Hanseatic

For the month of January: Hanseatic's Large Cap product gained 3.01%, underperforming the Russell 1000 Growth benchmark by 2.96% and the S&P 500 Total Return Index by 1.47%. The Large Cap Custom Screened* product gained 1.57%. The Small Cap product gained 2.77%, underperforming the Russell 2000 Growth benchmark by 4.71%. The All Cap product gained 3.12%, underperforming the Russell 3000 benchmark by 1.93%. The High Yield product lost 1.16%.

The past month turned out to have been the best performing January for the equity markets since January 2001. The significant underperformance across portfolios was due to the lack of exposure to the strongest performing individual stocks within several sectors, primarily Financials, Materials, Industrials and Technology. Most of these stocks have been mired in cyclical, and in many cases, secular declines prior to the last several weeks. A key factor going forward will be the determination as to whether this emerging leadership can be sustained in the weeks and months ahead, or recedes and will retrospectively be viewed as a January effect anomaly.

* The Large Cap Custom Screened Equity Composite includes all fully discretionary portfolios that invest in large capitalization U.S. stocks that are rated A or higher (or the equivalent) by one of the following securities rating agency recognized by the Superintendent of Insurance: Moody's Investor's Services, Standard & Poor's Corporation, Fitch Investor Service, Duff & Phelps Credit Rating Agency, or Thompson Bank Watch, or if not so rated are similar in structure and in all material respects to other obligations of the same institution which are so rated and that are considered to have growth in earnings that is superior to that of the average company within the benchmark, Russell 1000 Growth Custom Screen Index (BM1: 2010-Current)

Hanseatic Management Services, Inc. is an independent registered investment adviser. Hanseatic Management Services, Inc. claims compliance with the Global Investment Performance Standards (GIPS). The Independent Verifier's Report, presentations that comply with the requirements of the GIPS standards and a list and description of all Firm composites, are available for download through Hanseatic's website and also by email request.

Year to date 2011: Hanseatic's Large Cap product has gained 2.27% underperforming the Russell 1000 Growth benchmark by 0.37% and outperforming the S&P 500 Total Return Index by 0.15%. The Large Cap Custom Screened* product has gained 4.06%. The Small Cap product has lost 3.69%, underperforming the Russell 2000 Growth benchmark by 0.77%. The All Cap product has lost 1.55%, underperforming the Russell 3000 benchmark by 2.58%. The High Yield product has gained 6.63%.

For the fourth quarter of 2011: Hanseatic's Large Cap product has gained 8.79% underperforming the Russell 1000 Growth benchmark by 1.81% and underperforming the S&P 500 Total Return Index by 3.02%. The Large Cap Custom Screened* product has gained 9.64%. The Small Cap product has gained 7.48%, underperforming the Russell 2000 Growth benchmark by 7.51%. The All Cap product has gained 7.55%, underperforming the Russell 3000 benchmark by 4.57%. The High Yield product has gained 8.66%.

For the month of December: Hanseatic's Large Cap product lost 0.21%, underperforming the Russell 1000 Growth benchmark by 0.11% and the S&P 500 Total Return Index by 1.23%. The Large Cap Custom Screened* product gained 1.66%. The Small Cap product lost 0.91%, underperforming the Russell 2000 Growth benchmark by 0.69%. The All Cap product lost 0.49%, underperforming the Russell 3000 benchmark by 1.31%. The High Yield product gained 3.40%.

Relative underperformance in the fourth quarter was entirely accounted for by the portfolio's underweight positions in Energy, Materials, and Industrials during the month of October. The portfolio had been positioned a little more conservatively as a result of the market turmoil in prior months. In October the market transitioned away from the defense sectors toward these "risk-on" sectors in quite volatile fashion.

Relative underperformance in the Small Cap portfolio is also attributable to the same phenomenon in October wherein there was abrupt transition to the above-mentioned "risk-on" sectors, as well as relative strength in small technology stocks.

Looking out to 2012, we first remind ourselves of our long-held belief that economic forecasting in general, stock market prognostications in particular, is folly. That is not to say that one cannot observe the financial and economic landscape and conclude some general probabilities, with the support of Hanseatic models, about market prospects.

It is difficult to even casually scan the current formidable financial terrain and not be reminded of the adage that the most important thing in investing is "the return OF one's money, not the return ON your money". Starting with Europe, of course, where the currency and sovereign debt problems seem almost intractable, and are compounded by the cultural and political divisions that exist among member countries, particularly between the North and South of Europe. Domestically, we may not have the crisis atmosphere of 2008, but many of the same problems seem to persist, most notably high unemployment and fiscal debt issues.

Nevertheless, against this backdrop, we believe the equity markets will most likely have a surprisingly favorable 2012. One reason is the history of the VIX. The VIX is a measure of the implied volatility of S&P 500 options, but is often referred to as a fear index. In August 2011 the VIX posted a reading above 45 indicating investors perceived market risk to be extremely high. But we also believe the VIX has utility as a contrarian indicator. Previous high VIX readings were seen in 1997, 1998, 2001, 2002 and 2008, all favorable investment points at least for the intermediate term with the exception of 2001.

Hanseatic also continues to believe a recession is not likely on the horizon, and that relative and absolute strength in industrial stocks may be a harbinger of a stronger than expected cyclical economic recovery. Home builder equity price strength may also be discounting a nascent recovery in the housing sector. Faced with a likely contentious election cycle on the horizon, some caution would seem warranted because of the policy uncertainties. 1980 was a similarly fractious election year that delivered an exceptional return, around 18%.

For the month of November: Hanseatic's Large Cap product gained 0.90%, outperforming the Russell 1000 Growth benchmark by 0.91% and the S&P 500 Total Return Index by 1.12%. The Large Cap Custom Screened* product gained 0.75%. The Small Cap product lost 1.88%, underperforming the Russell 2000 Growth benchmark by 1.35%. The All Cap product lost 1.30%, underperforming the Russell 3000 benchmark by 1.03%. The High Yield product gained 1.84%.

Year to date 2011: Hanseatic's Large Cap product has gained 2.49% underperforming the Russell 1000 Growth benchmark by 0.48% and outperforming the S&P 500 Total Return Index by 1.40%. The Large Cap Custom Screened* product has gained 2.37%. The Small Cap product has lost 2.80%, outperforming the Russell 2000 Growth benchmark by 0.09%. The All Cap product has lost 1.07%, underperforming the Russell 3000 benchmark by 1.27%. The High Yield product has gained 3.12%.

Relative outperformance in the Large Cap was due to strong performance by selected stocks in the Consumer Discretionary, Healthcare and Industrial sectors. The consolidation by most technology and energy stocks partially offset gains in all the other sectors. November was no exception to the high volatility the equity markets have experienced for most of 2011.

Underperformance in the Small Cap portfolio resulted from poor performance by selected technology stocks. The impact of an adverse intellectual property judicial ruling on a single stock accounted for a substantial part of the underperformance. Being moderately underweight the Energy sector also depressed performance.

Year to date 2011, Hanseatic's Large Cap product has lost 5.99% outperforming the Russell 1000 Growth benchmark by 1.21% and outperforming the S&P 500 Total Return Index by 2.69%. The Small Cap product has lost 10.39%, outperforming the Russell 2000 Growth benchmark by 5.18%.

For the third quarter of 2011, Hanseatic's Large Cap product has lost 11.17% outperforming the Russell 1000 Growth benchmark by 1.97% and outperforming the S&P 500 Total Return Index by 2.70%. The Small Cap product has lost 18.47%, outperforming the Russell 2000 Growth benchmark by 3.78%.

Hanseatic's Large Cap product lost 4.29% in the month of September, outperforming the Russell 1000 Growth benchmark by 3.08% and the S&P 500 Total Return Index by 2.74%. The Small Cap product lost 9.47%, outperforming the Russell 2000 Growth benchmark by 2.03%.

Quarterly outperformance in the Large Cap portfolio was due to positive performance in Healthcare, Consumer Staples and selected Technology stocks. The portfolio also benefited from being underweight the Energy, Industrial and Financial sectors.

Outperformance in the Small Cap was due largely to positive absolute and significant relative performance in Healthcare, Staples and selected Energy stocks. As in the Large Cap portfolio, the underweighting of the Industrial sector helped relative performance.

The third quarter was a painful and volatile period in the equity markets, featuring a 17% decline in the S&P 500 over a mere 10 trading days, and multiple 5% intraday trading swings. This is an environment dominated by news and speculation about the European sovereign debt crisis and reminiscent of the panic in 2008.

It has become evident recently that the consensus economic viewpoint is that the U.S. economy is already in recession or destined for it near term. The ECRI organization added its voice to the inevitability of recession just last week. In Hanseatic's view the economy is clearly in a soft patch which may develop into a recession, or may be a rather scary, but temporary lapse in an ongoing recovery. Just last summer, the equity markets discounted the widely held view that the economy was headed toward a double-dip recession, which did not materialize.

We remind ourselves that markets are a discounting mechanism, and that some economic distress has already been discounted by both stock and commodity prices. If the current economic environment is not going to parallel 2008, and Hanseatic is highly skeptical that it is, then the non-defensive market sectors should have much better performance this quarter.

Hanseatic's Large Cap product lost 5.83% in the month of August, underperforming the Russell 1000 Growth benchmark by 0.55% and underperforming the S&P 500 Total Return Index by 0.40%. The Small Cap product lost 7.24%, outperforming the Russell 2000 Growth benchmark by 1.33%.

Year to date 2011, Hanseatic's Large Cap product has lost 1.78% underperforming the Russell 1000 Growth benchmark by 1.96% and underperforming the S&P 500 Total Return Index by 0.01%. The Small Cap product has lost 1.06%, outperforming the Russell 2000 Growth benchmark by 3.54%.

The underperformance in the Large Cap portfolio was due to the pronounced declines in several Consumer Discretionary stocks in general, and outsized declines in two specific stocks that were related to earnings/forward guidance issues. The portfolio performed relatively well in stocks belonging to the Energy, Consumer Staples and Industrial sectors.

Outperformance in the Small Cap was due to positive relative gains in stocks across the sector spectrum save Technology. Relative performance was especially strong in stocks within the Healthcare and Industrial sectors.

Hanseatic's Large Cap product lost 1.37% in the month of July, underperforming the Russell 1000 Growth benchmark by 0.37% and outperforming the S&P 500 Total Return Index by 0.66%. The Small Cap product lost 2.93%, outperforming the Russell 2000 Growth benchmark by 0.99%.

Year to date 2011, Hanseatic's Large Cap product has gained 4.37% underperforming the Russell 1000 Growth benchmark by 1.39% and outperforming the S&P 500 Total Return Index by 0.50%. The Small Cap product has gained 6.69%, outperforming the Russell 2000 Growth benchmark by 2.35%.

The modest underperformance of the Large Cap portfolio relative to the growth benchmark was due primarily to the abrupt declines in a few Technology and Healthcare stocks. These declines were prompted in general by disappointing guidance relative to consensus expectations. Offsetting the earnings-related volatility were gains in Energy, Industrial and Consumer Discretionary stocks.

Outperformance in the Small Cap was due to good absolute and relative advances in Healthcare, Industrial and Consumer Discretionary holdings. All other sectors had only small positive/negative deviations from the benchmark sector returns.

Year to date 2011, Hanseatic's Large Cap product has gained 5.81% underperforming the Russell 1000 Growth benchmark by 1.02% and underperforming the S&P 500 Total Return Index by 0.21%. The Small Cap product has gained 9.90%, outperforming the Russell 2000 Growth benchmark by 1.31%.

