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Sit Investment associates Domestic Investment Outlook & Strategy

July 11, 2000

Contact: Peter L. Mitchelson, CFA – President David A. Brown, CFA, CPA – Vice President Sit Investment Associates, Inc. 90 South Seventh Street Suite 4600 Minneapolis, MN 55402 (612) 332-3223

Current Month Highlights Page Midyear Review: Slowing growth Current conditions: Economy slows, Fed pauses 2 Monetary policy and fixed income strategy: Fed 6 could hold steady Fiscal policy: Surplus forecasts continue to rise 8Equity investment strategy: Russell reshuffle raises 9 strategic issues

Exhibits Warranting Special Attention

Exhibit NASDAQ Index volatility at unprecedented levels; C S&P 500 volatility high, but less than 2H87 Large federal budget surpluses continue under most P economic scenarios Latest Russell Index reconstitution included high Q turnover June 30, 2000 equity market index reformulations R and subcomponent trends Greater stability in the U.S. economy and in consumer V prices

■ Sit Investment Associates, Inc. ■

Investment Outlook & Strategy

July 11, 2000

EXECUTIVE SUMMARY

Domestic equity market returns, which were positive in June, were generally negative for the second quarter of 2000 and, for the first half, were below those of the past several years. Fixed income securities also rallied in June and first half returns were in line with long-term averages. Federal Reserve tightening and signs of slowing economic activity contributed to the weaker six-month equity performance, which is not unexpected given the five years of extraordinarily positive results achieved through 1999. Our forecast for second quarter U.S. real GDP growth is +3.5 percent, down from +5.5 percent logged in the first quarter, and stronger growth should resume in the second half. After holding interest rates steady at the June 27-28 FOMC meeting, the Fed could raise rates again in late August, but it will be heavily influenced by the flow of economic news between now and then. Taxable bond portfolio durations are slightly less than their related benchmarks. Even though domestic equities have shown relatively weaker performance this year, earnings progress has been strong in all of Sit Investment Associates’ equity strategies. We remain overweighted in traditional growth sectors, including technology and health care.


Investment Outlook & Strategy

July 11, 2000

MIDYEAR REVIEW: slowing growth

Halfway through the year, it is appropriate to review our economic and financial market assumptions. Our conclusions are as follows:

1. Domestic equity market returns, which were positive in June, were generally negative for the second quarter, and first half returns were much below those of the past several years. Small and mid cap stocks, however, performed relatively well. Federal Reserve tightening and signs of slowing activity contributed to the weaker first half performance, which is not unexpected in relation to the five calendar years of extraordinarily positive results achieved through 1999. Bond prices rallied in June and major fixed income index performance in the first half was in line with long-term averages.

2. Final 1Q00 real GDP growth for the U.S. economy was little changed from previous estimates and grew at a healthy +5.5 percent rate. Based on weaker personal consumption data, it now appears that 2Q00 real GDP will slow considerably to a rate of about +3.5 percent. April and May CPI data were surprisingly benign, but we believe will worsen a bit in June and remain in the +3.5 percent range on a year-over-year basis. In each of the two previous years, slower second quarter growth has been followed by stronger subsequent growth and we believe this will occur again this year.

3. As predicted last month, the Federal Reserve held interest rates

steady at the June 27-28 FOMC meeting in view of signs that

aggregate demand growth could be moderating. We expect one more increase in rates, probably at the August 22nd meeting, but the Fed will be heavily influenced by the flow of data between now and then. Taxable bond portfolio durations are slightly less than their related benchmarks.

4. Federal budget surplus forecasts continue to escalate both for the near term and the next decade, the latter influenced heavily by rosier economic assumptions. The current year surplus should exceed $225 billion. Economic scenario testing reveals that the surpluses are likely to remain large unless a recession is followed by a very long and slow recovery. Based on our positive economic forecasts, the U.S. Treasury security market may diminish in importance faster than many now believe.

5. The annual reformulation of stock market benchmarks has material impacts on industry sector weights, portfolio concentration at both industry and individual security levels, and market capitalizations, all of which are discussed in this month’s review. Even though domestic equities have shown weaker performance this year, earnings progress has been strong in all of Sit Investment Associates’ equity strategies. Given more moderate economic growth and contained inflation, we believe these strong earnings streams will continue to merit high valuation ratings. We remain overweighted in traditional growth sectors, including technology and health care.

Sit Investment Associates, Inc. July 11, 2000Investment Outlook and Strategy Page 2

CURRENT CONDITIONS: economy slows, fed pauses Following two successive months of negative returns, the major domestic equity and fixed income market indices rallied in June, with particularly strong moves occurring in technology stocks across all capitalizations. Driving forces were emerging signs of moderation in parts of the economy that might give the Federal Reserve some policy leeway following its aggressive 50 basis point increase in the federal funds rate target at the May 16th FOMC meeting. Confidence in this viewpoint grew after the Fed left rates unchanged at its June 27-28th meeting. Powered by strong advances in the corporate sector, the Lehman Aggregate Bond Index in June logged its best monthly return of the year. Small and mid cap stocks achieved their second best monthly returns of 2000 in June, but they were not enough to prevent overall modestly negative results for the second quarter, as shown below and in further detail in Exhibit A.

Total Returns to 6/30/00 1 Mo. 3 Mos. 6 Mos. 12 Mos.Large Cap S&P 500 Index 2.5% -2.7% -0.4% 7.3% Dow Jones Ind’l Avg. -0.6 -4.0 -8.4 -3.3 Russell 1000 Index 2.6 -3.4 0.8 9.3 Small/Medium Cap NASDAQ OTC Comp.* 16.6 -13.3 -2.5 47.7 S&P MidCap Index 1.5 -3.3 9.0 17.0 Russell 2000 Index 8.7 -3.8 3.0 14.3 Fixed Income Lehman Muni Bond Index 2.7 1.5 4.5 3.3 Lehman Aggregate Index 2.1 1.7 4.0 4.6

*Price Change Only

The outsized NASDAQ Composite return of +16.6 percent was partly a recovery move following monthly declines of –15.6 percent and –11.9 percent in April and May, respectively, that were related to concerns over high valuations and possible further interest rate hikes. The 10 most heavily weighted NASDAQ stocks, nine of which are technology-related and which represent 41.2 percent of the index weight, advanced +17.4 percent in the month and contributed 41 percent of the total index return (see Exhibit B). Of these nine tech names, the best gains were recorded by JDS Uniphase (+36.2 percent) and Microsoft (+27.9 percent). For the first half of 2000, the NASDAQ top ten names gained an average +20.9 percent in price despite three of the companies experiencing declines, the most notable of which was Microsoft, down –31.9 percent. The biggest gainer in this group was Intel, up +62.4 percent. Stock market volatility has remained high and has been at unprecedented levels among the NASDAQ indices. Merrill Lynch’s calculations of semi-annual volatility for the technology-laden NASDAQ 100 Index and the S&P 500 Index are shown in Exhibit C. First half 2000 volatility for the NASDAQ 100 Index greatly exceeded that experienced in the second half of 1987, which included the October 1987 crash. S&P 500 Index volatility measured in the same manner has been much less recently than in the second half of 1987, but it is still greatly higher than long-term average volatility. The narrow number of industry groups that are outperforming their related broad market indices and the continuing high representation of technology and health care sectors among these favored few are the principal reasons for the sustained high volatility. The following table shows how few industry sectors outperformed during the first half and that high/low performance spreads remained high.


