FBR FAMILY OF FUNDS, N-1A EL, 1996-06-11

FBR FAMILY OF FUNDS
N-1A EL, 1996-06-11

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Reg. ICA No. 811-07665
File No. 33-_____

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 11, 1996

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------------------

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|

Pre-Effective Amendment No. |_|

Post-Effective Amendment No. |_|

and

REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 |X|

Amendment No. |_|

--------------------------------------------------

THE FBR FAMILY OF FUNDS
(Exact Name of Registrant as Specified in Charter)

Potomac Tower
1001 Nineteenth Street North
Arlington, VA 22209
(Address of Principal Executive Office) (Zip Code)

Registrant's Telephone Number, including Area Code: (703) 312-9583

Eric F. Billings
Friedman, Billings, Ramsey & Co., Inc.
Potomac Tower
1001 Nineteenth Street North
Arlington, VA 22209

Copy to:

Meyer Eisenberg, Esq.
Kramer, Levin, Naftalis & Frankel
555 13th Street NW
Suite 1300 East
Washington, DC 20004-1109
(Name and Address of Agent for Service)

Approximate date of proposed public offering: As soon as practicable after
this registration statement becomes effective.

---------------------------------------------------

An indefinite number of shares of beneficial interest of the Registrant is
being registered by this Registration Statement pursuant to Rule 24f-2 under the
Investment Company Act of 1940. The registration fee is $500.

---------------------------------------------------

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

<PAGE>

THE FBR FAMILY OF FUNDS
CROSS-REFERENCE SHEET

(Pursuant to Rule 404 showing location in each form of Prospectus of the
responses to the Items in Part A and location in each form of Prospectus and the
Statement of Additional Information of the responses to the Items in Part B of
Form N-1A).

Form N-1A Part A Item Prospectus Caption

1. Cover Page Cover Page

2. Synopsis Highlights; Summary of Fund
Expenses

3. Condensed Financial Information Inapplicable

4. General Description of Registrant Highlights; Investment Objectives;
Investment Policies and Risk
Factors; Fund Organization and Fees

5. Management of the Fund Fund Organization and Fees

5A. Management's Discussion of Fund Fund Organization and Fees
Performance

6. Capital Stock and Other Securities How to Purchase Shares; How to
Redeem Shares; Dividends,
Distributions and Taxes; Additional
Information

7. Purchase of Securities Being Highlights; How to Purchase Shares;
How Offered to Redeem Shares

8. Redemption or Repurchase Highlights; How to Purchase Shares;
How to Redeem Shares

9. Pending Legal Proceedings Inapplicable

<PAGE>

Form N-1A Part B Item Prospectus Caption

10. Cover Page Cover Page

11. Table of Contents Table of Contents

12. General Information and History Additional Information-Description
of Shares

13. Investment Objectives and Policies Investment Objectives and Policies

14. Management of the Fund Trustees and Officers

15. Control Persons and Principal Additional Information -
Holders of Securities Miscellaneous

16. Investment Advisory and Other Advisory & Other Contracts
Services

17. Brokerage Allocation and Other Advisory & Other
Practices Contracts-Portfolio Transactions

18. Capital Stock and Other Securities Valuation of Portfolio Securities;
Additional Redemption Information;
Additional Information

19. Purchase, Redemption and Pricing Valuation of Portfolio Securities;
of Securities Being Offered Additional Redemption Information;
Trustees and Officers

20. Tax Status Additional Redemption Information;
Additional Tax Information

21. Underwriters Advisory & Other
Contracts-Distributor

22. Calculation of Performance Data Performance

23. Financial Statements Financial Statements

Part C
- ------

Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.

-2-

<PAGE>

PART A

-3-

<PAGE>
THE FBR FAMILY OF FUNDS DRAFT

PROSPECTUS FOR CURRENT YIELD, PURCHASE, AND REDEMPTION INFORMATION,
______ __, 1996 CALL TOLL FREE: [888-888-0025]
[800-821-3460]
E-MAIL: funds@ fbr.com
INTERNET: http://www.fbrfunds.com

THE FBR FAMILY OF FUNDS is a registered open-end management investment company
which currently consists of four series: FBR Small Cap Financial Fund ("Small
Cap Financial Fund"), FBR Financial Services Fund ("Financial Services Fund"),
each of which are diversified portfolios, FBR Virtual Information Fund ("Virtual
Information Fund") and FBR Growth/Value Fund, each of which are non-diversified
portfolios ("Growth/Value Fund") (collectively the portfolios are referred to as
the "Funds"). FBR Fund Advisers, Inc. is the investment adviser to the Funds
(the "Adviser"). Friedman, Billings, Ramsey & Co., Inc., a registered
broker-dealer, is the Funds' distributor (the "Distributor"). The Adviser and
the Distributor are both affiliates of Friedman, Billings, Ramsey Investment
Management, Inc. and FBR Offshore Management, Inc., each of which is a
registered investment adviser.

Each of the Funds seeks capital appreciation.