For the second quarter of 2011, Hanseatic's Large Cap product has lost 1.88% underperforming the Russell 1000 Growth benchmark by 2.64% and underperforming the S&P 500 Total Return Index by 1.98%. The Small Cap product has lost 3.18%, underperforming the Russell 2000 Growth benchmark by 2.59%.

Hanseatic's Large Cap product lost 2.36% in the month of June, underperforming the Russell 1000 Growth benchmark by 0.93% and the S&P 500 Total Return Index by 0.69%. The Small Cap product lost 2.42%, underperforming the Russell 2000 Growth benchmark by 0.28%.

Large Cap underperformance in the second quarter was due largely to the reversal downward of those sectors and stocks associated with the so-called risk trade. The market has been discounting the perception of slower economic growth, a prolonged slump in housing and the ongoing turmoil in Europe. The effect was an abrupt capital flight away from Energy, Materials and some Industrial stocks and into defensive Consumer Staples and Healthcare issues. While the portfolio had representation in all ten sectors, it was relatively overweight the sectors which turned weak in the second quarter.

Underperformance in the Small Cap was due largely to the same market environmental forces described above as well as a few stock specific loss situations. Consumer Discretionary stocks performed well in portfolio.

Year to date 2011, Hanseatic's Large Cap product has gained 8.36% underperforming the Russell 1000 Growth benchmark by 0.03% and outperforming the S&P 500 Total Return Index by 0.54%. The Small Cap product gained 12.64%, outperforming the Russell 2000 Growth benchmark by 1.67%.

Hanseatic's Large Cap product lost 1.57% in the month of May, underperforming the Russell 1000 Growth benchmark by 0.48% and the S&P 500 Total Return Index by 0.44%. The Small Cap product lost 2.84%, underperforming the Russell 2000 Growth benchmark by 0.89%.

Underperformance in the Large Cap portfolio was due primarily to the abrupt selloff in Energy stocks and that the portfolio was moderately overweight the Energy sector. In contrast, Consumer Discretionary stocks performed well for the portfolio.

Energy also hindered performance in the Small Cap portfolio, along with declines in selected Technology and Industrial stocks. Poor performance in these sectors outweighed the positive performance by holdings in the Consumer Discretionary and Healthcare sectors.

Year to date 2011, Hanseatic's Large Cap product has gained 10.19% outperforming the Russell 1000 Growth benchmark by 0.61% and outperforming the S&P 500 Total Return Index by 1.13%. The Small Cap product gained 15.99%, outperforming the Russell 2000 Growth benchmark by 2.82%.

Hanseatic's Large Cap product gained 2.17% in the month of April, underperforming the Russell 1000 Growth benchmark by 1.18% and the S&P 500 Total Return Index by 0.79%. The Small Cap product gained 2.18%, underperforming the Russell 2000 Growth benchmark by 1.42%.

Large Cap relative underperformance during the month was due primarily to relative and absolute declines in selected Technology and Industrial stocks. Also notable was the rise, after prolonged declines, in specific stocks which have large benchmark weights but were either underweight or had no position in the portfolio. Part of our analysis going forward will be to determine whether these are periodic advances in relative bear markets for these issues or the beginning of relative or absolute advances that are more sustained.

Small Cap underperformance was overwhelmingly due to relative underperformance in the resurgent Healthcare sector. As in the Large Cap, this was primarily a case of being relatively underweight or absent stocks with benchmark weightings. Declines in selected Energy and Technology stocks also contributed to relative underperformance.

For the first quarter of 2011, Hanseatic's Large Cap product gained 7.90% outperforming the Russell 1000 Growth benchmark by 1.87% and outperforming the S&P 500 Total Return Index by 1.98%. The Small Cap product gained 13.57%, outperforming the Russell 2000 Growth benchmark by 4.33%.

Hanseatic's Large Cap product gained 0.54% in the month of March, outperforming the Russell 1000 Growth benchmark by 0.42% and the S&P 500 Total Return Index by 0.50%. The Small Cap product gained 3.00%, underperforming the Russell 2000 Growth benchmark by 0.75%.

Large Cap performance during the first quarter was due primarily to the positive behavior of individual Energy and Materials stocks. These two sectors are also overweighted in the portfolio. Consumer Discretionary and Telecom stocks also contributed to relative portfolio performance. The only notable drawback to performance was the relative declines in some large cap technology stocks.

Small Cap performance during the quarter was also led by Energy stocks, with Technology and Industrial stocks also performing well. Performance laggards included price declines due to earnings guidance issues with a couple Technology stocks and declines in two precious metal holdings.

Hanseatic's Large Cap product gained 4.60% in the month of February, outperforming the Russell 1000 Growth benchmark by 1.33% and the S&P 500 Total Return Index by 1.17%. The Small Cap product gained 9.43%, outperforming the Russell 2000 Growth benchmark by 3.55%.

Year-to-date, the Large Cap has gained 7.29% and leads the Russell 1000 Growth benchmark by 1.39% and the S&P 500 Total Return Index by 1.41%. The Small Cap has gained 10.27% and leads the Russell 2000 Growth benchmark by 4.98%.

Large Cap performance was primarily a function of good performance in the portfolio's Energy, Materials and Technology holdings. All ten portfolio sectors were positive on an absolute basis. An underweight position in the Healthcare sector was the only notable drawback to relative performance.

Small Cap portfolio stocks performed well across the sector/industry group spectrum. All ten sectors were positive on an absolute basis, and nine of ten portfolio sectors outperformed the benchmark sector measures. Stocks in the Energy, Technology, Industrial and Financial sectors were the primary performance leaders.

Hanseatic's Large Cap product gained 2.64% in the month of January, outperforming the Russell 1000 Growth benchmark by 0.09% and the S&P 500 Total Return Index by 0.27%. The Small Cap product gained 0.91%, outperforming the Russell 2000 Growth benchmark by 1.47%.

Large Cap performance was enhanced by the strong performance of the portfolio's Energy, Materials, and selected Technology and Consumer Discretionary stocks. This positive effect modestly offset the declines incurred by a variety of issues related to disappointing or less-than-consensus fourth quarter earnings/forward guidance.

Earnings-related issues also negatively impacted some Small Cap portfolio stocks, but good performance in Energy, Technology and Industrials in particular helped relative performance. Financial, Healthcare, and Consumer Staples also aided relative performance. Materials stocks, in particular precious metals-related issues, and some Consumer Discretionary stocks penalized performance.

Year-to-date, the Large Cap has gained 23.55% and leads the Russell 1000 Growth benchmark by 6.84% and the S&P 500 Total Return Index by 8.49%. The Small Cap has gained 21.66% and lags the Russell 2000 Growth benchmark by 7.43%.

For the fourth quarter of 2010, Hanseatic's Large Cap product gained 12.89% outperforming the Russell 1000 Growth benchmark by 1.06% and outperforming the S&P 500 Total Return Index by 2.13%. The Small Cap product gained 14.22%, underperforming the Russell 2000 Growth benchmark by 2.89%.

Hanseatic's Large Cap product gained 5.16% in the month of December, underperforming the Russell 1000 Growth benchmark by 0.35% and the S&P 500 Total Return Index by 1.52%. The Small Cap product gained 5.84%, underperforming the Russell 2000 Growth benchmark by 1.75%.

While Hanseatic considers the ritual of annual forecasts as more entertainment than investment wisdom, it is nevertheless important to try to understand the investment backdrop and the potential catalysts for change, both positive and negative.

Currently, interest rates remain in a secular decline despite the recent uptick. Inflation also remains benign despite the recent advances in commodity prices, particularly food, and energy costs. The Fed is widely expected to raise rates at the end of its quantitative easing program, and perhaps it will do so sooner than the market expects. Even so, this does not likely translate to a monetary policy that is inimical to growth; it will likely be a long time before an interest rate policy will hinder growth.

Fears of a double dip recession have moderated considerably since last summer, but concerns persist amid a stubbornly high though incrementally improving employment picture. Fiscal issues loom large not only in Europe but increasingly domestically with municipalities and states.

Growth stocks have outperformed value and other themes in the U.S. equity market, particularly over the past four months, with small and mid-cap stocks outperforming their large cap brethren. This is a significant deviation from 2010 forecast wisdom.

Hanseatic believes the most significant potential catalysts for the U.S. equity markets are positive, at least for the intermediate term. One catalyst that has emerged is the funds flow out of other asset classes, particularly fixed income and income-oriented equities into common stocks. The rush into these defensive strategies was mostly the result of the extreme fear that developed over the course of the 2008 economic contagion. In contrast with recent years, U.S. markets are now among the strongest international equity markets and may be the beneficiary of fund flows in that arena. And finally and perhaps most importantly, Hanseatic believes the economy is likely to do better than most expect which will improve investor and consumer confidence, a crucial element that has been sorely lacking for some time. The healthiest equity markets have two fundamental characteristics - reasonable valuations and rising multiples. The first is in place, the second can develop with increasing confidence. Let's hope.

Year-to-date, the Large Cap has gained 17.43% and leads the Russell 1000 Growth benchmark by 6.81% and the S&P 500 Total Return Index by 9.57%. The Small Cap has gained 14.94% and lags the Russell 2000 Growth benchmark by 5.04%.

Hanseatic's Large Cap product gained 2.01% in the month of November, outperforming the Russell 1000 Growth benchmark by 0.85% and the S&P 500 Total Return Index by 2.00%. The Small Cap product gained 4.18%, underperforming the Russell 2000 Growth benchmark by 0.18%.

The Large Cap portfolio outperformed the benchmarks in seven of ten market sectors. Relative underperformance in the Consumer Discretionary sector hindered performance but was offset by robust gains in Technology and Industrials in particular.

The Small Cap portfolio also outperformed the benchmark in seven out of ten market sectors. Relative underperformance in Consumer Discretionary and Materials was not sufficiently offset by the positive returns in Energy, Industrials, and Technology.

It should be noted that Hanseatic has restated the September 2010 Large Cap performance. The Large Cap did not outperform for the month of September as was previously stated. The revision was made during the quarterly performance examination. All calculations have been corrected that were affected by the adjustment.

Year-to-date, the Large Cap has gained 15.48% and leads the Russell 1000 Growth benchmark by 6.13% and the S&P 500 Total Return Index by 7.64%. The Small Cap has gained 10.36% and lags the Russell 2000 Growth benchmark by 4.61%.

Hanseatic's Large Cap product gained 5.21% in the month of October, outperforming the Russell 1000 Growth benchmark by 0.43% and the S&P 500 Total Return Index by 1.40%. The Small Cap product gained 3.62%, underperforming the Russell 2000 Growth benchmark by 0.68%.

The Large Cap portfolio was also hurt by the phenomena of companies reporting good quarterly financial performance but then offering next-quarter guidance that is less than market or analyst expectations in some form.

This process was particularly punitive to Small Cap performance as severe "sell the guidance" declines accounted for all the underperformance relative to the benchmark.

Equity markets have followed the first more positive course, and with it a significant change in leadership away from the defensive consumer staples/utility stocks in favor of more growth oriented stocks, primarily technology.

Year-to-date, the Large Cap has gained 9.45% and leads the Russell 1000 Growth benchmark by 5.09% and the S&P 500 Total Return Index by 5.56%. The Small Cap has gained 6.51% and lags the Russell 2000 Growth benchmark by 3.72%.

For the third quarter of 2010, Hanseatic's Large Cap product gained 13.14% outperforming the Russell 1000 Growth benchmark by 0.15% and outperforming the S&P 500 Total Return Index by 1.84%. The Small Cap product gained 11.81%, underperforming the Russell 2000 Growth benchmark by 1.01%.