Performance Trends Across 17

Industries in Stock Market Indices S&P 500 1998 1999 1H00 Hi/Lo Ind. Performance Spread 102.2% 106.2% 55.1% # Groups Outperforming Index 5 7 5 Russell 1000 Growth Hi/Lo Ind. Performance Spread 118.7% 132.5% 104.9% # Groups Outperforming Index 5 7 6 S&P MidCap Index Hi/Lo Ind. Performance Spread 194.3% 139.4% 71.1% # Groups Outperforming Index 4 4 5 Russell MidCap Growth Hi/Lo Ind. Performance Spread 96.1% 188.3% 104.9% # Groups Outperforming Index 6 4 5 Russell 2000 Hi/Lo Ind. Performance Spread 76.3% 153.6% 63.9% # Groups Outperforming Index 7 4 5 Russell 2000 Growth Hi/Lo Ind. Performance Spread 81.9% 159.8% 80.2% # Groups Outperforming Index 5 4 7 Although health care and technology stocks have been dominant outperformers over the past several years, during the first half of 2000 energy and energy-related firms such as drillers and supply firms entered the lists of top-five performers across all capitalizations in response to high oil and natural gas prices. As shown in Exhibit D, however, the energy sector was noticeably weaker in June. Given OPEC intentions to increase oil supplies and the historic election results in Mexico that could lead to a more market-oriented business environment, we believe energy prices are likely to be contained. As the exhibit also shows, only

four of 17 S&P 500 sectors outperformed in June and they were all technology and health care related.

Reflecting the return to favor of technology-related groups in June, extremely wide spreads favoring growth over value indices occurred during the month. In the case of large cap stocks, the more than 12 percentage point spread of growth over value allowed growth to pull ahead of value for the entire second quarter (and for year-to-date, as well), although the same did not occur for small cap even though the one-month spread was also very large. For the past 12 months, the Russell index spreads favoring growth over value have been extremely large, ranging from 29 percentage points for small cap to over 55 percent in the case of mid cap.

Large and Small Stock Total Returns to 06/30/00

1 Mo. 3 Mos. 6 Mos. 12 Mos. Large Cap Russell 1000 Growth Index 7.6% -2.7% 4.2% 25.7% Russell 1000 Value Index -4.6 -4.7 -4.2 -8.9

Small Cap Russell 2000 Growth Index 12.9 -7.4 1.2 28.4 Russell 2000 Value Index 2.9 2.0 5.9 -0.9

With respect to international comparisons, the ranking of the U.S. equity market continued to edge higher during the first half even though absolute returns have been negative. As shown in Exhibit E, all major regions of the world recorded negative results in the first half of 2000 and only six out of 34 individual countries achieved positive results. The U.S. ranked 10th on the list, compared to 20th for calendar 1999 and 18th for the first half of 1999.


Regarding the economy, the final revisions of first quarter U.S. real Gross Domestic Product contained very few changes. Total real GDP was +5.5 percent for the quarter compared to +5.4 percent reported in the two previous estimates. The single biggest change in the subcomponents was a relative improvement in the net export sector. Although the trade area continues to be the biggest drag on total GDP, the relative trend in this sector continues to improve (see Exhibit F). Net export growth is accelerating but is still swamped by imports, which have finally started to decelerate slightly. The decline in government sector spending was the most curious development in the quarter, but was entirely concentrated in the defense sector. Shown below are the final figures for first quarter GDP.

Dollars (Bil) of Real GDP Change 3Q99 4Q99 1Q00 Final Final Final Personal Cons. Expenditures $71.2 $87.2 $114.9 Nonresid. Fixed Invs. 31.4 8.9 68.1 Residential Invs. -3.7 1.7 4.8 Inventory Change 24.0 28.7 -38.7 Net Exports -19.3 -3.7 -23.4 Government 17.0 34.3 -5.8 Residual 0.9 0.3 1.1 Total $121.5 $157.4 $121.0

% Change in Real 5.7% 7.3% 5.5% GDP (ann.)

% Change in Real 4.5% 6.0% 7.1% Final Sales (ann.)

% Change in GDP 1.1% 1.9% 3.0% Deflator (ann.)

Two months of data on personal consumption expenditures (PCE) are now available for the second quarter and there has been a major deceleration in sequential spending even though the year-over-year growth rates remain very strong. To illustrate the degree of weakness that has occurred, the increase in real PCE over the past two months has averaged +$12.5 billion compared to +$34.3 billion in the prior 6 months. The table below shows year-over-year changes in consumer income and spending series and Exhibit G displays the slowdown in spending in graphical terms.

Consumer Income and Spending Year-Over-Year Percent Change

Nominal Real Disposable Personal Personal Consumption Consumption Income Income Expenditures Expenditures

1999 March 5.9% 5.5% 7.0% 5.7% June 6.2 5.9 6.5 5.0 Sept. 5.5 5.2 7.3 5.3 Oct. 6.2 6.1 7.2 5.2 Nov. 5.6 5.5 7.8 5.7 Dec. 5.9 5.8 8.1 5.9 2000 Jan. 6.0 5.6 8.4 6.2 Feb. 6.0 5.5 8.8 6.1 March 6.5 5.9 8.5 5.4 April 6.6 5.9 8.3 5.8 May 6.6 6.0 8.0 5.4 The slowdown in spending has been concentrated in goods as opposed to services and in durables (autos, etc.) as opposed to nondurables. Perhaps the widely heralded “wealth effect” of the stock market is beginning to work in reverse and rising oil and other energy prices are causing consumers to adopt more cautious spending habits. If the pace of the consumer spending


slowdown continued in June at the same rate as in April and May, the annualized growth rate of real PCE in the second quarter will be +3.1 percent, more than a 50 percent reduction compared to the first quarter’s torrid +7.7 percent pace. Under this assumption, the year-over-year growth rate in real PCE will decelerate from +5.9 percent to +5.4 percent, which is still very strong. The observed slowdown in consumer spending is the primary reason why we have lowered our 2Q00 real GDP growth rate from +5.0 percent to +3.5 percent. Despite evidence of slowing consumer spending and a continued deceleration in residential spending, we believe that the general fundamentals of the economy remain quite strong. The unemployment rate remains at a very low 4.0 percent and, even though they have retreated from their highs, both the University of Michigan and Conference Board measures of consumer confidence remain vigorous. In recent years, second quarter slowdowns have often been followed by third quarter recoveries, which we believe will be the case again this year. As shown in Exhibit H, sharp contractions in short-term real retail sales have been frequently followed by equally pronounced rebounds. Easing energy prices, growing export orders and a recovery in government spending are a formula for continued strength in the second half, not deterioration in activity. In last month’s review, we summarized the inflation outlook as mixed and this continues to be the case with somewhat more favorable commodity price news (energy and grains) being offset by ongoing concerns in labor markets. The monthly increase in the Consumer Price Index in May was a surprisingly mild +0.1 percent and included a remarkable drop in overall energy prices of –1.9 percent. Even more suspicious, gasoline prices were reported to be down –3.5 percent on a seasonally adjusted basis while the U.S. Energy Department reported a +4.8 percent

increase in conventional regular unleaded gasoline prices to $1.472 per gallon in May. We believe that the more favorable than expected May CPI number will be followed by a considerably stronger figure in June that will push the year-over-year CPI figure back up toward +3.5 percent before it begins moderating back toward the +3 percent level later in the year. The latest data on the CPI are shown below and Exhibit I contains PPI and CPI graphs covering the past 40 years.

