FTI FUNDS, 497, 1998-12-16

FTI FUNDS
497, 1998-12-16

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FTI FUNDS
PROSPECTUS

FTI Funds (the "Trust") is an open-end management investment company (a mutual
fund). This combined prospectus offers investors interests in the following six
separate investment portfolios (individually referred to as the "Fund," and
collectively as the "Funds"), each having a distinct investment objective and
policies:

o FTI Municipal Bond Fund;

o FTI Bond Fund;

o FTI Large Capitalization Growth Fund;

o FTI Large Capitalization Growth and Income Fund;

o FTI Small Capitalization Fund; and

o FTI International Equity Fund;

Fiduciary International, Inc. is the investment adviser to the Funds.
Edgewood Services, Inc. serves as the distributor. This combined prospectus
contains the information you should read and know before you invest in any of
the Funds in the Trust. Keep this prospectus for future reference.

The shares offered by this prospectus are not deposits or obligations of any
bank, are not endorsed or guaranteed by any bank, and are not insured by the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
governmental agency. Investment in these shares involves investment risks,
including the possible loss of principal.

Additional information about the Trust is contained in the Trust's Statement of
Additional Information, dated December 8, 1998, which has also been filed with
the Securities and Exchange Commission ("SEC"). The information contained in the
Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Statement of Additional Information
free of charge, obtain other information, including a copy of the Funds' annual
report, or make inquiries about any of the Funds by writing to the Trust at the
address listed in the back of this prospectus or by calling1-888-FIDUCIARY.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

Prospectus dated December 8, 1998

<PAGE>

TABLE OF CONTENTS

<PAGE>

236

SYNOPSIS

The Trust, an open-end, management investment company, was established as a
Massachusetts business trust under a Declaration of Trust dated October 18,
1995. The Declaration of Trust permits the Trust to offer separate series of
shares of beneficial interest representing interests in separate portfolios of
securities. The shares of any one portfolio may be offered in separate classes.

As of the date of this prospectus, the Board of Trustees (the "Trustees") of the
Trust has established the following six diversified Funds:

o FTI Municipal Bond Fund ("Municipal Bond Fund")--seeks to provide total
return with emphasis on income by investing primarily in municipal
securities;

o FTI Bond Fund ("Bond Fund")--seeks to provide total return with emphasis
on income by investing primarily in a diversified portfolio of fixed
income securities;

o FTI Large Capitalization Growth Fund ("Large Capitalization Growth
Fund")--seeks to provide long-term growth of principal by investing
primarily in the equity securities of seasoned, financially strong U.S.
growth companies having a market value capitalization in excess of $5
billion;

o FTI Large Capitalization Growth and Income Fund ("Large Capitalization
Growth and Income Fund")--seeks to provide long-term growth of principal
and income by investing primarily in the equity securities of seasoned,
financially strong U.S. growth companies having a market value
capitalization in excess of $5 billion, while remaining sensitive to the
tax liability of shareholders;

oFTI Small Capitalization Equity Fund ("Small Capitalization
Fund")--seeks to provide growth of principal by investing primarily in
domestic equity securities of small capitalization companies having a
market value capitalization below $1.5 billion; and

o FTI International Equity Fund ("International Equity Fund")--seeks to
provide growth of principal by investing in foreign equity securities;

For information on how to purchase shares of any of the Funds, please refer to
"Investing in the Funds." A minimum initial investment of $10,000 is generally
required for each Fund. This prospectus should be read together with any account
agreement for minimum investment requirements imposed by Fiduciary Trust Company
International or any of its affiliates. See "Minimum Investment Required."
Shares of each Fund are sold at net asset value without the imposition of any
sales charge, and are redeemed at net asset value. Information on redeeming
shares may be found under "Redeeming Shares." Shares may be sold through
financial intermediaries, who may impose certain conditions on their customers
in addition to or different from those imposed by the Funds, and who may charge
their customers direct fees for their services, including transaction fees on
share purchases and redemptions. The Funds are advised by Fiduciary
International, Inc. (the "Adviser").

SPECIAL CONSIDERATIONS AND RISK FACTORS. Investors should be aware of the
following general considerations and risk factors. The market value of fixed
income securities, which constitute a major portion of the investments of
several Funds, may vary inversely in response to changes in prevailing interest
rates. The market value of the equity securities in which the Large
Capitalization Growth Fund, Large Capitalization Growth and Income Fund, Small
Capitalization Fund and International Equity Fund invest will also fluctuate,
and the possibility exists that the value of common stocks could decline over
short or even extended periods of time. The section entitled "Risk Factors --
Equity Investment Considerations" also discloses the potential risks related to
small capitalization stocks, in which the Small Capitalization Fund primarily
invests. The Bond Fund may invest in asset-backed and mortgage-backed
securities, which involve unique risks. (See "Asset-Backed Securities" in
"Portfolio Investments and Strategies.") The foreign securities in which the
Funds (except Municipal Bond Fund) may invest may be subject to certain risks in
addition to those inherent in U.S. investments, and these risks are more fully
discussed in the section entitled "Risk Factors--Foreign Securities
Considerations." The Funds may make certain investments and employ certain
investment techniques that involve other risks, including entering into
repurchase agreements and forward commitments, lending portfolio securities and
entering into futures contracts and related options as hedges. These risks and
those associated with investing in when-issued securities, options and futures
are described under "Investment Objective of Each Fund" and "Portfolio
Investments and Strategies."

YEAR 2000 STATEMENT. Like other mutual funds and business organizations
worldwide, the Funds' service providers (among them, the Adviser, distributor,
administrator and transfer agent) must ensure that their computer systems are
adjusted to properly process and calculate date-related information with respect
to dates of January 1, 2000 and later. Many software programs and, to a lesser
extent, the computer hardware in use today cannot distinguish the year 2000 from
the year 1900. Such a design flaw could have a negative impact on the handling
of securities trades, pricing and accounting services. The Funds and their
service providers are actively working on necessary changes to computer systems
to deal with the year 2000 issue and believe that systems will be year 2000
compliant.

<PAGE>

SUMMARY OF FUND EXPENSES
MUNICIPAL BOND FUND
SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)......................... None
Maximum Sales Charge Imposed on Reinvested Dividends
( as a percentage of offering price)........................ None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)................ None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee................................................... None

ANNUAL FUND OPERATING EXPENSES *
(As a percentage of projected average net assets)

Management Fee . .............................................. 0.50%
Distribution (12b-1) Fee (1)................................... 0.00%
Other Expenses................................................. 0.47%
Shareholder Services Fee (1)......................... 0.00%
Total Fund Operating Expenses.................................. 0.97%

(1)Presently, the Fund has no intention of paying or accruing 12b-1 fees or
shareholder services fees during the fiscal year ending November 30, 1999. If
the Fund were paying or accruing 12b-1 fees or shareholder services fees, the
Fund would be able to pay up to 0.75% of its average daily net assets for 12b-1
fees and up to 0.25% of its average daily net assets for shareholder services
fees. See "FTI Funds Information." Wire-transferred redemptions of less than
$5,000 may be subject to additional fees.

* Annual Fund Operating Expenses are estimated based on average expenses
expected to be incurred during the fiscal year ending November 30, 1999. During
the course of the period, expenses may be more or less than the average amount
shown.

......THE PURPOSE OF THIS TABLE IS TO ASSIST AN INVESTOR IN UNDERSTANDING THE
VARIOUS COSTS AND EXPENSES THAT A SHAREHOLDER OF THE FUND WILL BEAR, EITHER
DIRECTLY OR INDIRECTLY. FOR MORE COMPLETE DESCRIPTIONS OF THE VARIOUS COSTS AND
EXPENSES, SEE "INVESTING IN THE FUND."

EXAMPLE
.................................... 1 Year 3 Years
You would pay the following expenses on a
$1,000 investment assuming
(1) 5% annual return and (2) redemption
at the end of each time period............ $10 $31

The above example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown. This
example is based on estimated data for the Fund's fiscal year ending November
30, 1999.

<PAGE>

SUMMARY OF FUND EXPENSES
BOND FUND
SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)......................... None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)......................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)................ None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee................................................... None

ANNUAL FUND OPERATING EXPENSES *
(As a percentage of projected average net assets)

Management Fee . .............................................. 0.50%
Distribution (12b-1) Fee (1)................................... 0.00%
Other Expenses................................................. 0.48%
Shareholder Services Fee (1).......................... 0.00%
Total Fund Operating Expenses . .................................. 0.98%

EXAMPLE
.................................... 1 Year 3 Years
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and
(2) redemption at the end of each time period............ $10 $31

<PAGE>

SUMMARY OF FUND EXPENSES
LARGE CAPITALIZATION GROWTH FUND
SHAREHOLDER TRANSACTION EXPENSES

ANNUAL FUND OPERATING EXPENSES *
(As a percentage of projected average net assets)

Management Fee . .............................................. 0.75%
Distribution (12b-1) Fee (1)................................... 0.00%
Other Expenses................................................. 0.61%
Shareholder Services Fee (1).............................0.00%
Total Fund Operating Expenses ....................................1.36%

EXAMPLE
.................................... 1 Year 3 Years
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and
(2) redemption at the end of each time period............ $14 $43

<PAGE>

SUMMARY OF FUND EXPENSES

LARGE CAPITALIZATION GROWTH AND INCOME FUND
SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price)......................... None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price)......................... None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)................ None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee................................................... None

ANNUAL FUND OPERATING EXPENSES *
(As a percentage of projected average net assets)

Management Fee . .............................................. 0.75%
Distribution (12b-1) Fee (1)................................... 0.00%
Other Expenses................................................. 0.33%
Shareholder Services Fee (1)......................... 0.00%
Total Fund Operating Expenses ...........................................1.08%

EXAMPLE
.................................... 1 Year 3 Years
You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and
(2) redemption at the end of each time period............ $11 $34

<PAGE>

SUMMARY OF FUND EXPENSES
SMALL CAPITALIZATION FUND
SHAREHOLDER TRANSACTION EXPENSES

Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price) None
Maximum Sales Charge Imposed on Reinvested Dividends
(as a percentage of offering price) None
Contingent Deferred Sales Charge (as a percentage of purchase price
or redemption proceeds, as applicable) None
Redemption Fee (as a percentage of amount redeemed, if applicable) None
Exchange Fee None

ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management Fee 1.00%
Distribution (12b-1) Fee(1) 0.00%
Other Expenses (after expense reimbursement)(2) 0.50%
Shareholder Services Fee(1) 0.00%
Total Fund Operating Expenses (after expense reimbursement)(3) 1.50%

(1) Presently, the Fund has no intention of paying or accruing 12b-1 fees or
shareholder services fees during the fiscal year ending November 30, 1998.
If the Fund were paying or accruing 12b-1 fees or shareholder services
fees, the Fund would be able to pay up to 0.75% of its average daily net
assets for 12b-1 fees and up to 0.25% of its average daily net assets for
shareholder services fees. See "FTI Funds Information."
(2) Other expenses have been reduced to reflect the voluntary reimbursement of
certain other operating expenses. This voluntary reimbursement may be
modified or terminated at any time.
(3) The Total Fund Operating Expenses would have been 1.74% absent the
voluntary reimbursement of certain other operating expenses.

The purpose of this table is to assist an investor in understanding the
various costs and expenses that a shareholder of the Fund will bear, either
directly or indirectly. For more complete descriptions of the various costs and
expenses, see "Investing in the Funds" and "FTI Funds Information."
Wire-transferred redemptions of less than $5,000 may be subject to additional
fees.

LONG-TERM SHAREHOLDERS MAY PAY MORE OVER TIME THAN THE ECONOMIC EQUIVALENT
OF THE MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.

EXAMPLE 1 year 3 years 5 years 10 years

You would pay the following expenses on a $1,000 investment assuming (1) 5%
annual return and (2) redemption at the end of each
time period $15 $ 47 $ 82 $ 179
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

<PAGE>

SUMMARY OF FUND EXPENSES
INTERNATIONAL EQUITY FUND
SHAREHOLDER TRANSACTION EXPENSES

ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)

Management Fee 1.00%
Distribution (12b-1) Fee(1) 0.00%
Other Expenses (after expense reimbursement)(2) 0.20%
Shareholder Services Fee(1) 0.00%
Total Fund Operating Expenses (after expense reimbursement)(3) 1.20%

(1) Presently, the Fund has no present intention of paying or accruing 12b-1
fees or shareholder services fees during the fiscal year ending November
30, 1998. If the Fund were paying or accruing 12b-1 fees or shareholder
services fees, the Fund would be able to pay up to 0.75% of its average
daily net assets for 12b-1 fees and up to 0.25% of its average daily net
assets for shareholder services fees. See "FTI Funds Information."
(2) Other expenses have been reduced to reflect the voluntary reimbursement of
certain other operating expenses by the Adviser. The Adviser may terminate
this voluntary reimbursement at any time at its sole discretion.
(3) The Total Fund Operating Expenses were 1.60% for the fiscal year ended
November 30, 1997. The current rate of Total Fund Operating Expenses is
shown in the table above, and reflects an increase in the voluntary
reimbursement of certain other operating expenses by the Adviser from July
6, 1998 through the fiscal year ending November 30, 1998. Total Fund
Operating expenses are estimated to be 1.40% absent the anticipated
voluntary reimbursement described above in note (2), and are expected to be
1.37% for the fiscal year ending November 30, 1998.

The purpose of this table is to assist an investor in understanding the various
costs and expenses that a shareholder of the Fund will bear, either directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "Investing in the Funds" and "FTI Funds Information." Wire-transferred
redemptions of less than $5,000 may be subject to additional fees.

LONG-TERM SHAREHOLDERS MAY PAY MORE OVER TIME THAN THE ECONOMIC EQUIVALENT OF
THE MAXIMUM FRONT-END SALES CHARGES PERMITTED UNDER THE RULES OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC.

EXAMPLE 1 year 3 years 5 years 10 years

You would pay the following expenses on a
$1,000 investment assuming (1) 5% annual return
and (2) redemption at the end of each time period $ 12 $38 $66 $145

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

<PAGE>

FTI SMALL CAPITALIZATION EQUITY FUND
FINANCIAL HIGHLIGHTS

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated January 26, 1998, on the Fund's
financial statements for the period ended November 30, 1997, and on the
following table for the periods presented, is included in the Annual Report,
which is incorporated by reference. This table should be read in conjunction
with the Fund's financial statements and notes thereto, which may be obtained
free of charge.
YEAR ENDED PERIOD ENDED
NOVEMBER 30, NOVEMBER 30,
1997 1996(A)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.08 $10.00
- ----------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------
Net operating loss (0.09) (0.04)
- ----------------------------------------------------------------
Net realized and unrealized gain on investments 2.38 2.12
- ---------------------------------------------------------------- --------- ---------
Total from investment operations 2.29 2.08
- ---------------------------------------------------------------- --------- ---------
NET ASSET VALUE, END OF PERIOD $14.37 $12.08
- ---------------------------------------------------------------- --------- ---------
TOTAL RETURN(B) 18.96% 20.80%
- ----------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------
Expenses 1.50% 1.50%*
- ----------------------------------------------------------------
Net operating loss (0.89%) (0.68%)*
- ----------------------------------------------------------------
Expense waiver/reimbursement(c) 0.24% 1.51%*
- ----------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------
Net assets, end of period (000 omitted) $40,505 $19,318
- ----------------------------------------------------------------
Average commission rate paid(d) $.0620 $0.0334
- ----------------------------------------------------------------
Portfolio turnover 111% 94%
* Computed on an annualized basis.

(a) Reflects operations for the period from December 22, 1995 (start of
performance) to November 30, 1996. (b) Based on net asset value, which does not
reflect the sales charge or contingent deferred sales charge, if applicable. (c)
This voluntary expense decrease is reflected in both the expense and net
operating loss ratios shown above. (d) Represents total commissions paid on
portfolio securities divided by total portfolio shares purchased or sold on
which commissions were charged. Further information about the Fund's performance
is contained in the Fund's annual report dated November 30, 1997, which can be
obtained free of charge.
</TABLE>

<PAGE>

FTI INTERNATIONAL EQUITY FUND
FINANCIAL HIGHLIGHTS

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Ernst & Young LLP, the Fund's
independent auditors. Their report dated January 26, 1998, on the Fund's
financial statements for the period ended November 30, 1997, and on the
following table for the periods presented, is included in the Annual Report,
which is incorporated by reference. This table should be read in conjunction
with the Fund's financial statements and notes thereto, which may be obtained
free of charge.
YEAR ENDED PERIOD ENDED
NOVEMBER 30, NOVEMBER 30,
1997 1996(A)
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.99 $10.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.02 0.01(b)
- ----------------------------------------------------------------------
Net realized and unrealized gain on investments and foreign currency 1.390.99
- ---------------------------------------------------------------------- --------- ---------
Total from investment operations 1.41 1.00
- ---------------------------------------------------------------------- --------- ---------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Distributions from net investment income (0.20) (0.01)
- ---------------------------------------------------------------------- --------- ---------
NET ASSET VALUE, END OF PERIOD $12.20 $10.99
- ---------------------------------------------------------------------- --------- ---------
TOTAL RETURN(C) 13.01% 10.04%
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 1.60% 1.68%*
- ----------------------------------------------------------------------
Net investment income 0.13% 0.05%*
- ----------------------------------------------------------------------
Expense waiver/reimbursement(d) 0.13% 3.05%*
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $40,869 $12,065
- ----------------------------------------------------------------------
Average commission rate paid(e) $0.0363 $0.0365
- ----------------------------------------------------------------------
Portfolio turnover 55% 29%
* Computed on an annualized basis.
</TABLE>

(a) Reflects operations for the period from December 22, 1995 (start of
performance) to November 30, 1996. (b) Per share information is based on average
shares outstanding. (c) Based on net asset value, which does not reflect the
sales charge or contingent deferred sales charge, if applicable. (d) This
voluntary expense decrease is reflected in both the expense and net investment
income ratios shown above.
(e) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. Further
information about the Fund's performance is contained in the Fund's annual
report dated November 30, 1997, which can be obtained free of charge.

INVESTMENT OBJECTIVE OF EACH FUND

The investment objective and policies of each Fund appear below. The investment
objective of a Fund cannot be changed without the approval of holders of a
majority of that Fund's shares. While there is no assurance that a Fund will
achieve its investment objective, it endeavors to do so by following the
investment policies described in this prospectus.

Unless indicated otherwise, the investment policies and limitations of a Fund
may be changed by the Trustees without approval of shareholders. Shareholders
will be notified before any material change in these policies and limitations
becomes effective.

Additional information about investment limitations, strategies that one or more
Funds may employ, and certain investment policies mentioned below, appear in the
"Portfolio Investments and Strategies" section of this prospectus and in the
Statement of Additional Information.

MUNICIPAL BOND FUND

The investment objective of Municipal Bond Fund is total return with emphasis on
income. The Fund seeks to achieve its investment objective by investing
primarily in a diversified portfolio of high-quality municipal bonds. Municipal
bonds are debt obligations issued by or on behalf of states, territories and
possessions of the United States, including the District of Columbia, and their
political subdivisions, agencies and instrumentalities, the interest from which
is exempt from federal regular income tax. The Fund invests its assets so that
at least 80% of its annual interest income is exempt from federal regular income
tax. (Federal regular income tax does not include the federal individual
alternative minimum tax or the federal alternative minimum tax for
corporations.) The Fund may invest in obligations subject to alternative minimum
tax without limit.

Municipal bonds are generally issued to finance public works such as airports,
bridges, highways, housing, hospitals, mass transportation projects, schools,
streets, and water and sewer works. Municipal bonds are also issued to repay
outstanding obligations, to raise funds for general operating expenses, and to
make loans to other public institutions and facilities. Certain types of
"private activity" municipal bonds are issued to obtain funding for privately
operated facilities. There are two general categories of municipal bonds:
general obligation and revenue. General obligation bonds are backed by the
taxing power of the issuing municipality. Revenue bonds are backed by the
revenues of a project or facility. Payment of principal and interest on such
bonds is dependent solely on the revenue generated by the facility financed by
the bond or other specified sources of revenue or collateral. Private activity
bonds are typically one type of "revenue" bonds. In most cases, lower quality
bonds are private activity bonds or other revenue bonds which are not payable
from general tax revenues. The Fund does not intend to purchase securities if,
as a result of such purchase, more than 25% of the value of its total assets
would be invested in the securities of governmental subdivisions located in any
one state, territory or possession of the United States.

ACCEPTABLE INVESTMENTS. The securities in which the Fund invests include,
but are not limited to:

municipal bonds (including bonds having serial maturities and pre-refunded
bonds) and leases. See "Municipal Leases" in "Portfolio Investments and
Strategies" and "Municipal Bond Considerations;"

tax and revenue bond anticipation notes issued to finance working capital
needs in anticipation of receiving taxes or other revenues;

bond anticipation notes that are intended to be refinanced through a later
issuance of longer-term bonds;

municipal commercial paper and other short-term notes;

variable rate demand notes. See Corporate and Foreign Government/Agency
Debt Obligations" in "Portfolio Investments and Strategies;"

participation, trust, and partnership interests in any of the foregoing
obligations. See "Participation Interests" in "Portfolio Investments and
Strategies;"

domestic issues of corporate debt obligations. See "Corporate and Foreign
Government/Agency Debt Obligations" in "Portfolio Investments and
Strategies;"

securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities, including those obligations purchased on a when-issued
or delayed delivery basis ("U.S. Government Securities"). See "U.S.
Government Securities" in "Portfolio Investments and Strategies;" and

shares of other investment companies. See "Investing in Securities of Other
Investment Companies" in "Portfolio Investments and Strategies."

Under normal market conditions, the Fund will invest its assets so that at least
80% of its total assets are invested in securities that at the time of purchase,
are rated investment-grade (BBB by Standard and Poor's ("S&P")/Baa by Moody's
Investor Services, Inc. ("Moody's") or better) or, in the opinion of the
Adviser, are the unrated equivalent. No more than 20% of the assets may be
invested in securities rated as low as B (or in the opinion of the Adviser, the
unrated equivalent). See "Risk Factors" - "Bond Investment Considerations."

While the Fund may purchase securities of any maturity, it will invest
primarily in bonds with intermediate (5 to 15 years) maturities. Under normal
market conditions, the Fund's duration will generally range between four and
seven years. See "Duration" in "Portfolio Investments and Strategies."

As noted, the Fund seeks to produce total return, with emphasis on tax exempt
income. Total return measures the overall change in the value of an investment
in the Fund (assuming reinvestment of dividend and capital gain distributions).
Two factors make up total return: income produced by the Fund's investments (at
least 80% of which will be exempt from federal regular income tax), and the
change in value of the Fund's investments (which will be reflected in changes in
the value of the Fund's shares). A positive change in value is called capital
appreciation. Capital appreciation of securities the Fund continues to hold is
known as "unrealized" appreciation, and is reflected in an increase in the value
of the Fund's shares. When the Fund sells such a security, it "realizes" the
capital appreciation (or "capital gains"). The Fund must distribute capital
gains (which are taxable) to shareholders. When the Fund makes distributions,
its share price will decline by the amount of the per share distribution.

As a general matter, the Fund's Acceptable Investments listed above produce
income in the form of interest payments to the Fund. They are also subject to
fluctuations in value. The Adviser's approach in managing the Fund is to produce
income, and seek opportunities for capital appreciation, while managing and
controlling risk of capital losses. The Adviser believes that investing
primarily in high quality, highly liquid securities of intermediate duration,
should provide attractive total return with less volatility than associated with
longer duration securities. In seeking capital appreciation, the Adviser uses
moderate interest rate anticipation, active sector allocation and disciplined
security selection. Application of this investment approach is designed to
result in increases in the value of the Fund's shares. If the Fund sells
securities that have risen in value, it will realize capital gains, which will
be taxable when distributed to shareholders. Identifying and quantifying the
risks inherent in different structure/strategies, specific bonds markets and
securities within those sectors is the central focus of the Adviser's internal
research process. Identifying the sensitivity the Fund or individual security
has to a changing interest rate, volatility, and prepayment environment is
essential to establishing prudent risk parameters. There is no assurance that
the Adviser's attempts to pursue these approaches will result in the Fund
achieving its objective.