Hanseatic's Large Cap product gained 10.38% in the month of September, underperforming the Russell 1000 Growth benchmark by 0.26% and outperforming the S&P 500 Total Return Index by 1.46%. The Small Cap product gained 12.78%, underperforming the Russell 2000 Growth benchmark by 1.37%.

The equity market environment has improved significantly over the last three months. In our second quarter commentary we noted that the markets were close to an important boundary point, a departure point for two divergent paths. The first a contrarian, opportunistic accumulation point after a weak and volatile first half year; the second a period of sideways movement or a more directed negative environment.

There has been some attention in the financial media of the past month's return being the best September since 1939, and one of the five largest monthly S&P 500 returns in the past 20 years. None of this holds any consequence or predictive value in our view. Clearly the large monthly return in March 2000 at the onset of a bear market was at a different place in overall market structure than the gains in March 2000 or December 1991, which occurred at an early stage in cyclical bull market environments. Our studies conclude that the current environment, while clearly not without risk, has a predominance of favorable characteristics.

Year-to-date, the Large Cap has lost 0.82% and leads the Russell 1000 Growth benchmark by 4.86% and the S&P 500 Total Return Index by 3.80%. The Small Cap has lost 5.53% and lags the Russell 2000 Growth benchmark by 2.09%.

Hanseatic's Large Cap product lost 3.13% in the month of August, outperforming the Russell 1000 Growth benchmark by 1.56% and outperforming the S&P 500 Total Return Index by 1.29%. The Small Cap product lost 7.24% during the month, outperforming the Russell 2000 Growth benchmark by 0.05%.

That August 2010 was a less than stellar month would be an understatement: The lowest August volume in over ten years and worst monthly performance since 2001. The good news perhaps is that these dismal August statistics are no indication of what the remainder of the year holds with respect to liquidity or performance. Going back to the early 1990s, the five negative performances in the S&P 500 in August were followed by increases in market volume and positive returns over the last third of the calendar year. As would be expected given equity market returns this year and especially this month, market sentiment by any measure has become extremely negative.

Outperformance in the large cap portfolio was due to exposure to selected technology stocks and the overweight positions in telecommunication and utility stocks. The portfolio also benefited from being underweight some of the weaker industry groups including integrated oil and oil and gas exploration stocks, and most financial stocks. Exposure to the largest cap technology stocks penalized performance.

The modest gain in the small cap portfolio was less market sector/group thematic than the large cap portfolio and more the result of the performance of a diversified group of individual stocks. On the positive side were technology stocks, material stocks, primarily gold-oriented, and healthcare stocks. On the negative side were some disappointing consumer discretionary stocks and industrial stocks.

Year-to-date, the Large Cap has gained 2.42% and leads the Russell 1000 Growth benchmark by 3.48% and the S&P 500 Total Return Index by 2.53%. The Small Cap has gained 1.91% and lags the Russell 2000 Growth benchmark by 2.24%.

Hanseatic's Large Cap product gained 5.87% in the month of July, underperforming the Russell 1000 Growth benchmark by 1.26% and underperforming the S&P 500 Total Return Index by 1.14%. The Small Cap product gained 6.98% during the month, outperforming the Russell 2000 Growth benchmark by 0.37%.

The U.S. equity markets traded higher in July, although they remain mired in the trading range that has prevailed since early May. Meanwhile the lack of dispersion among stocks has reached extreme levels. There is a natural tendency to conclude that some new development(s) has changed the markets' internal structure, in today's case high frequency trading and the popularity of structured products. Rather, Hanseatic believes that it is a part of the normal ebb and flow of market behavior and psychology, and that as soon as the phenomenon becomes widely recognized the tendency is to revert to more normal conditions.

Underperformance in the Large Cap portfolio was primarily due to being relatively underweight industrial, energy and consumer discretionary stocks. A couple stocks adversely impacted by reactions to earnings/guidance also penalized the portfolio.

In the Small Cap portfolio, outperformance was primarily a function of individual stock selection rather than sector weightings. Some individual stock reactions to earnings/guidance also penalized the portfolio.

Year-to-date, the Large Cap has lost 3.23% and leads the Russell 1000 Growth benchmark by 4.41% and the S&P 500 Total Return Index by 3.42%. The Small Cap has lost 4.72% and lags the Russell 2000 Growth benchmark by 2.41%.

For the second quarter of 2010, Hanseatic's Large Cap product lost 8.98% outperforming the Russell 1000 Growth benchmark by 2.77% and outperforming the S&P 500 Total Return Index by 2.45%. The Small Cap product lost 11.40%, underperforming the Russell 2000 Growth benchmark by 2.18%.

Hanseatic's Large Cap product lost 5.83% in the month of June, underperforming the Russell 1000 Growth benchmark by 0.32% and the S&P 500 Total Return Index by 0.60%. The Small Cap product lost 8.95%, underperforming the Russell 2000 Growth benchmark by 2.24%.

In the first half of 2010, the markets have undergone three distinct phases. First was a moderate correction into mid-February, followed by a broad and relatively sustained ten week rally into late April. The sharp correction over the past eight weeks has also been relatively broad and marked by very high volatility even by the standards of the past ten years, which have been extremely volatile compared to prior post-WWII history.

The correction has put the market close, in our view, to an important boundary point. One path suggests an opportunistic, contrarian accumulation point within an ongoing cyclical/secular bull market. A second alternative is that the market has changed character for an undetermined period; and whether in the form of a trading range or a more directed negative environment, a clearly different relative sector/group leadership will necessarily evolve.

Hanseatic's Large Cap portfolio lost 6.50% in the month of May, outperforming the Russell 1000 Growth benchmark by 1.13% and outperforming the S&P 500 Total Return Index by 1.49%. The Small Cap portfolio lost 7.58%, underperforming the Russell 2000 Growth benchmark by 0.97%.

The U.S. equity market delivered its worst May return since 1940; energy stocks were hit particularly hard amid the fear and uncertainty about the impacts of the Gulf oil spill disaster. All ten sectors performed negatively on an absolute basis.

The relative outperformance in the Large Cap portfolio was due primarily to being underweight energy stocks in general and the oil exploration and drilling stocks in particular. Portfolio performance and volatility profile was also enhanced by an early-May addition of selected counter-cyclical stocks including consumer staples and utilities.

Underperformance in the Small Cap portfolio was primarily the result of being modestly overweight energy stocks and guidance/news-related declines in some individual stock holdings.

Hanseatic's Large Cap portfolio gained 3.36% in the month of April, outperforming the Russell 1000 Growth benchmark by 2.24% and outperforming the S&P 500 Total Return Index by 1.78%. The Small Cap portfolio gained 5.40%, outperforming the Russell 2000 Growth benchmark by 1.20%.

The Large Cap portfolio performed well in April, particularly on a relative basis. Portfolio stocks outperformed benchmark stocks in eight of ten sectors. Technology, consumer discretionary and financial stocks were the most significant absolute and benchmark relative performers.

Outperformance in the Small Cap portfolio on a relative basis was also consistent, with materials stocks the only notable underperformer relative to the benchmark. Stocks in nine of ten sectors had positive absolute performance.

Hanseatic's Large Cap portfolio gained 7.31% in the month of March, outperforming the Russell 1000 Growth benchmark by 1.52% and outperforming the S&P 500 Total Return Index by 1.28%. The Small Cap portfolio gained 8.05%, outperforming the Russell 2000 Growth benchmark by 0.10%.

The performance profile for the Large Cap portfolio in March was similar to the previous month in that stocks in seven of the ten market sectors were positive relative to the benchmark, and all ten market sectors were positive on an absolute basis. Consumer discretionary, material and financial stocks were the leaders on a relative basis, while consumer staple stocks modestly penalized portfolio performance.

In the Small Cap portfolio, all ten market sectors were likewise positive on an absolute basis. Finance, materials and energy stocks were the primary contributors to the modest relative outperformance. Technology and consumer discretionary stocks subtracted from performance from a relative standpoint.

Hanseatic's Large Cap portfolio gained 5.37% in the month of February, outperforming the Russell 1000 Growth benchmark by 1.94% and outperforming the S&P 500 Total Return Index by 2.27%. The Small Cap portfolio gained 4.73%, outperforming the Russell 2000 Growth benchmark by 0.37%.

Performance for the Large Cap portfolio during February was well balanced as nine of the ten market sectors were positive relative to the benchmarks, and all ten market sectors were positive from an absolute standpoint. Materials, consumer discretionary, industrial and energy stocks were the primary contributors to the relative outperformance.

In the Small Cap portfolio, all ten market sectors also delivered positive absolute performance, however the relative sector performance was more mixed as several individual stocks were negatively impacted by news announcements and/or guidance issues. Relative outperformance was guided primarily by energy and industrial stocks while consumer discretionary and technology stocks were good performers on an absolute basis, but modestly negative on a relative basis.

Hanseatic's Large Cap portfolio lost 5.97% in the month of January, underperforming the Russell 1000 Growth benchmark by 1.61% and underperforming the S&P 500 Total Return Index by 2.37%. The Small Cap portfolio lost 4.90%, underperforming the Russell 2000 Growth benchmark by 0.43%.

Underperformance in the Large Cap relative to the benchmark was primarily due to the sharp selloff at the end of the month in a few technology stocks and overweight positions in the materials and consumer discretionary sectors. Consumer staples, financial and utility stocks were the defensive-oriented categories that outperformed the benchmark.

In the Small Cap, as with the Large Cap portfolio, technology stocks contributed to the underperformance relative to the benchmark, as well as overweight positions in the energy and materials sectors. Healthcare, industrial, and consumer discretionary stocks contributed to relative performance.

Hanseatic's Large Cap portfolio gained 3.70% in the month of December, outperforming the Russell 1000 Growth benchmark by 0.61% and outperforming the S&P 500 Total Return Index by 1.77%. The Small Cap portfolio gained 7.92%, underperforming the Russell 2000 Growth benchmark by 0.64%.

The principal reason for outperformance in the Large Cap portfolio was the exposure to selected technology stocks. Consumer discretionary, energy and healthcare stocks also contributed to absolute and relative performance. Financial and metals stocks subtracted from performance.

In the Small Cap portfolio, stocks from all ten sectors were positive on an absolute basis. Energy, technology, consumer discretionary and healthcare stocks accounted for most of the positive performance.

Hanseatic's Large Cap portfolio gained 6.57% in the month of November, outperforming the Russell 1000 Growth benchmark by 0.43% and outperforming the S&P 500 Total Return Index by 0.57%. The Small Cap portfolio gained 3.87%, outperforming the Russell 2000 Growth benchmark by 0.78%.

The equity markets have traced similar patterns the last three months; directionally positive during the first half of the month - volatile correction/consolidation during the latter half of the month. November was notable in that the consolidation over the past two weeks was constructive relative to the sharp corrections experienced in September and October.

In the Large Cap portfolio, all market sectors contributed positively to absolute performance with the exception of energy stocks. Technology, consumer discretionary and material stocks accounted for most of the portfolio's relative outperformance.

Positive performance was also well diversified in the Small Cap portfolio. Material, technology, finance, healthcare and consumer discretionary stocks all contributed to absolute and relative outperformance for the portfolio.

Hanseatic's Large Cap portfolio lost 4.17% in the month of October, underperforming the Russell 1000 Growth benchmark by 2.82% and underperforming the S&P 500 Total Return Index by 2.31%. The Small Cap portfolio lost 9.33%, underperforming the Russell 2000 Growth benchmark by 2.38%.

In direct contrast to September, all ten market sectors had negative absolute performance. Relative portfolio underperformance in the Large Cap portfolio was focused on technology, consumer discretionary and finance stocks, and occurred almost entirely on the two trap door decline days at the very end of the month.

Likewise, the underperformance in the Small Cap portfolio was concentrated in the high volatility end of month timeframe and resided primarily in technology, consumer discretionary, healthcare and finance stocks.