U.S. CPI TRENDS - % CHANGE

YEAR- 6 MONTHS 3 MONTHSPeriod OVER-YEAR ANNUALIZED ANNUALIZED

December 1998 1.6 1.1 0.7 March 1999 1.7 1.7 2.7 June 1999 2.0 2.8 2.9 September 1999 2.6 3.5 4.1 October 1999 2.6 2.4 3.6 November 1999 2.6 2.5 2.9 December 1999 2.7 2.5 1.0 January 2000 2.7 2.4 1.2 February 2000 3.2 3.1 3.3 March 2000 3.7 3.8 6.7 April 2000 3.0 3.6 5.9 May 2000 3.1 3.6 3.8 Other favorable inflation news included the latest reading of the National Association of Purchasing Management’s Prices Paid Index, which fell again in June to 61.2 from 65.8 in May and a peak of 80.0 earlier this year (see Exhibit J). A year ago, the Prices Paid Index was at 53.5 and was in a sharply rising phase, exactly opposite to the current situation.


Saudi Arabia’s offer to increase oil production an additional 500,000 barrels a day is also favorable news and could be joined by others, including non-OPEC Mexico. Negotiations are continuing among the OPEC countries to determine how the increase will be shared among various nations. Saudi Arabia reportedly has excess production capacity of 2.3 million barrels a day in addition to its present 8.25 million quota. We expect the crude oil price will ultimately settle in the range of $25 to $30 per barrel. Most importantly, we believe the energy component of the CPI will cease being a major negative trend factor in the inflation equation as we move into 2001. The same is not true in the case of labor, which continues to be in very tight supply as evidenced in the latest employment report on July 7th. The civilian unemployment rate fell from 4.1 percent to 4.0 percent despite the fact that job growth was considerably below expectations. In the report, average hourly earnings rose +3.6 percent compared to last year and this figure has been remarkably stable over the past year. In early 1998, average hourly earnings peaked at +4.4 percent year-over-year after rising from the +2.0 to +2.5 percent level in 1992-93. In working to offset labor pressures, enterprises continue to pour large sums of money into capital equipment. In 1Q00, real spending on equipment and software increased +13.7 percent on a year-over-year basis, more than 2-1/2 times the rate of overall real GDP. As we examine the economic outlook at mid year, we continue to see a very encouraging environment, as suggested in our economic assumptions shown in Exhibit K. We acknowledge that growth slowed in the second quarter, which is a favorable development in forestalling further aggressive Federal Reserve tightening. We believe real growth will be quite satisfactory in the second half. Inflation pressures persist, but they should not worsen with energy prices leveling out, some signs of

moderation among manufacturers and continued high levels of productivity-based capital spending. Keeping watch on these developments is the vigilant Federal Reserve, which is the subject of the next section of this review. MONETARY POLICY AND FIXED INCOME STRATEGY: fed could hold steady In last month’s review, we wrote that “recent signs of economic weakness suggest that higher interest rates may finally be having their desired effect and may allow the Federal Reserve to stand pat when it meets in June.” This is exactly what did happen at the June 27-28 FOMC meeting as the Fed left interest rates unchanged (see Exhibit L), representing a remarkable turnabout in policy in the space of a relatively short six weeks. At the May 16th policy meeting, the Committee’s vote to raise rates a relatively aggressive 50 basis points was unanimous as a “more forceful” policy move was deemed desirable “in light of the extraordinary and persisting strength of overall demand, exceeding even the increasingly rapid growth of potential supply, and the attendant indications of growing pressures in already tight markets for labor and other resources.” Furthermore, “a 50 basis point adjustment was more likely to help forestall a rise in inflationary expectations that, at least to some members, already showed signs of worsening.” The Federal Reserve’s commentary accompanying the decision to leave rates unchanged on June 28th contained considerably more conciliatory language, as follows:

“Recent data suggest that the expansion of aggregate demand may be moderating toward a pace closer to


the rate of growth of the economy’s potential to produce. Although core measures of prices are rising slightly faster than a year ago, continuing rapid advances in productivity have been containing costs and holding down underlying price pressures.”

Despite this more balanced commentary, the Committee nevertheless concluded that the risks are "weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future,” thereby leaving the door open to additional interest rate increases if conditions warrant. In the three previous rate cycles, the Fed averaged increases totaling 300 basis points from trough to peak, which is considerably more than the 175 basis points implemented in the current cycle. The next three FOMC meeting dates are August 22, October 3 and November 15. In view of the elections, the August 22nd date would appear to be more probable for another rate hike, but it will be determined principally by the flow of data between now and then. Our best estimate today is that the Fed will raise interest rates a further 25 basis points on August 22nd and then stand pat. Our forecasts for U.S. Treasury interest rates are contained in Exhibit M. Interest rates declined in June in response to continued signs of slower economic growth. With respect to U.S. Treasury securities, the 2-year through 10-year maturities declined the most, which lessened the inversion of the yield curve. For example, the 5-year maturity U.S. Treasury yield fell 34 basis points, while the yield of the 30-year maturity U.S. Treasury declined only 13 basis points during the month. However, at month end, the 5-year Treasury yield was at 6.18 percent, still higher than the 5.89 percent yield of the 30-year Treasury bond. Yield spreads have been correlated to the relative inversion of the yield curve. As a result, the reduced inversion helped yield

spreads narrow for most sectors in June. Narrowing yield spreads and the relatively longer duration of the corporate sector made corporates the best performers last month. The tighter yield spreads also helped mortgages outperform. The relatively shorter duration of the asset-backed sector caused its return to lag all other sectors. U.S. Treasury yields are at the lower end of their recent trading range. Consequently, Sit Investment Associates’ taxable total return portfolios are moderately shorter in duration than the Lehman Aggregate Bond Index. Portfolios also continue to be underweighted in U.S. Treasuries to take advantage of further tightening of yield spreads. Municipal bond yields also declined during June. The yield on the Bond Buyer 40-Bond Index fell 22 basis points during the month to 5.91 percent on June 30th, approaching its year-to-date low reached in early April. Since the beginning of the year, the Bond Buyer Index yield has remained in a range between 5.9 percent and 6.3 percent. Lower issuance volume, combined with continued demand from retail buyers looking to reinvest seasonal June 1st and July 1st principal and interest payments contributed to the improved performance of municipal securities during the month. Intermediate maturity municipal yields declined less than intermediate Treasury yields during June. Municipal bonds continue to offer attractive yields on an after-tax basis. Municipal indices, with their longer durations, outperformed taxable indices during the month due to their stronger price performance. Likewise, the longer duration revenue bond sectors, such as hospitals and water/sewer bonds, outperformed shorter duration sectors, such as resource recovery bonds. The housing sector underperformed during the month due to its


more stable price characteristics, however, its performance remains competitive over longer-term periods. In addition, returns for the hospital sector are competitive on a year-to-date basis. We continue to monitor hospital and housing credits closely and continue to seek opportunities to improve the risk/reward profiles of municipal portfolios.