From time to time, in order to enhance after-tax total return, the Fund may
invest in taxable securities (primarily U.S. Treasury securities). For example,
investing in the taxable sector becomes attractive as municipals trade
relatively rich to Treasuries. The Treasury market possesses superior
performance characteristics and, generally, outperforms municipal securities in
a market rally because lower yields result in an increase in municipal supply.
Treasuries are also an effective investment vehicle for capturing trading
opportunities due to their superior liquidity.

In addition, the Fund may lend portfolio securities, invest in restricted and
illiquid securities, repurchase agreements, and when-issued and delayed delivery
transactions. See "Portfolio Investments and Strategies" for a discussion of
these investments.

INVESTMENT LIMITATIONS. The Fund's investment limitations are discussed
below under "Diversification" and "Restricted and Illiquid Securities."

BOND FUND

The investment objective of the Bond Fund is total return with emphasis on
income. The Fund seeks to achieve its investment objective by investing
primarily in a diversified portfolio of investment grade fixed income
securities.

Total return measures the overall change in the value of an investment in the
Fund (assuming reinvestment of dividend and capital gain distributions). Two
factors make up total return: income produced by the Fund's investments, and the
change in value of the Fund's investments (which will be reflected in changes in
the value of the Fund's shares). A positive change in value is called capital
appreciation.

As a general matter, the Fund's Acceptable Investments listed below produce
income in the form of interest payments to the Fund. They are also subject to
fluctuations in value. The Adviser's approach in managing the Fund is to produce
income, and seek opportunities for capital appreciation, while managing and
controlling risk of capital losses. In seeking capital appreciation, the Adviser
performs scenario analysis by evaluating economic and political trends to assess
the expected distribution of returns. To measure Value-at-Risk, the Adviser
"stress tests" the portfolio to produce objective views of market risk and to
analyze "worst case scenarios." As investment strategies are implemented,
forecasts are continually reviewed to confirm investment views. Forecast returns
determine preferred markets. Risk management systems assist in determining
appropriate weightings based upon: forecast returns; historic volatilities and
correlations; guidelines and risk tolerances; and benchmarks. In an effort to
manage and control risk, the Adviser evaluates fundamental economic and
political trends by analyzing and managing bond markets and foreign markets as
separate and distinct asset classes. Using quantitative tools to establish
relative valuations between sectors and securities, the Adviser actively manages
country and currency allocations, average duration targets, sector and issue
selection. The ultimate goal is to maximize return while limiting risk of
capital losses. There is no assurance that the Adviser's attempts to pursue
these approaches will result in the Fund achieving its investment objective.

ACCEPTABLE INVESTMENTS. The securities in which the Fund invests include,
but are not limited to:

U.S. Government Securities. See "U.S. Government Securities" in "Portfolio
Investments and Strategies;"

domestic (i.e., issued in the United States) and foreign issues of
corporate debt obligations as well as domestic and foreign issues of
obligations of foreign governments and/or their instrumentalities having
floating or fixed rates of interest. See "Corporate and Foreign
Government/Agency Debt Obligations" and "Foreign Securities
Considerations."

mortgage-backed and other asset-backed securities. See "Asset-Backed
Securities" in "Portfolio Investments and Strategies;"

commercial paper rated A-1 by S&P, Prime-1 by Moody's or F-1 by Fitch
Investor Service, Inc. ("Fitch") and money market instruments (including
commercial paper) which are unrated but deemed to be of comparable quality
by the Adviser, including Canadian Commercial Paper and Europaper
("Commercial Paper");

certificates of deposits, demand and time deposits, savings shares,
bankers' acceptances and other instruments of domestic and foreign banks,
savings and loans and other deposit or thrift institutions ("Bank
Instruments");

municipal securities. See "Municipal Bond Considerations;"

repurchase agreements collateralized by eligible investments. See
"Repurchase Agreements" in "Portfolio Investments and Strategies;" and

shares of other investment companies. See "Investing in Securities of Other
Investment Companies" in "Portfolio Investments and Strategies."

Under normal market conditions, the Fund will invest its assets so that at least
80% of its total assets are invested in securities that at the time of purchase,
are rated investment grade or better or, in the opinion of the Adviser, are the
unrated equivalent. The average credit quality of the portfolio will be a
minimum of AA. No more than 20% of the assets may be invested in securities
rated as low as B. See "Risk Factors" "Bond Investment Considerations." Up to
30% of the assets may be invested in securities of foreign issuers, provided
that the securities are denominated in U.S. dollars. See "Risk Factors" -
"Foreign Securities Considerations." The securities in which the Fund invests
may be of any maturity, but under normal market conditions, the Fund's duration
is within one and a half years of the Lehman Brothers Aggregate Bond Index
(which is currently about four and a half years). See "Duration" in "Portfolio
Investments and Strategies."

In addition, the Fund may lend portfolio securities; invest in preferred stock,
restricted and illiquid securities, repurchase agreements, and when-issued and
delayed delivery transactions. See "Portfolio Investments and Strategies" for a
discussion of these investments.

INVESTMENT LIMITATIONS. The Fund's investment limitations are discussed below
under "Diversification" and "Restricted and Illiquid Securities."

LARGE CAPITALIZATION GROWTH FUND

The investment objective of the Large Capitalization Growth Fund is long-term
growth of principal. The Fund seeks to achieve its investment objective by
investing primarily in the equity securities of large capitalization companies
with total market capitalizations in excess of $5 billion at the time of
purchase. Although current income is an incidental consideration, many of the
Fund's securities should provide regular dividends which are expected to grow
over time.

The Adviser focuses on companies which are above-average financial quality and
offer the prospect for above-average growth in earnings, cash flow, or assets
relative to the overall market as defined by Standard & Poor's 500 Composite
Stock Price Index ("S&P 500"). The Fund allocates its investments among
different industries and companies, and adjusts its holdings based on long-term
investment considerations as opposed to short-term trading. While the Fund
emphasizes U.S. investments, it can commit a portion of its assets to the equity
securities of foreign growth companies which meet the criteria applicable to
domestic investments. In selecting investments for the Fund's portfolio, the
Adviser considers earnings growth, relative valuation measures and a review of
management. In reviewing earnings growth, the Adviser takes into consideration
strong, sustainable internal growth, quality of earnings and accounting
practices, and looks for a high proportion of recurring revenues, and the strong
probability of retaining or widening profitability. Relative valuation measures
include a risk/reward analysis, price/earnings ratios, growth estimates on both
an absolute and relative basis, and the return on invested capital. A review of
management targets a proven track record, the depth of management, wide equity
ownership, and management incentive programs. There is no assurance that the
Adviser's attempts to pursue these approaches will result in benefits to the
Fund.

ACCEPTABLE INVESTMENTS. The securities in which the Fund invests include, but
are not limited to:

o common stocks, and securities convertible into common stocks, which
will be primarily composed of issues of large capitalization domestic
companies. See "Portfolio Investments and Strategies" and "Equity
Investment Considerations." Under normal market conditions, at least
65% of the total assets of the Fund's portfolio will be invested in
the common stock of large capitalization companies, which the Fund
defines as those having a market value capitalization in excess of $5
billion;

o preferred stocks, investment grade corporate bonds, notes, warrants,
and rights;

o foreign securities which are traded publicly in the United States. The
Fund may invest up to 10% of its net assets in foreign securities;

o American Depositary Receipts ("ADRs"), which are receipts typically
issued by a United States bank or trust company that evidence
ownership of underlying securities issued by a foreign issuer. The
Fund may invest up to 20% of its net assets in ADRs. See "Depositary
Receipts" in "Portfolio Investments and Strategies;"

o U.S. Government Securities, Bank Instruments, and Commercial Paper.
See "Portfolio Investments and Strategies;"

o real estate investment trusts ("REITs"). See "Real Estate Investment
Trusts" in "Portfolio Investments and Strategies;" and

o shares of other investment companies. See "Investing in Securities of
Other Investment Companies" in "Portfolio Investments and Strategies."

In addition, the Fund may lend portfolio securities, invest in restricted and
illiquid securities, repurchase agreements, and engage in forward commitment and
when-issued and delayed delivery transactions. The Fund may also invest in put
and call options, futures, and options on futures, in order to implement its
investment strategy and for hedging purposes. See "Portfolio Investments and
Strategies" for a discussion of these investments.

INVESTMENT LIMITATIONS. The Fund's investment limitations are discussed below
under "Diversification" and "Restricted and Illiquid Securities."

LARGE CAPITALIZATION GROWTH AND INCOME FUND

The investment objective of the Large Capitalization Growth and Income Fund is
long-term growth of principal and income. The Fund seeks to achieve its
investment objective by investing primarily in dividend-paying equity securities
of large capitalization companies with total market capitalizations in excess of
$5 billion at the time of purchase. Although the Adviser utilizes very similar
methodologies in selecting portfolio securities as described above for the Large
Capitalization Growth Fund, the Fund will be managed with a greater focus on
dividend-paying ability in selecting securities, as well as in making general
sector allocations. The Fund is expected generally to have fewer holdings than
Large Capitalization Growth Fund and may commit a larger portion of its assets
to any single holding. The Fund seeks to approximate the dividend yield of S&P
500 while remaining sensitive to the tax liability of shareholders by attempting
to keep capital gains distributions relatively low.

ACCEPTABLE INVESTMENTS. The securities in which the Fund invests include, but
are not limited to:

o preferred stocks, investment grade corporate bonds, notes, warrants,
and rights;

o foreign securities which are traded publicly in the United States. The
Fund may invest up to 10% of its net assets in foreign securities;

o real estate investment trusts ("REITs"). See "Real Estate Investment
Trusts" in "Portfolio Investments and Strategies;"

(Y) U.S. Government Securities, Bank Instruments, and Commercial Paper.
See "Portfolio Investments and Strategies;" and

o shares of other investment companies. See "Investing in Securities of
Other Investment Companies" in "Portfolio Investments and Strategies."

A TAX-SENSITIVE APPROACH TO INVESTING. In pursuing its objective, the Fund will
be managed in an attempt to keep its distributions of capital gains relatively
low. Whenever a mutual fund sells a stock out of its portfolio, it is likely to
"realize" either a capital gain (if the stock has risen in value) or a capital
loss (if the stock has fallen in value) equal to the difference between the
price the Fund paid to acquire the stock and the price at which it sells the
stock. Each year, mutual funds are required to determine if their capital gains
exceed their capital losses, and generally must distribute any such "net capital
gains" to their shareholders. Shareholders must then pay capital gains taxes on
these distributions. The Fund will try to keep its capital gains distributions
relatively low. For example, it will generally buy securities that it intends to
hold for a number of years, and avoid short-term trading. In deciding which
securities to sell, the Adviser will consider their capital gain or loss
situation, and may attempt to offset capital gains by appropriately timing its
sales of securities that have gone down in value. Also, the Adviser generally
will consider selling any security that has not met its expectations for growth,
in which case the capital gain would be relatively small. Successful application
of this strategy may result in shareholders incurring relatively larger amounts
of capital gains when they ultimately sell their shares.

In addition, the Fund may lend portfolio securities, invest in restricted and
illiquid securities, repurchase agreements, and engage in forward commitment and
when-issued and delayed delivery transactions. The Fund may also invest in put
and call options, futures, and options on futures, in order to implement its
investment strategy and for hedging purposes. See "Portfolio Investments and
Strategies" for a discussion of these investments.

INVESTMENT LIMITATIONS. The Fund's investment limitations are discussed below
under "Diversification" and "Restricted and Illiquid Securities."

SMALL CAPITALIZATION FUND

The investment objective of the Small Capitalization Fund is to provide growth
of principal. Under normal market conditions, at least 65% of the total assets
of the Fund's portfolio will be invested in the common stock of small
capitalization companies, which the Fund defines as those having a market value
capitalization below $1.5 billion. Dividend income is not a consideration in the
selection of investments. In selecting investments for the Fund's portfolio, the
Adviser seeks to select companies it believes are undervalued in the
marketplace, or which have earnings that might be expected to grow faster than
the U.S. economy in general. The Adviser also looks to purchase stocks whose
expected growth rates exceed their current price-earnings ratio. These companies
typically possess a relatively high rate of return on invested capital so that
future growth can be internally financed. These companies may offer the
possibility of accelerating earnings growth because they often represent the
first opportunity to participate in new products, new services and new
technologies. Companies in which the Fund is likely to invest are those that
have a unique franchise opportunity, exhibit high barriers of entry to
competitors, have strong balance sheets and cash flow, and have an exceptional
management team. The securities of these companies may have more limited
marketability and may be subject to more abrupt market movements than securities
of larger, more established companies or the market averages in general. There
is no assurance that the Adviser's attempts to pursue these approaches will
result in benefits to the Fund.

ACCEPTABLE INVESTMENTS. The securities in which the Fund invests include, but
are not limited to:

o common stocks, and securities convertible into common stocks, which
will be primarily composed of issues of small capitalization domestic
companies. See "Portfolio Investments and Strategies" and "Equity
Investment Considerations." Small capitalization companies would
generally be those stocks included in the Russell 2000 Growth Index or
the Standard & Poor's Small Cap 600 Index, or have characteristics
similar to the stocks in those indices;

o preferred stocks, investment grade corporate bonds, notes, warrants,
and rights;

o shares of other investment companies. See "Investing in Securities of
Other Investment Companies" in "Portfolio Investments and Strategies;"

o foreign securities which are traded publicly in the United States. The
Fund may invest up to 10% of its net assets in these foreign
securities; and

o U.S. Government Securities, Bank Instruments and Commercial Paper. See
"Portfolio Investments and Strategies."

In addition, the Fund may lend portfolio securities, invest in restricted and
illiquid securities, repurchase agreements, and engage in forward commitment and
when-issued and delayed delivery transactions. The Fund may also invest in put
and call options, futures, and options on futures, in order to implement its
investment strategy and for hedging purposes. See "Portfolio Investments and
Strategies" for a discussion of these investments, as well as the potential
risks related to small capitalization stocks.

INVESTMENT LIMITATIONS. The Fund's investment limitations are discussed below
under "Diversification" and "Restricted and Illiquid Securities."

INTERNATIONAL EQUITY FUND

The investment objective of the International Equity Fund is to provide growth
of principal. The Fund pursues its investment objective through a flexible
policy of investing in a broad, diversified portfolio of stocks and debt
obligations of issuers located outside the United States. Under normal market
conditions, at least 65% of the Fund's total assets will be invested in
securities denominated in foreign currencies, including the European Currency
Unit (the "ECU"), of issuers located in at least three different nations outside
of the United States, and at least 65% of the Fund's total assets will be
invested in equity securities, i.e., common stocks and preferred stocks. The ECU
is a multinational currency unit which represents specified amounts of the
currencies of certain member states of the European Economic Community. The Fund
may also invest up to 35% of its total assets in debt securities.

In seeking to achieve the Fund's investment objective, the Adviser believes
there are three potential advantages to investing in foreign equity securities:

o the opportunity to invest in non-U.S. companies believed to possess
superior growth potential;

o the opportunity to invest in foreign nations with business and
economic policies different from those in the United States; and

o the opportunity to reduce portfolio volatility to the extent that
securities markets inside and outside the United States do not move in
harmony.

In managing the Fund's portfolio, the Adviser, through both fundamental research
and a value screen, will identify foreign equity securities that it determines
to be underpriced. The Adviser uses fundamental analysis to assess the world
economies and makes projections regarding the likely future trends in economic
activity. It will use these projections to determine whether current securities
prices are reflecting the level of anticipated economic activity that it
foresees. In selecting securities based on this analysis, the Adviser will
choose securities whose near-term growth and long-term growth prospects are not
being fully valued in the marketplace (in the opinion of the Adviser). The goal
is to create a diversified portfolio emphasizing the higher growth regions of
the world and investing in underpriced, quality growth companies within these
regions. The Fund will invest primarily in foreign industrialized countries
throughout the world that comprise the Morgan Stanley Capital International EAFE
(Europe, Australia, and the Far East) Index. There is no assurance that the
Adviser's attempts to pursue these approaches will result in benefits to the
Fund.

ACCEPTABLE INVESTMENTS. The securities in which the Fund invests include, but
are not limited to:

o common stocks, and securities convertible into common stocks, of
established foreign companies that appear to have growth potential and
are located in economically developed nations. The Fund may also invest
up to 20% of its total assets in common stocks of issuers located in
emerging market nations. See "Foreign Securities Considerations;"

o foreign preferred stocks, warrants and convertible securities. See
"Convertible Securities" in "Portfolio Investments and Strategies;"

o American Depositary Receipts ("ADRs"), which are receipts typically
issued by a United States bank or trust company that evidence ownership
of underlying securities issued by a foreign issuer. ADRs, Global
Depositary Receipts ("GDRs"), International Depositary Receipts ("IDRs")
and European Depositary Receipts ("EDRs"). EDRs, GDRs and IDRs are
typically issued by foreign banks or trust companies, although they also
may be issued by United States banks or trust companies, and evidence
ownership of underlying securities issued by either a foreign or a
United States corporation. See "Depositary Receipts" in "Portfolio
Investments and Strategies;"

(Y) fixed income securities of foreign companies or governments that are
rated investment grade or, if unrated, determined by the Adviser to be
of comparable quality. See "Foreign Government Securities" in "Portfolio
Investments and Strategies;"
o shares of other investment companies, as described in "Investing in
Securities of Other Investment Companies," in "Portfolio Investments and
Strategies;"

o U.S. Government Securities, Bank Instruments, and Commercial Paper.
See "Portfolio Investments and Strategies;" and

o other money market instruments.

In addition, the Fund may lend portfolio securities, invest in restricted and
illiquid securities, repurchase agreements, and engage in forward commitment and
when-issued and delayed delivery transactions. The Fund may also invest in
forward foreign currency exchange contracts, put and call options, futures and
options on futures, in order to implement its investment strategy and for
hedging purposes. See "Portfolio Investments and Strategies" for a discussion of
these investments, as well as the potential risks related to foreign securities
and investing in emerging market nations. In the event that any fixed income
security owned by the Fund is downgraded below investment grade, the Fund may
consider disposing of the security, but will not be required to do so.

INVESTMENT LIMITATIONS. The Fund's investment limitations are discussed below
under "Diversification" and "Restricted and Illiquid Securities."

PORTFOLIO INVESTMENTS AND STRATEGIES

DIVERSIFICATION

With respect to 75% of the value of its total assets, each Fund will not invest
more than 5% in securities of any one issuer other than cash, cash items or
securities issued or guaranteed by the government of the United States or its
agencies or instrumentalities and repurchase agreements collateralized by U.S.
Government Securities. No Fund will acquire more than 10% of the outstanding
voting securities of any one issuer. These limitations cannot be changed by a
Fund without shareholder approval.

RESTRICTED AND ILLIQUID SECURITIES

The Funds may invest in restricted securities. Restricted securities are any
securities in which a Fund may invest pursuant to its investment objective and
policies but which are subject to restriction on resale under federal securities
law. The Funds will limit investment in illiquid securities (including certain
restricted securities not determined by the Trustees to be liquid,
non-negotiable time deposits, over-the-counter options, and repurchase
agreements providing for settlement in more than seven days after notice) to 15%
of their respective net assets.

A Fund may invest in commercial paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933. Section
4(2) commercial paper is restricted as to disposition under federal securities
law, and is generally sold to institutional investors, such as one of the Funds,
which agrees to purchase the paper for investment purposes and not with a view
to public distribution. Any resale by the purchaser must be in an exempt
transaction. Section 4(2) commercial paper is normally resold to other
institutional investors through or with the assistance of the issuer or
investment dealers who make a market in Section 4(2) commercial paper, thus
providing liquidity. The Funds believe that Section 4(2) commercial paper and
certain other restricted securities, which meet the criteria for liquidity
established by the Trustees, are quite liquid. Therefore, the Funds intend to
treat these securities as liquid and not subject to the investment limitation
applicable to illiquid securities. In addition, because these securities are
liquid, the Funds will not subject such securities to the limitation otherwise
applicable to restricted securities.

REPURCHASE AGREEMENTS

The securities in which each Fund invests may be purchased pursuant to
repurchase agreements. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. Government
Securities or other securities to a Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. To the extent that the
original seller does not repurchase the securities from a Fund, that Fund could
receive less than the repurchase price on any sale of such securities. The Funds
will only enter into repurchase agreements with banks and other recognized
financial institutions, such as broker/dealers, which are deemed by the Adviser
to be creditworthy under guidelines established by the Trustees.

U.S. GOVERNMENT SECURITIES

The U.S Government Securities in which the Funds may invest include but are not
limited to: direct obligations of the U.S. Treasury (such as Treasury bills,
notes and bonds), and obligations issued by U.S. government agencies or
instrumentalities, including securities that are supported by the full faith and
credit of the United States (such as GNMA certificates); securities that are
supported by the right of the issuer to borrow from the U.S. Treasury (such as
securities of Federal Home Loan Banks); and securities that are supported by the
credit of the instrumentality (such as FNMA and FHLMC).

CORPORATE AND FOREIGN GOVERNMENT/AGENCY DEBT OBLIGATIONS

The Funds invest in corporate and foreign government/agency debt obligations,
including bonds, notes, medium term notes, and debentures, which may have
floating or fixed rates of interest. The prices of fixed income securities
fluctuate inversely to the direction of interest rates.

FLOATING RATE DEBT OBLIGATIONS. The Funds expect to invest in floating rate debt
obligations, including increasing rate securities. Floating rate securities are
generally offered at an initial interest rate which is at or above prevailing
market rates. The interest rate paid on these securities is then reset
periodically (commonly every 90 days) to an increment over some predetermined
interest rate index. Commonly utilized indices include the three-month Treasury
bill rate, the six-month Treasury bill rate, the one-month or three-month London
Interbank Offered Rate (LIBOR), the prime rate of a bank, the commercial paper
rates, or the longer-term rates on U.S. Treasury securities. Increasing rate
securities, which currently do not make up a significant share of the market in
corporate debt securities, are generally offered at an initial interest rate
which is at or above prevailing market rates. Interest rates are reset
periodically (most commonly every 90 days) at different levels on a
predetermined scale. These levels of interest are ordinarily set at
progressively higher increments over time. Some increasing rate securities may,
by agreement, revert to a fixed rate status. These securities may also contain
features which allow the issuer the option to convert the increasing rate of
interest to a fixed rate under such terms, conditions, and limitations as are
described in each issuer's prospectus.

FIXED RATE DEBT OBLIGATIONS. The Funds will also invest in fixed rate
securities, including fixed rate securities with short-term characteristics.
Fixed rate securities with short-term characteristics are long-term debt
obligations but are treated in the market as having short maturities because the
call features of the securities may make them callable within a short period of
time. A fixed rate security with short-term characteristics would include a
fixed income security priced close to call or redemption price or a fixed income
security approaching maturity, where the expectation of call or redemption is
high. Fixed rate securities tend to exhibit more price volatility during times
of rising or falling interest rates than securities with floating rates of
interest. This is because floating rate securities, as described above, behave
like short-term instruments in that the rate of interest they pay is subject to
periodic adjustments based on a designated interest rate index. Fixed rate
securities pay a fixed rate of interest and are more sensitive to fluctuating
interest rates. In periods of rising interest rates, the value of a fixed rate
security is likely to fall. Fixed rate securities with short-term
characteristics are not subject to the same price volatility as fixed rate
securities without such characteristics. Therefore, they behave more like
floating rate securities with respect to price volatility.

VARIABLE RATE DEMAND NOTES. Variable rate demand notes are long-term debt
instruments that have variable or floating interest rates and provide a Fund
with the right to tender the security for repurchase at its stated principal
amount plus accrued interest. Such securities typically bear interest at a rate
that is intended to cause the securities to trade at par. The interest rate may
float or be adjusted at regular intervals (ranging from daily to annually), and
is normally based on a published interest rate or interest rate index. Most
variable rate demand notes allow a Fund to demand the repurchase of the security
on not more than seven days prior notice. Other notes only permit a Fund to
tender the security at the time of each interest rate adjustment or at other
fixed intervals. See "Demand Features." The Municipal Bond Fund and Bond Fund
treat variable rate demand notes as maturing on the later of the date of the
next interest rate adjustment or the date on which the Fund may next tender the
security for repurchase.