Hanseatic's Large Cap portfolio gained 6.52% in the month of September, outperforming the Russell 1000 Growth benchmark by 2.27% and outperforming the S&P 500 Total Return Index by 2.79%. The Small Cap portfolio gained 7.41%, outperforming the Russell 2000 Growth benchmark by 0.84%.

For the third quarter of 2009, Hanseatic's Large Cap product gained 18.85% outperforming the Russell 1000 Growth benchmark by 4.88% and outperforming the S&P 500 Total Return Index by 3.24%. The Small Cap product gained 19.57%, outperforming the Russell 2000 Growth benchmark by 3.62%.

In the Large Cap portfolio, each of the market sectors contributed positively for the both the month of September and the third quarter. The performance of technology stocks and consumer discretionary stocks in the portfolio was primarily responsible for outperformance relative to the benchmarks for both time periods. Financial stocks, healthcare stocks and material stocks also contributed to positive relative performance.

In the Small Cap portfolio it was largely the same story; positive absolute performance across market sectors and groups with technology stocks and consumer discretionary stocks yielding the best relative outperformance. Material stocks, financial stocks, healthcare stocks and energy stocks also helped relative outperformance.

Hanseatic's Large Cap portfolio gained 2.40%, outperforming the Russell 1000 Growth benchmark by 0.33% and underperforming the S&P 500 Total Return Index by 1.21%. The Small Cap portfolio gained 1.58%, outperforming the Russell 2000 Growth benchmark by 0.60%.

Sector performance narrowed in the month of August with financial, technology and consumer discretionary stocks performing well, and the healthcare and energy stocks in modestly negative territory. The outperformance of the Large portfolio relative to the Russell 1000 Growth benchmark was due to exposure in technology stocks, especially semiconductor and computer manufacturers, and to the strong performance of banks and insurers.

Underperformance of the portfolio relative to the S&P 500 Total Return index was due to the outsized impact of the financial sector. Though the index gained over 3% in August, only two (finance and industrial) of the ten sectors outperformed the benchmark. Eight of the top ten performing stocks in the index were financial stocks.

Market breadth also narrowed in the small cap arena in August. Despite positive index returns, only technology, financial, consumer discretionary and material stocks outperformed the benchmark. Outperformance in the Small Cap portfolio was due to having exposure to these stocks in general, and technology and consumer discretionary in particular.

Hanseatic's Large Cap portfolio gained 8.96%, outperforming the Russell 1000 Growth benchmark by 1.86% and outperforming the S&P 500 Total Return Index by 1.40%. The Small Cap portfolio gained 9.62%, outperforming the Russell 2000 Growth benchmark by 1.87%.

All ten sectors had positive monthly performance in the Large Cap portfolio. Outperformance relative to the benchmarks was due primarily to positive trends in technology sectors, and also due to exposure in selected consumer discretionary, healthcare, materials and finance sector stocks.

Outperformance in the Small Cap portfolio was also due primarily to the technology sector exposure in general and the semiconductor group in particular. The portfolio also benefited from exposure to selected consumer discretionary, industrial and material sector stocks. As with the Large Cap portfolio, all ten sectors had positive performance in the Small Cap portfolio.

For the second quarter of 2009, Hanseatic's Large Cap portfolio gained 7.47%, underperforming the Russell 1000 Growth benchmark by 8.85% and underperforming the S&P 500 Total Return Index by 8.46%. The Small Cap portfolio gained 6.77%, underperforming the Russell 2000 Growth benchmark by 16.61%.

Year to date, Hanseatic's Large Cap portfolio lost 1.69%, underperforming the Russell 1000 Growth benchmark by 13.22% and underperforming the S&P 500 Total Return Index by 4.85%. The Small Cap portfolio lost 10.33%, underperforming the Russell 2000 Growth benchmark by 21.69%.

Global equity markets rebounded strongly in the second quarter, delivering the best quarterly performance since 1998. Financial stocks performed the best after the prices of many were discounting the risk of bankruptcy. The perception of a global economic recovery led by emerging market economies buoyed energy and materials stocks. Technology stocks also rebounded sharply.

Underperformance in the Large Cap portfolio was due largely to being relatively underweight technology stocks and in particular those that are most heavily weighted in the index. All portfolio sectors performed positively with the exception of finance stocks where exposure to a couple individual issues penalized performance.

Underperformance in the Small Cap portfolio was also primarily due to underexposure to technology stocks, particularly in the early part of the quarter. Rotation out of healthcare stocks and the weakness in coal and refinery stocks also hurt performance.

Hanseatic's Large Cap portfolio gained 3.03%, underperforming the Russell 1000 Growth benchmark by 1.93% and underperforming the S&P 500 Total Return Index by 2.56%. The Small Cap portfolio gained 0.98%, underperforming the Russell 2000 Growth benchmark by 2.89%.

The Large Cap portfolio underperformace was due largely to cyclical corrections in selected consumer and information technology stocks, and modest underweighting in the energy and financial industry stocks that were the primary focus of the market's appreciation in May.

Underperformance in the Small Cap portfolio was also due in good measure to what appears to be normal cyclical corrections in a number of consumer and information technology stocks, but also what has been persistent underperformance in the healthcare industry. Our portfolio management process also avoided many of the high risk stocks which have recorded significant gains over the past several weeks.

Hanseatic's Large Cap portfolio gained 5.50%, underperforming the Russell 1000 Growth benchmark by 4.10% and underperforming the S&P 500 Total Return Index by 4.07%. The Small Cap portfolio gained 4.42%, underperforming the Russell 2000 Growth benchmark by 10.63%.

Year-to-date, the Large Cap has lost 3.49% and lags the Russell 1000 Growth benchmark by 8.58% and trails the S&P 500 Total Return Index by 1.00%. The Small Cap has lost 12.30% and lags the Russell 2000 Growth benchmark by 16.14%.

The Large Cap portfolio underperformace was due largely to exposure to Healthcare and Gold stocks. In both cases, the defensive diversification benefits of stocks in these sectors were far outweighed by significantly lagging the outsized gains of the Financial, Consumer Discretionary and Technology sectors.

The Small Cap portfolio returns were also significantly penalized by Healthcare sector exposure in general and the Biotech group in particular. It should also be pointed out that a disproportionate amount of the index return (about half) is attributed to less than 10% of the stock index universe.

This narrow leadership anomaly also applied to the Large Cap portfolio.

During the first quarter of 2009 Hanseatic's Large Cap portfolio lost 8.56%, underperforming the Russell 1000 Growth benchmark by 4.44% and outperforming the S&P 500 Total Return Index by 2.45%. The Small Cap portfolio lost 16.05%, underperforming the Russell 2000 Growth benchmark by 6.31%.

The Large Cap portfolio was penalized by exposure to several stocks in the Healthcare (HMOs, Drugs and Biotech), Consumer Staples, Finance and Industrial sectors. Stocks in other sectors including Technology, Materials, Consumer Discretionary, Energy, Utilities and Telecom performed relatively well for the quarter.

The Small Cap portfolio underperformed due to exposure in the Industrial (Airlines and Environmental), Healthcare (Services, Drugs and Equipment) and Finance (Regional Banks and Consumer Finance) sectors. Energy, Telecommunications, Utility, Consumer Discretionary and Staples stocks performed relatively well.

Hanseatic's Large Cap portfolio lost 7.58% during February, underperforming the Russell 1000 Growth benchmark by 0.06% and outperforming the S&P 500 Total Return Index by 3.07%. The Small Cap portfolio lost 12.48%, underperforming the Russell 2000 Growth benchmark by 2.13%.

The Large Cap portfolio was penalized by exposure to several stocks in the Healthcare (HMOs and Drugs), Technology, and Industrial sectors. Consumer Discretionary did relatively well for the month.

The Small Cap environment was again volatile in February. Not a single market sector achieved positive overall performance, with Healthcare, Industrial and Material stocks performing the most poorly.

The retreat in former Healthcare leadership in both the Large Cap and Small Cap portfolios was most notable in February.

Hanseatic's Large Cap portfolio lost 5.83% during January, underperforming the Russell 1000 Growth benchmark by 1.02% and outperforming the S&P 500 Total Return Index by 2.60%. The Small Cap portfolio lost 9.33%, underperforming the Russell 2000 Growth benchmark by 1.72%.

The Large Cap portfolio was penalized by exposure to several stocks in the Consumer Discretionary, Staples, and Finance sectors. Most stocks in the portfolio performed relatively well, especially Healthcare, Energy and Utility stocks.

The Small Cap environment was particularly volatile in January. Not a single sector achieved positive overall performance, with Industrial, Finance and Technology stocks performing the most poorly.

For the year 2008, the Hanseatic Large Cap and Hanseatic Small Cap products underperformed their Russell benchmarks by 2.86% and 9.42% respectively. The Hanseatic Large Cap underperformed the S&P 500 Total Return index by 4.30%.

During the fourth quarter of 2008, Hanseatic's Large Cap product lost 26.34% underperforming the Russell 1000 Growth benchmark by 3.55% and underperforming the S&P 500 Total Return index by 4.40%. The Small Cap product lost 28.29%, underperforming the Russell 2000 Growth benchmark by 0.84%.

Hanseatic's Large Cap gained 0.40% during the month of December underperforming the Russell 1000 Growth benchmark by 1.41% and the S&P 500 Total Return index by 0.66%. The Small Cap gained 2.50% during the month of December and underperformed the Russell 2000 Growth benchmark by 2.92%.

For 2008, underperformance in both the Large Cap and Small Cap portfolios derived from two major factors. First was the synchronized selloff in the Energy, Materials and Industrial sectors in August and September; the portfolio was moderately overweight in all three sectors. Second was the intense panic-selling in September through the first half of November, fueled by forced liquidations in mutual funds and hedge funds. In this environment liquidity demands effectively short-circuited the supply-demand equation in the equity markets. By our internal measures, the selling intensity was similar and in some markets greater than the only other period of comparable selling pressure - the terminal stages of the 1929-32 bear market.

Extreme conditions aside, we should have adapted the portfolio into a more defensive sector orientation. For both the Large Cap and Small Cap products, exposure in the Technology, Consumer Discretionary, Industrial and Healthcare sectors penalized performance the most. Stocks in Telecom, Utility, consumer Staples and Finance sectors performed relatively strong.

Hanseatic's Large Cap portfolio lost 9.37% during November, underperforming the Russell 1000 Growth benchmark by 1.42% and underperforming the S&P 500 Total Return Index by 2.19%. The Small Cap portfolio lost 12.77%, underperforming the Russell 2000 Growth benchmark by 0.67%.

Year-to-date, the Large Cap has lost 41.62% and lags the Russell 1000 Growth benchmark by 2.09% and trails the S&P 500 Total Return Index by 3.96%. The Small Cap has lost 49.22% and lags the Russell 2000 Growth benchmark by 7.52%.

For the second consecutive month, global equity markets have spiraled lower, discounting unprecedented turmoil in the credit markets and looming recessionary forces. The key structural feature of the markets has been the dislocations caused by mutual fund and hedge fund redemptions and tax-loss selling. The nature of this selling is that it is indiscriminant about the relative value or prospects of individual stocks; the sole objective is to gain liquidity, voluntarily or not.

Large Cap relative underperformance was due primarily to recent underperformance in Healthcare stocks, which had been relative leaders and which the portfolio has been moderately overweight. Portfolio stocks in all other sectors outperformed or were in line with the style benchmark.

Small Cap underperformance was also due to relative weakness in several Healthcare and Consumer Discretionary stocks. Contributing positively were a variety of stocks from the Industrial, Technology and Healthcare.

