Encouraging Outlook
The increase in stock market volatility during the second half of 2007 persisted into the first quarter of 2008 with all the major stock market indices showing declines in value. Continuing credit market turbulence, a difficult profit environment and fears of a recession contributed to investor uncertainty. Although the heightened share price volatility may persist for a while longer, we believe the market is in the process of forming a bottom and that the outlook beyond the near term is positive. Share prices have already declined significantly and, in our opinion, are discounting most of the economic and corporate profit weakness that is likely to develop. A more accommodative monetary policy should be particularly favorable for stocks as the Federal Reserve Board acts to reduce the downside risk in the economy.

More importantly, we believe the outlook is encouraging for high-quality large-capitalization growth stocks. We think these shares are attractively valued, have solid balance sheets, and their above-average earnings growth will become increasingly attractive in a more challenging corporate profit environment. Thanks to their product mix, the domestic-based earnings of large-cap growth stocks should do relatively well in a slower growing U.S. economy, and they are well positioned to benefit from better growth prospects abroad as well as a lower dollar. We expect these favorable conditions to continue for a considerable period. On average, the holdings in the portfolio generate 49% of their sales from international markets. Sectors that we find attractive include Energy, Technology, Healthcare and Consumer Staples, all of which have significant global reach and are benefiting from healthy global economic conditions.

Strength in Energy
The Fund's continued overweight in Energy aided performance during the first quarter, with Devon Energy and Halliburton being two of the biggest contributors. Early in the quarter, we added to the position in Devon as the company continued to execute well and on expectations of 8% to 10% production growth and its exploration-driven upside potential. We subsequently reduced the position after significant appreciation owing to big rallies in both crude oil and natural gas resulted in the stock trading at a level close to our fair value estimate. In contrast, we reduced the position in Halliburton early on as a source of funds given the muted outlook for North America in 2008, but increased the position later in the quarter as natural gas fundamentals improved dramatically in just two months.

The Fund's significant underweighting in Financials aided performance as well, as the battered sector continues to suffer the fallout from the credit crunch. Indeed, the sale of American Express during the quarter has resulted in a zero weighting for the sector in the portfolio. We sold American Express based on the uncertain macro environment, lack of near-term earnings momentum, and the potential for additional earnings weakness should the economy worsen.

In the Technology sector, Apple and Google both came under pressure as investors took profits in some of last year's biggest winners. Having trimmed both positions several times in 2007, we took advantage of the recent weakness to add back to both holdings. We sold Cisco, Paychex, and Intel, with the Intel sale resulting from a disappointing fourth quarter earnings report. We increased the Fund's positions in Electronic Arts, Hewlett-Packard, and Qualcomm.  A favorable analysts' day presentation by Electronic Arts increased our confidence that the company has the right organizational structure and the right people in place.  We believe Hewlett-Packard's 69% international exposure coupled with market share gains in PCs, servers, and printers will provide the growth to drive its shares higher. The addition to Qualcomm proved timely as Motorola announced plans to begin using the firm's 3G chips later this year to fix a glaring hole in its product line-up, thereby giving a boost to the stock.

Bond Market Outlook
Yields on Treasury securities continued to decline for all maturities during the first quarter, as
the housing and credit market crises continued to have an impact on the real economy. We anticipate that yields on longer maturity Treasury bonds will be range bound as economic weakness over the next quarter offsets continued concerns about rising inflation pressures from elevated commodity costs. We continue to maintain a duration that is moderately shorter than the benchmark indices. The difference in yield, or spread, between corporate and Treasuries is likely to remain elevated as estimates for corporate profits decrease due to muted domestic economic growth. Spreads between investment grade corporate bonds and Treasury bonds have reached historically wide levels. Thus, we have increased the Fund's weighting in corporate bonds. We anticipate further additions to the corporate sector on an opportunistic basis in order to take advantage of the historically wide spreads, which are likely to decline later in the year as the economy begins to benefit from fiscal and monetary stimulus.

Profit Growth Challenge
There has been much debate about whether or not the US economy is in or headed into a recession. Regardless of the answer, the environment for US corporate profit growth has become challenging. S&P 500 Index earnings declined during both the September and December quarters of 2007, and expectations for the first half of 2008 are now for declines as well. Still, we continue to believe that the market is nearing a bottom and that for long-term investors the outlook is favorable. Valuations for large-cap stocks appear reasonable, and we think those companies best able to deliver profit growth—such as traditional growth stocks—are poised to stand out as we move forward.

Montag & Caldwell Investment Counsel
Atlanta, GA