FOREIGN GOVERNMENT SECURITIES. The foreign government securities in which the
Funds may invest generally consist of obligations supported by national, state
or provincial governments or similar political subdivisions. Foreign government
securities also include debt obligations of supranational entities, which
include international organizations designed or supported by governmental
entities to promote economic reconstruction or development, international
banking institutions and related government agencies. Examples of these include,
but are not limited to, the International Bank for Reconstruction and
Development (the World Bank), the Asian Development Bank, the European
Investment Bank and the Inter-American Development Bank.

Foreign government securities also include debt securities of
"quasi-governmental agencies." Debt securities of quasi-governmental agencies
are either debt securities issued by entities which are owned by a national,
state or equivalent government or are obligations of a political unit that are
not backed by the national government's full faith and credit and general taxing
powers. Further, foreign government securities include mortgage- related
securities issued or guaranteed by national, state or provincial governmental
instrumentalities, including quasi-governmental agencies.

DEMAND FEATURES

The Funds may acquire securities that are subject to puts and standby
commitments ("demand features") to purchase the securities at their principal
amount (usually with accrued interest) within a fixed period (usually seven
days) following a demand by the Fund. The demand feature may be issued by the
issuer of the underlying securities, a dealer in the securities, or by another
third party, and may not be transferred separately from the underlying security.
The Funds use these arrangements to provide the Fund with liquidity and not to
protect against changes in the market value of the underlying securities. The
bankruptcy, receivership, or default by the issuer of the demand feature, or a
default on the underlying security or other event that terminates the demand
feature before its exercise, will adversely affect the liquidity of the
underlying security. Demand features that are exercisable even after a payment
default on the underlying security may be treated as a form of credit
enhancement.

PARTICIPATION INTERESTS

The Municipal Bond Fund may purchase interests in municipal securities from
financial institutions such as commercial and investment banks, savings
associations, and insurance companies. These interests may take the form of
participations, beneficial interests in a trust, partnership interests or any
other form of indirect ownership that allows the Municipal Bond Fund to treat
the income from the investment as exempt from federal income tax. The Municipal
Bond Fund invests in these participation interests in order to obtain credit
enhancement or demand features that would not be available through direct
ownership of the underlying municipal securities.

MUNICIPAL LEASES

Municipal leases in which the Municipal Bond Fund and Bond Fund invest are
obligations issued by state and local governments or authorities to finance the
acquisition of equipment and facilities. They may take the form of a lease, an
installment purchase contract, a conditional sales contract, or a participation
interest in any of the above. Lease obligations may be subject to periodic
appropriation. Municipal leases are subject to certain specific risks in the
event of default or failure of appropriation.

CREDIT ENHANCEMENT

Certain of the Municipal Bond Fund's and Bond Fund's acceptable investments may
be credit-enhanced by a guaranty, letter of credit, or insurance. Any
bankruptcy, receivership, default, or change in the credit quality of the party
providing the credit enhancement will adversely affect the quality and
marketability of the underlying security and could cause losses to the Fund and
affect its share price.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

The Funds may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which a Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete the transaction may cause a Fund to miss a price or yield considered to
be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may vary
from the purchase prices. Accordingly, a Fund may pay more or less than the
market value of the securities on the settlement date.

FORWARD COMMITMENTS

Forward commitments are contracts to purchase securities for a fixed price at a
date beyond customary settlement time. The Funds may enter into these contracts
if liquid securities in amounts sufficient to meet the purchase price (but not
to exceed, in the aggregate, 10% of its assets) are segregated on a Fund's
records at the trade date and maintained until the transaction has been settled.
Risk is involved if the value of the security declines before settlement.
Although a Fund enters into forward commitments with the intention of acquiring
the securities, it may dispose of the commitments prior to settlement and
realize short-term profits or losses.

LENDING OF PORTFOLIO SECURITIES

In order to generate additional income, each Fund may lend portfolio securities
on a short-term or long-term basis, or both, up to one-third the value of its
total assets, to broker/dealers, banks, or other institutional borrowers of
securities. A Fund will only enter into loan arrangements with broker/dealers,
banks, or other institutions which the Adviser has determined are creditworthy
under guidelines established by the Trustees and will receive collateral in the
form of cash or U.S. Government Securities equal to at least 100% of the value
of the securities loaned.

There is the risk that when lending portfolio securities, the securities may not
be available to a Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities files for bankruptcy or become insolvent,
disposition of the securities may be delayed pending court action.

CONVERTIBLE SECURITIES

The Funds(except Municipal Bond Fund) may invest in convertible securities
rated, at the time of purchase, BBB or better by S&P or Fitch or Baa by Moody's,
or, if unrated, are of comparable quality as determined by the Adviser. (If a
security's rating is reduced below the required minimum after a Fund has
purchased it, the Fund may consider disposing of the security, but will not be
required to do so.)

Convertible securities are fixed income securities which may be exchanged or
converted into a predetermined number of the issuer's underlying common stock at
the option of the holder during a specified time period. Convertible securities
may take the form of convertible bonds, convertible preferred stock or
debentures, units consisting of "usable" bonds and warrants or a combination of
the features of several of these securities. The investment characteristics of
each convertible security vary widely, which allows convertible securities to be
employed for a variety of different investment strategies. In selecting a
convertible security, the Adviser evaluates the investment characteristics of
the convertible security as a fixed income investment, and the investment
potential of the underlying security for capital appreciation.

ASSET-BACKED SECURITIES

The Bond Fund may invest in mortgage-backed and asset-backed securities.
Asset-backed securities are created by the grouping of certain governmental,
government-related and private loans, receivables and other lender assets into
pools. Interests in these pools are sold as individual securities. These
securities differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal paid at
maturity or specified call dates. Asset-backed securities, however, provide
periodic payments which generally consist of both interest and principal
payments. The estimated life of an asset-backed security and the average
maturity of a portfolio including such assets vary with the prepayment
experience with respect to the underlying debt instruments. The credit
characteristics of asset-backed securities also differ in a number of respects
from those of traditional debt securities.

The credit quality of most asset-backed securities depends primarily upon the
credit quality of the assets underlying such securities, how well the entity
issuing the securities is insulated from the credit risk of the originator or
any other affiliated entities, and the amount and quality of any credit support
provided to such securities.

NON-MORTGAGE RELATED ASSET-BACKED SECURITIES. Non-mortgage related asset-backed
securities include, but are not limited to, interests in pools of receivables,
such as motor vehicle installment purchase obligations and credit card
receivables. These securities may be in the form of pass-through instruments or
asset-backed bonds. The securities, all of which are issued by non-governmental
entities and carry no direct or indirect government guarantee, are structurally
similar to CMOs and mortgage pass-through securities, which are described below.

MORTGAGE-RELATED ASSET-BACKED SECURITIES. The Bond Fund may invest in various
mortgage-related asset-backed securities. These types of investments may include
ARMS and CMOs (as such terms are defined below), or other securities
collateralized by or representing an interest in real estate mortgages
(collectively, "mortgage securities"). The mortgage securities may have interest
rates which reset at least annually and generally will be issued or guaranteed
by government agencies. Mortgage securities come in a variety of forms, the
simplest of which are pass-through certificates. An issuer of pass-through
certificates gathers monthly payments from an underlying pool of mortgages.
Then, the issuer deducts its fees and expenses and passes the balance of the
payments onto the certificate holders once a month. Holders of pass-through
certificates receive a pro rata share of all payments and pre-payments from the
underlying mortgages.

ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS"). ARMS are pass-through mortgage
securities with adjustable, rather than fixed, interest rates. The ARMS in which
the Bond Fund may invest are issued by the Government National Mortgage
Association ("GNMA"), the Federal National Mortgage Association ("FNMA"), and
the Federal Home Loan Mortgage Corporation ("FHLMC") and are actively traded.
The underlying mortgages that collateralize ARMS issued by GNMA are fully
guaranteed by the Federal Housing Administration or Veterans Administration,
while mortgages that collateralize ARMS issued by FHLMC or FNMA are typically
conventional residential mortgages conforming to strict underwriting, size and
maturity constraints.

Unlike conventional bonds, ARMS pay back principal over the life of the
securities rather than at maturity. Thus, a holder of the ARMS would receive
monthly scheduled payments of principal and interest, and may receive
unscheduled principal payments representing prepayments on the underlying
mortgages. At the time that a holder of the ARMS reinvests the payments and any
unscheduled prepayments of principal that it receives, the holder may receive a
rate of interest which is actually lower than the rate of interest paid on the
existing ARMS. As a consequence, ARMS may be a less effective means of "locking
in" long-term interest rates than other types of U.S. Government Securities.

Like other U.S. Government Securities, the market value of ARMS will generally
vary inversely with changes in market interest rates. Thus, the market value of
ARMS generally declines when interest rates rise and generally rises when
interest rates decline.

While ARMS generally entail less risk of a decline during periods of rapidly
rising rates, ARMS may also have less potential for capital appreciation than
other similar investments (e.g., investments with comparable maturities) because
as interest rates decline, the likelihood increases that mortgages will be
prepaid. Furthermore, if ARMS are purchased at a premium, mortgage foreclosures
and unscheduled principal payments may result in some loss of a holder's
principal investment to the extent of the premium paid. Conversely, if ARMS are
purchased at a discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase current and total returns and
would accelerate the recognition of income, which would be taxed as ordinary
income when distributed to shareholders.

COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). CMOs are a form of asset-backed
security issued by single-purpose, stand-alone finance subsidiaries or trusts of
financial institutions, government agencies, investment banks, or companies
related to the construction industry. CMOs include interests in real estate
mortgage investment conduits.

The Bond Fund will invest only in CMOs which are rated BBB or Baa or higher by
S&P or Moody's and which as a general matter may be: (a) collateralized by pools
of mortgages in which each mortgage is guaranteed as to payment of principal and
interest by an agency or instrumentality of the U.S. government; (b)
collateralized by pools of mortgages in which payment of principal and interest
is guaranteed by the issuer and such guarantee is collateralized by U.S.
Government Securities; or (c) securities in which the proceeds of the issuance
are invested in mortgage securities and payment of the principal and interest
are supported by the credit of any agency or instrumentality of the U.S.
government.

CONSIDERATIONS FOR MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Mortgage-backed
and asset-backed securities generally pay back principal and interest over the
life of the security. At the time the Bond Fund reinvests the payments and any
unscheduled prepayments of principal received, the Fund may receive a rate of
interest which is actually lower than the rate of interest paid on these
securities ("prepayment risks"). Mortgage-backed and asset-backed securities are
subject to higher prepayment risks than most other types of debt instruments
with prepayment risks because the underlying mortgage loans or the collateral
supporting asset-backed securities may be prepaid without penalty or premium.
Prepayment risks on mortgage-backed securities are also affected by other
factors, such as the frequency with which people sell their homes or elect to
make unscheduled payments on their mortgages. Although asset-backed securities
generally are less likely to experience substantial prepayments than are
mortgage-backed securities, certain of the factors that affect the rate of
prepayments on mortgage-backed securities also affect the prepayments on
asset-backed securities.

Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
motor vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state, and
is then reregistered because the owner and obligor moves to another state, such
reregistration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and the technical requirements under state laws, the trustee
for the holders of asset-backed securities backed by automobile receivables may
not have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.

REAL ESTATE INVESTMENT TRUSTS

The Large Capitalization Growth Fund and Large Capitalization Growth and Income
Fund may purchase interests in equity, mortgage, and hybrid real estate
investment trusts ("REITs"). A real estate investment trust manages a portfolio
of real estate to earn profits. REITs make investments in a diverse array of
real estate from shopping centers and office buildings to apartment complexes
and hotels. Equity REITs take equity positions in real estate, receiving income
from rents and capital gains as buildings are sold at a profit. Mortgage REITs
lend money to building developers and receive interest income. Hybrid REITs have
characteristics of and may have risks associated with both equity and mortgage
REITs. Equity and mortgage REITs are dependent upon management skill and are not
diversified. Therefore, they are subject to the risk of financing single
projects. REITs are also subject to heavy cash flow dependency, defaults by
borrowers, and self-liquidation. Additionally, equity REITs may be affected by
any changes in the value of the underlying property owned by the trusts, and
mortgage REITs may be affected by the quality of any credit extended. The
Adviser seeks to mitigate these risks by selecting REITs diversified by sector
and geographic location.

DEPOSITARY RECEIPTS

The Large Capitalization Growth Fund, the Large Capitalization Growth and Income
Fund, the Small Capitalization Fund and International Equity Fund may invest in
foreign issuers by purchasing sponsored or unsponsored ADRs, and the
International Equity Fund may also purchase sponsored and unsponsored GDRs, IDRs
and EDRs. ADRs evidence ownership of underlying securities issued by a foreign
corporation, and are generally issued by a United States bank or trust company.
EDRs, GDRs and IDRs are typically issued by foreign banks or trust companies,
although they also may be issued by United States banks or trust companies, and
evidence ownership of underlying securities issued by either a foreign or a
United States corporation. ADRs, EDRs, GDRs and IDRs are collectively known as
"Depositary Receipts." Generally, Depositary Receipts in registered form are
designed for use in the United States securities market and Depositary Receipts
in bearer form are designed for use in securities markets outside the United
States. Depositary Receipts may not necessarily be denominated in the same
currency as the underlying securities into which they may be converted.
Ownership of unsponsored Depositary Receipts may not entitle the Small
Capitalization Fund and International Equity Fund to financial or other reports
from the issuer of the underlying security, to which they would be entitled as
the owner of sponsored Depositary Receipts.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

The Funds may invest in the securities of other investment companies, but they
will not own more than 3% of the total outstanding voting stock of any
investment company, invest more than 5% of their respective total assets in any
one investment company, or invest more than 10% of their respective total assets
in investment companies in general unless permitted to do so by action of the
SEC. It should be noted that investment companies incur certain expenses, such
as management fees, and, therefore, any investment by the Funds in shares of
other investment companies may be subject to such duplicate expenses.

Due to restrictions on direct investment by foreign entities in certain foreign
nations, investment in other investment companies may be the most practical or
only manner in which the Funds (except the Municipal Bond Fund) can invest in
securities markets of certain foreign countries. Such investments may involve
the payment of substantial premiums above the net asset value of such issuers'
portfolio securities, and may be constrained by market availability. There can
be no assurance that investment companies that invest in certain foreign nations
will be available. The Funds will invest in such companies when, in the
Adviser's judgment, the potential benefits of such investment justify the
payment of any applicable premium or sales charge.

RISK FACTORS

BOND INVESTMENT CONSIDERATIONS. The value of bonds will generally fluctuate
inversely to the direction of interest rates. Changes in the credit quality of
the bond's issuer, or in the rating assigned to the bond, will also affect its
price. The amount of this fluctuation is dependent upon the quality and maturity
of the bonds in the Fund's portfolio as well as on market conditions. Generally
speaking, the lower quality, longer-term bonds have greater fluctuation in value
than high quality, shorter-term bonds. If a bond's rating falls below the
acceptable level specified for a particular Fund after the Fund has purchased
it, the Fund is not required to drop the debt security from its portfolio, but
will consider appropriate action.

Bond prices are interest rate sensitive, which means that their value varies
inversely with market interest rates. Thus, if market interest rates have
increased from the time a bond was purchased, the bond, if sold, might be sold
at a price less than its cost. Similarly, if market interest rates have declined
from the time a bond was purchased, the bond, if sold, might be sold at a price
greater than its cost. (In either instance, if the bond was held to maturity, no
loss or gain normally would be realized as a result of interim market
fluctuations.)

Prices of lower grade bonds also fluctuate with changes in the perceived quality
of the credit of their issuers. In addition, bonds rated "BBB" by S&P or "Baa"
by Moody's have speculative characteristics. Changes in economic conditions or
other circumstances are more likely to lead to weakened capacity to make
principal and interest payments than higher rated bonds. Bonds rated below "BBB"
or "Baa" are not "investment grade" and either have speculative characteristics
or are predominantly speculative with respect to capacity to pay interest and
repay principal in accordance with their terms. Bonds that are determined not to
be investment grade are typically subject to greater market fluctuations and
securities in the lowest rating category may be in danger of loss of income and
principal due to an issuer's default. To a greater extent than investment grade
securities, the value of lower-rated securities tends to reflect short-term
corporate, economic, and market developments , as well as investor perceptions
of the issuer's credit quality. In addition, lower-rated securities may be more
difficult to dispose of or to value than investment grade securities.

When the Adviser selects debt securities for a Fund, it will consider the
ratings assigned to various debt securities. In making its investment decisions,
the Adviser will also consider many factors other than current yield, including
the preservation of capital, the potential for realizing capital appreciation,
maturity, and yield to maturity. The Adviser will adjust investments in
particular securities or in types of debt securities in response to its
appraisal of changing economic conditions and trends. The Funds may sell one
security and purchase another security of comparable quality and maturity to
take advantage of what the Adviser believes to be short-term differentials in
market values or yield disparities.

MUNICIPAL BOND CONSIDERATIONS. A large portion of the Municipal Bond Fund's
portfolio may be invested in bonds whose interest payments are from revenues of
similar projects (such as housing or hospitals) or where issuers share the same
geographic location. As a result, the Fund may be more susceptible to similar
economic, political or regulatory developments than would a portfolio of bonds
with a greater geographic and project variety. This susceptibility may result in
greater fluctuations in share price.

Many issuers of municipal bonds which have characteristics of rated bonds choose
not to have their obligations rated. Unrated bonds may carry a greater risk and
a higher yield than rated securities. Although unrated bonds are not necessarily
of lower quality, the market for them may not be as broad as that for rated
bonds since many investors rely solely on the major rating agencies for credit
appraisal.

Further, the lower rated or unrated municipal bonds which the Funds may purchase
are frequently traded only in markets where the number of potential purchasers
and sellers is limited. This consideration may have the effect of limiting the
availability of such bonds for the Fund to purchase and may also have the effect
of limiting the ability of the Fund to sell such bonds at their fair value
either to meet redemption requests or to respond to changes in the economy or
the financial markets.

EQUITY INVESTMENT CONSIDERATIONS. With respect to the Large Capitalization
Growth Fund, Large Capitalization Growth and Income Fund, Small Capitalization
Fund, and International Equity Fund, as with other mutual funds that invest
primarily in equity securities, the Funds are subject to market risks. Since
equity markets tend to be cyclical, the possibility exists that the value of
common stocks could decline over short or even extended periods of time.

Furthermore, because the Small Capitalization Fund invests primarily in small
capitalization stocks, there are some additional risk factors associated with
investments in this Fund. Small capitalization stocks have historically been
more volatile in price than larger capitalization stocks, such as those included
in the S&P 500. This is because, among other things, smaller companies have a
lower degree of liquidity in the equity market and tend to have a greater
sensitivity to changing economic conditions. In addition to exhibiting greater
volatility, these stocks may, to some degree, fluctuate independently of the
stocks of large companies. That is, the stocks of small capitalization companies
may decline in price as the price of large company stocks rise, or vice versa.
Therefore, investors should expect that there will be periods of time when the
Fund will exhibit greater volatility than broad stock market indices such as the
S&P 500 Index.

FOREIGN SECURITIES CONSIDERATIONS. Investing in foreign securities carries
substantial risks in addition to those associated with investments in domestic
securities. The risks associated with investments in foreign securities relate
to political and economic developments abroad, as well as those that result from
the differences between the regulation of domestic securities and issuers and
foreign securities and issuers. In an attempt to reduce some of these risks, the
Funds that invest in foreign securities will attempt to distribute their
investments broadly among foreign nations. The securities of at least three
different foreign nations will always be represented in the portfolio of the
International Equity Fund.

The economies of foreign countries may differ from the U.S. economy in such
respects as growth of gross national product, the rate of inflation, currency
depreciation, capital reinvestment, resource self-sufficiency, and balance of
payments position. Further, the economies of emerging market nations generally
are heavily dependent on international trade and, accordingly, have been, and
may continue to be, adversely affected by trade barriers, exchange controls,
managed adjustments in relative currency values, and other protectionist
measures imposed or negotiated by the countries with which they trade. These
economies also have been, and may continue to be, adversely affected by economic
conditions in the countries with which they trade. The usual risks of investing
in foreign securities of developed nations are magnified when investing in
emerging market nations. As a general matter, emerging market investments are
more volatile and exhibit greater and more rapid fluctuations in value. The
International Equity Fund may invest up to 20% of its total assets in issuers
located in emerging market nations, and this component of the Fund's investment
portfolios should be considered speculative.

With reference to investment in foreign securities of both developed and
emerging market nations, prior governmental approval for such investments may be
required under certain circumstances, and the extent of foreign investment in
certain debt or equity securities and domestic companies may be subject to
limitation. Foreign ownership limitations also may be imposed by the charters of
individual companies to prevent, among other concerns, violation of foreign
investment limitations.

Repatriation of investment income, capital, and the proceeds of sales by foreign
investors may require governmental registration and/or approval in some
countries. A Fund could be adversely affected by delays in, or a refusal to
grant, any required governmental registration or approval for such repatriation.
Any investment subject to such repatriation controls will be considered illiquid
by a Fund if it appears reasonably likely that this process will take more than
seven days.

With respect to any foreign nation, there is the possibility of currency
fluctuations, nationalization, expropriation or confiscatory taxation, political
changes, governmental regulation, social instability or diplomatic developments
(including war) which could affect adversely the economies of such countries or
the value of the Funds' investments in those countries. In addition, because of
differences in the legal systems, it may be more difficult to obtain and enforce
a contractual obligation or court judgment in a court outside of the U.S.

Brokerage commissions, custodial services, and other costs relating to
investment may be more expensive than in the United States. Foreign markets may
have different clearance and settlement procedures and in certain markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
The inability of a Fund to make intended security purchases due to settlement
problems could cause the Funds to miss attractive investment opportunities.
Inability to dispose of a portfolio security due to settlement problems could
result either in losses to a Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.

Additional differences exist between investing in foreign and domestic
securities. Examples of such differences include:

o less publicly available information about foreign issuers;

o credit risks associated with certain foreign governments;

o the lack of uniform accounting, auditing, and financial reporting
standards and practices or regulatory requirements comparable to those
applicable to U.S. companies;

o less readily available market quotations on foreign issues;

o differences in government regulation and supervision of foreign stock
exchanges, brokers, listed companies, and banks;

o the limited size of many foreign securities markets and limited trading
volume in issuers, compared to the volume of trading in U.S. securities,
could cause prices to be erratic for reasons apart from factors that
affect the quality of securities;

o the likelihood that securities of foreign issuers may be less liquid or
more volatile;

o unreliable mail service between countries;

o political or financial changes which adversely affect investments in
some nations;

o increased risk of delayed settlements of portfolio transactions or loss
of certificates for portfolio securities;

o certain markets may require payment for securities before delivery;

o religious and ethnic instability; and

o certain national policies which may limit the use or transfer of Fund
assets, or may restrict the Funds' investment opportunities, including
restrictions on investment in issuers or industries deemed sensitive to
national interests.

U.S. GOVERNMENT POLICIES. In the past, U.S. government policies have
discouraged or restricted certain investments abroad by investors similar to the
Funds. Investors are advised that when such policies are instituted, the Funds
will abide by them.

CURRENCY RISKS. Because debt and equity securities purchased by the Bond Fund
and International Equity Fund may be denominated in currencies other than the
U.S. dollar, changes in foreign currency exchange rates will affect the Funds'
net asset values; the value of interest earned; gains and losses realized on the
sale of securities; and net investment income and capital gains, if any, to be
distributed to shareholders by the Funds. If the value of a foreign currency
rises against the U.S. dollar, the value of Fund assets denominated in that
currency will increase; correspondingly, if the value of a foreign currency
declines against the U.S. dollar, the value of Fund assets denominated in that
currency will decrease. Under the United States Internal Revenue Code, as
amended (the "Code"), the Funds are required to separately account for the
foreign currency component of gains or losses, which will usually be viewed
under the Code as items of ordinary and distributable income or loss, thus
affecting the Funds' distributable income (see "Federal Income Tax" in this
prospectus).