Hanseatic's Large Cap portfolio lost 19.14% during October, underperforming the Russell 1000 Growth benchmark by 1.54% and underperforming the S&P 500 Total Return Index by 2.34%. The Small Cap portfolio lost 19.72%, outperforming the Russell 2000 Growth benchmark by 1.98%.

Year-to-date, the Large Cap has lost 35.56% and lags the Russell 1000 Growth benchmark by 1.26% and trails the S&P 500 Total Return Index by 2.72%. The Small Cap has lost 41.74% and lags the Russell 2000 Growth benchmark by 8.06%.

Not a single industry group sector or style benchmark was spared from damage in the devastating October, 2008 decline in the equity markets. Large Cap portfolio underperformance was due to the poor performance of individual stocks in Industrials, Healthcare and Technology. Offsetting the steep decline in most stocks were positive monthly results from several biotech, utility and financial stocks.

The outperformance in the Small Cap portfolio derived from positive performance in a diverse group of stocks across Finance, Industrials (Transportation), Technology and Healthcare. The portfolio return was penalized by sharp declines in several Energy and Industrial stocks.

Year-to-date, the Large Cap has lost 20.22% and leads the Russell 1000 Growth benchmark by 0.05% and lags the S&P 500 Total Return Index by 0.93%. The Small Cap has lost 27.40% and lags the Russell 2000 Growth benchmark by 12.11%.

Hanseatic's Large Cap product lost 18.38% during the third quarter of 2008, underperforming the Russell 1000 Growth benchmark by 6.05%, and underperforming the S&P 500 Total Return Index by 10.01%. The Small Cap product lost 17.33%, underperforming the Russell 2000 Growth benchmark by 10.34%.

The negative performance for the Large Cap in the third quarter was due almost entirely to the portfolio's exposure to Energy, Materials and Industrial stocks. Stocks in theses sectors have been subjected to intense selling pressure as energy and raw materials prices reversed course; the declines in these stocks were likely exacerbated by liquidity/redemption issues for a number of investment funds. Returns for the quarter were negative for all ten market sectors. Selected Healthcare and Finance stocks were the only notable profitable exceptions.

The negative performance for the Small Cap had a sector profile similar to the Large Cap, with stocks in the Energy, Materials and Industrials coming under significant selling pressure. Again, selected Healthcare groups and stocks performed well.

Year-to-date, the Large Cap has lost 10.35% and lags the Russell 1000 Growth benchmark by 0.53% and leads the S&P 500 Total Return Index by 1.04%. The Small Cap has lost 16.22% and lags the Russell 2000 Growth benchmark by 11.72%.

Hanseatic's Large Cap portfolio lost 2.05% during August, underperforming the Russell 1000 Growth benchmark by 3.13% and underperforming the S&P 500 Total Return Index by 3.50%. The Small Cap portfolio lost 1.68%, underperforming the Russell 2000 Growth benchmark by 4.16%.

Underperformance in the Large Cap portfolio was largely attributable to the sharp declines in stocks within the Energy, Materials and Industrial sectors. Selloffs in two stocks that were related to adverse drug trial announcements also undermined performance. Portfolio stocks in the Consumer Discretionary, Telecommunications, Consumer Staples and Finance sectors were modestly higher.

Declines in Energy and Industrial sector stocks also negatively impacted the Small Cap portfolio, along with selected Technology and Consumer Staples stocks. Consumer Discretionary and Healthcare stocks generally performed well.

Year-to-date, the Large Cap has lost 8.41% and leads the Russell 1000 Growth benchmark by 2.38% and the S&P 500 Total Return Index by 4.24%. The Small Cap has lost 14.80% and lags the Russell 2000 Growth benchmark by 7.99%.

Hanseatic's Large Cap portfolio lost 6.30% during July, underperforming the Russell 1000 Growth benchmark by 4.40% and underperforming the S&P 500 Total Return Index by 5.46%. The Small Cap portfolio lost 2.99%, underperforming the Russell 2000 Growth benchmark by 5.32%.

Underperformance in the Large Cap portfolio was largely attributable to the sharp selloff in Energy and Materials stocks. The relative underperformance was also partially the result of underexposure to financial sector stocks. Positive performance from Healthcare and selected Technology stocks were a minor offset.

As with the Large portfolio, the Small Cap portfolio was negatively impacted by its Energy and Materials stock exposure, as well as declines in some Technology and Consumer Discretionary stocks. The portfolio's Healthcare and Industrial stocks performed well.

Second Quarter 2008 Performance

Hanseatic's Large Cap product gained 7.85% during the second quarter of 2008, outperforming the Russell 1000 Growth benchmark by 6.60%, and outperforming the S&P 500 Total Return Index by 10.58%. The Small Cap product gained 6.86%, outperforming the Russell 2000 Growth benchmark by 2.39%.

Year-to-date, the Large Cap has lost 2.36% and leads the Russell 1000 Growth benchmark by 6.70% and the S&P 500 Total Return Index by 9.55%. The Small Cap has lost 12.27% and lags the Russell 2000 Growth benchmark by 3.34%.

Performance for the Large Cap product was due largely to advances in Energy, Materials and selected Technology, Industrial and Utility sector stocks. Modestly offsetting these gains were losses in stocks from the Consumer Discretionary, Telecom and Consumer Staple sectors. As in the first quarter, relative performance was helped by being underweight the Banking and Investment Banking groups within the Finance sector.

As with the Large Cap product, the Small Cap portfolio performance was helped by good performance from stocks in the Energy, Industrial and Materials sectors. Setbacks in several Technology and Consumer Discretionary stocks penalized performance.

Hanseatic's Large Cap product gained 4.81% in the month of May, outperforming the Russell 1000 Growth benchmark by 1.14% and outperforming the S&P 500 Total Return Index by 3.52%. The Small Cap product gained 4.74%, underperforming the Russell 2000 Growth benchmark by 0.92%.

Year-to-date, the Large Cap has gained 1.82% and leads the Russell 1000 Growth benchmark by 3.82% and leads the S&P 500 Total Return index by 5.62%. The Small Cap has lost 11.34% and lags the Russell 2000 Growth benchmark by 8.18%.

Large Cap portfolio performance was largely attributable to good appreciation in a variety of Technology, Industrial, Energy and Material stocks. Healthcare and Finance stocks in the portfolio had minor net losses for the month.

The Small Cap portfolio performance benefited from gains in Energy, Industrial, Material and Consumer Discretionary stocks. Performance was penalized by a small net loss from stocks in the Consumer Staples, Finance and Technology sectors.

Hanseatic's Large Cap product gained 7.22% in the month of April, outperforming the Russell 1000 Growth benchmark by 1.97% and outperforming the S&P 500 Total Return Index by 2.35%. The Small Cap product gained 3.17%, underperforming the Russell 2000 Growth benchmark by 1.97%.

Year-to-date, the Large Cap has lost 2.93% and leads the Russell 1000 Growth benchmark by 2.53% and leads the S&P 500 Total Return index by 2.10%. The Small Cap has lost 15.30% and lags the Russell 2000 Growth benchmark by 6.95%.

Large Cap portfolio performance was largely attributable to positive results from selected Technology, Energy, Industrial and Healthcare stocks. All sectors contributed to the overall performance except Consumer Staples, which posted a minor loss.

The Small Cap portfolio performance benefited from the performance of Energy and Industrial stocks, and Technology, Finance and Consumer Staples stocks to a lesser extent. Performance was penalized by disappointing guidance or earnings performance relative to expectations from a few Healthcare companies. The decline in Energy and Materials stocks in the later part of the month also hurt performance.

Hanseatic's Large Cap product lost 9.50% during the first quarter of 2008, outperforming the Russell 1000 Growth benchmark by 0.68%, and underperforming the S&P 500 Total Return Index by 0.06%. The Small Cap product lost 17.92%, underperforming the Russell 2000 Growth benchmark by 5.09%.

The mixed performance for the Large Cap product was due largely to poor performance in Technology stocks; Consumer Discretionary and Healthcare stocks also hampered performance. The portfolio was advanced by positive absolute returns in Materials and selected Energy stocks. Relative performance was helped by being underweight the Banking and Consumer Finance groups within the Finance sector.

As with the Large Cap product, the Small portfolio was hurt by poor performance in Technology stocks primarily, but also Healthcare and Industrial issues. A smaller diversified group of stocks performed well.

Hanseatic's Large Cap product gained 0.92% in the month of February, outperforming the Russell 1000 Growth benchmark by 2.91% and outperforming the S&P 500 Total Return index by 4.17%. The Small Cap product lost 2.75%, outperforming the Russell 2000 Growth benchmark by 0.71%.

Year-to-date, the Large Cap has lost -8.05% and leads the Russell 1000 Growth benchmark by 1.58% and leads the S&P 500 Total Return index by 1.00%. The Small Cap has lost 13.94% and lags the Russell 2000 Growth benchmark by 1.62%.

In the Large Cap, outperformance was due largely to overweight positions in the Energy and Material sectors, and selected Telecom, Industrial and Consumer Staples stocks. Performance also benefited from being underweight most of the industry groups within the Financial and Consumer Cyclical sectors. Technology stock exposure penalized portfolio performance.

Notable performers in the Small Cap were selected Healthcare, Energy, Consumer Staples and Industrial holdings. Semiconductor, Biotech and Consumer Cyclical holdings penalized performance.

Hanseatic's Large Cap product lost 8.80% in the month of January, underperforming the Russell 1000 Growth benchmark by 1.00% and underperforming the S&P 500 Total Return index by 2.80%. The Small Cap product lost 11.53%, underperforming the Russell 2000 Growth benchmark by 2.36%.

In the Large Cap, Technology was the clear underperformer in January. The broad market correction impacted almost every Sector with Energy, Health Care and Industrials leading the rest to the downside. Materials were the only positive sector with Selected Gold stocks positively contributing to performance. An underweight position in Financials also penalized performance.

Underperformance from Technology, Industrials, Consumer Discretionary and Materials stocks were the largest laggards in the Small Cap.

For the year 2007, the Hanseatic Large Cap and Hanseatic Small Cap products outperformed their Russell benchmarks by 11.16% and 8.83% respectively. The Hanseatic Large Cap outperformed the S&P 500 Total Return index by 17.48%.

During the fourth quarter of 2007, Hanseatic's Large Cap product gained 3.37% outperforming the Russell 1000 Growth benchmark by 4.14% and outperforming the S&P 500 Total Return index by 6.70%. The Small Cap product gained 0.67%, outperforming the Russell 2000 Growth benchmark by 2.77%.

Hanseatic's Large Cap gained 2.63% during the month of December exceeding the Russell 1000 Growth benchmark by 2.99% and the S&P 500 Total Return index by 3.32%. The Small Cap gained 1.38% during the month of December and outperformed the Russell 2000 Growth benchmark by 0.75%.

Commentary

For 2007, outperformance in the Large Cap portfolio derived primarily from exposure to selected Technology stocks and the Energy and Materials sectors. Healthcare, industrial, Utility and Telecommunications stocks also contributed positively. Finance and Consumer Discretionary stocks modestly subtracted from portfolio performance, though underweighting these two sectors contributed to relative performance.

In the Small Cap portfolio, all market sectors contributed positively to performance in 2007 with the exception of the negative impact of Financial stocks. Healthcare, Materials, Consumer Staples and Discretionary sector stocks performed best.

Hanseatic's Large Cap product lost 4.95% in the month of November, underperforming the Russell 1000 Growth benchmark by 1.27% and underperforming the S&P 500 Total Return index by 0.77%. The Small Cap product lost 7.37%, underforming the Russell 2000 Growth benchmark by 0.46%.