Total Returns Through 6/30/00 Lehman Index

1 Month

3 Mos.

6 Mos.

Last 12 Mos.

Aggregate 2.1% 1.7% 4.0% 4.6% Treasury 1.7 1.5 5.4 5.3 Agency 2.1 1.7 3.6 4.0 U.S. Credit (Corporates) 2.5 1.2 2.7 3.0 Asset-Backed 1.6 1.8 3.4 4.8 Mortgage Pass-Through 2.1 2.3 3.7 5.0 5-Year Treasury 2.0 2.0 3.7 3.5 Municipal 2.7 1.5 4.5 3.3 5-Year Municipal 1.8 1.6 2.8 3.8 Revenue 2.6 1.5 4.5 2.8 Electric 2.7 1.6 4.7 3.1 Hospital 2.9 1.6 4.3 0.4 Housing 2.1 1.4 3.8 3.4 IDR/PCR 2.4 1.4 4.0 2.1 Transportation 2.7 1.6 4.6 3.0 Education 2.7 1.5 4.6 3.4 Water/Sewer 2.9 1.6 5.3 3.5 Resource Recovery 2.1 1.4 3.5 1.3 FISCAL POLICY: surplus forecasts continue to rise Both near-term and long-term federal budget surplus forecasts were increased during the past month. First, with respect to the current fiscal year, the deficit for the month of May was $20

billion less than a year ago, partly due to calendar timing differences of receipts and disbursements compared to the prior year (see Exhibit N). Nevertheless, the cumulative surplus for the first eight months of the fiscal year is $120 billion (three times that of last year’s) and the rolling 12-month surplus through May was $204 billion. Most private forecasters project the fiscal 2000 surplus at $225 billion and we believe it could be higher. The arithmetic of how these enormous surpluses have occurred is very simple: receipts are growing at twice the rate of disbursements. Total receipts grew +11.8 percent during the past eight months and the income tax component (both individual and corporate), which accounts for 59 percent of total receipts, grew by over +15 percent. The strong economy, low unemployment and large capital gains taxes generated by the strong stock market have bolstered revenues. On the expenditure side, which has grown +5.2 percent, national defense (16 percent of the total) has grown +6.7 percent and Social Security has grown +4.4 percent. Interestingly, a key element in the restricted growth of total expenditures is the fact that interest payments on the national debt are actually decreasing. Accounting for 13 percent of total outlays, interest payments decreased –1.2 percent on a year-over-year basis and should continue on a downward path with further debt buybacks and contained interest rates. With respect to the longer-term outlook, on June 26th President Clinton released updated budget estimates from the Office of Management and Budget for the period 2001 through 2010, and they are mind-boggling (see Exhibit O). Including Social Security surpluses of $2.3 trillion (which are considered by both parties to be off limits for spending increases or tax cuts), the aggregate surplus could reach $4.2 trillion. Excluding the


Social Security amount, the “spendable” surplus increased from $746 billion, forecasted as recently as February, to $1.9 trillion, creating a huge grab bag for the “politics of political plenty.” President Clinton has proposed a compromise $250 billion marriage penalty tax cut/$253 billion prescription drug benefit spending package and both presidential candidates have laid out massive spending and/or tax cut menus to sway potential voters. The sensitivity of long-term forecasts to the performance of the economy is seen in the fact that of the total $1.275 trillion increase in the 10-year surplus projection, $984 billion came from higher assumptions for economic growth. The sustainability of the surpluses, however, seems relatively well assured based on a series of economic scenario simulations prepared by Credit Suisse First Boston. Each of the scenarios assumed either a mild or severe recession in 2001 or 2005 followed by recoveries, all but one of which were classified as “instantaneous” in nature. Only in the case of a severe recession in 2001 followed by a “slow recovery” (i.e., a 10-year crawl back to trend GDP levels) did the surpluses actually disappear (slightly, in 2004 through 2006, see Exhibit P). In the recession scenarios followed by quick recoveries, the annual surpluses never dipped below $100 billion. The conclusion from this work is that the Treasury market as a broad, deep and liquid market and as an arbiter of value may lose these characteristics, perhaps quicker than many believe. The coming political season may alter these views if huge spending increases or tax cuts win the day, but we believe it is unlikely.

EQUITY INVESTMENT STRATEGY: russell reshuffle raises strategic issues Each year the Frank Russell Company goes through the process of reconstituting its stock market indices to maintain their currency. Partly due to the large number of initial public offerings over the past 15 months, the number of names and estimated dollar turnover within the various indices was very high this year, as indicated in the graphs contained in Exhibit Q. New additions to the Russell 1000 and Russell 2000 Indices were the highest in three years and dollar “turnover” within the Russell 2000 and Russell Midcap Growth Indices exceeded 50 percent. The significance of the IPO phenomenon is seen in the fact that 71 out of 76 Russell 1000 additions and 255 out of 538 Russell 2000 additions were IPOs since May 31, 1999. Exhibit R is designed to highlight other changes resulting from stock index reformulations and summarizes data from the end of 1997 through June 30, 2000 for the S&P 500 Index and three Russell growth indices (since Sit Investment Associates’ management philosophy is growth stock investing). Our main observations from this data include the following:

1) Industry sector weights can change materially over time. Each of the four indices in Exhibit R is subdivided into 17 economic sectors and we have underlined a number of the more significant changes that have occurred in the latest revisions as well as over time. Within the Russell 1000 Growth Index, for example, the Electronic Technology weight increased 8 percentage points from the end of May to the end of June and the weight of Consumer Non-durables was more than cut in half.


2) Industry concentration can become extremely large, thereby raising issues of fiduciary responsibility. Since the end of 1997, the combined electronic technology and technology services weighting in the Russell 1000 Growth Index has increased from 22.6 percent to 57.9 percent of the entire index. The combined weight of these two sectors was 51.8 percent in the Russell Midcap Growth Index and 41.3 percent in the Russell 2000 Growth Index. For investment managers to make active “bets” in these two sectors, as much as two-thirds of a portfolio would have to be allocated to two sectors that are normally associated with higher volatility.

3) Market capitalizations of the indices can experience

major change, virtually overnight. The weighted average caps of the Russell Midcap Growth and Russell 2000 Growth indices decreased –43.4 percent and –37.7 percent, respectively, from the end of May to the end of June. Managers operating under capitalization size constraints have had their playing field changed overnight, which does not appear conducive to the implementation of long-term investment strategies.

4) Individual company concentration can also be extreme.

The collective weight of the five largest companies in the Russell 1000 Growth Index was 27.6 percent at the end of June, led by GE with a weight of 7.0 percent. The other four companies were Cisco and Intel (both 6.5 percent each), Microsoft and Pfizer. The top five names in the S&P 500 Index have a combined weight of 17.1 percent.

5) Earnings growth rates of broad market indices, including the S&P 500, have been rising. Given the increasing weight of technology sectors in all indices, projected earnings growth rates of the indices have been rising on a secular basis, adding a relative degree of “growthiness” to all diversified portfolios.

As growth managers, Sit Investment Associates believes it is extremely important to communicate the major changes occurring in widely-used benchmark measures so that our strategies and performance can be evaluated in proper context. We will be discussing this material with clients in upcoming meetings.