The exchange rates between the U.S. dollar and foreign currencies are a function
of such factors as supply and demand in the currency exchange markets,
international balances of payments, governmental interpretation, speculation and
other economic and political conditions. Although the Bond Fund and
International Equity Fund value their assets daily in U.S. dollars, the Funds
will not convert their holdings of foreign currencies to U.S. dollars daily.
When a Fund converts its holdings to another currency, it may incur conversion
costs. Foreign exchange dealers may realize a profit on the difference between
the price at which they buy and sell currencies.

The Funds will engage in foreign currency exchange transactions in connection
with their investments in foreign securities. The Funds will conduct their
foreign currency exchange transactions either on a spot (i.e. cash) basis at the
spot rate prevailing in the foreign currency exchange market, or through forward
contracts to purchase or sell foreign currencies.

The Adviser believes that active management of currency risks through a variety
of hedging vehicles and strategies (as described further below) can considerably
limit the risk of capital loss through movements in the foreign exchange
markets, such as those described above. The Adviser will not engage in currency
exchange transactions for speculative purposes.

ALLOCATION. The allocation of each Fund's respective assets in a particular
market and currency will be based on a fundamental assessment of the economic
strength of each relevant country combined with considerations of credit quality
and currency and interest rate trends. These factors are reviewed on a regular
basis by the Adviser in order to derive specific interest rate and currency
forecasts, which are quantified in terms of total return. The market and
currency allocation of the Funds will vary to achieve an optimal mix of
investments in pursuit of the Funds' investment objective.

HEDGING VEHICLES

As noted in "Investment Objective of Each Fund," the Funds may use the following
hedging vehicles in an attempt to manage the currency and interest rate risks
described above:

o forward foreign currency exchange contracts;

o options contracts; and

o futures contracts.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specified amount of a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are traded directly between currency traders
(usually large commercial banks) and their customers. When a Fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may want to establish the U.S. dollar cost or proceeds, as the case
may be. By entering into a forward contract in U.S. dollars for the purchase or
sale of the amount of foreign currency involved in an underlying security
transaction, a Fund is able to protect itself against a possible loss between
trade and settlement dates resulting from an adverse change in the relationship
between the U.S. dollar and such foreign currency. However, this tends to limit
potential gains which might result from a positive change in such currency
relationships.

There is no limitation as to the percentage of a Fund's assets that may be
committed under forward foreign currency exchange contracts. The Funds do not
enter into such forward contracts or maintain a net exposure in such contracts
where the Funds would be obligated to deliver an amount of foreign currency in
excess of the value of the Funds' portfolio securities or other assets
denominated in that currency or, in the case of a "cross-hedge" (see "Hedging
Strategies" below), denominated in a currency or currencies that the Adviser
believes will reflect a high degree of correlation with the currency with regard
to price movements. The Funds generally do not enter into a forward foreign
currency exchange contract with a term longer than one year.

OPTIONS. The Funds may deal in options on foreign currencies, foreign currency
futures, securities, and securities indices, which options may be listed for
trading on a national securities exchange or traded over-the-counter. (The Large
Capitalization Growth Fund, Large Capitalization Growth and Income Fund, and the
Small Capitalization Fund will deal solely in options on securities, in which
the Funds can invest directly.) The Funds may write covered call options and
secured put options on up to 25% of their respective net assets and may purchase
put and call options provided that no more than 5% of the fair market value of
their respective net assets may be invested in premiums on such options.

A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying currency, security or other asset at the
exercise price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying currency,
security or other asset at the exercise price during the option period. The
writer of a covered call owns assets that are acceptable for escrow and the
writer of a secured put invests an amount not less than the exercise price in
eligible assets to the extent that it is obligated as a writer. If a call
written by a Fund is exercised, the Fund foregoes any possible profit from an
increase in the market price of the underlying asset over the exercise price
plus the premium received. In writing puts, there is a risk that the Funds may
be required to take delivery of the underlying asset at a disadvantageous price.

Over-the-counter options ("OTC options") differ from exchange traded options in
several respects. They are transacted directly with dealers and not with a
clearing corporation, and there is a risk of non-performance by the dealer as a
result of the insolvency of such dealer or otherwise, in which event a Fund may
experience material losses. However, in writing options the premium is paid in
advance by the dealer of OTC options. While OTC options may not be continuously
liquid, they are available for a greater variety of assets, and a wider range of
expiration dates and exercise prices, than are exchange-traded options.

FUTURES. Futures contracts are contracts that obligate the long or short holder
to take or make delivery of a specified quantity of an asset, such as a
currency, a security, or the cash value of a securities index at a specified
future date at a specified price. The Funds may engage in futures transactions,
but will not participate in futures contracts if the sum of their initial margin
deposits on open contracts will exceed 5% of the fair market value of each
Fund's respective net assets.

HEDGING STRATEGIES

CURRENCY HEDGING. When the Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell an amount of that foreign currency for a
fixed U.S. dollar amount approximating the value of some or all of a Fund's
portfolio securities denominated in such foreign currency (i.e., "hedge"). A
Fund may, as an alternative, enter into a forward contract to sell a different
foreign currency for a fixed U.S. dollar amount where the Adviser believes that
the U.S. dollar value of the currency to be sold pursuant to the forward
contract will fall whenever there is a decline in the U.S. dollar value of the
currency in which portfolio securities of the Fund are denominated (i.e.,
"cross-hedge"). A cross-hedge can be achieved not only by using a "proxy"
currency in which Fund securities are denominated, but also by using the
Canadian Dollar as a "proxy" currency for the U.S. dollar. This strategy may be
beneficial because the level of divergence in the exchange rates of U.S. and
Canadian currencies has historically tended to be relatively small.

INTEREST RATE HEDGING. The Municipal Bond Fund, the Bond Fund and the
International Equity Fund may engage in futures transactions and may use options
in an attempt to hedge against the effects of fluctuations in interest rates and
other market conditions.

GENERAL. The Funds might not employ any of the techniques or strategies
described above, and there can be no assurance that any technique or strategy
(or combination thereof) used will succeed. The use of these techniques and
strategies involves certain risks, including:

o dependence on the Adviser's ability to predict movements in the prices
of assets being hedged or movements in interest rates and currency
markets;

o imperfect correlation between the hedging instruments and the
securities or currencies being hedged;

o the fact that skills needed to use these instruments are different from
those needed to select the Funds' securities;

o the possible absence of a liquid secondary market for any particular
instrument at any particular time;

o possible impediments to effective portfolio management or the ability to
meet redemption requests or other short-term obligations because of the
percentage of the Funds' assets segregated to cover its obligations; and

o the possible need to defer closing out hedged positions to avoid adverse
tax consequences.

New futures contracts, options thereon and other financial products and risk
management techniques continue to be developed. A Fund may use these investments
and techniques to the extent consistent with its investment objective and
regulatory and federal tax considerations.

DERIVATIVE CONTRACTS AND SECURITIES

The term "derivative" has traditionally been applied to certain contracts
(including futures, forward, option and swap contracts) that "derive" their
value from changes in the value of an underlying security, currency, commodity
or index. Certain types of securities that incorporate the performance
characteristics of these contracts are also referred to as "derivatives." The
term has also been applied to securities "derived" from the cash flows from
underlying securities, mortgages or other obligations.

Derivative contracts and securities can be used to reduce or increase the
volatility of an investment portfolio's total performance. While the response of
certain derivative contracts and securities to market changes may differ from
traditional investments, such as stock and bonds, derivatives do not necessarily
present greater market risks than traditional investments. The Funds will only
use derivative contracts for the purposes disclosed in the applicable prospectus
sections above. To the extent that a Fund invests in securities that could be
characterized as derivatives, such as futures, asset-backed and mortgage-backed
securities, it will only do so in a manner consistent with its investment
objective, policies and limitations.

DURATION

With reference to the Municipal Bond Fund and Bond Fund, duration is a measure
of a debt security's price sensitivity expressed in years and is a measure of
the interest rate risk of a debt security, taking into consideration that there
may be cash flows before the maturity date and that the cash flows must be
considered in terms of their present value. Duration is similar to, but more
precise than, average life. It is a measure of the number of years until the
average dollar--in present value terms--is received from coupon and principal
payments. As such, it is one measure of systematic risk. Duration is computed by
multiplying each principal and interest payment by its present value, summing
these products, and dividing the sum by the full price of the debt security. A
more complete description of this calculation is available upon request from the
Trust.

Duration measures the magnitude of the change in the price of a debt security
relative to a given change in the market rate of interest. The duration of a
debt security depends primarily upon the security's coupon rate, maturity date,
and level of market interest rates for similar debt securities. There will be no
limit on the duration of any one individual issue purchased by the Municipal
Bond Fund and Bond Fund, except that the purchase of an issue that has no final
maturity date (other than preferred stock) shall not be permitted. Unless
otherwise specified, the weighted average duration of the Funds shall not exceed
ten years and shall not be less than one year, but will normally fall within a
range of three to seven years. The Adviser regards that range as being
consistent with a prudent attitude towards risk. Shifts outside this range would
be made only under unusual circumstances.

PORTFOLIO TURNOVER

The Large Capitalization Growth and Income Fund's approach to portfolio turnover
has been discussed above. The following discussion relates to the other Funds.

Although the Funds do not intend to invest for the purpose of seeking short-term
profits, securities in their portfolios will be sold whenever the Adviser
believes it is appropriate to do so in light of each Fund's investment
objective, without regard to the length of time a particular security may have
been held. The rate of portfolio turnover for each Fund may exceed that of
certain other mutual funds with the same investment objective. A higher rate of
portfolio turnover involves correspondingly greater transaction expenses which
must be borne directly by a Fund and, thus, indirectly by its shareholders. In
addition, a high rate of portfolio turnover may result in the realization of
larger amounts of capital gains which, when distributed to a Fund's
shareholders, are taxable to them. (Further information is contained in the
Trust's Statement of Additional Information under the sections "Brokerage
Transactions" and "Tax Status.") Nevertheless, transactions for each Fund's
portfolio will be based only upon investment considerations and will not be
limited by any other considerations when the Adviser deems it appropriate to
make changes in a Fund's portfolio. A portfolio turnover rate exceeding 100% is
considered to be high.

FTI FUNDS INFORMATION

MANAGEMENT OF FTI FUNDS

BOARD OF TRUSTEES. The Trust is managed by a Board of Trustees. The Trustees are
responsible for managing the business affairs of the Trust and for exercising
all the Trust's powers except those reserved for the shareholders.

INVESTMENT ADVISER. Pursuant to an investment advisory contract with the Trust,
investment decisions for the Trust are made by Fiduciary International, Inc.,
the Trust's investment adviser (the "Adviser"), subject to direction by the
Trustees. The Adviser continually conducts investment research and supervision
for each Fund and is responsible for the purchase or sale of portfolio
instruments, for which it receives an annual fee from the assets of each Fund.

ADVISORY FEES. The Adviser receives an annual investment advisory fee equal
to0.50% of each of Municipal Bond Fund's and Bond Fund's respective average
daily net assets, 0.75% of each of Large Capitalization Growth Fund's and Large
Capitalization Growth and Income Fund's respective daily net assets, and 1.00%
of each of the Small Capitalization and International Equity Fund's respective
average daily net assets. The advisory fees paid by the Small Capitalization
Fund and International Equity Fund, while higher than the advisory fees paid by
other mutual funds in general, are comparable to fees paid by other mutual funds
with similar objectives and policies to those Funds. The investment advisory
contract provides for the voluntary waiver of expenses by the Adviser from time
to time. The Adviser can terminate this voluntary waiver of expenses at any time
with respect to a Fund at its sole discretion.

ADVISER'S BACKGROUND. Fiduciary International, Inc. ("FII") is a New York
corporation that was organized in 1982 as Fir Tree Advisers, Inc. FII is a
wholly-owned subsidiary of Fiduciary Investment Corporation, which, in turn, is
a wholly-owned subsidiary of Fiduciary Trust Company International ("FTCI").
FTCI has more than 60 years of investment experience, including more than 30
years experience in managing pooled investment vehicles which invest in the
international markets. FII is an indirect subsidiary of FTCI. FTCI is a New York
state-chartered bank specializing in investment management activities. As of
November 30, 1998, FTCI had total assets under management of approximately $42.7
billion. These assets included investments managed for individuals and
institutional clients, including employee benefit plans of corporations, public
retirement systems, unions, endowments, foundations and others.

FII is a registered investment adviser under the Investment Advisers Act of
1940. The Adviser and its officers, affiliates, and employees may act as
investment managers for parties other than the Trust, including other investment
companies.

Ronald Sanchez and Jon S. Mastrandrea have been primarily responsible for
the day-to-day investment management of the Municipal Bond Fund since its
inception. Mr. Sanchez, Certified Financial Analyst and Senior Vice President of
FTCI, is a manager of tax-exempt fixed income portfolios. Mr. Sanchez received a
B.S. degree from C.W. Post College. He joined FTCI in 1993 with six years prior
experience as a fixed income portfolio manager with Public Service Mutual
Insurance Company. Mr. Mastrandrea, Vice President of FTCI, received a B.A.
degree from State University of New York at Binghamton, attended Brunel
University, London, England, and received an M.B.A. from the Stern School of
Business, New York University. He joined FTCI in 1998 with fifteen years
experience at CIBC Oppenheimer Corporation, Donaldson, Lufkin & Jenrette, Smith
Barney, and Citibank, N.A..

Michael Rohwetter and Michael Materasso have been primarily responsible for
the day-to-day investment management of the Bond Fund since its inception. Mr.
Rohwetter, Senior Vice President of FTCI, is a manager of institutional domestic
fixed income portfolios. Mr. Rohwetter received a B.B.A. degree from Pace
University. He joined FTCI in 1983 from the New York Mercantile Exchange. Mr.
Materasso, Vice President of FTCI, is head of the Domestic Fixed Income Group.
He is a member of the Global Investment Committee and Investment Policy
Committee. Mr. Materasso received a B.A. degree from Baruch College. He joined
FTCI in 1988 with sixteen years experience at Chase Manhattan Bank, Sterling
National and Glickenhaus & Co.

Thomas Dempsey, Coleen Barbeau, and John Hartz have been primarily
responsible for the day-to-day investment management of the Large Capitalization
Growth Fund since its inception. Mr. Dempsey, Vice President of FTCI, is
responsible for managing institutional portfolios in the large capitalization
growth equity sector. Mr. Dempsey received a B.A. degree from Georgetown
University in 1988, and joined FTCI the same year. Mr. Dempsey was previously
responsible for the sales and marketing of all of Fiduciary Trust's
institutional equity products. Ms. Barbeau, Senior Vice President of FTCI, is
responsible for managing institutional and individual portfolios. She is a
member of the Global Investment Committee, Investment Policy Committee and
Co-chair of the Large Capitalization Equity Committee. Ms. Barbeau received a
B.A. degree from Montclair University in 1981. Prior to joining FTCI in 1983,
she was with Shearson/American Express for two years. Mr. Hartz, Senior Vice
President of FTCI, manages institutional large capitalization equity portfolios.
Mr. Hartz received a B.A. degree from Trinity College in 1959 and an M.B.A. from
Columbia Business School in 1962. Prior to joining FTCI in 1987, he was an
investment manager for 26 years at several leading institutions, most recently
as vice president of the Investment Advisory Division of MONY Financial
Services. He is a member of the Investment Policy Committee and Co-chair of the
Large Capitalization Committee.

S. Mackintosh Pulsifer and Carl Scaturo have been primarily responsible for the
day-to-day investment management of the Large Capitalization Growth and Income
Fund since its inception. Mr. Pulsifer, Senior Vice President of FTCI, manages
individual and trust portfolios and is a member of the Investment Policy
Committee. Mr. Pulsifer received an A.B. degree from Bowdoin College and an
M.B.A. from New York University Graduate School of Business Administration. He
joined FTCI in 1988 after 15 years of investment experience with a New York City
based private, independent investment counsel firm. Mr. Scaturo, Senior Vice
President of FTCI, is responsible for managing individual and trust portfolios.
Mr. Scaturo received a B.A. degree in Business Administration from the
University of Southern Connecticut in 1985 and is presently attending New York
University. Prior to joining FTCI in 1990, he was with Citibank for five years,
one year as a broker with Citibank's retail trading area and four years in the
Private Banking Investment Division.

Helen Degener and Grant Babyak are primarily responsible for the day-to-day
investment management of the Small Capitalization Fund. Ms. Degener, Senior Vice
President of FTCI, has managed the Fund since its inception, and, along with Mr.
Babyak, serves on its Small Cap Investment Committee. Ms. Degener has been with
FTCI since 1994. Prior to FTCI, she spent thirteen years at Morgan Guaranty
Trust Company as a Vice President and manager of several small capitalization
equity funds. Mr. Babyak is a Senior Vice President of FTCI and has been with
the Adviser since 1996. Prior to joining Fiduciary, Mr. Babyak worked for six
years at Avatar Associates as an institutional portfolio manager and two years
at United States Trust Company as an analyst.

Steven Miller, Sheila Coco, and William Yun have been primarily responsible
for the day-to-day investment management of the International Equity Fund since
its inception. Mr. Miller joined FTCI in 1994 and is a Senior Vice President.
Previously, he had spent seven years with Vital Forsikring, a Norwegian life
insurance company, and Heller Financial. Ms. Coco and Mr. Yun are both Executive
Vice Presidents of FTCI and Chartered Financial Analysts. Along with Mr. Miller,
they serve on the Adviser's Global Investment Committee. Ms. Coco has been with
FTCI since 1980 and had previously spent four years in the investment division
of Morgan Guaranty Trust Company. Mr. Yun joined Fiduciary in 1992, and has nine
years of prior investment experience with CB Commercial Holdings, The First
Boston Corp. and Blyth Eastman Paine Webber, Inc. He is a member of the New York
Society of Security Analysts.

DISTRIBUTION OF SHARES OF THE FUNDS

Edgewood Services, Inc., the principal distributor (the "Distributor") for
shares of the Funds, is a New York corporation and a wholly-owned subsidiary of
Federated Investors. The Distributor is a registered broker/dealer. Its
principal offices are at Clearing Operations, P.O. Box 897, Pittsburgh, PA
15230-0897.

DISTRIBUTION PLAN. Under a distribution plan adopted in accordance with the
Investment Company Act of 1940's Rule 12b-1 (the "Plan"), the Funds may pay to
the Distributor an amount computed at an annual rate of 0.75% of the average
daily net asset value of each Fund's shares to finance any activity which is
principally intended to result in the sale of shares subject to the Plan.
However, the Plan will not be activated, and the Distributor has no present
intention to collect any fees pursuant to the Plan, unless and until such time
as a second "trust" class of shares of the Funds is created for shareholders
that are trust clients.

The Distributor may from time to time and for such periods as it deems
appropriate, voluntarily reduce its compensation under the Plan to the extent
the expenses attributable to the shares exceed such lower expense limitation as
the Distributor may, by notice to the Trust, voluntarily declare to be
effective.

The Distributor may select financial institutions, such as banks, fiduciaries,
custodians for public funds, investment advisers, and broker/dealers ("brokers")
to provide distribution and/or administrative services as agents for their
clients or customers. Administrative services may include, but are not limited
to, the following functions: providing office space, equipment, telephone
facilities, and various clerical, supervisory, computer, and other personnel as
necessary or beneficial to establish and maintain shareholder accounts and
records; processing purchase and redemption transactions and automatic
investments of client account cash balances; answering routine client inquiries;
assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as may reasonably be requested.

The Distributor will pay financial institutions a fee based upon shares subject
to the Plan and owned by their clients or customers. The schedules of such fees
and the basis upon which such fees will be paid will be determined from time to
time by the Distributor.

The Funds' Plan is a compensation type plan. As such, the Funds make no payments
to the Distributor except as described above. Therefore, the Funds do not pay
for unreimbursed expenses of the Distributor, including amounts expended by the
Distributor in excess of amounts received by it from the Funds, interest,
carrying or other financing charges in connection with excess amounts expended,
or the Distributor's overhead expenses. However, the Distributor may be able to
recover such amounts or may earn a profit from future payments made by the Funds
under the Plan.

Furthermore, the Distributor may offer to pay a fee from its own assets to
financial institutions as financial assistance for providing substantial
marketing and sales support. The support may include sponsoring sales,
educational and training seminars for their employees, providing sales
literature, and engineering computer software programs that emphasize the
attributes of the Funds. Such assistance will be predicated upon the amount of
shares the financial institution sells or may sell, and/or upon the type and
nature of sales or marketing support furnished by the financial institution. Any
payments made by the Distributor may be reimbursed by the Adviser or its
affiliates.

SHAREHOLDER SERVICES ARRANGEMENTS. The Trust and FII have entered into a
Shareholder Services Agreement (the "Services Agreement") with respect to the
shares of the Funds to provide administrative support services to customers who
from time to time may be owners of record or beneficial owners of the Funds'
shares. In return for providing these support services, FII (or a financial
institution which has an agreement with FII) may receive payments from a Fund at
a rate not exceeding 0.25% of the average daily net assets of the shares
beneficially owned by the financial institution's customers for whom it is
holder of record or with whom it has a servicing relationship. These
administrative services may include, but are not limited to, the following
functions: providing office space, equipment, telephone facilities, and various
personnel, including clerical, supervisory, and computer, as necessary or
beneficial to establish and maintain shareholder accounts and records;
processing purchase and redemption transactions and automatic investments of
client account cash balances; answering routine client inquiries regarding the
Funds; assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as the Funds reasonably request.
Certain trust clients, including ERISA plans, will not be affected by the
Services Agreement because the Services Agreement will not be activated unless
and until a second "trust" class of shares of the Funds (which would not have a
Services Agreement) is created and such trust clients' investments in a Fund are
converted to such trust class.

ADMINISTRATIVE ARRANGEMENTS

The Distributor may pay financial institutions and other financial service
providers, such as banks, fiduciaries, custodians for public funds, investment
advisers, and broker/dealers, a fee based upon the average net asset value of
shares of their customers for providing administrative services. This fee, if
paid, will be reimbursed to the Distributor by the Adviser and not the Funds.

ADMINISTRATION OF THE FUNDS

ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Services Company, provides the Funds with certain administrative
personnel and services necessary to operate each Fund.

Such services include shareholder servicing and certain legal and accounting
services. Federated Administrative Services provides these at an annual rate as
specified below:

MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
.15% on the first $250 million
.125% on the next $250 million
.10% on the next $250 million
.075% on assets in excess of $750 million

The administrative fee received during any fiscal year shall be at least $75,000
per Fund. Federated Administrative Services may choose voluntarily to waive a
portion of its fee.

CUSTODIAN. Fiduciary Trust Company International, Two World Trade Center,
New York, New York 10048-0772, is custodian for the securities and cash of the
Funds.

TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTANT. Federated
Shareholder Services Company, Pittsburgh, Pennsylvania, a subsidiary of
Federated Services Company, with offices in Boston, Massachusetts, is transfer
agent for the shares of the Funds and dividend disbursing agent for the Funds.
Federated Services Company also provides certain accounting and recordkeeping
services with respect to the portfolio investments of the Funds.

INDEPENDENT AUDITORS. The independent auditors for the Funds are Ernst &
Young LLP, Pittsburgh, Pennsylvania.

LEGAL COUNSEL TO THE TRUST. Legal counsel to the Trust is provided by Dewey
Ballantine LLP, New York, New York; and Dickstein Shapiro Morin & Oshinsky LLP,
Washington, D.C.

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the Funds' Adviser looks for prompt execution of the order at a
favorable price. In working with dealers, the Adviser will generally utilize
those who are recognized dealers in specific portfolio instruments, except when
a better price and execution of the order can be obtained elsewhere. In
selecting among firms believed to meet these criteria, the Adviser may give
consideration to those firms which have sold or are selling shares of the Funds
and other funds distributed by Edgewood Services, Inc. or Federated Securities
Corp. The Adviser makes decisions on portfolio transactions and selects brokers
and dealers subject to review by the Trustees.