Year-to-date, the Large Cap has gained 19.76% and leads the Russell 1000 Growth benchmark by 7.54% and leads the S&P 500 Total Return index by 13.53%. The Small Cap has gained 14.34% and leads the Russell 2000 Growth benchmark by 7.96%.

In the Large Cap, Technology was the clear underperformer in November. The broad market correction impacted every Sector with Materials, Consumer Discretionary and Energy leading the rest to the downside.

Underperformance from Industrial, Technology and Materials stocks were the largest laggards in the Small Cap. Selected Healthcare stocks helped minimize the broad correction in the portfolio.

Hanseatic's Large Cap product gained 5.86% in the month of October, outperforming the Russell 1000 Growth benchmark by 2.46% and outperforming the S&P 500 Total Return index by 4.27%. The Small Cap product gained 7.18%, outperforming the Russell 2000 Growth benchmark by 2.68%.

Year-to-date, the Large Cap has gained 25.93% and leads the Russell 1000 Growth benchmark by 9.42% and leads the S&P 500 Total Return index by 15.06%. The Small Cap has gained 23.37% and leads the Russell 2000 Growth benchmark by 9.10%.

In the Large Cap, Technology, Telecommunications and Materials stocks were the best performers in October. Relative performance benefited from being underweight the Finance and Consumer Discretionary sectors.

Positive performance from Healthcare, Industrial and Technology stocks were the leaders in the Small Cap with all exposed sectors contributing positively to the month. Relative performance was furthered by being underweight Consumer Discretionary, Finance and Utilities.

Hanseatic's Large Cap product gained 6.95% in the month of September, outperforming the Russell 1000 Growth benchmark by 2.76% and outperforming the S&P 500 Total Return index by 3.21%. The Small Cap product gained 7.39%, outperforming the Russell 2000 Growth benchmark by 4.48%.

For the third quarter of 2007, Hanseatic's Large Cap product gained 7.05% outperforming the Russell 1000 Growth benchmark by 2.84% and outperforming the S&P 500 Total Return index by 5.02%. The Small Cap product gained 4.69%, outperforming the Russell 2000 Growth benchmark by 4.67%.

Year-to-date, the Large Cap has gained 18.84% and leads the Russell 1000 Growth benchmark by 6.16% and leads the S&P 500 Total Return index by 9.71%. The Small Cap has gained 15.09% and leads the Russell 2000 Growth benchmark by 5.74%.

AUM Update

The AUM for the third quarter reflect both the discretionary and non-discretionary assets under management for HMSI. Previously HMSI had removed the non-discretionary assets from its performance reports and marketing materials. In accordance with GIPS, HMSI has added them back to the performance reports and marketing materials.

Commentary

Healthy gains in selected Technology, Materials and Healthcare stocks accounted for most of the positive Large Cap performance in the third quarter. The credit contraction modestly penalized performance in the form of Financial, Utility and Consumer Discretionary stocks.

Small capitalization stocks continue to have a different leadership structure than the large capitalization stocks. Favorable performance in the Small Cap portfolio was paced by a more diversified sector leadership that included selected Healthcare, Materials, Consumer Staples, Technology, Telecom and Industrial stocks. Only Financial sector stocks penalized performance.

Hanseatic's Large Cap product gained 1.66% in the month of August, outperforming the Russell 1000 Growth benchmark by 0.07% and outperforming the S&P 500 Total Return index by 0.16%. The Small Cap product gained 0.34%, underperforming the Russell 2000 Growth benchmark by 2.17%.

Year-to-date, the Large Cap has gained 11.13% and leads the Russell 1000 Growth benchmark by 2.98% and leads the S&P 500 Total Return index by 5.93%. The Small Cap has gained 7.15% and leads the Russell 2000 Growth benchmark by 0.89%.

By our proprietary measures of correction and volatility, the turmoil in August 2007 was comparable to the Long Term Capital Management crisis in October, 1998, particularly with smaller capitalization stocks. As a wide spectrum of portfolio managers were forced to adjust to abrupt changes in the price of risk and credit in the fixed income arena, stocks wholly unrelated to the credit contagion became sources of liquidity and were sold indiscriminately. While a more normal supply-demand environment for equities is gradually being restored, it is clear that investor perceptions of risk and leverage in a number of asset classes and strategies have a new reality.

Technology stocks were the primary drivers of the Large Cap portfolio in August, with Healthcare and Materials stocks also modestly positive. Energy, Industrial and Telecom stocks were a net subtraction to portfolio performance.

Materials, Finance, Industrial and Consumer Discretionary were all negatively impacted in the Small Cap portfolio. Technology and Healthcare stocks helped to offset the overall negative monthly performance.

Hanseatic Marketing Update

Hanseatic will be visiting the Boston area September 17th-18th. If anyone would like to schedule a meeting please notify Brian Stangel at 505 314 5883.

Hanseatic's Large Cap product lost 1.55% in the month of July, on par with the Russell 1000 Growth benchmark and outperforming the S&P 500 Total Return index by 1.55%. The Small Cap product lost 2.86%, outperforming the Russell 2000 Growth benchmark by 2.33%.

Year-to-date, the Large Cap has gained 9.29% and leads the Russell 1000 Growth benchmark by 2.84% and leads the S&P 500 Total Return index by 5.65%. The Small Cap has gained 6.77% and leads the Russell 2000 Growth benchmark by 3.12%.

In what proved to be one of the most turbulent months in recent years, portfolio performance was hurt most by the impact of the mortgage crisis on Consumer Discretionary, Finance and Industrial stocks. Only selected Materials, Technology and Healthcare stocks partially offset the sharp month-end selloff.

The reverberations from a potential credit crunch were felt more sharply in the small cap arena. Smaller Technology as well as Finance and Consumer Discretionary companies suffered the most, and were only modestly offset by gains in Materials and Telecom stocks.

Hanseatic Marketing Update

Hanseatic will be visiting Chicago August 7th-9th. If anyone would like to schedule a meeting please notify Brian Stangel at 505 314 5883.

Year-to-date, the Large Cap has gained 10.93% and leads the Russell 1000 Growth benchmark by 2.80%. The Small Cap has gained 9.89% and leads the Russell 2000 Growth benchmark by 0.56%.

For the second quarter of 2007, Hanseatic's Large Cap product gained 9.24% outperforming the Russell 1000 Growth benchmark by 2.38%. The Small Cap product gained 5.98%, underperforming the Russell 2000 Growth benchmark by 0.88%.

Hanseatic's Large Cap product lost 0.76% in the month of June, outperforming the Russell 1000 Growth benchmark by 0.73%. The Small Cap product lost 1.03%, underperforming the Russell 2000 Growth benchmark by 0.46%.

All ten market sectors contributed positively to Large Cap performance in the second quarter, with Technology,Materials and Energy performing the best. In general the adage that the market is a "market of stocks and not a stock market" applies to the current market environment. There is currently little consistent sector/industry group leadership beyond Energy and Materials.

Technology, Industrial, Healthcare and Material stocks were the best performers in the Small Cap portfolio, with a few Retail and Financial stocks penalizing returns.

Hanseatic's Large Cap product gained 5.38% in the month of May, outperforming the Russell 1000 Growth benchmark by 1.78%. The Small Cap product gained 4.62%, outperforming the Russell 2000 Growth benchmark by 0.06%.

Year-to-date, the Large Cap has gained 11.63% and leads the Russell 1000 Growth benchmark by 1.87%. The Small Cap has gained 11.02% and leads the Russell 2000 Growth benchmark by 1.06%.

For the Large Cap product, performance was well-balanced as stocks from all ten market sectors contributed positively. Technology, Materials and Energy sector stocks were the most notable outperformers.

The modest outperformance in the Small Cap portfolio was due primarily to contributions from Technology, Consumer Discretionary and Industrial stocks.

Katherine Burr and Brian Stangel will be visiting the East Coast June 12th-15th. If anyone would like to schedule a meeting please notify Brian Stangel at 505 314 5883.

HMSI was notified in May that it qualified as a top ten Large Cap Growth manager in the PSN Three, Four and Five Star rankings through First Quarter 2007. HMSI was the number one ranked Four Star Large Cap Growth manager for a second consecutive quarter. The ranking measured risk-adjusted performance over the last three years. PSN is a global database of approximately 2,000 investment managers, representing more than 10,000 domestic, global and international investment products.

*Three Star peer groups were created using the information collected through the PSN investment manager questionnaire and uses only gross of fee returns. Products must have an R-squared of 0.80 or greater relative to the style benchmark for the recent five year period. Moreover, products must have returns greater than the style benchmark for the three latest three-year rolling periods. The top ten returns for the latest three-year period then become the TOP GUNS. Four Star peer groups were created using the information collected through the PSN investment manager questionnaire and uses only gross of fee returns. Products must have an R-squared of 0.80 or greater relative to the style benchmark for the recent five year period. Moreover, products must have returns greater than the style benchmark for the three latest three-year rolling periods. After that we select only the products which standard deviation for the five year period is equal or less than the median standard deviation for the peer group. The top ten returns for the latest three-year period then become the TOP GUNS. Five Star peer groups were created using the information collected through the PSN investment manager questionnaire and uses only gross of fee returns. Products must have an R-Squared of 0.80 or greater relative to the style benchmark for the recent five year period. Moreover, products must have returns greater than the style benchmark for the three latest three-year rolling periods. After that we select only the products which standard deviation for the five year period is equal or less than the median standard deviation for the peer group. The top ten information ratios for the latest five-year period then become the TOP GUNS. - Source: Informa Investment Solutions.

The Portfolio Management Team

Hanseatic's Large Cap product gained 4.28% in the month of April, underperforming the Russell 1000 Growth benchmark by 0.43%. The Small Cap product gained 2.40%, underperforming the Russell 2000 Growth benchmark by 0.22%.

Year-to-date, the Large Cap has gained 5.88% and lags the Russell 1000 Growth benchmark by 0.07%. The Small Cap has gained 6.18% and leads the Russell 2000 Growth benchmark by 1.02%.

The underperformance in the Large Cap product was due primarily to relative weakness in Telecommunication stocks and absolute weakness in a few Technology stocks. Positive contributors to portfolio performance included Healthcare and selected Technology stocks.

There was no specific theme associated with the modest underperformance in the Small Cap product beyond the negative reactions to guidance projections by a few individual companies.

Hanseatic will be visiting the Columbus, OH area on May 15th and 16th and the East Coast June 11th - 15th, please contact Brian Stangel or Katherine Burr if you would like to schedule an in-person meeting.

The Portfolio Management Team

Hanseatic's Large Cap product gained 1.53% during the first quarter, outperforming the Russell 1000 Growth benchmark by 0.34%. The Small Cap product gained 3.73%, outperforming the Russell 2000 Growth benchmark by 1.25%.

The modest outperformance in the Large Cap product was primarily attributable to overweight positions in the Energy, Basic Materials, Utility and Telecom Sectors. Finance and Technology stocks generally penalized portfolio performance.

In a strikingly contrasting Small Cap market environment, selected Technology, Consumer Discretionary and Basic Material stocks contributed positively. Finance and Healthcare stocks moderately penalized portfolio performance.

Hanseatic will be visiting Los Angeles April 13th and New York City late the week of April 23rd, if anyone would like to schedule a personal meeting please contact Katherine Burr or Brian Stangel.

The Portfolio Management Team

Hanseatic's Large Cap product lost 2.49% in the month of February, underperforming the Russell 1000 Growth benchmark by 0.61%. The Small Cap product lost 0.74%, underperforming the Russell 2000 Growth benchmark by 0.42%.

Year-to-date, the Large Cap has gained 0.09% and lags the Russell 1000 Growth benchmark by 0.55%. The Small Cap has gained 2.77% and leads the Russell 2000 Growth benchmark by 1.23%.

