The Fund registered gains for the quarter but underperformed the benchmark Russell 2000 Growth Index. Most stock sectors finished higher for the quarter, extending the upturn that began in early spring as signs of an economic recovery remained mixed. On an absolute basis, holdings in the technology and materials sectors contributed most significantly to gains. Stock selection decisions in the consumer discretionary, energy and health care sectors contributed to underperformance. Security selections in the materials, technology and telecommunications sectors contributed positively to relative returns.

Capital Markets

U.S. equity markets advanced solidly in the third quarter, adding to gains for the year and recovering more of the value lost in the 16-month bear market that ended in March. Although economic growth remained subdued, investors showed newfound enthusiasm for riskier assets, bidding up stock prices especially in the beaten-down financials and materials sectors. During the quarter, value and growth indexes spanning all capitalization segments recorded double-digit returns with value stocks somewhat more in favor. Among growth indexes, all sectors registered positive returns with stocks in the technology and consumer discretionary sectors contributing most significantly to gains. Telecommunications and utilities stocks posted positive returns but underperformed growth indexes.

In the consumer discretionary sector, shares of Youbet.com fell after the online horse racing and betting company reported its second-quarter earnings declined, missing analyst expectations. Analysts said the company’s results provided another indication the gambling industry may still be hurting from lower consumer spending during the recession.

Among energy holdings, shares of Matrix Services fell in the period as the industrials services company reported a decline in its fiscal fourth quarter net income compared to the same period last year. The company attributed the lower income to decreased activity in its construction services business.

Within health care, shares of ICU Medical declined in the period despite reports of an increase in the company’s net income in the second quarter. The company, a low-cost manufacturer of safe medical connectors, custom medical products and critical care devices, said in a statement that it benefited from stable domestic and international demand despite the challenging economic environment. It also raised its revenue and earnings per share guidance range for fiscal year 2009.

In the materials sector, Omnova Solutions posted strong gains in the period as the specialty chemicals maker reported higher fiscal third-quarter profit. The company attributed the earnings increase to continued cost reductions, which helped offset a drop in sales. The company announced that for the fourth quarter of 2009, it expects to continue to generate significantly improved year-over-year earnings.

Technology stock Intellon, a leading provider of integrated circuits for home networking, rose in the period as the company reported higher quarterly revenues. The company attributed the increase to disciplined expense control and improvements in its retail channel.

Within the telecommunications sector, shares of Virgin Mobile USA climbed in the period as the wireless service provider’s second-quarter profit increased sharply. The company, which was acquired by Sprint Nextel in July, reported lower revenue but said earnings were boosted by lower operating costs.

We expect equity returns to moderate in coming quarters as a subdued economic expansion limits top-line growth for companies. In such an environment, one characterized by scarce growth, investors typically will pay a premium for shares of companies that deliver sustained improvements in free cash flow. Our investment philosophy and process focus on identifying reasonably valued companies with improving fundamentals likely to lead to possible earnings growth. This approach and discipline has proven rewarding for long-term investors and we remain confident that it will continue to identify and capture compelling opportunities.