NET ASSET VALUE

The net asset value per share of each Fund fluctuates. Net asset value is
determined by dividing the sum of the market value of all securities and other
assets of a Fund, less liabilities, by the number of Fund shares outstanding.
Trading in foreign securities may be completed at times which vary from the
closing of the New York Stock Exchange ("NYSE"). As a result, in computing their
net asset values, the Funds value foreign equity securities at the latest
closing price on the exchange on which they are traded immediately prior to the
closing of the NYSE. Foreign securities quoted in foreign currencies are
translated into U.S. dollars at the foreign exchange rate in effect at noon,
Eastern time, on the day the value of the foreign security is determined.
Occasionally, events that affect these values and exchange rates may occur
between the times at which they are determined and the closing of the NYSE. If
such events materially affect the value of portfolio securities, these
securities may be valued at their fair value as determined in good faith by, or
pursuant to procedures adopted by, the Trustees, although the actual calculation
may be done by others.

INVESTING IN THE FUNDS

SHARE PURCHASES

Shares of the Funds are sold on days on which both the NYSE and the Federal
Reserve Wire System are open for business. Shares of the Funds may be purchased
through Fiduciary International, Inc. or through authorized broker/dealers. In
connection with the sale of shares of the Funds, Edgewood Services, Inc. may,
from time to time, offer certain items of nominal value to any shareholder or
investor. The Funds reserve the right to reject any purchase request.

THROUGH FIDUCIARY INTERNATIONAL, INC. An investor may write or call
Fiduciary International, Inc. to place an order to purchase shares of a Fund.
Call1-888-FIDUCIARY. Representatives are available from 9:00 a.m. to 5:00 p.m.
(Eastern time). Payment may be made either by mail or federal funds. Purchase
orders must be received by Fiduciary International, Inc. before 3:00 p.m.
(Eastern time). Payment is normally required on the next business day. Texas
residents must purchase shares through Edgewood Services, Inc. at
1-800-356-2805.

BY MAIL. To purchase shares of a Fund by mail, send a check made payable to
"FTI Funds" (and identify the appropriate Fund) to: Federated Shareholder
Services Company, P.O. Box 8609, Boston, Massachusetts 02266-8609. Orders by
mail are considered received after payment by check is converted into federal
funds. This is normally the next business day after the Fund receives the check.

BY WIRE. To purchase shares of a Fund by wire, call1-888-FIDUCIARY. Payment
by wire must be received by Fiduciary International, Inc. before 3:00 p.m.
(Eastern time) on the next business day after placing the order. Fiduciary Trust
Company International is on-line with the Federal Reserve Bank of New York.
Accordingly, to purchase shares of the Funds by wire, wire funds as follows:

Fiduciary Trust Company International
ABA #026007922
Credit: Account Number 550000100
Further credit to: (Name of Fund)
Re: (customer name)

Shares of the Funds cannot be purchased by Federal Reserve Wire on Columbus Day,
or Veterans' Day.

THROUGH AUTHORIZED BROKER/DEALERS. An investor may place an order through
authorized brokers and dealers to purchase shares of a Fund. Shares will be
purchased at the net asset value next determined after the Fund receives the
purchase request from Fiduciary International, Inc. Generally, purchase requests
through authorized brokers and dealers must be received by Fiduciary
International, Inc. and transmitted to the Fund before 3:00 p.m. (Eastern time)
in order for shares to be purchased at that day's public offering price. In
certain cases the Funds may agree t receive such orders after 3:00 p.m.

MINIMUM INVESTMENT REQUIRED

The minimum initial investment in shares of each Fund is $10,000 . With respect
to clients of financial intermediaries (such as brokers and dealers), minimum
investments will be calculated by combining all accounts maintained in a Fund by
the intermediary. This prospectus should be read together with any account
agreement for minimum investment requirements imposed by Fiduciary Trust Company
International or its affiliates.
The minimum investment required may be waived for employees of the Adviser or
its affiliates.

WHAT SHARES COST

Shares are sold at their net asset value next determined after an order is
received. There is no sales charge imposed by the Funds. The net asset value of
each Fund is determined as of the close of trading (normally 4:00 p.m., Eastern
time) on the NYSE, Monday through Friday, except on: (i) days on which there are
not sufficient changes in the value of a Fund's portfolio securities that its
net asset value might be materially affected; (ii) days during which no shares
of a Fund are tendered for redemption and no orders to purchase shares are
received; or (iii) the following holidays: New Year's Day, Martin Luther King
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.

CONFIRMATIONS AND ACCOUNT STATEMENTS

As transfer agent for the Trust, Federated Shareholder Services Company
maintains a share account for each shareholder of record. Share certificates are
not issued.

Detailed confirmations of each purchase and redemption are sent to each
shareholder. In addition, shareholders will receive statements showing all
account activity for the statement period.

DIVIDENDS

The Municipal Bond Fund and Bond Fund each declare dividends daily and pay them
monthly. For shareholders invested in the Large Capitalization Growth Fund and
Large Capitalization Growth and Income Fund on the record date, dividends are
declared and paid quarterly. For shareholders invested in the Small
Capitalization Fund and International Equity Fund on the record date, dividends
are declared and paid semi-annually. Dividends are automatically reinvested in
additional shares of a Fund on the payment date, at the ex-dividend date net
asset value, unless shareholders request cash payments on the new account form
or by writing to the appropriate Fund. All shareholders on the record date are
entitled to the dividend. If shares are redeemed or exchanged prior to the
record date, or purchased after the record date, those shares are not entitled
to that dividend. A portion of distributions to shareholders could, under some
circumstances, be reclassified as a return of capital for income tax purposes
(See "Federal Income Tax").

CAPITAL GAINS

Capital gains realized by a Fund, if any, will be distributed at least once
every twelve months.

EXCHANGE PRIVILEGE

In order to provide greater flexibility to shareholders whose investment
objectives have changed, shareholders of the Funds may exchange all or some of
their shares in one Fund for shares in other Funds in the Trust. Shareholders of
the Funds may also exchange into certain money market funds for which affiliates
or subsidiaries of Federated Investors serve as investment adviser and/or
principal underwriter ("Federated Money Funds"). These exchanges are made at net
asset value. None of the Funds imposes any additional fees on exchanges.
Shareholders in certain Federated Money Funds may exchange their shares in the
Federated Money Funds for shares in the Funds.

REQUIREMENTS FOR EXCHANGE

A shareholder may exchange shares of one Fund for shares of any of the other
Funds in the Trust by calling 1-888-FIDUCIARY or by writing to Fiduciary
International, Inc. Shares purchased by check are eligible for exchange after
seven days.

Orders to exchange shares of one Fund for shares of any of the other Funds will
be executed by redeeming the shares owned and purchasing shares of any of the
other Funds at the net asset value determined after the exchange request is
received. Orders for exchanges received by a Fund prior to 3:00 p.m. (Eastern
time) on any day the Funds are open for business will be executed as of the
close of business that day. Orders for exchanges received after 3:00 p.m.
(Eastern time) on any business day will be executed at the close of the next
business day.

An authorization form permitting a Fund to accept telephone exchange requests
must first be completed. It is recommended that investors request this privilege
on the account application at the time of their initial application. If not
completed at the time of initial application, authorization forms and
information on this service can be obtained through Fiduciary International,
Inc. Telephone exchange instructions may be recorded. If reasonable procedures
are not followed by a Fund, it may be liable for losses due to unauthorized or
fraudulent telephone instructions.

An excessive number of exchanges may be disadvantageous to the Trust. Therefore,
the Trust, in addition to its right to reject any exchange request, reserves the
right to modify or terminate the exchange privilege at any time. Shareholders
would be notified prior to any modification or termination.

An exchange order must comply with the requirements for a redemption and must
specify the dollar value or number of shares to be exchanged. Exchanges are
subject to the minimum initial investment requirement of the Fund being
acquired. Prior to any exchange, the shareholder must receive a copy of the
current prospectus of the Fund into which an exchange is to be effected.

Further information on the exchange privilege and prospectuses for certain
Federated Money Funds are available by contacting the Trust.

TAX CONSEQUENCES

An exercise of the exchange privilege, like an ordinary redemption of shares, is
treated as a sale for federal income tax purposes. Depending on the length of
time the shareholder has held the shares being exchanged, a short-term or
long-term capital gain or loss may be realized.

REDEEMING SHARES

Each Fund redeems shares at their net asset value next determined after
Fiduciary International, Inc. receives the redemption request. Redemptions will
be made on days on which both the NYSE and the Federal Reserve Wire System are
open for business. Telephone or written requests for redemption must be received
in proper form by Fiduciary International, Inc. Normally, redemption proceeds
are available within one business day, but in no event more than seven days,
after receipt of a proper redemption request.

BY TELEPHONE. A shareholder may redeem shares of a Fund by calling Fiduciary
International, Inc. to request a redemption. Call 1-888-FIDUCIARY to redeem
shares. Shares will be redeemed at the net asset value next determined after a
Fund receives the redemption request from Fiduciary International, Inc. Although
Fiduciary International Inc., does not charge for telephone redemptions, it
reserves the right to charge a fee for the cost of wire-transferred redemptions
of less than $5,000, or in excess of one per month. Fiduciary International
Inc., is responsible for promptly submitting redemption requests and providing
proper written redemption instructions to a Fund. If, at any time, a Fund should
determine it necessary to terminate or modify this method of redemption,
shareholders would be promptly notified. A redemption request must be received
by Fiduciary International, Inc. before 3:00 p.m. (Eastern time) in order for
shares to be redeemed at that day's net asset value.

An authorization form permitting a Fund to accept telephone redemption requests
must first be completed. It is recommended that investors request this privilege
at the time of their initial application. If not completed at the time of
initial application, authorization forms and information on this service can be
obtained from the Trust. Telephone redemption instructions may be recorded. If
reasonable procedures are not followed by a Fund, it may be liable for losses
due to unauthorized or fraudulent telephone instructions.

In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered.

BY MAIL. Shareholders may redeem shares of a Fund by sending a written request
to: Federated Shareholder Services Company, P.O. Box 8609, Boston, Massachusetts
02266-8609. The written request should include the shareholder's name, the Fund
name, the account number, and the share or dollar amount requested, and should
be signed by each registered owner exactly as the shares are registered. If
share certificates have been issued, they should be sent by insured mail with
the written request to Federated Shareholder Services Company.

SIGNATURES. Shareholders requesting a redemption of any amount to be sent to an
address other than that on record with a Fund, or a redemption payable other
than to the shareholder of record must have signatures on written redemption
requests guaranteed by:

o a trust company or commercial bank whose deposits are insured by the
Bank Insurance Fund , which is administered by the Federal Deposit
Insurance Company ("FDIC");

o a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;

o a savings bank or savings association whose deposits are insured by the
Savings Association Insurance Fund , which is administered by the FDIC;
or

o any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.

The Funds do not accept signatures guaranteed by a notary public.

The Funds and their transfer agent have adopted standards for accepting
signature guarantees from the above institutions. The Funds may elect in the
future to limit eligible signature guarantors to institutions that are members
of a signature guarantee program. The Funds and the transfer agent reserve the
right to amend these standards at any time without notice.

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, the Trust may
redeem shares in any account and pay the proceeds to the shareholder if the
account balance falls below the required minimum value of $10,000 due to
shareholder redemptions. Before shares are redeemed to close an account, the
shareholder is notified in writing and allowed 30 days to purchase additional
shares to meet the minimum requirement.

SHAREHOLDER INFORMATION

VOTING RIGHTS

Each share of a Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each Fund in the
Trust have equal voting rights, except that in matters affecting only a
particular Fund, only shares of that Fund are entitled to vote. As a
Massachusetts business trust, the Trust is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in the operation of the Trust or a Fund and for the election of Trustees
under certain circumstances. As of September 4, 1998, Fiduciary Trust Company
International may for certain purposes be deemed to control the Small
Capitalization Equity Fund and International Equity Fund, because it is owner of
record of certain shares of the Funds.

As of September 4,1998, Greenwich Academy, Greenwich, Connecticut, may for
certain purposes be deemed to control the Global Bond Fund because it is owner
of record of certain shares of the Fund.

Trustees may be removed by the Trustees or by shareholders at a special meeting.
The Trustees shall call a special meeting of shareholders upon the written
request of shareholders owning at least 10% of the Trust's outstanding shares
entitled to vote.

EFFECT OF BANKING LAWS

Banking laws and regulations presently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, or distributing securities. However, such banking
laws and regulations do not prohibit such a holding company affiliate or banks
generally from acting as investment adviser, transfer agent or custodian to such
an investment company or from purchasing shares of such a company as agent for
and upon the order of such customer. The Adviser is subject to such banking laws
and regulations.

The Adviser believes, based on the advice of its counsel, that it may perform
the services for any Fund contemplated by its advisory agreement with the Trust
without violation of the Glass-Steagall Act or other applicable banking laws or
regulations. Changes in either federal or state statutes and regulations
relating to the permissible activities of banks and their subsidiaries or
affiliates, as well as further judicial or administrative decisions or
interpretations of such or future statutes and regulations, could prevent the
Adviser from continuing to perform all or a part of the above services for its
customers and/or a Fund. If it were prohibited from engaging in these
customer-related activities, the Trustees would consider alternative advisers
and means of continuing available investment services. In such event, changes in
the operation of a Fund may occur, including possible termination of any
automatic or other Fund share investment and redemption services then being
provided by the Adviser. It is not expected that existing shareholders would
suffer any adverse financial consequences (if another adviser with equivalent
abilities to Fiduciary is found) as a result of any of these occurrences.

TAX INFORMATION

FEDERAL INCOME TAX

The Funds anticipate that they will pay no federal income tax because each Fund
expects to meet requirements of Subchapter M of the Code applicable to regulated
investment companies and to receive the special tax treatment afforded to such
companies.

Each Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by one
Fund will not be combined for tax purposes with those realized by any of the
other Funds.

Investment income received by the Funds from sources within foreign countries
may be subject to foreign taxes withheld at the source. The United States has
entered into tax treaties with many foreign countries that entitle the Funds to
reduced tax rates or exemptions on this income. The effective rate of foreign
tax cannot be predicted, since the amount of Fund assets to be invested within
various countries is unknown. However, the Funds intend to operate so as to
qualify for treaty-reduced tax rates where applicable.

Unless otherwise exempt, shareholders are required to pay federal income tax on
any dividends and other distributions, including capital gains distributions,
received, and the funds will inform shareholders of the amount and nature of
these distributions. This applies whether dividends and distributions are
received in cash or as additional shares. Distributions representing long-term
capital gains, if any, will be taxable to shareholders as long-term capital
gains no matter how long the shareholders have held the shares. No federal
income tax is due on any dividends earned in an individual retirement account or
qualified retirement plan until distributed.

Due to differences in the book and tax treatment of fixed-income securities
denominated in foreign currencies, it is difficult to project currency effects
on an interim basis. Therefore, to the extent that currency fluctuations can not
be anticipated, a portion of distributions to shareholders could later be
designated as a return of capital, rather than income, for income tax purposes,
which may be of particular concern to simple trusts.

If more than 50% of the value of a Fund's assets at the end of the tax year is
represented by stock or securities of foreign corporations, the Fund intends to
qualify under certain Code provisions that allow shareholders to claim a foreign
tax credit or deduction on their U.S. income tax returns. The Code limits a
shareholder's ability to claim a foreign tax credit in a number of ways which
may be affected by a shareholder's personal tax circumstances, as well as by the
circumstances of the Fund's actual investments. Furthermore, shareholders who
elect to deduct their portion of a Fund's foreign taxes rather than take the
foreign tax credit must itemize deductions on their income tax returns. Tax laws
limit a shareholder's ability to claim itemized deductions.

Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under federal, state, local, and foreign tax laws, including
treatment of distributions as income or return of capital.

Each Fund is required to backup withhold a significant portion of taxable
dividends, capital gains distributions and redemptions paid to shareholders who
have not complied with IRS taxpayer identification regulations. Domestic
shareholders may avoid the "backup withholding" by making the appropriate
certification of their social security number or taxpayer identification number.

MUNICIPAL BOND FUND TAX CONSIDERATIONS

In general, shareholders are not required to pay federal regular income tax on
any dividends received from the Fund that represent net interest on tax-exempt
municipal bonds. However, under the Tax Reform Act of 1986, dividends
representing net interest income earned on certain "private activity" bonds
issued after August 7, 1986 may be included in calculating the federal
individual alternative minimum tax or the federal alternative minimum tax for
corporations. The Fund may purchase all types of municipal bonds, including
private activity bonds.

The alternative minimum tax applies when it exceeds the regular tax for the
taxable year. Alternative minimum taxable income is equal to the regular taxable
income of the taxpayer increased by certain "tax preference" items not included
in regular taxable income and reduced by only a portion of the deductions
allowed in the calculation of the regular tax. Thus, should the Fund purchase
any private activity bonds, a portion of the Fund's dividends may be treated as
a tax preference item.

Dividends of the Fund representing net interest income earned on non-municipal
bond investments and any realized net short-term gains are taxed as ordinary
income. Distributions representing long-term capital gains, if any, will be
taxable to shareholders as long-term capital gains no matter how long the
shareholders have held their shares. Distributions may be subject to state and
local taxes.

These tax consequences apply whether dividends are received in cash or as
additional shares.

CAPITAL GAINS CONSIDERATIONS FOR MUNICIPAL BOND FUND, BOND FUND, LARGE
CAPITALIZATION GROWTH FUND, AND LARGE CAPITALIZATION GROWTH AND INCOME FUND

Each of these Funds intends to acquire certain portfolio securities from one or
more common trust funds ("CTFs") previously managed by FTCI. It is anticipated
by each Fund, based on the advice of counsel, that the acquisition will be
effected in a manner that is tax-free to the Fund and, as a result, the Fund
will calculate the gain or loss realized upon the sale of those securities based
on the CTFs' original purchase cost of the security. Because many of the CTFs'
securities have risen in value before being acquired by the Funds, unusually
large capital gains may be realized by the Funds (and distributed to
shareholders) when the Funds sell these securities. As noted above, a
shareholder must pay federal income tax on the amount of capital gains
distributions received from a Fund even though the shareholder may have owned
the Fund shares for just a short period of time. Moreover, the shareholder will
be required to pay federal income tax on the amount of the capital gains
distribution received, even if that gain represents appreciation in the
portfolio securities before those secuties were acquired by the Funds from the
CTFs.

PERFORMANCE INFORMATION

From time to time, the Funds may advertise their total returns and yields.

Total return represents the change, over a specified period of time, in the
value of an investment in a Fund after reinvesting all income and capital gains
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.

The yield of a Fund is calculated by dividing the net investment income per
share (as defined by the SEC) earned by the Fund over a thirty-day period by the
maximum offering price per share of the Fund on the last day of the period. This
number is then annualized using semi-annual compounding. The yield does not
necessarily reflect income actually earned by the Fund and, therefore, may not
correlate to the dividends or other distributions paid to shareholders.

From time to time, advertisements for a Fund may refer to ratings, rankings, and
other information in certain financial publications and/or compare the
performance of the Fund to certain indices.

<PAGE>

ADDRESSES
<S> <C> <C>
FTI Funds
FTI Municipal Bond Fund
FTI Bond Fund
FTI Large Capitalization Growth Fund
FTI Large Capitalization Growth and Income Fund
FTI Small Capitalization Equity Fund 5800 Corporate Drive
FTI International Equity Fund Pittsburgh, Pennsylvania 15237-7010

Distributor
Edgewood Services, Inc. Clearing Operations
P.O. Box 897
Pittsburgh, Pennsylvania 15230-0897

Investment Adviser
Fiduciary International, Inc. Two World Trade Center
New York, New York 10048-0772

Custodian
Fiduciary Trust Company International Two World Trade Center
New York, New York 10048-0772

Transfer Agent, Dividend Disbursing Agent
and Portfolio Accountant Services
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779

Independent Auditors
Ernst & Young LLP One Oxford Centre
Pittsburgh, Pennsylvania 15219

Legal Counsel
Dewey Ballantine LLP 1301 Avenue of the Americas
New York, New York 10019-6092

Legal Counsel
Dickstein Shapiro Morin & Oshinsky LLP 2101 L. Street, N.W.
Washington, D.C. 20037

</TABLE>

FTI FUNDS

PROSPECTUS

An Open-End Management Investment Company

FTI Municipal Bond Fund

FTI Bond Fund

FTI Large Capitalization Growth Fund

FTI Large Capitalization Growth and Income Fund

FTI Small Capitalization Equity Fund

FTI International Equity Fund

Prospectus dated December 8, 1998
CUSIP 302927504MBF
CUSIP 302927603BF
CUSIP 302927801LCGF
CUSIP 302927702LCGIF
CUSIP 302927108 SCEF
CUSIP 302927207 IEF

G01548-04 (12/98)

A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS STATEMENT SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

FTI FUNDS

STATEMENT OF ADDITIONAL INFORMATION

This Statement of Additional Information relates to the following eight
eight separate investment portfolios (individually referred to as the
"Fund," and collectively as the "Funds") of FTI Funds (the "Trust"):

o FTI Municipal Bond Fund;

o FTI Bond Fund;

o FTI Large Capitalization Growth Fund;

o FTI Large Capitalization Growth and Income Fund;

o FTI Municipal Bond Fund;

o FTI Bond Fund;

o FTI Large Capitalization Growth Fund;

o FTI Large Capitalization Growth and Income Fund;

o FTI Small Capitalization Equity Fund; and

o FTI International Equity Fund.

This Statement of Additional Information should be read with the prospectus
for the Funds dated December 8, 1998. This Statement is not a prospectus
itself. To receive a copy of the prospectus, write or call the Trust.

FTI FUNDS
5800 CORPORATE DRIVE
PITTSBURGH, PENNSYLVANIA 15237-7010

Statement dated December 8, 1998

EDGEWOOD SERVICES, INC.
Distributor
A subsidiary of FEDERATED INVESTORS
CUSIP 302927504MBF CUSIP 302927603BF CUSIP 302927801LCGF CUSIP
302927702LCGIF Cusip 302927108 SCEF Cusip 302927207 IEF G01548-05(12/98)

<PAGE>

TABLE OF CONTENTS

<PAGE>

GENERAL INFORMATION ABOUT THE TRUST 1

INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS 1

TYPES OF INVESTMENTS AND INVESTMENT TECHNIQUES 1 Repurchase Agreements 1 Reverse
Repurchase Agreements 1 When-Issued and Delayed Delivery Transactions 1
Lending Portfolio Securities 2 Restricted and Illiquid Securities 2 U.S.
Government Securities 2 Municipal Securities 3 Bank Instruments 3 Convertible
Securities 3 Real Estate Mortgage Investment Conduits ("REMICs") 3 Forward
Foreign Currency Exchange Contracts 4 Foreign Currency Options 4 Special Risks
Associated with Foreign Currency Options 4 Options on Futures Contracts 6
Foreign Currency Futures Transactions6 Special Risks Associated with Foreign
Currency Futures Contracts and Related Options6 Options on Securities 6
Over-the-Counter Options 7 Options on Securities Indices 7 Regulatory
Restrictions 8 Additional Risk Considerations 8 Portfolio Turnover 8

INVESTMENT LIMITATIONS 9

FTI FUNDS MANAGEMENT 1
Officers and Trustees 1
Trust Ownership 2
Trustees Compensation 3
Trustee Liability 3

INVESTMENT ADVISORY SERVICES 3
Adviser to the Trust 3
Advisory Fees 3

ADMINISTRATIVE SERVICES 4
Transfer Agent, Dividend Disbursing Agent
and Portfolio Accountant 4
Custodian 4
Independent Auditors 4

BROKERAGE TRANSACTIONS 4

PURCHASING SHARES 5
Distribution Plan and Shareholder
Services Agreement 5
Conversion to Federal Funds 5

DETERMINING NET ASSET VALUE 5
Determining Market Value of Securities5
Trading in Foreign Securities 6

REDEEMING SHARES 6
Redemption in Kind 6

MASSACHUSETTS PARTNERSHIP LAW 6

TAX STATUS 7
The Funds' Tax Status 7
Foreign Taxes 7
Shareholders' Tax Status 7
Capital Gains 7

TOTAL RETURN 7

YIELD 7

TAX-EQUIVALENT YIELD 8
Tax-Equivalency Table 9

PERFORMANCE COMPARISONS 10

FINANCIAL STATEMENTS 13

APPENDIX 14

<PAGE>

GENERAL INFORMATION ABOUT THE TRUST

The Trust was established as a Massachusetts business trust under a Declaration
of Trust dated October 18, 1995. As of the date of this Statement of Additional
Information, the Trust consists of eight separate portfolios of securities which
are as follows: FTI Municipal Bond Fund ("Municipal Bond Fund"), FTI Bond Fund
("Bond Fund"), FTI Large Capitalization Growth Fund ("Large Capitalization
Growth Fund"), FTI Large Capitalization Growth and Income Fund ("Large
Capitalization Growth and Income Fund"), FTI Municipal Bond Fund ("Municipal
Bond Fund"), FTI Bond Fund ("Bond Fund"), FTI Large Capitalization Growth Fund
("Large Capitalization Growth Fund"), FTI Large Capitalization Growth and Income
Fund ("Large Capitalization Growth and Income Fund"), FTI Small Capitalization
Equity Fund ("Small Capitalization Fund") and FTI International Equity Fund
("International Equity Fund").

INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS

The prospectus discusses the objectives of each Fund and the policies it employs
to achieve those objectives. The following discussion supplements the
description of the Funds' investment objectives in the prospectus. A Fund's
investment objective cannot be changed without the approval of shareholders. The
investment policies described below may be changed by the Board of Trustees (the
"Trustees") without shareholder approval. Shareholders will be notified before
any material change in these policies becomes effective.

TYPES OF INVESTMENTS AND INVESTMENT TECHNIQUES

REPURCHASE AGREEMENTS

The Funds or their custodian will take possession of the securities subject to
repurchase agreements and these securities will be marked to market daily. In
the event that a defaulting seller filed for bankruptcy or became insolvent,
disposition of such securities by a Fund might be delayed pending court action.
The Funds believe that under the regular procedures normally in effect for
custody of a Fund's portfolio securities subject to repurchase agreements, a
court of competent jurisdiction would rule in favor of a Fund and allow
retention or disposition of such securities. The Funds will only enter into
repurchase agreements with banks and other recognized financial institutions,
such as broker/dealers, which are deemed by the Adviser to be creditworthy
pursuant to guidelines established by the Trustees.

REVERSE REPURCHASE AGREEMENTS

The Funds may also enter into reverse repurchase agreements. These transactions
are similar to borrowing cash. In a reverse repurchase agreement, a Fund
transfers possession of a portfolio instrument to another person, such as a
financial institution, broker or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on a stipulated date in the
future the Fund will repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon rate. The use of reverse
repurchase agreements may enable a Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be disadvantageous, but the ability to
enter into reverse repurchase agreements does not ensure that a Fund will be
able to avoid selling portfolio instruments at a disadvantageous time.

When effecting reverse repurchase agreements, liquid assets of a Fund, in a
dollar amount sufficient to make payment for the obligations to be purchased,
are segregated on the Fund's records at the trade date. These assets are marked
to market daily and maintained until the transaction is settled.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

The Funds may engage in when-issued and delayed delivery transactions. These
transactions are made to secure what is considered to be an advantageous price
or yield for a Fund. No fees or other expenses, other than normal transaction
costs, are incurred. However, liquid assets of a Fund sufficient to make payment
for the securities to be purchased are segregated on the Fund's records at the
trade date. These assets are marked to market daily and are maintained until the
transaction has been settled. A Fund may dispose of a commitment prior to
settlement if the Adviser deems it appropriate to do so. In addition, a Fund may
enter into transactions to sell its purchase commitments to third parties at
current market values and simultaneously acquire other commitments to purchase
similar securities at later dates. A Fund may realize short-term profits or
losses upon the sale of such commitments. As a matter of policy, the Funds do
not intend to engage in when-issued and delayed delivery transactions to an
extent that would cause the segregation of more than 20% of the total value of
their respective assets.

LENDING PORTFOLIO SECURITIES

A Fund may lend its portfolio securities to broker-dealers, banks, or other
institutional borrowers of securities. A Fund will only enter into loan
arrangements with broker-dealers, banks, or other institutions which the Adviser
has determined are creditworthy under guidelines established by the Trustees and
will receive collateral equal to at least 100% of the value of the securities
loaned.

The collateral received when a Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the particular Fund. During the
time portfolio securities are on loan, the borrower pays a Fund any dividends or
interest paid on such securities. Loans are subject to termination at the option
of a Fund or the borrower. A Fund may pay reasonable administrative and
custodial fees in connection with a loan and may pay a negotiated portion of the
interest earned on the cash or equivalent collateral to the borrower or placing
broker. A Fund does not have the right to vote securities on loan, but would
terminate the loan and regain the right to vote if that were considered
important with respect to the investment.

RESTRICTED AND ILLIQUID SECURITIES

The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a Securities and Exchange Commission (the "SEC")
Staff position set forth in the adopting release for Rule 144A under the
Securities Act of 1933 (the "Rule"). The Rule is a non-exclusive, safe-harbor
for certain secondary market transactions involving securities subject to
restrictions on resale under federal securities laws. The Rule provides an
exemption from registration for resales of otherwise restricted securities to
qualified institutional buyers. The Rule was expected to further enhance the
liquidity of the secondary market for securities eligible for resale under the
Rule. The Trust, on behalf of the Funds, believes that the Staff of the SEC has
left the question of determining the liquidity of all restricted securities
(eligible for resale under Rule 144A) for determination to the Trustees. The
Trustees consider the following criteria in determining the liquidity of certain
restricted securities:

o the frequency of trades and quotes for the security;

o the number of dealers willing to purchase or sell the security and the
number of other potential buyers;

o dealer undertakings to make a market in the security; and

o the nature of the security and the nature of the marketplace trades.

Notwithstanding the foregoing, securities of foreign issuers which are not
listed on a recognized domestic or foreign exchange or for which a bona fide
market does not exist at the time of purchase or subsequent transaction shall be
treated as illiquid securities by the Trustees.

When a Fund invests in certain restricted securities determined by the Trustees
to be liquid, such investments could have the effect of increasing the level of
Fund illiquidity to the extent that the buyers in the secondary market for such
securities (whether in Rule 144A resales or other exempt transactions) become,
for a time, uninterested in purchasing these securities.

U.S. GOVERNMENT SECURITIES

The types of U.S. government securities in which the Funds may invest
generally include direct obligations of the U.S. Treasury (such as U.S. Treasury
bills, notes, and bonds) and obligations issued or guaranteed by U.S. government
agencies or instrumentalities. These securities are backed by:

o the full faith and credit of the U.S. Treasury;

o the issuer's right to borrow from the U.S. Treasury;

o the discretionary authority of the U.S. government to purchase certain
obligations of the agency or instrumentality; or

o the credit of the agency or instrumentality issuing the obligations.

Examples of agencies and instrumentalities whose obligations are permissible
investments but may not always receive financial support from the U.S.
government are: Federal Land Banks; Central Bank for Cooperatives; Federal
Intermediate Credit Banks; Federal Home Loan Banks; Farmers Home Administration;
and Federal National Mortgage Association.

MUNICIPAL SECURITIES

The municipal bonds in which the Municipal Bond Fund and Bond Fund invest have
the characteristics set forth in the prospectus. If a bond loses its rating or
has its rating reduced after the Fund has purchased it, the Fund is not required
to drop the bond from its portfolio, but may consider doing so. If ratings made
by Standard & Poor's or Moody's Investors Service change because of changes in
those organizations or in their rating systems, the Fund will try to use
comparable ratings as standards in accordance with the investment policies
described in the Funds' prospectus.

MUNICIPAL SECURITIES

ZERO COUPON SECURITIES
The Funds may invest in zero coupon securities. Unlike debt securities that
provide periodic payments of interest (referred to as a coupon payment), zero
coupon securities do not pay interest or principal until final maturity.
Investors buy zero coupon securities at a price below the amount payable at
maturity. The difference between the purchase price and the amount paid at
maturity represents interest on the zero coupon security. An investor must wait
until maturity to receive interest and principal, which increases the risk
factors usually associated with bond investments. There are many forms of zero
coupon securities. Some are issued at a discount and are referred to as zero
coupon or capital appreciation bonds. Others are created from interest bearing
bonds by separating the right to receive the bond's coupon payments from the
right to receive the bond's principal due at maturity, a process known as coupon
stripping. In addition, some securities give the issuer the option to deliver
additional securities in place of cash interest payments, thereby increasing the
amount payable at maturity. These are referred to as pay-in-kind or PIK
securities. ZERO COUPON SECURITIES The Funds may invest in zero coupon
securities. Unlike debt securities that provide periodic payments of interest
(referred to as a coupon payment), zero coupon securities do not pay interest or
principal until final maturity. Investors buy zero coupon securities at a price
below the amount payable at maturity. The difference between the purchase price
and the amount paid at maturity represents interest on the zero coupon security.
An investor must wait until maturity to receive interest and principal, which
increases the risk factors usually associated with bond investments. There are
many forms of zero coupon securities. Some are issued at a discount and are
referred to as zero coupon or capital appreciation bonds. Others are created
from interest bearing bonds by separating the right to receive the bond's coupon
payments from the right to receive the bond's principal due at maturity, a
process known as coupon stripping. In addition, some securities give the issuer
the option to deliver additional securities in place of cash interest payments,
thereby increasing the amount payable at maturity. These are referred to as
pay-in-kind or PIK securities. BANK INSTRUMENTS

The Funds may invest in the instruments of banks and savings and loans whose
deposits are insured by the Bank Insurance Fund, which is administered by the
Federal Deposit Insurance Corporation ("FDIC"), or the Savings Association
Insurance Fund, which is administered by the FDIC, such as certificates of
deposit, demand and time deposits, savings shares, and bankers' acceptances.
These instruments are not necessarily guaranteed by those organizations.

In addition, the Funds (except Municipal Bond Fund and Bond Fund) may invest in:

o Eurodollar Certificates of Deposits issued by foreign branches of U.S.
or foreign banks;

o Eurodollar Time Deposits, which are U.S. dollar-denominated deposits in
foreign branches of U.S. or foreign banks;

o Canadian Time Deposits, which are U.S. dollar-denominated deposits
issued by branches of major Canadian banks located in the United
States; and

o Yankee Certificates of Deposit, which are U.S. dollar-denominated
certificates of deposit issued by U.S. branches of foreign banks and
held in the United States.

CONVERTIBLE SECURITIES

The convertible bonds and convertible preferred stocks in which the Funds
(except Municipal Bond Fund) may invest generally retain the investment
characteristics of fixed income securities until they have been converted but
also react to movements in the underlying equity securities. The prices of fixed
income securities generally fluctuate inversely to the direction of interest
rates. The holder is entitled to receive the fixed income of a bond or the
dividend preference of a preferred stock until the holder elects to exercise the
conversion privilege. Usable bonds are corporate bonds that can be used in whole
or in part, customarily at full face value, in lieu of cash to purchase the
issuer's common stock.

Convertible securities are senior to equity securities, and therefore have a
claim to assets of the corporation prior to the holders of common stock in the
case of liquidation. However, convertible securities are generally subordinated
to similar nonconvertible securities of the same company. The interest income
and dividends from convertible bonds and preferred stocks provide a stable
stream of income with generally higher yields than common stocks, but lower than
nonconvertible securities of similar quality. The Funds will exchange or convert
the convertible securities held in their portfolios into shares of the
underlying common stocks when, in the Funds' Adviser's opinion, the investment
characteristics of the underlying common shares will assist a Fund in achieving
its investment objective. Otherwise, the Funds will hold or trade the
convertible securities.

REAL ESTATE MORTGAGE INVESTMENT CONDUITS ("REMICS")

The Bond Fund Bond Fund may invest in REMICs. REMICs are offerings of multiple
class real estate mortgage-backed securities which qualify and elect treatment
as such under provisions of the Internal Revenue Code. Issuers of REMICs may
take several forms, such as trusts, partnerships, corporations, limited
liability corporations, associations, or a segregated pool of mortgages. Once
REMIC status is elected and obtained, the entity is not subject to federal
income taxation. Instead, income is passed through the entity and is taxed to
the person or persons who hold interest in the REMIC. A REMIC interest must
consist of one or more classes of "regular interests," some of which offer
adjustable rates, and a single class of "residual interests." To qualify as a
REMIC, substantially all of the assets of the entity must be in assets directly
or indirectly secured principally by real property.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

Each Fund that invests in foreign securities that invests in foreign securities
may each enter into forward foreign currency exchange contracts in order to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and a foreign currency involved in an
underlying transaction. As an example of the Funds' ability to engage in hedging
strategies, a Fund may invest in securities denominated in a Western European
currency, such as the French Franc, and seek to hedge against the effect of an
increase in the value of the U.S. dollar against that currency by entering into
a forward foreign currency exchange contract to sell the lower yielding German
Mark, which has historically had price movements that tend to correlate closely
with those of the French Franc, thereby creating a hedge similar to the simple
Dollar/Franc hedge, but at a possibly lower cost. In addition, the Fund might
arrange to sell those Marks against Canadian Dollars in an effort to minimize
hedging costs. It should be noted that forward foreign currency exchange
contracts may limit potential gains which could result from a positive change in
such currency relationships. The Adviser believes that it is important to have
the flexibility to enter into forward foreign currency exchange contracts
whenever it determines that it is in a Fund's best interest to do so. The Funds,
however, will not speculate in foreign currency exchange.

There is no limitation as to the percentage of a Fund's assets that may be
committed to such contracts. The Funds do not enter into forward foreign
currency exchange contracts or maintain a net exposure in such contracts when
the Funds would be obligated to deliver an amount of foreign currency in excess
of the value of the Funds' respective portfolio securities or other assets
denominated in that currency or, in the case of a 'cross-hedge,' denominated in
a currency or currencies that the Adviser believes will tend to be closely
correlated with that currency with regard to price movements. Generally, a Fund
will not enter into a forward foreign currency exchange contract with a term
longer than one year.

FOREIGN CURRENCY OPTIONS

A foreign currency option provides the option buyer with the right to buy or
sell a stated amount of foreign currency at the exercise price on a specified
date or during the option period. The owner of a call option has the right, but
not the obligation, to buy the currency. Conversely, the owner of a put option
has the right, but not the obligation, to sell the currency.

When the option is exercised, the seller (i.e., writer) of the option is
obligated to fulfill the terms of the sold option. However, either the seller or
the buyer may, in the secondary market, close its position during the option
period at any time prior to expiration.

A call option on foreign currency generally rises in value if the underlying
currency appreciates in value, and a put option on foreign currency generally
falls in value if the underlying currency depreciates in value.

Although purchasing a foreign currency option can protect a Fund against an
adverse movement in the value of a foreign currency, the option will not limit
the movement in the value of such currency. For example, if a Fund were holding
securities denominated in a foreign currency that was appreciating and had
purchased a foreign currency put to hedge against a decline in the value of the
currency, the Fund would not have to exercise its put option. Likewise, if the
Fund were to enter into a contract to purchase a security denominated in a
foreign currency and, in conjunction with that purchase, were to purchase a
foreign currency call option to hedge against a rise in value of the currency,
and if the value of the currency instead depreciated between the date of
purchase and the settlement date, the Fund would not have to exercise its call.
Instead, the Fund could acquire in the spot market the amount of foreign
currency needed for settlement.

SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY OPTIONS

Buyers and sellers of foreign currency options are subject to the same risks
that apply to options generally. In addition, there are certain additional risks
associated with foreign currency options. The markets in foreign currency
options are relatively new, and the Funds' ability to establish and close out
positions on such options is subject to the maintenance of a liquid secondary
market. Although the Funds will not purchase or write such options unless and
until, in the opinion of the Adviser, the market for them has developed
sufficiently to ensure that the risks in connection with such options are not
greater than the risks in connection with the underlying currency, there can be
no assurance that a liquid secondary market will exist for a particular option
at any specific time.

In addition, options on foreign currencies are affected by all of those factors
that influence foreign exchange rates and investments generally.

The value of a foreign currency option depends upon the value of the underlying
currency relative to U.S. dollars. As a result, the price of the option position
may vary with changes in the value of either or both currencies and may have no
relationship to the investment merits of a foreign security. Because foreign
currency transactions occurring in the interbank market involve substantially
larger amounts than those that may be involved in the use of foreign currency
options, investors may be disadvantaged by having to deal in an odd lot market
(generally consisting of transactions of less than $1 million) for the
underlying foreign currencies at prices that are less favorable than for round
lots.

There is no systematic reporting of last sale information for foreign currencies
or any regulatory requirement that quotations available through dealers or other
market sources be firm or revised on a timely basis. Available quotation
information is generally representative of very large transactions in the
interbank market and thus may not reflect relatively smaller transactions (i.e.,
less than $1 million) where rates may be less favorable. The interbank market in
foreign currencies is a global, around-the-clock market subject to significant
price and rate movements.

FUTURES CONTRACTS

The Funds may enter into contracts for the future delivery of a financial
instrument, such as an amount of foreign currency, a security, or the cash value
of a securities index during a specified future period at a specified price.
This investment technique is designed primarily to hedge against anticipated
future changes in foreign exchange rates, interest rates or market conditions,
all of which might otherwise have an adverse effect upon the value of securities
or other assets which the Funds hold or intend to purchase. A "sale" of a
futures contract means the undertaking of a contractual obligation to deliver
the underlying foreign currency, security or cash value of a securities index
called for by the contract at a specified price during a specified delivery
period. A "purchase" of a futures contract means the undertaking of a
contractual obligation to acquire the underlying foreign currency, security or
cash value of a securities index at a specified price during a specified
delivery period. At the time of delivery, in the case of fixed income securities
pursuant to the contract, adjustments are made to recognize differences in value
resulting from the delivery of securities with a different interest rate than
the rate specified in the contract. In some cases, securities called for by a
futures contract may not have been issued at the time the contract was written.

Although some futures contracts by their terms call for the actual delivery or
acquisition of assets, in most cases a party will close out the contractual
commitment before delivery without having to make or take delivery of the
underlying assets by purchasing (or selling, as the case may be) on a
commodities exchange an identical futures contract calling for delivery in the
same month. Such a transaction, if effected through a member of an exchange,
cancels the obligation to make or take delivery of the underlying assets. All
transactions in the futures market are made, offset or fulfilled through a
clearing house associated with the exchange on which the contracts are traded.
Brokerage fees will be incurred by a Fund when it purchases or sells contracts,
and the Fund will be required to maintain margin deposits. At the time a Fund
enters into a futures contract, it is required to deposit with its custodian, on
behalf of the broker, a specified amount of cash or eligible securities, called
"initial margin." The initial margin required for a futures contract is set by
the exchange on which the contract is traded. Subsequent payments, which are
called "variation margin," to and from the broker are made on a daily basis as
the market price of the futures contract fluctuates. The costs incurred in
connection with futures transactions could reduce the Funds' returns.

Futures contracts entail risks. If the Adviser's judgment about the general
direction of interest rates, markets or exchange rates is wrong, the overall
performance may be poorer than if no such contracts had been entered into. An
imperfect correlation may exist between movements in the prices of futures
contracts and portfolio assets being hedged. Further, the market prices of
futures contracts may be affected by certain factors. For example, the normal
relationship between the assets and futures markets could be distorted if
participants in the futures market were to elect to close out their contracts
through offsetting transactions rather than by meeting margin requirements.
Price distortions also could result if investors in futures contracts were to
decide to make or take delivery of underlying assets rather than engaging in
closing transactions because of the resultant liquidity of the futures market.
Further, increased participation by speculators in the futures market could
cause temporary price distortions because, as perceived by speculators, margin
requirements in the futures market are less onerous than margin requirements in
the cash market. Because of the possibility of price distortions in the futures
market and the imperfect correlation between movements in the prices of
securities or other assets and movements in the prices of futures contracts, a
correct forecast of market trends by the Adviser still may not result in a
successful hedging transaction. If one of these events were to occur, a Fund
could lose money on the futures contracts as well as on its portfolio assets.

OPTIONS ON FUTURES CONTRACTS

The Funds may engage in futures transactions and may use options in an attempt
to hedge against the effects of fluctuations in interest rates and other market
conditions. For example, if a Fund owned long-term bonds and interest rates were
expected to rise, it could sell futures contracts or the cash value of a
securities index. If interest rates did increase, the value of the bonds owned
by the Fund would decline, but this decline would be offset in whole or in part
by an increase in the value of the Fund's futures contracts or the cash value of
the securities index.

If, on the other hand, long-term interest rates were expected to decline, the
Fund could hold short-term debt securities and benefit from the income earned by
holding such securities, while at the same time the Fund could purchase futures
contracts on long-term bonds or the cash value of a securities index. Thus, the
Fund could take advantage of the anticipated rise in the value of long-term
bonds without actually buying them. The futures contracts and short-term debt
securities could then be liquidated and the cash proceeds used to buy long-term
bonds.

The Fund may also purchase and write call and put options on futures contracts.
An option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract at a specified price at
any time during the period of the option. When the option is exercised, the
writer of the option delivers the futures contract to the holder at the exercise
price. With regard to put and call options on futures contracts written by a
Fund, the Fund would be required to deposit initial and maintenance margin with
the custodian. Options on futures contracts involve risks similar to those
discussed above that relate to transactions in futures contracts. Furthermore,
an option on a futures contract purchased by a Fund may expire as worthless,
which would cause the Fund to lose the cost of the premium paid for the option.

FOREIGN CURRENCY FUTURES TRANSACTIONS

By using foreign currency futures contracts and options on such contracts, the
Funds may be able to achieve many of the same objectives as they would through
the use of forward foreign currency exchange contracts. The Funds may be able to
achieve these objectives possibly more effectively and at a lower cost by using
futures transactions instead of forward foreign currency exchange contracts.

SPECIAL RISKS ASSOCIATED WITH FOREIGN CURRENCY FUTURES CONTRACTS AND RELATED
OPTIONS

Buyers and sellers of foreign currency futures contracts are subject to the same
risks that apply to the use of futures generally. In addition, there are risks
associated with foreign currency futures contracts and their use as a hedging
device similar to those associated with options on foreign currencies, as
described above.

Options on foreign currency futures contracts may involve certain additional
risks. Trading options on foreign currency futures contracts is relatively new.
The ability to establish and close out positions on such options is subject to
the maintenance of a liquid secondary market. To reduce this risk, the Funds
will not purchase or write options on foreign currency futures contracts unless
and until, in the Adviser's opinion, the market for such options has developed
sufficiently that the risks in connection with such options are not greater than
the risks in connection with transactions in the underlying foreign currency
futures contracts. Compared to the purchase or sale of foreign currency futures
contracts, the purchase of call or put options on futures contracts involves
less potential risk to a Fund because the maximum amount at risk is the premium
paid for the option (plus transaction costs). However, there may be
circumstances when the purchase of a call or put option on a futures contract
would result in a loss, such as when there is no movement in the price of the
underlying currency or futures contract.

OPTIONS ON SECURITIES

A Fund (except Municipal Bond Fund) may write (sell) covered call options on
securities if it owns securities that are acceptable for escrow purposes.
Additionally, a Fund may write secured put options on securities. When writing a
secured put option, a Fund will invest an amount not less than the exercise
price of the put option in eligible securities, so long as the Fund is obligated
as a writer of a put option. A call option gives the purchaser the right to buy,
and the writer the obligation to sell, the underlying security at the exercise
price during the option period. A put option gives the purchaser the right to
sell, and the writer the obligation to buy, the underlying security at the
exercise price during the option period. The premium received for writing an
option will reflect such factors as the current market price of the underlying
security, the relationship of the exercise price to such market price, the
option period, supply and demand, and interest rates. The exercise price of an
option may be below, equal to or above the current market value of the
underlying security at the time that the option is written. The Funds may also
write or purchase spread options. A spread option is an option for which the
exercise price may be a fixed dollar spread or yield spread between the security
underlying the option and another security that a Fund does not own but uses as
a benchmark.