The underperformance in the Large Cap product was due largely to weakness in several Finance and Consumer Discretionary stocks that was exacerbated by the extreme volatility in the last few days of the month.

The Small Cap portfolio modestly lagged the benchmark due to poor monthly performance in Healthcare stocks in particular. Contributing positively was the performance of an eclectic group of stocks primarily from the Materials, Consumer Discretionary, and Technology sectors.

As a general observation, market leadership is unusually fragmented and somewhat bifurcated in that while many stocks have participated in the secular bull market which began in early 2003, a significant portion of the market, notably the Technology sector, remain mired in cyclical or secular bear markets. Resolution of this imbalance should prove interesting.

Hanseatic's Large Cap product gained 2.66% in the month of January, outperforming the Russell 1000 Growth benchmark by 0.09%. The Small Cap product gained 3.50%, outperforming the Russell 2000 Growth benchmark by 1.73%.
(All Hanseatic returns are estimates and will be final later in the month, final numbers are available by request.)

The modest outperformance in the Large Cap product was due to exposure across a diversified group of stocks that have performed well. Market leadership currently resides in diverse industry groups that include the Gaming, Metals, Healthcare (ex-HMOs) and Computer Networking and Software. The portfolio also benefited from being underweight lagging areas of the market such as Energy and Semiconductors.

The leadership structure is different for small cap stocks, as Technology stocks, Communications Equipment, Telecom Services and Biotech stocks contributed to outperformance in the Small Cap.

Turning to the overall market, the 2006 domestic equity markets provided an unexpectedly positive performance. However, the market's path over the course of the year was volatile and notably difficult for money managers and market forecasters. Looking back, much of the complexity for market participants derived from the almost parabolic spikes in energy pricing in February and again in April 2006. In hindsight, this was the final throes of a 3-4 year secular rally in crude oil and its derivatives, and the Energy and Materials sectors of the equity markets, albeit in a much more uneven way.

Nevertheless, the moves to historic levels in energy engendered understandable anxiety about inflation, interest rates and the related impacts on housing and by extension consumer spending. Moreover, the stock market had bottomed in March 2003, or October 2002 depending on one's measure, thus the cyclical bull market was already quite long in the tooth by historical measures. When energy peaked in May its subsequent decline, absent any other sector leadership, led the entire market into a mid-year selloff. At that point, the seasonality argument ("sell in May-buy in November") that has gained increasing popularity as well as the four year cycle thesis added to a growing certainty that the markets were about to begin a new leg in the secular bear market which began in 2000. Then in late July 2006 the market, with a modestly negative return for the year, did what markets do best - fool the majority. In this case, the vast majority, as it began one of the best second-half rallies on record.

The equity market also changed character in the sense that the strongest indices in the last six months were the two narrowest indices, the Dow Industrials and the S&P 500. While a 500 stock index may not normally fit the definition of narrow, consider that because it is a capitalization weighted index, the 15 largest stocks make up 25% of the index. Many of these stocks were the strongest in the last half of the year; and it was this narrow market leadership that accounts for the large discrepancy in performance between the S&P 500 and Russell 1000 large cap benchmarks.

Looking ahead to 2007, the consensus forecasts predict moderate economic growth, no recession and a benign interest rate environment. Housing has been a key engine of the U.S. economy in recent years. Now that the housing markets have slowed and in some areas are in recession, the impact on the consumer and the broad economy is a key question. It is our considered view that economic forecasting, in addition to necessarily hindering one�s ability to adapt to changing market environments, have much in common with weather forecasting. In each arena, the professionals are intelligent and well-trained, but the complexity of the underlying dynamics in each subject area is often underestimated.

About one week ago the meteorologists forecast a storm that would bring 1" of snow accumulation for the Albuquerque area. Forty-eight hours later, the storm passed leaving snow depths of 15-30"s depending on elevation. In both weather and economics, the value of forecasts can be short-lived.

For the year, both the Hanseatic Large and Small Cap products outperformed their Russell benchmarks by 2.97% and 0.61% respectively.

During the fourth quarter both the Hanseatic Large and Small Cap products bested their Russell benchmarks by 0.71% and 0.88% respectively.

Hanseatic's Large Cap product gained 0.53% during the month exceeding the Russell 1000 Growth Index by 0.19%. The Small Cap product gained 0.94%, overshadowing the Russell 2000 Growth benchmark by 1.18%. (All Hanseatic returns are estimates and will be final later in the month)

Hanseatic's Large Cap product gained 2.43% in the month of November, outperforming the Russell 1000 Growth benchmark by 0.45%. The Small Cap product gained 2.40%, outperforming the Russell 2000 Growth benchmark by 0.01%.

Year-to-date, the Large Cap has gained 11.29% and leads the Russell 1000 Growth benchmark by 2.58%. The Small Cap has gained 12.85% and lags the Russell 2000 Growth benchmark by 0.77%.

(All Hanseatic returns are estimates and will be final later in the month, final numbers are available by request.)

The outperformance in the Large Cap product was due to increased exposure to the technology sector, particularly software. Selected energy and finance sector stocks also contributed positively. Healthcare stocks were a modest drag to portfolio performance.

The modest outperformance in the Small Cap product was attributable to strong gains in technology and energy. In contrast to the Large Cap portfolio, Healthcare stocks, particularly smaller medical equipment companies, enhanced performance. Retail apparel stocks were the only group that notably penalized the Small Cap portfolio.

Hanseatic's Large Cap product gained 3.35% in the month of October, underperforming the Russell 1000 Growth benchmark by 0.17%. The Small Cap product gained 5.93%, underperforming the Russell 2000 Growth benchmark by 0.55%.

Year-to-date, the Large Cap leads the Russell 1000 Growth benchmark by 2.00%. The Small Cap lags the Russell 2000 Growth benchmark by 0.87%.

(All Hanseatic returns are estimates and will be final later in the month, final numbers are available by request.)

The underperformance in the Large Cap product was due to underexposure in Technology, and in particular those technology stocks with the largest capitalization weighting in the benchmark indices. All sectors in the portfolio contributed positively for the month.

The Small Cap product's underperformance relative to the benchmark was primarily due to an underweight position in technology stocks. Eight of the ten market sectors contributed positively; Consumer Staples and Utilities modestly penalized portfolio performance.

Hanseatic's Large Cap product gained 1.19% in the month of September, underperforming the Russell 1000 Growth benchmark by 1.56%. The Small Cap product gained 0.04%, underperforming the Russell 2000 Growth benchmark by 0.64%.

During the third quarter, Hanseatic's Large Cap product lost 1.67% underperforming the Russell 1000 Growth benchmark by 5.61%. The Small Cap product lost 3.45%, underperforming the Russell 2000 Growth benchmark by 1.69%.

Year-to-date, the Large Cap leads the Russell 1000 Growth benchmark by 2.00%. The Small Cap lags the Russell 2000 Growth benchmark by 0.38%.

(All Hanseatic returns are estimates and will be final later in the month, final numbers are available by request.)

Underperformance in the Large Cap product during the third quarter was largely attributable to declines in moderately overweight positions in the Energy and Industrial sectors. Technology and Finance contributed positively during the quarter.

In a contrasting Small Cap climate, Technology, Industrials and Health Care stocks penalized third quarter performance, while Consumer Discretionary and Utility stocks contributed positively.

Hanseatic's Large Cap product lost 0.15% in the month of August, underperforming the Russell 1000 Growth benchmark by 3.27%. The Small Cap product gained 1.02%, underperforming the Russell 2000 Growth benchmark by 1.91%. (All Hanseatic returns are estimates and will be final later in the month, final numbers are available by request.)

Year-to-date, the Large Cap leads the Russell 1000 Growth benchmark by 3.33%. The Small Cap leads the Russell 2000 Growth benchmark by 0.18%.

The overall market had a generally positive tone during the month of August. Technology stocks were particularly strong, although still negative for the year. Energy, Utility and Transportation stocks spent the month digesting some of their prior gains. Also, growth stocks, primarily Technology, outperformed value-oriented stocks during the month.

Underperformance in both products derived from modestly overweight positions in Energy, Materials and selected industrial stocks, and an underweight position in Technology.

Hanseatic's Large Cap product lost 2.92% in the month of July, underperforming the Russell 1000 Growth benchmark by 1.01% and underperforming the S&P 500 Total Return Index by 3.54%. The Small Cap product lost 4.60%, outperforming the Russell 2000 Growth benchmark by 0.59% and outperforming the Russell 2500 Growth Index by 0.27%. (All Hanseatic returns are estimates and will be final later in the month, final numbers are available by request.)

Year-to-date, the Large Cap leads the Russell 1000 Growth benchmark by 6.47% and the S&P500 Total Return Index by 0.30%. The Small Cap leads the Russell 2000 Growth benchmark by 2.04% and the Russell 2500 Growth Index by 2.74%.

The overall market was weak during the month; Consumer Staples and Utilities were the only sectors showing positive performance in the Large Cap. Industrial, Consumer Discretionary and Technology stocks were particularly weak.

The Small Cap outperformance during the month was largely attributable to an overweight position in the Energy sector and exposure to selected Healthcare, Consumer Discretionary and Telecommunication stocks.

Hanseatic's Large Cap product gained 0.75% in the month of June, outperforming the Russell 1000 Growth benchmark by 1.14% and outperforming the S&P 500 Total Return Index by 0.61%. The Small Cap product gained 0.73%, outperforming the Russell 2000 Growth benchmark by 0.67% and outperforming the Russell 2500 Growth Index by 1.20%. (All Hanseatic returns are estimates and will be final later in the month, final numbers are available by request.)

For the second quarter, the Large Cap led the Russell 1000 Growth benchmark by 2.19% and lagged the S&P500 Total Return Index by 0.27%. The Small Cap lagged the Russell 2000 Growth benchmark by 0.83% and the Russell 2500 Growth Index 1.96%.

Year-to-date, the Large Cap leads the Russell 1000 Growth benchmark by 7.60% and the S&P500 Total Return Index by 3.96%. The Small Cap leads the Russell 2000 Growth benchmark by 1.44% and the Russell 2500 Growth Index by 2.53%.

Seven of the ten Sectors contributed to the Large Cap performance during the quarter. Consumer Discretionary, Materials and Energy contributed slightly more than others without any significant standouts. Technology, Finance and Healthcare were all negative on the quarter.

The Small Cap underperformance during the quarter was largely attributable to an overweight position in the Technology Sector, in particular Semiconductors. Seven of the ten Sectors contributed to the underperformance during the quarter. Energy, Telecommunications and Utilities were positive on the quarter.

Hanseatic's Large Cap product lost 4.30% in the month of May, underperforming the Russell 1000 Growth benchmark by 0.91% and underperforming the S&P 500 Total Return Index by 1.42%. The Small Cap product lost 9.76%, underperforming the Russell 2000 Growth benchmark by 2.72% and underperforming the Russell 2500 Growth Index by 3.79%. (Hanseatic returns are estimates and will be final later in the month)

Year-to-date, the Large Cap leads the Russell 1000 Growth benchmark by 6.28% and the S&P500 Total Return Index by 3.17%. The Small Cap leads the Russell 2000 Growth benchmark by 0.70% and the Russell 2500 Growth Index by 1.23%.

Seven of the ten Sectors contributed to the Large Cap underperformance during the month. Technology, Semiconductors and Communication Equipment in particular, hindered performance. Agricultural Products and Entertainment were the best performing Sub-Industries.

The Small Cap underperformance during the month was largely attributable to an overweight position in the Technology Sector, in particular Semiconductors and Software.