The performance of domestic equity markets in the first half of 2000 was certainly more subdued than in the two previous years when S&P 500 returns ranged between +12 and +17 percent. However, based on the five calendar years of S&P 500 Index performance exceeding +20 percent per year achieved through 1999, investors should not be surprised with a period of sub-par returns. In fact, we see many elements of a positive nature that will permit the bull market to resume. First, investor sentiment is definitely more cautious. The American Association of Individual Investors’ gauge of the percent of investors who are bullish has fallen from over 70 percent early this year to less than 30 percent currently. Net equity mutual fund sales have slowed noticeably from peaks reached in December 1999 and February 2000.

Second, even though stock prices rose in June, six-month price momentum calculations actually decreased further compared to the end of May, thereby moving in the direction of establishing a base for the resumption of a positive price trend. The


NASDAQ OTC Composite Index, for example, is nearing the bottom of the range experienced over the past ten years (see Exhibit S).

Most importantly, earnings trends for corporations, in general, and for holdings in Sit Investment Associates’ portfolios, in particular, are progressing satisfactorily. While year-over-year S&P 500 earnings growth will decelerate somewhat in the second quarter, it will still be in solid double-digit territory. With respect to the earnings trends of technology companies, an important portfolio component, the general pattern of earnings revisions continues to be positive, particularly in contrast to those of non-technology companies (see Exhibit T). We continuously monitor the trends of earnings forecasts in Sit Investment Associates’ portfolio strategies and here the news continues to be favorable. In all three domestic strategies, 5-year projected earnings growth rates either increased or were sustained at high levels exceeding +30 percent compared to the previous three years: SIA 5-Year Projected

E.P.S. Growth Rates Dates of Large Medium Small S&P

Projection Cap Cap Cap 500 June 1997 +18.9% +23.8% +28.7% +9.0% June 1998 +19.8 +24.5 +29.0 +9.0 June 1999 +20.5 +27.9 +35.1 +10.0 June 2000 +23.2 +34.2 +34.2 +10.0 Additional details regarding the financial characteristics of the three domestic equity strategies are contained in Exhibit U. While earnings growth rates are being sustained at high levels, another important reason why the valuation of these earnings is likely to remain high is that the economy has become more stable and, hence, more predictable. Exhibit V contains data on

the 3-year moving standard deviations of U.S. industrial production and consumer prices and the less volatile nature of these series in recent years is very clear. Technology has played a role in this greater stability, but so has enlightened Federal Reserve policies that have kept inflation dormant. While inflation still has cycles, and we are in one now, they are likely to be relatively mild. If we are correct in this assumption, price-earnings multiples accorded growth stocks, in general, and technology stocks, in particular, can remain high, but earnings expectations must be achieved. Our industry sector overweights and underweights remain as they have in recent quarters: strong overweightings in those sectors with high inherent earnings growth rates that typically accompany innovative products, strong managements that thrive in a competitive environment, and healthy balance sheets. Underweights typically occur in slower growing and/or more cyclical groups. Exhibit W contains our large cap growth strategy sector weighting positions relative to the S&P 500 Index.

This analysis contains collective options of our analysts and portfolio managers, and is provided for informational purposes only. While the information is deemed accurate at the time of writing, such information is subject to change at any time without notice

Exhibit A


Securities Markets

E Q U I T I E S 06/30/00 05/31/00 03/31/00 12/31/99 12/31/98 One Month

Three Months

Six Months

Eighteen Months

Dow Jones Industrials 10447.89 10522.33 10921.92 11497.12 9181.43 -0.7% -4.3% -9.1% +13.8% S&P 500 1454.60 1420.60 1498.58 1469.25 1229.23 +2.4 -2.9 -1.0 +18.3 NASDAQ OTC Composite 3966.11 3400.91 4572.83 4069.31 2192.69 +16.6 -13.3 -2.5 +80.9

F I X E D I N C O M E

U.S. TREASURY

1-Year Bill 6.05 6.42 6.24 5.97 4.48 -37 b.p. -19.b.p. +8 b.p. +157 b.p. 2-Year Notes 6.34 6.68 6.48 6.24 4.54 -34 -14 +10 +180 5-Year Notes 6.18 6.53 6.32 6.35 4.55 -35 -14 -17 +163 10-Year Notes 6.02 6.29 6.02 6.44 4.66 -27 -- -42 +136 30-Year Bonds 5.89 6.02 5.84 6.48 5.12 -13 +5 -59 +77 AA INDUSTRIAL Intermediate Maturity 7.32 7.69 7.32 7.19 5.41 -37 -- +13 +191 Long Maturity 7.35 7.80 7.57 7.49 6.27 -45 -22 -14 +108 MORTGAGES Current Coupon GNMA (8.00%)

7.84

8.03

7.70

6.96

6.35

-19

+14

+7

+149

MUNICIPALS Bond Buyer 40-Bond Index 5.91 6.13 5.97 6.22 5.16 -22 -6 -31 +75

S H O R T T E R M

Fed Funds 6.62 6.53 6.04 4.80 4.45 +9 +58 +182 +217 Discount Rate 6.00 6.00 5.50 5.00 4.50 -- +50 +100 +150 Prime Rate 9.50 9.50 9.00 8.50 7.75 -- +50 +100 +175 13-week Treas. Bills-Disc. 5.70 5.49 5.71 5.19 4.44 +21 -1 +51 +126

E-06/00 pp-107.doc

Exhibit B

n Sit Investment Associates, Inc. n

June 2000 NASDAQ Performance PrimarilyDriven By the Top Ten Issues

JUNEMARKET CLOSING 2000 PERCENTAGE

PERCENT VALUE PRICE TOTAL POINTSYMBOL ISSUE OF INDEX ($ MIL.) 6/30/00 RETURN CONTRIB.

INTC INTEL CORP 8.4 $447,719.4 $133.688 7.2 0.68CSCO CISCO SYSTEMS INC 8.4 445,001.1 63.563 11.6 1.05MSFT MICROSOFT CORP 7.9 419,360.0 80.000 27.9 2.07ORCL ORACLE CORP 4.5 238,603.8 84.063 17.0 0.78SUNW SUN MICROSYSTEMS INC 2.7 144,264.4 90.938 18.7 0.51WCOM WORLDCOM INC 2.5 131,153.8 45.875 21.9 0.53DELL DELL COMPUTER CORP 2.4 127,670.1 49.313 14.3 0.36JDSU JDS UNIPHASE CORP 1.6 85,380.0 119.875 36.2 0.51AMAT APPLIED MATERIALS INC 1.4 73,184.7 90.625 8.5 0.13AMGN AMGEN INC 1.4 72,132.7 70.250 10.4 0.15