The purchase of a put option by the owner of the related security protects the
purchaser against any decline in the related security's price below the exercise
price (less the amount paid for the option). The ability of a Fund to purchase
put options allows it to protect capital gains in an appreciated security
without actually requiring the Fund to sell the appreciated security. On
occasion, a Fund would like to establish a position in a security upon which
call options are available. The purchase of a call option enables the Fund to
fix the cost of acquiring the security, which would be the cost of the call plus
the exercise price of the option. In addition, this method of acquiring
securities provides some protection from an unexpected downturn in the market.
This is because the Fund is at risk only for the amount of the premium paid for
the call option, which it can allow to lapse, if it so chooses.

During the option period, the covered call writer gives up the potential for
capital appreciation above the exercise price if the underlying asset rises in
value, and the secured put writer retains the risk of loss if the underlying
asset declines in value. For the covered call writer, substantial appreciation
in the value of the underlying asset would result in the asset being "called
away." For the secured put writer, substantial depreciation in the value of the
underlying asset could result in the asset being "put to" the writer. If a
covered call option expired unexercised, the writer of the call would realize a
gain and the buyer would realize a loss in the amount of the premium. If the
covered call option writer had to sell the underlying asset because of the
exercise of the call option, it would realize a gain or loss from the sale of
the underlying asset, with the proceeds being increased by the amount of the
premium.

If a secured put option expired unexercised, the writer would realize a gain and
the buyer would realize a loss on the amount of the premium. If the secured put
writer would have to buy the underlying asset because of the exercise of the put
option, the writer would incur an unrealized loss to the extent that the current
market value of the underlying asset is less than the exercise price of the put
option, less the premium received.

OVER-THE-COUNTER OPTIONS

The Funds (except Municipal Bond Fund) may deal in over-the-counter traded
options ("OTC options") in addition to exchange-traded options. OTC options
differ from exchange-traded options in several respects. First, they are
transacted with dealers rather than a clearing corporation. Second, a risk of
nonperformance by the dealer exists, whether as a result of the insolvency of
the dealer or otherwise, which could cause a Fund to experience material losses;
however, in writing OTC options, the premium is paid in advance by the dealer.
Third, in contrast to exchange-traded options, OTC options are available for a
greater variety of securities and wider range of expiration dates and exercise
prices. Because there is no exchange in the case of OTC options, pricing is
normally done with reference to information from market makers, which is
carefully monitored by the Adviser and verified in appropriate cases.

A writer or purchaser of a put or call option can terminate it voluntarily only
by entering into a closing transaction. In the case of OTC options, there cannot
be any assurance that a continuous liquid secondary market will exist for any
particular option at any given time. As a result, a Fund may be able to realize
the value of an OTC option it has purchased only by exercising it or by entering
into a closing sale transaction with the dealer that issued it. Likewise, in
cases where a Fund writes an OTC option, it generally can close out that option
prior to its expiration only by entering into a closing purchase transaction
with the dealer to whom the Fund wrote the option. If a covered call option
writer is unable to effect a closing transaction, it cannot sell the underlying
asset until the option either expires or is exercised. Thus, a covered call
option writer of an OTC option may not be able to sell an underlying asset even
though it might otherwise be advantageous to do so. Moreover, a secured put
writer of an OTC option may be unable to sell the assets pledged to secure the
put for other investment purposes so long as it is obligated as a put writer,
and a purchaser of the put or call option might also find it difficult to
terminate its position on a timely basis when no secondary market exists.

OPTIONS ON SECURITIES INDICES

The Funds also may purchase and write call and put options on securities indices
in order to hedge against market conditions which affect the values of
securities that the Funds own or intend to purchase. The Funds will not purchase
and write such options for speculation. By writing and purchasing index options,
a Fund may be able to achieve many of the same objectives as through the
purchasing and writing of options on individual securities. Options on
securities indices are similar to options on individual securities. However,
unlike an option on an individual security, which gives the right to take or
make delivery of a security at a specified price, an option on a securities
index gives the holder upon exercise the right to receive an amount of cash if
the closing level of the securities index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option. Upon exercise of the option, the amount of cash
received by the holder is equal to the difference between the closing price of
the index and the exercise price of the option. In consideration for the premium
received, the writer of the option has an obligation to make delivery of the
amount of cash resulting from the exercise of the option. Unlike options on
individual securities, all settlements are in cash, and the gain or loss depends
upon price movements in the market generally or in a segment of the market,
rather than upon price movements in individual securities.

The Funds cover call options written on a securities index through the ownership
of securities whose changes in price, in the opinion of the Adviser, are
anticipated to be similar to the price changes of the index, or in such other
manner or may be in conformance with applicable laws, regulations and exchange
rules. Any changes in the prices of the securities owned by a Fund probably will
not be perfectly correlated with the securities index. A Fund will secure put
options written on a securities index by means of segregating liquid high-grade
securities equal to the exercise price, or in such other manner as may be in
conformance with applicable laws, regulations and exchange rules. Upon writing
an option on a securities index, a Fund will be required to deposit with its
custodian and mark-to-market eligible securities that are equal in value to at
least 100% of the exercise price in the case of a put or, in the case of a call,
the value of the contract. Additionally, if a Fund writes a call option on a
securities index at a time when the value of the contract is greater than the
exercise price, the Fund will segregate and mark-to-market, until such time as
the option expires or is closed out, cash or a cash equivalent equal in value to
the excess of the contract value.

In addition, a Fund may purchase and write options on other appropriate indices,
as available (e.g., foreign currency indices).

Index options involve risks similar to those associated with transactions in
futures contracts, as described above. Also, an option purchased by a Fund may
expire as worthless. In such case, the Fund could lose the premium paid for the
option.

REGULATORY RESTRICTIONS

To the extent required to comply with SEC Release No. 10666, when purchasing a
futures contract, writing a put option or entering into a delayed delivery
purchase or forward foreign currency exchange purchase, the Funds will segregate
and maintain liquid securities equal to the value of such contracts.

To the extent required to comply with federal or state regulations, and thereby
avoid status as a "commodity pool operator," the Funds will not enter into a
futures contract, or purchase an option thereon, if immediately thereafter the
initial margin deposits for futures contracts held by a Fund, plus premiums paid
by it for open options of futures, would exceed 5% of the total assets of the
Fund. The Funds will not engage in transactions in futures contracts or options
thereon for speculation, but only to attempt to hedge against changes in market
conditions affecting the values of assets which a Fund holds or intends to
purchase. When futures contracts or options thereon are purchased in order to
protect against a price increase on securities or other assets intended to be
purchased later, it is anticipated that at least 75% of such intended purchases
will be completed. When other futures contracts or options thereon are
purchased, the underlying value of such contracts will at all times not exceed
the sum of (1) accrued profit on such contracts held by the broker; (2) cash or
high-quality money market instruments set aside in an identifiable manner; and
(3) cash proceeds from investments due in 30 days or less.

ADDITIONAL RISK CONSIDERATIONS

In the case of the Funds' foreign investments foreign investments, the Trustees
consider the Adviser's analysis of the likelihood of the imposition by any
foreign government of exchange control restrictions which would affect the
liquidity of a Fund's assets maintained with custodians in foreign countries, as
well as the degree of risk from political acts of foreign governments to which
such assets may be exposed. The Trustees also consider the degree of risk
involved through the holding of portfolio securities in domestic and foreign
securities depositories. However, in the absence of willful misfeasance, bad
faith or gross negligence on the part of the Adviser, any losses resulting from
the investingholding of the Funds' portfolio securities in foreign countries
and/or with securities depositories will be at the risk of shareholders. No
assurance can be given that the appraisals of these these risks will always be
correct or that such exchange control restrictions or political acts of foreign
governments might not occur.

PORTFOLIO TURNOVER

INVESTMENT LIMITATIONS

ISSUING SENIOR SECURITIES AND BORROWING MONEY

The Funds will not issue senior securities, except that a Fund may borrow
money directly or through reverse repurchase agreements in amounts up to
one-third of the value of its total assets, including the amount borrowed;
and except to the extent that a Fund may enter into futures contracts. The
Funds will not borrow money or engage in reverse repurchase agreements for
investment leverage, but rather as a temporary, extraordinary, or emergency
measure or to facilitate management of the portfolio by enabling a Fund to
meet redemption requests when the liquidation of portfolio securities is
deemed to be inconvenient or disadvantageous. A Fund will not purchase any
securities while any borrowings in excess of 5% of its total assets are
outstanding. During the period any reverse repurchase agreements are
outstanding, a Fund will restrict the purchase of portfolio securities to
money market instruments maturing on or before the expiration date of the
reverse repurchase agreements, but only to the extent necessary to assure
completion of the reverse repurchase agreements.

SELLING SHORT AND BUYING ON MARGIN

The Funds will not sell any securities short or purchase any securities on
margin, but may obtain such short-term credits as are necessary for
clearance of purchases and sale of securities. The deposit or payment by the
Funds of initial or variation margin in connection with futures contracts or
related options transactions is not considered the purchase of a security on
margin.

PLEDGING ASSETS

The Funds will not mortgage, pledge, or hypothecate any assets, except to
secure permitted borrowings. In these cases, the Funds may pledge assets
having a value of 15% of assets taken at cost. For purposes of this
restriction: (a) the deposit of assets in escrow in connection with the
writing of covered put or call options and the purchase of securities on a
when-issued basis, and (b) collateral arrangements with respect to (i) the
purchase and sale of stock options and (ii) initial or variation margin for
futures contracts, will not be deemed to be pledges of a Fund's assets.
Margin deposits for the purchase and sale of futures contracts and related
options are not deemed to be a pledge.

LENDING CASH OR SECURITIES

The Funds will not lend any of their respective assets except portfolio
securities up to one-third of the value of total assets. This shall not
prevent a Fund from purchasing or holding U.S. government obligations, money
market instruments, bonds, debentures, notes, certificates of indebtedness,
or other debt securities, entering into repurchase agreements, or engaging
in other transactions where permitted by a Fund's investment objective,
policies, and limitations, or the Trust's Declaration of Trust.

INVESTING IN COMMODITIES

None of the Funds will invest in commodities, except to the extent that the
Funds may engage in transactions involving futures contracts or options on
futures contracts.

INVESTING IN REAL ESTATE

None of the Funds will purchase or sell real estate, including limited
partnership interests, although the Funds may invest in securities of
issuers whose business involves the purchase or sale of real estate or in
securities which are secured by real estate or interests in real estate.

DIVERSIFICATION OF INVESTMENTS

With respect to 75% of the value of its total assets, each Fund will not
purchase securities issued by any other issuer (other than cash, cash items
or securities issued or guaranteed by the government of the United States or
its agencies or instrumentalities and repurchase agreements collateralized
by such securities), if, as a result, more than 5% of the value of its total
assets would be invested in the securities of that issuer. No Fund will
acquire more than 10% of the outstanding voting securities of any one
issuer.

CONCENTRATION OF INVESTMENTS

No Fund will invest 25% or more of the value of its respective total assets
in any one industry (other than securities issued by the U.S. government,
its agencies, or instrumentalities or repurchase agreements collateralized
by these securities and, in the case of the Municipal Bond Fund, tax-exempt
securities issued by governments or their political subdivisions ). and, in
the case of the Municipal Bond Fund, tax-exempt securities issued by
governments or their political subdivisions ).

UNDERWRITING

A Fund will not underwrite any issue of securities, except as a Fund may be
deemed to be an underwriter under the Securities Act of 1933 in connection
with the sale of securities in accordance with its investment objective,
policies, and limitations.

The above investment limitations cannot be changed with respect to a Fund
without the approval of the holders of a majority of that Fund's shares. The
following limitations may be changed by the Trustees without shareholder
approval. Shareholders will be notified before any material change in these
limitations becomes effective.

INVESTING IN ILLIQUID SECURITIES

The Funds will not invest more than 15% of the value of their respective net
assets in illiquid securities, including: repurchase agreements providing
for settlement more than seven days after notice; over-the-counter options;
and certain restricted securities not determined by the Trustees to be
liquid.

INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES

The Funds will limit their respective investment in other investment
companies to no more than 3% of the total outstanding voting stock of any
investment company, invest no more than 5% of their total assets in any one
investment company, or invest more than 10% of their total assets in
investment companies in general unless permitted to exceed these limits by
action of the Securities and Exchange Commission. The Funds will purchase
securities of closed-end investment companies only in open market
transactions involving only customary broker's commissions. However, these
limitations are not applicable if the securities are acquired in a merger,
consolidation, reorganization, or acquisition of assets.

INVESTING IN NEW ISSUERS

A Fund will not invest more than 5% of the value of its total assets in
securities of issuers which have records of less than three years of
continuous operations, including the operation of any predecessor.

INVESTING IN ISSUERS WHOSE SECURITIES ARE OWNED BY OFFICERS AND TRUSTEES OF THE
TRUST

A Fund will not purchase or retain the securities of any issuer if the
officers and Trustees of the Trust or the Funds' Adviser, owning
individually more than 1/2 of 1% of the issuer's securities, together own
more than 5% of the issuer's securities.

INVESTING IN MINERALS

A Fund will not purchase interests in oil, gas, or other mineral exploration
or development programs or leases, except it may purchase the securities of
issuers which invest in or sponsor such programs.

ARBITRAGE TRANSACTIONS

A Fund will not enter into transactions for the purpose of engaging in
arbitrage.

INVESTING IN PUTS AND CALLS

The Funds may not write or purchase options, except that a Fund may write
covered call options and secured put options on up to 25% of its net assets
and may purchase put and call options, provided that no more than 5% of a
Fund's net assets may be invested in premiums on such options.

PURCHASING SECURITIES TO EXERCISE CONTROL

A Fund will not purchase securities of a company for the purpose of
exercising control or management.

INVESTING IN WARRANTS

The Funds will not invest more than 5% of their respective net assets in
warrants. No more than 2% of a Fund's net assets, to be included within the
overall 5% limit on investments in warrants, may be warrants which are not
listed on the New York Stock Exchange ("NYSE") or the American Stock
Exchange. (If state restrictions change, this latter restriction may be
revised without notice to shareholders.) For purposes of this investment
restriction, warrants will be valued at the lower of cost or market, except
that warrants acquired by the Funds in units with or attached to securities
may be deemed to be without value.

Except with respect to the Funds' policy of borrowing money, if a percentage
limitation is adhered to at the time of investment, a later increase or decrease
in percentage resulting from any change in value or net assets will not result
in a violation of such restriction.

The Funds have no present intention to borrow money or pledge securities in
excess of 5% of the value of their respective net assets.

Each Fund will, as relevant, (1) limit the aggregate value of the assets
underlying covered call options or put options written by the Fund to not more
than 25% of its net assets, (2) limit the premiums paid for options purchased by
the Fund to 5% of its net assets, and (3) limit the margin deposits on futures
contracts entered into by the Fund to 5% of its net assets. These restrictions
may be revised without shareholder notification.

For purposes of its policies and limitations, the Funds consider certificates of
deposit and demand and time deposits issued by a U.S. branch of a domestic bank
or savings associations having capital, surplus, and undivided profits in excess
of $100,000,000 at the time of investment to be "cash items."

<PAGE>

FTI FUNDS MANAGEMENT

OFFICERS AND TRUSTEES

Officers and Trustees are listed with their addresses, birthdates, present
positions with FTI Funds and principal occupations.

Edward C. Gonzales *
Federated Investors Tower
Pittsburgh, Pennsylvania
Birthdate: October 22, 1930

President, Treasurer, and Trustee

Vice Chairman, Treasurer, and Trustee, Federated Investors; Vice President,
Federated Advisers, Federated Management, Federated Research, Federated Research
Corp., Federated Global Research Corp. and Passport Research, Ltd.; Executive
Vice President and Director, Federated Securities Corp.; Trustee, Federated
Shareholder Services Company; Trustee or Director and/or President, Executive
Vice President, and/or Treasurer of other funds distributed by Edgewood
Services, Inc. or its affiliates. other funds distributed by Edgewood Services,
Inc. or its affiliates.

Peter A. Aron
Lafayette Enterprises, Inc.
126 E. 56th Street
New York, NY 10022
Birthdate: May 26, 1946

Trustee

Vice President, Lafayette Enterprises, Inc. (privately owned Investment
Advisory Company); President, J. Aron Charitable Foundation, Inc.

Nancy L. Close
4951 Windsor Park12 Pheasant Run
Sarasota, FL 3423573 Weaver Street
Greenwich, CT 06831
Birthdate: December 2, 1946

Trustee

Asset Manager and Trustee of certain private trusts.

James C. Goodfellow *
Fiduciary Trust Company International
Two World Trade Center
New York, NY 10048
Birthdate: April 6, 1945

Trustee

Executive Vice President, Fiduciary Trust Company International, Managing
Director - J.P. Morgan and Co.

<PAGE>

Burton J. Greenwald
2009 Spruce Street
Philadelphia, PA 19103
Birthdate: December 6, 1929

Trustee

Managing Director, B. J. Greenwald Associates, Management Consultants to
the Financial Services Industry.

Jeffrey W. Sterling
Federated Investors Tower
Pittsburgh, Pennsylvania
Birthdate: February 5, 1947

Vice President and Assistant Treasurer

Vice President and Assistant Treasurer of some of other funds distributed
by Edgewood Services, Inc. or its affiliates.

Jay S. Neuman
Federated Investors Tower
Pittsburgh, Pennsylvania
Birthdate: April 22, 1950

Secretary

Corporate Counsel, Federated Investors.

*This Trustee is deemed to be an "interested person" as defined in the
Investment Company Act of 1940.

TRUST OWNERSHIP

Officers and Trustees own less than 1% of the outstanding shares of each Fund.

As of September 4, 1998, the following shareholders of record owned 5% or more
of the outstanding shares of Small Capitalization Fund: Fiduciary Trust Company
International, New York, New York, on behalf of certain underlying accounts,
owned approximately 2,676,233 shares (76.46%) and WAEPA, Falls Church, Virginia,
owned approximately 182,882 shares (5.22%).

As of September 4, 1998, the following shareholders of record owned 5% or more
of the outstanding shares of International Equity Fund: Fiduciary Trust Company
International, New York, New York, on behalf of certain underlying accounts,
owned approximately 3,846,843 shares (67.88%); State Street Bank and Trust
Company, as Trustee for Centrex Corporation, Boston, Massachusetts, owned
approximately 1,058,637 shares (18.68%); and State Street Bank and Trust
Company, as Trustee for Calmwater & Co., Quincey, Massachusetts, owned
approximately 359,726 shares (6.35%).

As of September 4, 1998, the following shareholder of record owned 5% or more of
the outstanding shares of International Bond Fund: Fiduciary Trust Company
International, New York, New York, on behalf of certain underlying accounts,
owned approximately 296,093 shares (99.90%).

As of September 4, 1998, the following shareholders of record owned 5% or more
of the outstanding shares of Global Bond Fund: Greenwich Academy, Greenwich,
Connecticut, owned approximately 121,065 shares (61.41%); Fiduciary Trust
Company International, New York, New York, on behalf of certain underlying
accounts, owned approximately 60,783 shares (30.83%); and Federated
Administrative Services, Pittsburgh, Pennsylvania, owned approximately 10,115
shares (5.13%).

<PAGE>

TRUSTEES COMPENSATION

AGGREGATE
NAME , COMPENSATION
POSITION WITH FROM
THE TRUST THE TRUST*#

Edward C. Gonzales $0
President, Treasurer,
and Trustee

Peter A. Aron $9,000
Trustee

Nancy L. Close $9,000
Trustee

James C. Goodfellow $0
Trustee

Burton J. Greenwald $9,000
Trustee

*Information is furnished for the fiscal year ended November 30, 1997. The Trust
is the only investment company in the Fund complex.

#The aggregate compensation is provided for the Trust which wais comprised of
foureight portfolios during the fiscal year ended November 30, 1997.

TRUSTEE LIABILITY

The Trust's Declaration of Trust provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not
protected against any liability to which they would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of their office.

INVESTMENT ADVISORY SERVICES

ADVISER TO THE TRUST

The Trust's Adviser is Fiduciary International, Inc. (the "Adviser" or
"Fiduciary"). Fiduciary is a New York corporation, and is a registered Adviser
under the Investment Advisers Act of 1940. The Adviser shall not be liable to
the Trust, a Fund, or any shareholder of any of the Funds for any losses that
may be sustained in the purchase, holding, or sale of any security or for
anything done or omitted by it, except acts or omissions involving willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
imposed upon it by its contract with the Trust.

ADVISORY FEES

For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectus.

For the fiscal year ended November 30, 1997, and for the period from December
22, 1995 (start of performance) to November 30, 1996, the Adviser earned:
$288,740 and $98,486, respectively, from Small Capitalization Fund and $321,927
and $55,029, respectively, from International Equity Fund.

ADMINISTRATIVE SERVICES

Federated Administrative Services, which is a subsidiary of Federated Investors,
provides administrative personnel and services to the Funds for a fee as
described in the prospectus.

For the fiscal year ended November 30, 1997, and for the period from December
22, 1995 (start of performance) to November 30, 1997, Federated Administrative
Services earned: $75,000 and $68,443, respectively, from Small Capitalization
Fund and $75,000 and $67,829, respectively, from International Equity Fund;
$75,000.

TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTANT

Federated Services Company through its registered transfer agent Federated
Shareholder Services Company, maintains all necessary shareholder records. For
its services, the transfer agent receives a fee based on the number of accounts
and transactions made by the Funds' shareholders.

Federated Services Company also provides certain accounting and recordkeeping
services with respect to the Funds' portfolio investments. The fee paid for this
service is based upon the level of the Funds' average net assets for the period,
plus out-of-pocket expenses.

CUSTODIAN

For its services as custodian, Fiduciary Trust Company International (the
"Custodian") receives an annual fee, payable monthly, based upon the Funds'
average aggregate daily net assets, plus transaction charges. The Custodian is
reimbursed for out-of-pocket expenses.

INDEPENDENT AUDITORS

The independent auditors for the Trust are Ernst & Young LLP.

BROKERAGE TRANSACTIONS

When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments for the Funds, the Adviser looks for prompt execution of the order
at a favorable price. In working with dealers, the Adviser will generally use
those who are recognized dealers in specific portfolio instruments, except when
a better price and execution of the order can be obtained elsewhere. The Adviser
makes decisions on portfolio transactions and selects brokers and dealers
subject to guidelines established by the Trustees. The Adviser may select
brokers and dealers who offer brokerage and research services. These services
may be furnished directly to the Funds or to the Adviser, and may include:

o advice as to the advisability of investing in securities;

o security analysis and reports;

o economic studies;

o industry studies;

o receipt of quotations for portfolio evaluations; and

o similar services.

The Adviser and its affiliates exercise reasonable business judgment in
selecting brokers who offer brokerage and research services to execute
securities transactions. They determine in good faith that commissions charged
by such persons are reasonable in relationship to the value of the brokerage and
research services provided. For the fiscal year ended November 30, 1997, and for
the period from December 22, 1995 (start of performance) to November 30, 1996,
Small Capitalization Fund paid total brokerage commissions of $72,588 and
$33,089, respectively and International Equity Fund paid total brokerage
commissions of $173,103 and $57,755, respectively

Research services provided by brokers may be used by the Adviser or its
affiliates in advising certain other accounts. To the extent that receipt of
these services may supplant services for which the Adviser might otherwise have
paid, it would tend to reduce its expenses.

Investment decisions for the Funds will be made independently from those of any
fiduciary or other accounts that may be managed by the Adviser or its
subsidiaries. If, however, such accounts and the Funds are simultaneously
engaged in transactions involving the same securities, the transactions may be
combined and allocated to each account. This system may adversely affect the
price the Funds pay or receive, or the size of the positions they obtain.

The Adviser may engage in other non-U.S. transactions that may have adverse
effects on the market for securities in the Funds' portfolios. The Adviser is
not obligated to obtain any material non-public ("inside") information about any
securities issuer, or to base purchase or sale recommendations on such
information.

PURCHASING SHARES

Shares of the Funds are sold at their net asset value on days on which the NYSE
and the Federal Reserve Wire are open for business. The procedure for purchasing
shares of the Funds is explained in the prospectus under "Investing in the
Funds."