Hanseatic's Large Cap product gained 1.77% in the month of April outperforming the Russell 1000 Growth Index by 1.91% and outperforming the S&P 500 Total Return by 0.43%. The Small Cap product gained 1.09%, outperforming the Russell 2000 Growth benchmark by 1.38% and outperforming the Russell 2500 Growth by 0.78%. (Hanseatic returns are estimates and will be final later in the month)

Year-to-date, the Large Cap leads the Russell 1000 Growth benchmark by 7.49% and the S&P500 Total Return Index by 4.83%. The Small Cap leads the Russell 2000 Growth by 4.21% and the Russell 2500 Growth by 6.07%.

Seven of the ten Sectors contributed to the Large Cap outperformance during the month. Healthcare stocks, biotech and HMOs in particular, hindered performance. Gold and Steel were the best performing Sub-Industries.

The Small Cap outperformance during the month was largely attributable to an overweight position in the Materials Sector and solid performance by selected Telecom and Industrial stocks.

Hanseatic's Large Cap product gained 2.52% in the month of March outperforming the Russell 1000 Growth Index by 1.04% and outperforming the S&P 500 Total Return by 1.27%. The Small Cap product gained 5.24%, outperforming the Russell 2000 Growth benchmark by .38% and outperforming the Russell 2500 Growth by .97%. (Hanseatic returns are estimates and will be final later in the month)

For the quarter and year-to-date, the Large Cap leads the Russell 1000 Growth benchmark by 5.36% and the S&P500 Total Return Index by 4.24%. The Small Cap leads the Russell 2000 Growth by 2.58% and the Russell 2500 Growth by 5.11%.

The Large Cap outperformance during the quarter came from Finance, Industrials, Materials and Technology Sectors respectively. Specific Sub-Industries that contributed were Investment Banking and Brokerage, Steel and selected Tech Comm Equipment.

The Small Cap outperformance during the quarter was attributable at the Sector level to Technology, Industrials, Finance, Materials and Energy respectively. Leadership in the Semiconductor Sub-Industry was most notable.

Hanseatic's Large Cap product lost 1.52% in the month of February underperforming the Russell 1000 Growth Index by 1.36% and underperforming the S&P 500 Total Return by 1.79%. The Small Cap product gained .46%, outperforming the Russell 2000 Growth benchmark by .99% and outperforming the Russell 2500 Growth by .76%. (Hanseatic returns are estimates and will be final later in the month)

For the year, the Large Cap leads the Russell 1000 Growth benchmark by 4.11% and the S&P500 Total Return Index by 2.77%. The Small Cap leads the Russell 2000 Growth by 2.04% and the Russell 2500 Growth by 3.85%.

The Large Cap portfolio was hurt in February by sharp declines in energy stocks and a couple specific technology stocks. The Small Cap portfolio was helped by positive performance in selected technology, healthcare and financial issues which offset the decline in energy stocks.

Hanseatic's Large Cap product gained 7.42% in the month of January outperforming the Russell 1000 Growth Index by 5.66% and outperforming the S&P 500 Total Return by 4.77%. The Small Cap product gained 10.58%, outperforming the Russell 2000 Growth benchmark by .93% and outperforming the Russell 2500 Growth by 3.01%. (Hanseatic returns are estimates and will be final later in the month)

The S&P500 and the NASDAQ Composite finished January with solid gains of 2.5% and 4.6% respectively. Eight of ten broad market sectors were positive. Energy, metals, and selected semiconductor stocks were especially strong.

A leading bear scenario for the current market rests on the negative case for housing prices and housing demand. Depending on the severity of the decline in the real estate market, the collateral impact on consumer spending and negative consequences for economic growth risks a serious stock market decline. Recent data underscore the notion that the housing sector is slowing. All the housing stocks underwent cyclical declines in the September-October period. But most housing stocks have recovered quite well in the last several weeks, seemingly not discounting the bear case.

And there is a case to be made that economic growth is robust, interest rates are low in an absolute sense and inflation is moderate. Moreover, and importantly, equity markets across the globe are in secular bull markets. We remain moderately constructive about the US Stick market.

Turning to the overall market, the 2005 domestic equity markets delivered flat and uninspiring performances. This was particularly notable given the context of a global equity bull market. By one measure of returns, the US ranked 29th out of 32 equity markets in the world.

Beneath the tranquility of the benchmark returns, things were a little more dynamic with the significant positive moves in the energy, utility and materials sector. Large cap growth stocks, widely-perceived to represent good value in the last two years, disappointed again.

Going into 2006, there is no shortage of daunting and quite rational risks confronting the market. The complex interactions among OPEC, individual member intrigues (Iran, Venezuela, Iraq) and the China/India demand profiles make energy pricing a minefield. Interest rates, with a new Fed chairman and the Ten Year Note yield less than the two year maturity presents a conundrum. All of this comes at a time when , at least in our view, the prevailing macro outlook of the US stock market is that the US is mired in a low-return secular environment, as in the 1966-1982 period. Moreover, the current "bull" market is three years old, matching the average post-WWII bull market in duration. If an investor holds these two tenets, as we believe many do, there is little room for doubt that 2006 will see the markets resume a southerly course.

We believe that market forecasts necessarily hinder one's ability to adapt to changing market environments; so we take none seriously, including our own. But we would not be surprised to see a more positive market performance than the consensus seems to anticipate. Inflation remains tame, and earnings growth may be surprisingly robust. But more than being "right" on the Dow or S&P500, it will again be more important to have exposure to those industry groups that will maintain their current leadership, or emerge as new leadership.

Hanseatic's Large Cap product gained 1.96% in the month of December outperforming the Russell 1000 Growth Index by 2.27% and outperforming the S&P 500 Total Return by 1.93%. The Small Cap product gained .55%, outperforming the Russell 2000 Growth benchmark by .70%. (Hanseatic returns are estimates and will be final later in the month)

Quarter-to-date both the Large and Small Cap products lead their Russell benchmarks by .51% and 2.36% respectively and the Large Cap trails the S&P 500 Total Return by .12%.

Year-to-date both the Large and Small Cap products lead their Russell benchmarks by 7.97% and 11.50% respectively and the Large Cap leads the S&P 500 Total Return by 8.32%.

By request, we have added the Russell 2500 Growth for a second benchmark against our Small Cap product. By client mandate our Small Cap product will, at times, have characteristics in common with the Russell 2500 Growth benchmark.

Our apologies for the duplicate email, the original attachment was the summary for our Small Cap product and not the intended performance update for both products.

Hanseatic's Large Cap product gained 4.62% in the month of November outperforming the Russell 1000 Growth Index by .31% and outperforming the S&P 500 Total Return by .84%. The Small Cap product gained 7.35%, outperforming the Russell 2000 Growth benchmark by 1.69%. (Hanseatic returns are estimates and will be final later in the month)

Year-to-date both the Large and Small Cap products lead their Russell benchmarks by 5.3% and 10.65% respectively and the Large Cap leads the S&P 500 Total Return by 6.01%.

The US has an incredibly resilient economy. Despite soaring energy prices, hurricanes and auto industry woes, real GDP growth during the third quarter was revised up to 4.3% with upward revisions in both consumer and business spending. Technology, selected healthcare and retailers bounced back vigorously from their October corrections. We remain moderately bullish about the US stock market.

Hanseatic's Large Cap product lost 3.14% in the month of October underperforming the S&P500 Total Return Index by 1.47%. The Small Cap product lost 3.74%, underperforming the Russell 2000 Growth benchmark by .04%. (Hanseatic returns are estimates and will be final later in the month)

Year-to-date both the Large and Small Cap products lead their benchmarks by 4.92% and 8.35% respectively.

It was a typically hyper October for the stock market as the lingering effects of the hurricanes worked themselves through the energy markets. Energy stocks reversed sharply and were accompanied by declines in utility, semiconductor and biotech stocks. Looking forward, there is no shortage of macro-economic and other concerns; the good news is that they have likely been discounted. We remain moderately bullish about the domestic equity markets.

Hanseatic's Large Cap product gained 3.34% in the month of September outperforming the S&P500 Total Return Index by 2.53%. The Small Cap product gained 2.31%, outperforming the Russell 2000 Growth benchmark by 1.52%. (Hanseatic returns are estimates and will be final later in the month)

In the third Quarter, the Large and Small Cap products led their benchmarks by 4.16% and 4.90% respectively.

Year-to-date both the Large and Small Cap products lead their benchmarks by 6.59% and 8.69% respectively.

Hanseatic's Large Cap product gained .23% outperforming the S&P500 Total Return Index by 1.14% in the month of August. The Small Cap product gained 1.47% outperforming the Russell 2000 Growth benchmark by 2.88%. (Hanseatic returns are estimates and will be final later in the month)

Year-to-date both the Large and Small Cap products lead their benchmarks by 3.90% and 6.94% respectively.

August was a difficult month for the US Equity markets with the notable exception of energy. Eight of the 10 major S&P industry sectors fell during the month with the financial, consumer discretionary, pharmaceutical and materials sectors leading the way on the downside. Aside from the positive energy sector, utilities were up slightly as was healthcare outside the large-cap drug stocks.

Hanseatic's Large Cap product gained 3.84% outperforming the S&P500 Total Return Index by 0.12% in the month of July. The Small Cap product gained 7.02% outperforming the Russell 2000 Growth benchmark by 0.03%. (Hanseatic returns are estimates and will be final later in the month)

Year-to-date both the Large and Small Cap products lead their benchmarks 2.43% and 3.44% respectively.

Equity markets were quite robust in June, belying the old Wall Street adage "sell in May and go away". The earnings season, reported results as well as guidance, was quite strong and the economy seems to be picking up at a steady pace. The small and mid-cap indices were particularly strong.

The bearish contingent have a host of macro economic concerns, notably rising interest rates and a steadfastly hawkish Fed, but also valuations, China, the Dollar, etc...we'll see.

Hanseatic's Large Cap product gained 2.00% outperforming the S&P500 Total Return Index by 1.86% in the month of June. The Small Cap product gained 3.32% outperforming the Russell 2000 Growth benchmark by 0.09%. (Hanseatic returns are estimates and will be final later in the month)

For the year the Large Cap product bests the S&P500 Total Return Index by 2.29%. The Small Cap product has outperformed the Russell 2000 Growth by 3.75% thus far in 2005.

Uncertainty about the Fed and the impact of higher energy prices dominated the equity markets in June. The Dow and S&P 500 indices were flat to down for the month while smaller capitalization benchmarks such as the Russell indices performed relatively well. Real estate-related themes, biotech, selected healthcare and utilities performed particularly well, while commodity and basic material stocks fared poorly over the month.

Hanseatic's Large Cap product gained 4.57% outperforming the S&P500 Total Return Index by 1.39% in the month of May. The Small Cap product gained 6.78% underperforming the Russell 2000 Growth benchmark by 0.27%. (Hanseatic returns are estimates and will be final later in the month)

For the year the Large Cap product bests the S&P500 Total Return Index by 0.34%. The Small Cap product has outperformed the Russell 2000 by 3.15% thus far in 2005.

The month of May was notable for the robust rally in all of the indices, but particularly the small to mid-cap growth stocks indices. The spring rally in the technology stocks in general, and semiconductor and computer networking stocks specifically, were robust. Biotech and selected healthcare stocks also performed well. The sea change in sentiment is likely linked to several factors, including a better-than-expected earnings season and the markets' discounting the beginning of the end of the Fed's agenda of rate increases.

Hanseatic's Large Cap product underperformed the S&P500 Total Return Index by 1.72% in the month of April, while the Small Cap product outperformed the Russell 2000 Growth benchmark by 1.06%. (Hanseatic returns are estimates and will be final later in the month)