AVERAGE 218,447.0 17.4

TOTAL 41.2 6.79

NASDAQ COMPOSITE % RETURN 16.62

\research\charts\Nasd0600-mtd.XLS


Changes in Group Leadership - S&P 500

S&P 500 Year 1998 Year 1999 6 Months 2000 June 2000ECONOMIC SECTOR Weighting Return Rank Return Rank Return Rank Return RankNON-ENERGY MINERALS 0.6 -6.9 16 47.3* 3 -28.1 17 -5.5 13PRODUCER MANUFACTURING 7.5 19.7 8 32.7* 4 -2.5 7 -2.9 11ELECTRONIC TECHNOLOGY 24.9 65.8* 2 72.3* 2 14.9* 4 10.3* 2CONSUMER DURABLES 1.3 28.3 6 -5.9 13 -15.0 13 -9.0 16ENERGY MINERALS 4.7 6.7 12 17.3 8 1.5* 5 -5.9 15PROCESS INDUSTRIES 1.6 -4.5 15 16.3 9 -25.2 16 -9.9 17HEALTH TECHNOLOGY 11.1 49.2* 4 -7.9 14 25.3* 2 8.5* 4CONSUMER NON-DURABLES 5.8 11.4 11 -12.2 15 -7.0 9 1.4 6INDUSTRIAL SERVICES 1.0 -28.2 17 3.0 12 27.0* 1 -1.4 8COMMERCIAL SERVICES 0.7 14.3 9 21.3* 7 -8.8 11 1.6 5TECHNOLOGY SERVICES 8.8 74.0* 1 80.7* 1 -20.0 15 12.5* 1HEALTH SERVICES 0.8 -1.5 13 -25.5 17 15.6* 3 9.2* 3CONSUMER SERVICES 3.9 27.5 7 25.7* 5 -6.0 8 -1.5 9RETAIL TRADE 5.6 63.3* 3 21.8* 6 -15.3 14 -1.9 10TRANSPORTATION 0.5 -2.1 14 -14.5 16 -8.5 10 -4.4 12UTILITIES 8.7 40.2* 5 7.8 10 -9.7 12 -0.9 7FINANCE 12.6 11.7 10 4.2 11 -0.5 6 -5.9 14

UNIVERSE(S&P 500) 100.0 28.7 21.0 -0.5 2.4

Groups Outperforming (cap weighted) 5/17 7/17 5/17 4/17 to Total Groups

S&P/BARRA GROWTH 36.4 42.3 2.6 8.1 S&P/BARRA VALUE 30.0 14.8 -4.1 -4.0

* Group OutperformedSource: Wilshire Associates, Inc.

Exhibit D

g:\research\charts\wilshire\Chgs-s&p.xls


The United States Ranked 10th Out of 34 World Equity MarketsYear-to-Date Through June 30, 2000

PERFORMANCE IN U.S. DOLLARS

DJ Global, Change fromIndexes, US$ 12/31/99 Country

Country on 06/30/00 points percent RankAustralia 166.71 -3.26 -1.92% 12Austria 83.13 -14.85 -15.16% 25Belgium 196.43 -40.89 -17.23% 28Brazil 352.62 -7.64 -2.12% 13Canada 244.43 37.25 17.98% 2Chile 156.98 -16.38 -9.45% 19Denmark 198.68 -1.69 -0.84% 9Finland 1503.8 -26.46 -1.73% 11France 291.78 5.78 2.02% 5Germany 273.23 -26.54 -8.85% 18Greece 298.88 -134.60 -31.05% 31Hong Kong 355.36 1.92 0.54% 6Indonesia 42.31 -29.41 -41.01% 34Ireland 254.37 -31.46 -11.01% 20Italy 257.24 7.69 3.08% 4Japan 106.38 -17.72 -14.28% 23Malaysia 111.69 -0.07 -0.06% 7Mexico 162.38 -7.91 -4.65% 17Netherlands 360.53 -9.87 -2.66% 15New Zealand 118.58 -22.81 -16.13% 26Norway 150.14 -4.65 -3.00% 16Philippines 84.68 -45.91 -35.16% 33Portugal 244.67 -31.86 -11.52% 21Singapore 135.39 -35.17 -20.62% 29South Africa 96.87 -19.10 -16.47% 27South Korea 101.78 -27.19 -21.08% 30Spain 240.00 -42.87 -15.16% 24Sweden 467.43 34.71 8.02% 3Switzerland 367.69 -1.70 -0.46% 8Taiwan 171.32 -4.13 -2.35% 14Thailand 37.39 -18.19 -32.73% 32United Kingdom 197.66 -28.32 -12.53% 22United States 351.27 -3.57 -1.01% 10Venezuela 42.68 8.02 23.14% 1

COMPOSITE INDICES

Latin America 196.42 -7.70 -3.77%Europe/Africa(ex S.Africa) 267.92 -16.76 -5.89%Asia/Pacific 115.39 -16.14 -12.27%World (ex U.S.) 179.38 -14.27 -7.37%

Exhibit E

g:\research\charts\dow jones global indexes.xls

Source: DowJones Company, July 3, 2000

Exhibit F


Year-Over-Year Changes in Real GDP Components(1)

1st Qtr. 1997

2nd Qtr. 1997

3rd Qtr. 1997

4th Qtr. 1997

1st Qtr. 1998

2nd Qtr. 1998

3rd Qtr. 1998

4th Qtr. 1998

1st Qtr. 1999

2nd Qtr. 1999

3rd Qtr. 1999

4th Qtr. 1999

1st Qtr. 2000

Personal Consumption Expend. 3.4% 2.7% 3.8% 3.9% 4.2% 5.4% 4.8% 5.1% 5.3% 5.0% 5.3% 5.6% 5.9% Non-Residential Fixed Invest. 11.2 10.8 11.3 9.6 13.6 14.2 10.1 13.1 8.6 7.4 10.2 7.1 10.9 Residential Investment 4.2 0.6 1.0 3.7 6.4 8.6 10.5 11.3 11.0 9.0 5.9 3.9 2.1 Inventory Change (2) ++ ++ + ++ ++ -- ++ - -- -- -- - -- Net Exports (3) -23.5 -14.3 -4.7 -76.3 -88.4 -114.2 -98.2 -78.3 -64.2 -45.2 -41.6 -46.8 -28.2 Exports 11.3 13.7 15.8 9.2 6.6 1.7 -1.4 2.0 1.0 3.0 6.3 4.8 7.9 Imports 12.3 13.7 14.5 14.2 13.9 12.5 9.4 10.8 10.3 10.7 13.2 12.6 12.4 Government Spending 2.2 1.8 2.8 2.2 1.5 1.6 1.5 2.3 3.8 2.6 3.5 5.0 3.3

TOTAL REAL GDP 4.5% 4.0% 4.5% 4.1% 4.6% 4.0% 3.9% 4.7% 3.9% 3.8% 4.3% 4.6% 5.1%

M e m o

Pers. Cons. Exp. Plus Res. Invs. 3.4 2.6 3.6 3.9 4.3 5.6 5.1 5.5 5.6 5.3 5.3 5.5 5.7 After-tax Corporate Profits 8.3 10.4 14.9 10.1 2.7 -0.4 -6.9 -6.4 3.9 5.5 10.9 15.0 13.3

Notes:

(1) FIGURES USE CHAIN-WEIGHTED GDP METHODOLOGY. (2) PERCENTAGE CHANGES ARE NOT ALWAYS MEANINGFUL; + OR - DENOTES DIRECTION OF CHANGE. (3) A DECREASE IN THE TRADE DEFICIT HAS A POSITIVE IMPACT ON ECONOMIC GROWTH. E-06/00

pp-106-a.doc

Exhibit K


Economic Assumptions

1997 1998 1999 2000E 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

QUARTERLY DATA (% CHANGE)