DISTRIBUTION PLAN AND SHAREHOLDER SERVICES AGREEMENT

As explained in the prospectus, the Funds have adopted a Distribution Plan
pursuant to Rule 12b-1 of the Investment Company Act of 1940 (the "1940 Act")
and a Shareholder Services Agreement. These arrangements permit the payment of
fees to financial institutions, Edgewood Services, Inc., the Trust's
distributor, and FII to stimulate distribution activities and to cause services
to be provided to shareholders by a representative who has knowledge of the
shareholders' particular circumstances and goals. These activities may include,
but are not limited to: marketing efforts; providing office space, equipment,
telephone facilities, and various clerical, supervisory, computer, and other
personnel as necessary or beneficial to establish and maintain shareholder
accounts and records; processing purchase and redemption transactions and
automatic investments of client account cash balances; answering routine client
inquiries; and assisting clients in changing dividend options, account
designations, and addresses.

By adopting the Distribution Plan, the Trustees expect that the Funds will be
able to achieve a more predictable flow of cash for investment purposes and to
meet redemptions. This will facilitate more efficient portfolio management and
assist the Funds in pursuing their investment objectives. By identifying
potential investors whose needs are served by the Funds' objectives, and
properly servicing these accounts, it may be possible to curb sharp fluctuations
in rates of redemptions and sales.

Other benefits, which may be realized under either arrangement, may include: (1)
providing personal services to shareholders; (2) investing shareholder assets
with a minimum of delay and administrative activity; (3) enhancing shareholder
recordkeeping systems; and (4) responding promptly to shareholders' requests and
inquiries concerning their accounts.

CONVERSION TO FEDERAL FUNDS

It is the Funds' policy to be as fully invested as possible so that maximum
income may be earned. To this end, all payments from shareholders must be in
federal funds or be converted into federal funds before shareholders begin to
earn dividends. Fiduciary acts as the shareholder's agent in depositing checks
and converting them to federal funds.

DETERMINING NET ASSET VALUE

The net asset values of the Funds generally change each day. The days on
which net asset value is calculated by the Funds are described in the
prospectus.

Dividend income is recorded on the ex-dividend date, except certain dividends
from foreign securities where the ex-dividend date may have passed, are recorded
as soon as the Trust is informed of the ex-dividend date.

DETERMINING MARKET VALUE OF SECURITIES

The market values of the Funds' portfolio securities are determined as follows:

o for equity securities, according to the last sale price on a national
securities exchange, if available;

o in the absence of recorded sales for listed equity securities, according
to the mean between the last closing bid and asked prices;

o for unlisted equity securities, the latest bid prices;

o for bonds and other fixed income securities, as determined by an
independent pricing service;

o for short-term obligations, according to the mean between the bid and
asked prices as furnished by an independent pricing service or for
short-term obligations with remaining maturities of 60 days or less at
the time of purchase, at amortized cost; or

o for all other securities, at fair value as determined in good faith by
the Trustees.

Prices provided by independent pricing services may be determined without
relying exclusively on quoted prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data.

The Funds will value futures contracts, options and put options on futures at
their market values established by the exchanges at the close of option trading
on such exchanges, unless the Trustees determine in good faith that another
method of valuing option positions is necessary to appraise fair value.

TRADING IN FOREIGN SECURITIES

Trading in foreign cities may be completed at times which vary from the closing
of the NYSE. In computing the net asset values, the Funds value foreign
securities at the latest closing price on the exchange on which they are traded
immediately prior to the closing of the NYSE. Foreign securities quoted in
foreign currencies are translated into U.S. dollars at the foreign exchange rate
in effect at noon, Eastern time, on the day the value of the foreign security is
determined.

Occasionally, events that affect values and exchange rates may occur between the
times at which they are determined and the closing of the NYSE. If such events
materially affect the value of portfolio securities, these securities may be
valued at their fair value as determined in good faith by the Trustees, although
the actual calculation may be done by others.

REDEEMING SHARES

Each Fund redeems shares at the next computed net asset value after Fiduciary
receives the redemption request. Redemption procedures are explained in the
prospectus under "Redeeming Shares." Since portfolio securities of the Funds may
be traded on foreign exchanges which trade on Saturdays or on holidays on which
the Funds will not make redemptions, the net asset values of the Funds may be
significantly affected on days when shareholders do not have an opportunity to
redeem their shares.

REDEMPTION IN KIND

Although the Trust intends to redeem shares in cash, it reserves the right under
certain circumstances to pay the redemption price, in whole or in part, by a
distribution of securities from a Fund's portfolio. The Trust has elected to be
governed by Rule 18f-1 of the 1940 Act, under which the Trust is obligated to
redeem shares for any one shareholder in cash only up to the lesser of $250,000
or 1% of a Fund's net asset value during any 90-day period. Any redemption
beyond this amount will also be in cash unless the Trustees determine that
further cash payments will have a materially adverse effect on remaining
shareholders. In such a case, the Fund will pay all or a portion of the
remainder of the redemption in portfolio instruments, valued in the same way as
the Fund determines net asset value. The portfolio instruments will be selected
in a manner that the Trustees deem fair and equitable.

Redemption in kind will be made in conformity with applicable SEC rules, taking
such securities at the same value employed in determining net asset value and
selecting the securities in a manner the Trustees determine to be fair and
equitable.

Redemption in kind is not as liquid as a cash redemption. If redemption is made
in kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur certain transaction costs.

MASSACHUSETTS PARTNERSHIP LAW

Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.

In the unlikely event a shareholder is held personally liable for obligations of
the Trust, the Trust is required to use its property to protect or to compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder (above and
beyond the loss of Trust property) will occur only if the Trust cannot meet its
obligations to indemnify shareholders and to pay judgments against them from its
assets.

TAX STATUS

THE FUNDS' TAX STATUS

The Funds will pay no federal income tax because they expect to meet the
requirements of Subchapter M of the Internal Revenue Code of 1986 applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies. To qualify for this treatment, each Fund must, among other
requirements:

o derive at least 90% of its gross income from dividends, interest, and
gains from the sale of securities;

o invest in securities within certain statutory limits; and

o distribute to its shareholders at least 90% of its net income earned
during the year.

FOREIGN TAXES

Investment income on certain foreign securities in which the Funds may invest
may be subject to foreign withholding or other taxes that could reduce the
return on these securities. Tax treaties between the United States and foreign
countries, however, may reduce or eliminate the amount of foreign taxes to which
the Funds would be subject.

SHAREHOLDERS' TAX STATUS

Shareholders are subject to federal income tax on dividends other than
tax-exempt dividends from the Municipal Bond Fund and capital gains received as
cash or additional shares. The Funds' dividends, and any short-term capital
gains, are taxable as ordinary income.

CAPITAL GAINS

Shareholders will pay federal tax at capital gains rates on long-term
capital gains distributed to them regardless of how long they have held shares
in the Funds.

TOTAL RETURN

For the one-year period ended November 30, 1997, and for the period from
December 22, 1995 (start of performance) to November 30, 1997, the average
annual total returns were 18.96% and 20.52%, respectively, for Small
Capitalization Fund.

For the one-year period ended November 30, 1997, and for the period from
December 22, 1995 (start of performance) to November 30, 1997, the average
annual total returns were 13.01% and 11.88%, respectively, for International
Equity Fund.

Total return assumes and is reduced by the payment of the maximum sales charge
and contingent deferred sales charge, if applicable.

The Funds' average annual total return is the average compounded rate of return
for a given period that would equate a $1,000 initial investment to the ending
redeemable value of that investment. The ending redeemable value is computed by
multiplying the number of shares owned at the end of the period by the net asset
value per share at the end of the period. The number of shares owned at the end
of the period is based on the number of shares purchased at the beginning of the
period with $1,000, less any applicable sales charge, adjusted over the period
by any additional shares, assuming the reinvestment, as applicable, of all
dividends and distributions.

YIELD

The yield for the Funds is determined by dividing the net investment income per
share (as defined by the SEC) earned by a Fund over a thirty-day period by the
maximum offering price per share on the last day of the period. This value is
then annualized using semi-annual compounding. This means that the amount of
income generated during the thirty-day period is assumed to be generated each
month over a 12-month period and is reinvested every six months. The yield does
not necessarily reflect income actually earned by the Fund because of certain
adjustments required by the SEC and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.

To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in a Fund,
the performance will be reduced for those shareholders paying those fees.

TAX-EQUIVALENT YIELD

The tax-equivalent yield of the Municipal Bond Fund is calculated similarly to
the yield, but is adjusted to reflect the taxable yield that the Fund would have
had to earn to equal its actual yield, assuming a 28% tax and assuming that
income is 100% tax-exempt.

<PAGE>

TAX-EQUIVALENCY TABLE

The Municipal Bond Fund may also use a tax-equivalency table in advertising and
sales literature. The interest earned by the municipal bonds in the Fund's
portfolio generally remains free from federal regular income tax,* and is often
free from state and local taxes as well. As the table below indicates, a
"tax-exempt" investment is an attractive choice for investors, particularly in
times of narrow spreads between tax-free and taxable yields.

TAXABLE YIELD EQUIVALENT FOR 1998
MULTISTATE MUNICIPAL FUND
FEDERAL INCOME TAX BRACKET:

15.00% 28.00% 31.00% 36.00% 39.60%

JOINT $1- $42,351- $102,301- $155,951- OVER

RETURN 42,350 102,300 155,950 278,450 $278,450

SINGLE $1- $25,351- $61,401- $128,101- OVER

RETURN 25,350 61,400 128,100 278,450 $278,450

Tax-Exempt

Yield Taxable Yield Equivalent

1.00% 1.18% 1.39% 1.45% 1.56% 1.66%

1.50% 1.76% 2.08% 2.17% 2.34% 2.48%

2.00% 2.35% 2.78% 2.90% 3.13% 3.31%

2.50% 2.94% 3.47% 3.62% 3.91% 4.14%

3.00% 3.53% 4.17% 4.35% 4.69% 4.97%

3.50% 4.12% 4.86% 5.07% 5.47% 5.79%

4.00% 4.71% 5.56% 5.80% 6.25% 6.62%

4.50% 5.29% 6.25% 6.52% 7.03% 7.45%

5.00% 5.88% 6.94% 7.25% 7.81% 8.28%

5.50% 6.47% 7.64% 7.97% 8.59% 9.11%

6.00% 7.06% 8.33% 8.70% 9.38% 9.93%

6.50% 7.65% 9.03% 9.42% 10.16% 10.76%

7.00% 8.24% 9.72% 10.14% 10.94% 11.59%

7.50% 8.82% 10.42% 10.87% 11.72% 12.42%

8.00% 9.41% 11.11% 11.59% 12.50% 13.25%

Note: The maximum marginal tax rate for each bracket was used in
calculating the taxable yield equivalent. Furthermore, additional state and
local taxes paid on comparable taxable investments were not used to increase
federal deductions.

The chart above is for illustrative purposes only. It is not an indicator
of past or future performance of Fund shares.

*Some portion of the Fund's income may be subject to the federal
alternative minimum tax and state and local income taxes.
TAX-EQUIVALENT YIELD

<PAGE>

TAX-EQUIVALENCY TABLE

The Municipal Bond Fund may also use a tax-equivalency table in advertising and
sales literature. The interest earned by the municipal bonds in the Fund's
portfolio generally remains free from federal regular income tax,* and may be
free from state and local taxes as well. As the table below indicates, a
"tax-exempt" investment is an attractive choice for investors, particularly in
times of narrow spreads between tax-free and taxable yields.

TAXABLE YIELD EQUIVALENT FOR 1998
MULTISTATE MUNICIPAL FUND
FEDERAL INCOME TAX BRACKET:

15.00% 28.00% 31.00% 36.00% 39.60%

JOINT $1- $42,351- $102,301- $155,951- OVER

RETURN 42,350 102,300 155,950 278,450 $278,450

SINGLE $1- $25,351- $61,401- $128,101- OVER

RETURN 25,350 61,400 128,100 278,450 $278,450

Tax-Exempt

Yield Taxable Yield Equivalent

1.00% 1.18% 1.39% 1.45% 1.56% 1.66%

1.50% 1.76% 2.08% 2.17% 2.34% 2.48%

2.00% 2.35% 2.78% 2.90% 3.13% 3.31%

2.50% 2.94% 3.47% 3.62% 3.91% 4.14%

3.00% 3.53% 4.17% 4.35% 4.69% 4.97%

3.50% 4.12% 4.86% 5.07% 5.47% 5.79%

4.00% 4.71% 5.56% 5.80% 6.25% 6.62%

4.50% 5.29% 6.25% 6.52% 7.03% 7.45%

5.00% 5.88% 6.94% 7.25% 7.81% 8.28%

5.50% 6.47% 7.64% 7.97% 8.59% 9.11%

6.00% 7.06% 8.33% 8.70% 9.38% 9.93%

6.50% 7.65% 9.03% 9.42% 10.16% 10.76%

7.00% 8.24% 9.72% 10.14% 10.94% 11.59%

7.50% 8.82% 10.42% 10.87% 11.72% 12.42%

8.00% 9.41% 11.11% 11.59% 12.50% 13.25%

The chart above is for illustrative purposes only. It is not an indicator
of past or future performance of Fund shares.

*Some portion of the Fund's income may be subject to the federal
alternative minimum tax and state and local income taxes.

PERFORMANCE COMPARISONS

The performance of each Fund depends upon such variables as:

o portfolio quality;

o average portfolio maturity;

o type of instruments in which the portfolio is invested;

o changes in interest rates on money market instruments;

o changes in each Fund's expenses; and

o various other factors.

Investors may use financial publications and/or indices to obtain a more
complete view of the Funds' performance. When comparing performance, investors
should consider all relevant factors, such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Funds use in advertising may include:

MUNICIPAL BOND FUND

o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories
by making comparative calculations using total return. Total return
assumes the reinvestment of all capital gains distributions and income
dividends and takes into account any change in offering price over a
specific period of time. From time to time, the Fund may quote its
Lipper ranking in advertising and sales literature.

o MORNINGSTAR, INC., an independent rating service, is the publisher of
the bi-weekly MUTUAL FUND VALUES. MUTUAL FUND VALUES rates more than
1,000 NASDAQ-listed mutual funds of all types, according to their
risk-adjusted returns. The maximum rating is five stars, and ratings
are effective for two weeks.

o LEHMAN BROTHERS MUNICIPAL INDEX is a broad market performance benchmark
for the tax-exempt bond market. As of December 1995, approximately
29,300 bonds were included in the Municipal Bond Index with a market
value of $443 billion. To be included in the Lehman Brothers Municipal
Bond Index, bonds must have a minimum credit rating of at least Baa.
They must have an outstanding par value of at least $3 million and be
issued as part of a transaction of at least $50 million. The index
includes both zero coupon bonds and bonds subject to the Alternative
Minimum tax.
o LEHMAN MUNICIPAL INDEX/7 YEAR is an unmanaged index of municipal bonds
issued after January 1, 1991 with a minimum credit rating of at least
Baa, been issued as part of a deal of at least $50 million, have a
maturity value of at least $3 million and a maturity range of 4-6
years. As of January 1996 the index also includes zero coupon bonds and
bonds subject to the Alternative Minimum Tax.
BOND FUND

o LEHMAN BROTHERS AGGREGATE BOND INDEX is composed of securities from the
Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed
Securities Index, and the Asset-Backed Securities Index. Total return
comprises price appreciation/depreciation and income as a percentage of
the original investment. Each of these indexes are rebalanced monthly
by market capitalization.

LARGE CAPITALIZATION GROWTH FUND

o STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX covers 500
industrial, utility, transportation, and financial companies in the
United States market (mostly NYSE issues). The index represents about
75% of NYSE market capitalization and 30% of all NYSE issues. It is a
capitalization-weighted index calculated on a total return basis with
dividends reinvested.

o DOW JONES INDUSTRIAL AVERAGE is an unmanaged index representing share
prices of major industrial corporations, public utilities, and
transportation companies. Produced by the Dow Jones & Company, it is
cited as a principal indicator of market conditions.

o RUSSELL 1000 INDEX measures the performance of the 1,000 largest
companies in the Russell 3000 Index, which represents approximately
90% of the total market capitalization of the Russell 3000 Index.

LARGE CAPITALIZATION GROWTH AND INCOME FUND

MUNICIPAL BOND FUND

o LEHMAN BROTHERS MUNICIPAL INDEX is a broad market performance benchmark
for the tax-exempt bond market. As of December 1995, approximately
29,300 bonds were included in the Municipal Bond Index with a market
value of $443 billion. To be included in the Lehman Brothers Municipal
Bond Index, bonds must have a minimum credit rating of at least Baa.
They must have an outstanding par value of at least $3 million and be
issued as part of a transaction of at least $50 million. The index
includes both zero coupon bonds and bonds subject to the Alternative
Minimum tax.
o LEHMAN MUNICIPAL INDEX/7 YEAR is an unmanaged index of municipal bonds
issued after January 1, 1991 with a minimum credit rating of at least
Baa, that were issued as part of an issuance of at least $50 million
and have a maturity value of at least $3 million and a maturity range
of 6-8 years. As of January 1996 the index also includes zero coupon
bonds and bonds subject to the Alternative Minimum Tax.
BOND FUND

LARGE CAPITALIZATION GROWTH FUND

o RUSSELL 1000 INDEX measures the performance of the 1,000 largest
companies in the Russell 3000 Index and represents approximately 90%
of the total market capitalization of the Russell 3000 Index.

o RUSSELL 1000 GROWTH INDEX measures the performance of those Russell
1000 companies with higher price-to-book ratios and higher
forecasted growth values.

LARGE CAPITALIZATION GROWTH AND INCOME FUND

SMALL CAPITALIZATION FUND:

o RUSSELL 2000 INDEX is a broadly diversified index consisting of
approximately 2,000 small capitalization common stocks that can be used
to compare to the total returns of funds whose portfolios are invested
primarily in small capitalization stocks.

o RUSSELL 2000 GROWTH INDEX measures the performance of those Russell
2000 companies with higher price-to-book ratios and higher
forecasted growth values.

o STANDARD & POOR'S MIDCAP 400 INDEX is a diversified index consisting of
400 domestic stocks chosen for market size (median market
capitalization of about $1.513 billion, as of July 1997), liquidity,
and industry group representation. It is a market-weighted index with
each stock affecting the index in proportion to its market value.

o STANDARD & POOR'S SMALLCAP 600 INDEX is an index consisting of 600
domestic stocks chosen for market size (median market capitalization of
$443 million, as of July 1997), liquidity, and industry group
representation. It is a market-weighted index, with each stock
affecting the index in proportion to its market value.

o RUSSELL MIDCAP(TM) INDEX consists of the smallest 800 securities in the
Russell 1000 Index, as ranked by total market capitalization. This
index captures the medium-sized universe of securities and represents
approximately 35% of the Russell 1000 total market capitalization.

SALOMON SMITH BARNEY EMERGING GROWTH INDEX is composed of companies
that have between $100 million and $2 billion in market capitalization
and all have earnings per share growth rates exceeding 20%; the Index
is rebalanced at least once a year.

INTERNATIONAL EQUITY FUND:

o LIPPER ANALYTICAL SERVICES, INC. ranks funds in various fund categories
by making comparative calculations using total return. Total return
assumes the reinvestment of all capital gains distributions and income
dividends and takes into account any change in net asset value over a
specific period of time. From time to time, the Fund may quote its
Lipper rating in advertising and sales literature.

o MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA, AND FAR EAST
INDEX (EAFE) is a market capitalization-weighted foreign securities
index, which is widely used to measure the performance of European,
Australian, New Zealand and Far Eastern stock markets. The index covers
approximately 1,020 companies drawn from 18 countries in the above
regions. The index values its securities daily in both U.S. dollars and
local currency, and calculates total returns monthly. EAFE U.S. dollar
total return is a net dividend figure less Luxembourg withholding tax.
The EAFE is monitored by Morgan Stanley Capital International, S.A.,
Geneva, Switzerland.

o FT-ACTUARIES EUROPE & PACIFIC INDEX is a subindex based on the
FT-Actuaries World Index, excluding Canada, Mexico, South Africa and
the United States. The subindex contains approximately 1,600 securities
in 20 countries.

Advertisements and sales literature for a Fund may quote total returns which are
calculated on nonstandardized base periods. These total returns also represent
the historic change in the value of an investment in the Fund based on
reinvestment of dividends over a specified period of time.

Advertising and other promotional literature may include charts, graphs and
other illustrations using a Fund's returns, or returns in general, that
demonstrate basic investment concepts such as tax-deferred compounding,
dollar-cost averaging and systematic investment. In addition, a Fund can compare
its performance, or performance for the types of securities in which it invests,
to a variety of other investments, such as bank savings accounts, certificates
of deposit, and Treasury bills.

ECONOMIC AND MARKET INFORMATION

Advertising and sales literature for a Fund may include discussions of economic,
financial and political developments and their effect on the securities market.
Such discussions may take the form of commentary on these developments by Fund
portfolio managers and their views and analysis on how such developments could
affect a Fund. In addition, advertising and sales literature may quote
statistics and give general information about the mutual fund industry,
including the growth of the industry, from sources such as the Investment
Company Institute ("ICI"). For example, according to the ICI, thirty-seven
percent of American households are pursuing their financial goals through mutual
funds. These investors, as well as businesses and institutions, have entrusted
over $4.4 trillion to the more than 6,700 funds available.

FINANCIAL STATEMENTS

The Financial Statements for the fiscal year ended November 30, 1997, are
incorporated herein by reference to the Annual Report of the Funds dated
November 30, 1997 and the Semi-annual Report of the Funds dated May 31, 1998
(File Nos. 33-63621 and 811-7369). A copy of the Reports may be obtained without
charge by contacting the Funds.

<PAGE>

APPENDIX

STANDARD & POOR'S ("S&P") LONG-TERM DEBT RATING DEFINITIONS

AAA-Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

AA-Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.

A-Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.

BBB-Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

BB--Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB-rating.

B--Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB-rating.

STANDARD AND POOR'S MUNICIPAL BOND RATING DEFINITIONS

AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.

A--Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effect of changes in
circumstances and economic conditions than debt in higher rated categories.

BBB--Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.

BB--Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB" rating.

B--Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The `B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB "or "BB"
rating.

STANDARD AND POOR'S MUNICIPAL BOND RATING DEFINITIONS

AAA--Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

AA--Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.

MOODY'S INVESTORS SERVICE, INC. LONG-TERM BOND RATING DEFINITIONS

AAA-Bonds which are rated AAA are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.

AA-Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the AAA group, they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in AAA securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in AAA securities.

A-Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.

BAA-Bonds which are rated BAA are considered as medium-grade obligations (i.e.,
they are neither highly protected nor poorly secured). Interest payments and
principal security appear to be adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

BA--Bonds which are rated BA are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.

MOODY'S INVESTORS SERVICE, INC. MUNICIPAL BOND RATING DEFINITIONS

AAA--Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.

AA--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.

A--Bonds which are rated "A" possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.

BAA--Bonds which are rated "Baa" are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

BA--Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.

MOODY'S INVESTORS SERVICE, INC. MUNICIPAL BOND RATING DEFINITIONS

FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS DEFINITIONS

AAA--Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal, which is unlikely to be affected by reasonably foreseeable events.

AA--Bonds considered to be investment grade and of very high quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.

A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.

BBB--Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds and, therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.

STANDARD & POOR'S COMMERCIAL PAPER RATING DEFINITIONS

A-1-This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.

A-2-Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree or safety is not as high as for issues designated
A-1.

MOODY'S INVESTORS SERVICE, INC., COMMERCIAL PAPER RATING DEFINITIONS

P-1-Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. PRIME-1 repayment
capacity will normally be evidenced by the following characteristics:

o Leading market positions in well-established industries;

o High rates of return on funds employed;

o Conservative capitalization structures with moderate reliance on debt
and ample asset protection;

o Broad margins in earning coverage of fixed financial charges and high
internal cash generation; and

o Well-established access to a range of financial markets and assured
sources of alternate liquidity.

PRIME-2-Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.