldman Sachs Commodity Price IndexYear-Ago Percent Change

-35%-25%-15%-5%5%

15%25%35%45%55%65%

1990 1992 1994 1996 1998 2000 2002

11/2002

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 MARKET10

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: Bloomberg

Source: Lehman Brothers Source: Yield Book

U.S. Treasury YieldsPercent

1

2

3

4

5

6

7

8

9

1990 1992 1994 1996 1998 2000 2002

11/30/200230-yr Tsy Bond

3-mo T-bill

Total Return by Market Sector

7.34% 7.90% 7.97%7.22%

11.81%

6.08%

-3.16%

1.02%2.11%0.81%

3.89%

1.13%

-0.34%

0.55%

-8.0%

-4.0%

0.0%

4.0%

8.0%

12.0%

Leh

Agg

Trea

s.

Age

ncy

Cor

p

Mor

t

HY

Tips

12 Months ending 11/29/2002

3 Months ending 11/29/2002

Credit Spreads

0

50

100

150

200

250

300

350

400

450

1990 1992 1994 1996 1998 2000 2002

Salomon BBB Index

Salomon A Index

November 2002

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

3 Mo 2Yr 5Yr 7Yr 10Yr 30Yr

U.S. Treasury Yield Curve

11/30/2001

11/30/2002

Equity Market Conditions and OutlookThe 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 MARKET12

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: Bloomberg Source:Factset

Source:Factset Source: Bloomberg

S&P 500 IndexYear-Ago Percent Change

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

1990 1992 1994 1996 1998 2000 2002

11/2002

THE BROAD STOCK MARKET

100

300

500

700

900

1100

1300

1500

1700

| 86 | 87 | 88 | 89 | 90 | 91 | 92 | 93 | 94 | 95 | 96 | 97 | 98 | 99 | 00 01 02

200

700

1200

1700

2200

2700

3200

3700

4200

4700

5200

S&P 500 (left scale) NASDAQ Composite (right scale)

10/31/2002

-30.00%

-20.00%

-10.00%

0.00%

10.00%

S&

P 5

00

Rus

1000

Val

Rus

100

0 G

r

Rus

MC

Rus

200

0

NA

SD

AQ

EA

FE

EM

G

2001

2002YTD

Total Return by Style

11/30/2002

-40.00%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

Con

Dis

c

Con

Sta

ples

Ene

rgy

Fin

anci

al

Hea

lth C

are

Indu

stria

ls IT

Mat

eria

ls

Tele

com

Util

ities

2001

2002YTD

Total Return by Sector

11/30/2002

THE STATE OF THE MARKET13

DisclosureThis 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.