Real GDP (New) 4.5 4.9 3.8 3.0 6.9 2.2 3.8 5.9 3.7 1.9 5.7 7.3 5.5 3.5 4.5 4.0 (Qtr. to Qtr. Ann.) S&P 500 Reported Profits 16.9 3.1 0.8 -9.3 -1.7 -5.5 -8.9 -4.3 6.5 26.7 32.7 49.2 25.6 10.7 12.0 7.4 (Year-over-Year) Consumer Price Index 2.9 2.3 2.2 1.9 1.5 1.6 1.5 1.5 1.7 2.1 2.3 2.6 3.2 3.2 3.3 3.2 (Year-over-Year)

LEVELS (QUARTERLY AVERAGE)

Unemployment Rate 5.3 4.9 4.9 4.7 4.7 4.4 4.6 4.4 4.3 4.3 4.2 4.1 4.1 4.0 4.1 4.2 Prime Rate 8.3 8.5 8.5 8.5 8.5 8.5 8.5 7.9 7.8 7.8 8.1 8.4 8.7 9.3 9.6 9.8 13-week Treasury Bills-Disc. 5.0 5.0 5.0 5.1 5.0 5.0 4.8 4.2 4.4 4.4 4.6 5.0 5.5 5.7 6.1 6.2 10-year Treasury Bonds-Yield 6.6 6.7 6.2 5.9 5.6 5.6 5.2 4.7 5.0 5.5 5.9 6.1 6.5 6.2 6.0 6.0

E-06/00 pp-100.y2000doc

E-06/00 pp-101.doc

Exhibit M


Expected Range Of Future Fixed Income Returns

From June 30, 2000

T I M E H O R I Z O N

6 Months 1 Year 3 Yrs (Ann. Return) Risk Level/ Representative Issue Interest Rate

Forecast Terminal Yield Total

Return Terminal

Yield Total

Return Terminal

Yield Total

Return

LOW RISK

2 yr. Constant Mat. Tsy. Pessimistic 7.25% 1.5% 7.00% 5.2% 6.50% 6.4% Present YTM 6.34% Most Likely 6.37 3.1 6.00 7.1 5.50 6.9

Optimistic 5.50 4.7 5.25 8.5 4.25 7.6

MEDIUM RISK

10 yr. Constant Mat. Tsy. Pessimistic 7.25 -5.6 7.00 -0.9 6.75 4.5 Present YTM 6.02% Most Likely 6.25 1.3 6.00 6.3 5.75 6.7

Optimistic 5.50 7.0 5.25 12.0 4.75 9.0

HIGH RISK

30 yr. Constant Mat. Tsy. Pessimistic 7.25 -13.6 7.25 -10.6 7.00 1.7 Present YTM 5.89% Most Likely 6.00 1.4 5.75 8.0 6.00 5.5

Optimistic 5.50 8.6 5.25 15.6 5.00 9.9

Exhibit N

■ Sit Investment Associates, Inc. ■ 2000 Federal Budget Surplus Trends Compared To 1999

RECEIPTS OUTLAYS SURPLUS/DEFICIT

FY99 FY2000 Diff FY99 FY2000 Diff FY99 FY2000 Diff

OCTOBER $120.0 $121.0 $1.1 $152.4 $147.7 $(4.7) $(32.4) $(26.7) $5.8 NOVEMBER 114.0 121.4 7.4 130.9 148.4 17.5 (16.9) (27.0) (10.1) DECEMBER 178.6 201.2 22.6 183.8 168.1 (15.7) (5.2) 33.1 38.2

JANUARY 171.7 189.5 17.8 101.2 127.3 26.1 70.5 62.2 (8.4) FEBRUARY 99.5 108.7 9.2 141.8 150.4 8.6 (42.3) (41.7) 0.6 MARCH 130.4 135.6 5.2 152.8 171.0 18.1 (22.4) (35.4) (13.0)

APRIL 266.2 295.1 28.9 152.8 135.7 -17.1 113.5 159.5 46.0 MAY 98.7 146.0 47.3 122.6 149.6 27.0 (24.0) (3.6) 20.4 JUNE 199.5 145.9 53.6

JULY 121.9 147.1 (25.2) AUGUST 126.3 129.1 (2.8) SEPTEMBER 200.4 142.4 58.0

FY TO DATE (8 MONTHS) $1179.1 $1318.5 $139.4 $1138.4 $1198.2 $59.8 $40.7 $120.3 $79.6

Source: Treasury Bulletin and ISI Group, Inc.

Exhibit Rn Sit Investment Associates, Inc. n

June 30, 2000 Equity Market Index Reformulations and Subcomponent Trends

S&P 500 Index Russell 1000 Growth

ECONOMIC SECTOR 12/97 12/98 12/99 05/00 06/00 12/97 12/98 12/99 05/00 06/00Non-Energy Minerals 1.2 0.8 1.0 0.7 0.6 0.5 0.1 0.0 0.0 0.0 Producer Manufacturing 4.0 3.2 2.9 3.0 2.7 3.0 2.4 1.0 1.0 0.3 Electronic Technology 10.8 13.6 20.3 22.4 25.0 16.1 18.4 29.6 33.5 41.9 Consumer Durables 3.1 2.2 1.5 1.5 1.3 1.2 0.8 0.4 0.4 0.3 Energy Minerals 7.4 5.8 4.9 5.2 4.8 0.6 0.1 0.1 0.1 0.2 Process Industries 6.9 5.9 6.3 6.1 5.8 7.6 6.9 7.3 7.6 6.9 Health Technology 10.8 11.9 8.8 10.3 10.2 19.4 20.5 13.9 16.3 15.1 Consumer Non-Durables 11.2 9.3 6.2 5.8 5.7 17.3 13.1 7.8 6.9 2.6 Industrial Services 1.3 0.9 0.8 1.0 1.0 2.0 1.0 0.7 0.9 1.1 Commercial Services 0.8 0.8 0.7 0.8 0.8 1.5 1.4 1.4 1.4 1.3 Technology Services 3.5 5.3 10.3 7.6 9.0 6.5 9.4 16.3 12.4 16.0 Health Services 1.4 1.2 0.8 0.8 0.9 2.3 1.5 0.6 0.6 0.5 Consumer Services 4.8 4.9 4.7 4.7 3.8 6.1 5.4 4.8 4.7 2.6 Retail Trade 4.8 6.5 6.6 5.9 5.7 6.6 8.8 8.5 7.4 6.0 Transportation 1.3 0.9 0.7 0.6 0.6 0.2 0.2 0.2 0.1 0.2 Utilities 10.5 11.3 10.5 9.7 9.4 1.9 3.2 3.9 3.3 3.7 Finance 16.3 15.4 12.9 13.9 12.8 7.2 6.9 3.3 3.4 1.4

UNIVERSE 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Weighted Ave Capitalization $48,870 $87,423 $144,569 $132,750 $145,083 $61,442 $102,812 $170,854 $159,882 $176,205 ($ millions)Weight of Top 5 Names 11.7% 12.4% 16.6% 16.2% 17.1% 18.4% 19.8% 24.8% 24.5% 27.6%

Combined Weight of 2 Largest Sectors 27.5% 29.0% 33.2% 36.2% 37.8% 36.6% 38.9% 45.9% 49.8% 57.9%

Weighted Ave P/E* 21x 29x 37x 30x 34x 25x 35x 49x 42x 52x

Weighted Ave 5-Year Growth Rate 12.9% 15.0% 17.5% 17.2% 17.9% 17.6% 18.8% 22.3% 21.9% 25.4%

* Excludes companies whose P/E exceeds 200x based on 12 month forward fiscal earnings estimates.

