The Third Quarter in Review 3 The Third Quarter in Review During the third quarter, the stock market took a roller coaster ride but remained slightly up by the end of the quarter. This was in part due to the Federal Open Market Committee lowering the federal funds rate to 4.75% on September 18, which in turn, helped ease credit concerns. Interest rates on government bonds decreased as investors looked for quality, while corporate rates increased during the quarter. Much of the cooling off was due in part to the declining housing market, weakening of capital spending, and credit worries. Source: Transamerica Investment Management, “Manager Commentary–Third Quarter 2007.” 3

Third Quarter Highlights Bond Market Lehman Brothers Aggregate Bond Index increased 2.84% Stock Market S&P 500 Index increased 2.03% During the third quarter, the Lehman Brothers Aggregate Bond Index increased 2.84% and the S&P 500 Index increased 2.03%. It is important to keep in mind that an investment cannot be made directly in an index. An index is unmanaged and does not take into account the fees and expenses associated with an actively managed fund, so performance may differ. Past performance is not a guarantee of future performance. Source: Morningstar, Inc. Data as of September 30, 2007. One cannot invest directly in an index. An index is unmanaged and does not take into account the fees and expenses associated with an actively managed fund, so performance may differ. Past performance is not a guarantee of future performance.

Annual Stock Market Returns vs. Long-Term Averages In the late 1990s, stocks experienced remarkable returns of 20% to 30%, but we were warned that these returns were not sustainable. At that time, Transamerica Retirement Services encouraged participants to focus on the long-term average return of the stock market which was about 10%. The negative returns that were seen in the years prior to 2003 were unlikely to be sustained indefinitely, as were the 20% to 30% returns that were seen in the 90s. We give the same message today as we did during the 90s, focus on the long-term average return of the market. It is important to keep in mind that an investment cannot be made directly in an index. An index is unmanaged and does not take into account the fees and expenses associated with an actively managed fund, so performance may differ. Past performance is not a guarantee of future results. Long-term average is approximately 10%, not the 20% to 30% returns we experienced in the late 90s, nor the negative returns we experienced the years prior to 2003. Source: Morningstar, Inc. Stock market represented by S&P 500 Index. The long-term average is based on the average annual total returns of the S&P 500 Index between the years of December 1997-September 2007. * One cannot invest directly in an index. An index is unmanaged and does not take into account the fees and expenses associated with an actively managed fund, so performance may differ. Past performance is not a guarantee of future performance. *Data as of September 30, 2007

Stock Index Returns More Conservative More Aggressive This chart shows the returns of some of the major U.S. equity indices for the third quarter of 2007. Value stocks, as measured by the Russell 1000® Value Index, decreased -0.24% and growth stocks, as measured by the Russell 1000® Growth Index, increased 4.21%. The Russell 1000® Index (indicative of large-cap company performance) increased 1.98%, and the Russell 2000® Index (small-cap performance) decreased -3.09%. It is important to keep in mind that an investment cannot be made directly in an index. An index is unmanaged and does not take into account the fees and expenses associated with an actively managed fund, so performance may differ. Past performance is not a guarantee of future results. Source: Morningstar, Inc. Value based on Russell 1000® Value Index, growth based on Russell 1000® Growth Index, large-cap based on Russell 1000® Index, and small-cap based on Russell 2000® Index. Data as of September 30, 2007. One cannot invest directly in an index. An index is unmanaged and does not take into account the fees and expenses associated with an actively managed fund, so performance may differ. Past performance is not a guarantee of future performance.

Bond Index Returns More Conservative More Aggressive This chart shows the returns of some of the major bond indices. 3-Month Treasuries, as measured by the Citigroup 3-Month Treasury Bill Index, increased 1.19%. Short-term Government Bonds, as measured by the Merrill Lynch 1-3 Year Treasury Index, increased 2.66%. Intermediate Government Bonds, as measured by the Lehman Brothers Intermediate Government Bond Index, increased 3.36% for the quarter. Investment Grade Bonds as a whole, as reflected by the Lehman Brothers Aggregate Bond Index, increased 2.84%. High Yield Bonds, as measured by the Credit Suisse First Boston Global High Yield Index, increased 0.05%. It is important to keep in mind that an investment cannot be made directly in an index. An index is unmanaged and does not take into account the fees and expenses associated with an actively managed fund, so performance may differ. Past performance is not a guarantee of future results. Source for all index information is Morningstar, Inc. Data as of September 30, 2007. The indices used to represent each investment style are as follows: 3-Month Treasury – Citigroup 3-Month Treasury Bill Index; Short-term Government Bond – Merrill Lynch 1-3 Year Treasury Index; Intermediate Government Bond – Lehman Brothers Intermediate Government Bond Index; Investment Grade Bond – Lehman Brothers Aggregate Bond Index; High Yield Bond – Credit Suisse First Boston Global High Yield Index. One cannot invest directly in an index. An index is unmanaged and does not take into account the fees and expenses associated with an actively managed fund, so performance may differ. Past performance is not a guarantee of future performance.

Lehman Brothers Aggregate Bond Index Returns vs. Long-Term Averages Long-term historical average for bonds is approximately 9%, higher than what we’re seeing today. The rates of return that we are seeing in bonds today are lower than the long-term average rate of return for bonds, which is approximately 9%. Over the long term, as economic conditions improve bond returns may increase as well. It should be noted that in today’s low inflation environment, bond rates are likely to be lower than historical averages. It is important to keep in mind that an investment cannot be made directly in an index. An index is unmanaged and does not take into account the fees and expenses associated with an actively managed fund, so performance may differ. Past performance is not a guarantee of future results. Source: Morningstar, Inc. Data as of September 30, 2007. The Lehman Brothers Aggregate Bond Index is used to represent the returns of the investments that make up the Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index, and Asset-Backed Securities Index. The Lehman Brothers Aggregate Bond Index is unmanaged, assumes reinvestment of all distributions and does not account for fees or other charges. The long-term average is based on the average annual total returns of the Lehman Brothers Aggregate Bond Index between the years of December 1997- September 2007. One cannot invest directly in an index. An index is unmanaged and does not take into account the fees and expenses associated with an actively managed fund, so performance may differ. Past performance is not a guarantee of future performance.

Outlook: Unemployment rate is expected to remain stable, with some concerns from low housing activity Home prices are expected to remain soft with a slight but continued decline Recession signals are mixed The economy will likely grow at a slower pace in the fourth quarter. Credit concerns suggest the Federal Reserve may decrease rates once more in the fourth quarter, but increased inflation concerns arising from high oil and commodity prices may prevent a further rate cut. Consumer spending will likely continue to increase slightly, supported by low unemployment and personal income growth, but will probably increase at a slower pace due to softer home prices, a reliance on credit card debt, and a negative personal savings rate. Home prices are likely to remain soft through the fourth quarter, reflecting a lower level of existing home sales and a historically high level of housing inventory. High stock market volatility is likely to persist as markets try to assess the probability of a U.S. recession in 2008 and undisclosed mortgage-related losses. Source: Transamerica Investment Management, “Fourth Quarter 2007 Outlook."