g:/research/charts/index char-combined.XLS

Source: Factset Data Systems and Sit Investment Associates, Inc. 6/30/00

Exhibit R (Continued)n Sit Investment Associates, Inc. n

June 30, 2000 Equity Market Index Reformulations and Subcomponent Trends

Russell Midcap Growth Russell 2000 Growth

ECONOMIC SECTOR 12/97 12/98 12/99 05/00 06/00 12/97 12/98 12/99 05/00 06/00Non-Energy Minerals 2.1 0.4 0.2 0.1 0.1 1.0 0.9 0.9 0.9 0.9 Producer Manufacturing 5.1 3.7 1.5 1.5 1.5 6.0 5.5 3.4 3.6 2.9 Electronic Technology 11.7 14.5 26.9 33.4 29.7 13.1 13.5 23.8 27.2 24.4 Consumer Durables 3.4 3.4 2.2 2.0 1.5 3.6 2.7 2.5 2.2 1.8 Energy Minerals 2.3 0.5 0.4 0.6 1.0 2.7 0.8 1.0 1.7 2.1 Process Industries 5.8 2.9 1.3 1.3 0.7 3.3 2.2 2.6 1.8 2.2 Health Technology 6.4 8.5 7.7 8.0 14.2 9.7 9.1 9.9 12.7 14.1 Consumer Non-Durables 5.2 4.7 2.4 2.3 2.2 3.7 2.4 1.5 1.8 1.9 Industrial Services 6.6 4.3 2.3 2.9 3.5 4.4 2.5 1.8 2.9 1.7 Commercial Services 5.9 7.7 6.8 6.2 5.6 7.0 7.7 5.9 5.3 5.9 Technology Services 8.1 12.1 22.5 19.1 22.1 11.4 15.7 19.9 14.6 16.9 Health Services 7.2 5.4 2.3 1.8 1.8 5.7 6.2 3.3 3.8 4.0 Consumer Services 7.9 6.5 5.4 4.9 3.7 7.9 7.3 5.5 5.0 5.1 Retail Trade 10.6 10.5 6.4 6.3 4.1 5.4 4.5 4.1 3.6 3.6 Transportation 1.0 0.9 0.9 0.7 1.0 1.2 1.8 1.2 1.3 0.8 Utilities 1.9 2.9 6.6 5.2 4.0 3.8 3.7 4.5 3.2 5.4 Finance 9.0 11.0 4.2 3.8 3.4 10.1 13.3 8.2 8.3 6.4

UNIVERSE ######## ######## ######## ######## ######## ######## ######## ######## ######## ########

Weighted Ave Capitalization$5,039 $7,831 $12,051 $14,204 $8,035 $849 $1,006 $1,807 $1,660 $1,034

Weight of Top 5 Names 5.3% 8.2% 9.9% 12.2% 6.2% 2.6% 2.7% 5.6% 5.4% 2.3%

Combined Weight of 2 Largest Sectors 22.3% 26.6% 49.4% 52.5% 51.0% 24.6% 29.3% 43.7% 41.8% 41.7%

Weighted Ave P/E* 24x 29x 47x 54x 45x 25x 27x 40x 35x 36x

Weighted Ave 5-Year Growth Rate 20.6% 22.3% 29.3% 29.8% 33.3% 25.4% 26.5% 28.3% 27.4% 31.0%

* Excludes companies whose P/E exceeds 200x based on 12 month forward fiscal earnings estimates.

g:/research/charts/index char-combined.XLS Source: FactSet Data Systems and Sit Investment Associates, Inc. 6/30/00


Large, Medium and Small Cap Stock 6-Month Price Momentum

E-06/00

Exhbit S

S&P Midcap 6-Month Price Momentum

-25

-15

-5

5

15

25

35

45

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

%Change

Apr.: 20.6% May: 13.1% Jun.: 8.3%

S&P 500 6-Month Price Momentum

-25

-15

-5

5

15

25

35

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

%Change

Apr.: 6.6% May: 2.3% Jun.: -1.0%

Russell 2000 6-Month Price Momentum

-35

-20

-5

10

25

40

55

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

%Change

Apr.: 18.1% May: 4.9% Jun.: 2.5%

NASDAQ OTC 6-Month Price Momentum

-30.0

-10.0

10.0

30.0

50.0

70.0

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

%Change

Apr.: 30.1% May: 1.9% Jun.: -2.5%

Exhibit U


Equity CharacteristicsJune 30, 2000

Large Cap Mid Cap Small Cap Russell 1000

Growth (33) Growth (06) Growth (103) Growth 3 S&P 500 4 S&P 500 5

Earnings Outlook - Strong Growth 1

2000 Projected Gain +32.5% +67.0% +59.5% +35.9% +13.6% +15.0%2001 Projected Gain +23.0% +30.2% +27.3% +24.8% +7.9% +7.3%

5-Year Projected Growth +23.3% +34.2% +34.2% +22.3% +10.0% +9.0%

Dividend Yield

Equities Only +0.5% +0.2% +0.2% 0.5% 1.2% 1.2%

Total Fund +0.5% +0.5% +1.0% 0.5% 1.2% 1.2%

Implied Return

5-Year Growth & Yield -Equity Only +23.7% +34.4% +34.4% +22.8% +11.2% +10.2%(Assumes no Change in P/E Ratio)

Average Price/Earnings Ratio 2

2000 Calendar P/E 48.2x 53.9x 49.8x 58.4x 26.6x 24.8x2001 Calendar P/E 39.0x 40.6x 36.2x 45.8x 24.7x 23.1x

Median Price/Earnings Ratio 2

2000 Calendar P/E 33.0x 37.6x 30.6x 31.0x 15.4x 15.4x2001 Calendar P/E 27.0x 24.0x 18.4x 24.5x 13.2x 13.2x

Weighted Average Market Capitalization ($ Billion) $160.561 $20.447 $12.103 $161.852 $149.109 $149.109

Footnotes:(1) Excludes stocks with C2000 P/E over 200x and earnings growth rates greater than 300%(2) Excludes stocks with C2000 P/E over 200x(3) Based on 6/30/00 rebalancing of Russell indices(4) Based on S&P 500 reported earnings - top down basis(5) Based on S&P 500 earnings prior to write-offs - top down basis

Source: First Call, I/B/E/S, Frank Russell, and Sit Investment Associates

E-06/00jal/portmkt\style_e.xls

Exhibit W


Sit Large Cap Growth Portfolio Weights Versus S&P 500 Index

SIA Large S&P 500 Cap Over/ ECONOMIC SECTOR Weighting Under Weight Non-Energy Minerals 0.6 0 Producer Manufacturing 7.5 0 Electronic Technology 24.9 ++ Consumer Durables 1.3 0 Energy Minerals 4.7 - Process Industries 1.6 - Health Technology 11.1 + Consumer Non-durables 5.8 - Industrial Services 1.0 0 Commercial Services 0.7 0 Technology Services 8.8 + Health Services 0.8 + Consumer Services 3.9 + Retail Trade 5.6 0 Transportation 0.5 0 Utilities 8.7 - Finance 12.6 - UNIVERSE (S&P 500) 100.0

Source: Wilshire Associates, Inc. and Sit Investment, 6/00

n sit investment associates, incrate of about +3.5 percent. april and may cpi data were surprisingly...

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