Please read this Prospectus before investing. It is designed to provide you with
information and to help you decide if a Fund's goals match your own. Retain this
document for future reference. A Statement of Additional Information (dated
_______, 1996) for the Funds has been filed with the Securities and Exchange
Commission (the "Commission") and is incorporated herein by reference. The
Statement of Additional Information is available without charge upon request by
writing to PFPC, Inc. (the "Transfer Agent"), Bellevue Corporate Center, P.O.
Box 8994, Wilmington, Delaware 19899-8994 or by calling 800-821-3460.

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

<PAGE>

TABLE OF CONTENTS PAGE

Highlights................................................................... 3
Investment Objectives........................................................ 6
Investment Policies and Risk Factors......................................... 6
How to Purchase Shares.......................................................16
Shareholder Services.........................................................18
How to Redeem Shares.........................................................20
Dividends, Distributions and Taxes...........................................23
Performance..................................................................24
Fund Organization and Fees...................................................25
Additional Information.......................................................27

- 2 -

<PAGE>

HIGHLIGHTS

INTRODUCTION.

The FBR Family of Funds (the "Trust") is a registered open-end management
investment company organized under the laws of the State of Delaware on April
30, 1996. The Trust currently consists of four series which represent interests
in one of the following investment portfolios: FBR Small Cap Financial Fund, FBR
Financial Services Fund, FBR Virtual Information Fund and FBR Growth/Value Fund.

FUND MANAGEMENT.

FBR Fund Advisers, Inc. serves as the investment adviser to the Funds. See "Fund
Organization and Fees".

THE FUNDS.

Each Fund seeks capital appreciation. There is no assurance that a Fund will
achieve its investment objective. See "Investment Objectives" and "Investment
Policies and Risk Factors".

HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES.

Shares representing interests in the Funds are offered at the next determined
net asset value after receipt of an order by FBR, an authorized dealer or the
Transfer Agent. Shares are offered on a no-load basis; there is no sales charge
imposed on purchases of shares.

Shares may be purchased or redeemed through FBR account executives, authorized
dealers or directly through the Transfer Agent, PFPC. The minimum initial
investment for each Fund is $1,000. Subsequent investments must be $100 or more.
The minimum initial investment for a Systematic Investment Plan is $500 with
minimum monthly payments of $50. The minimum initial investment for IRAs, or
pension, profit-sharing or other employee benefit plans is $500 and minimum
subsequent investments are $50. See "How to Purchase Shares".

Shares of the Funds may be exchanged for shares of other funds advised by the
Adviser and the Money Market Portfolio of The RBB Fund, Inc. at the net asset
value next determined after receipt by the Transfer Agent of an exchange
request. In addition, the Funds reserve the right to impose an administrative
charge for each exchange or to reject any exchange request that is reasonably
deemed to be disruptive to efficient portfolio management. See "Shareholder
Services-Exchange Privilege".

Shares may be redeemed at their net asset value next determined after receipt by
the Transfer Agent of a redemption request. There is a 1.00% redemption fee on
shares redeemed which have been held 90 days or less. In addition, the Funds
reserve the right, upon 60 days' written notice, to redeem an account if the net
asset value of the investor's shares in that account falls below $500 and is not
increased to at least such amount within such 60-day period. See "How to Redeem
Shares".

RISK FACTORS.

Investment in any of the Funds is subject to certain risks, as set forth in
detail under "Investment Policies and Risk Factors". Each Fund's net asset value
per share can be expected to fluctuate. In addition, the Small Cap Financial
Fund, Financial Services Fund and Virtual Information Fund are designed for
those investors who are interested in actively monitoring the progress of, and
can accept the risks of, industry-focused investing. Investors should consider
the Funds as a supplement to an overall investment program and should invest
only if they are willing to undertake the risks involved.

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<PAGE>

FUND EXPENSES

The table below summarizes the expenses associated with the Funds. This standard
format was developed for use by all mutual funds to help an investor make
investment decisions. You should consider this expense information along with
other important information in this Prospectus, including the Funds' investment
objectives, policies and risk factors.

<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES (1)

VIRTUAL
SMALL CAP FINANCIAL GROWTH/ INFORMATION
FINANCIAL FUND SERVICES FUND VALUE FUND FUND
-------------- ------------- ---------- ----
Maximum Sales Charge Imposed on Purchases (as a
<S> <C> <C> <C> <C>
percentage of the offering price) NONE NONE NONE NONE

Maximum Sales Charge Imposed on Reinvested
Dividends NONE NONE NONE NONE
Deferred Sales Charge NONE NONE NONE NONE
Redemption Fees on Shares held 90 days or less (as
a % of redemption amount) 1.00% 1.00% 1.00% 1.00%

Exchange Fee NONE NONE NONE NONE

Annual Fund Operating Expenses
(as a percentage of average daily net assets)
Management Fees .90% .90% .90% .90%
Rule 12b-1 Fee (2) .25% .25% .25% .25%
Shareholder Servicing Fee .25% .25% .25% .25%
Other Expenses .25% .25% .25% .25%
----- ----- ----- -----
Total Fund Operating Expenses (3) 1.65% 1.65% 1.65% 1.65%
</TABLE>

(1) Investors may be charged a fee if they effect transactions in Fund
shares through a broker or agent. (See "How to Purchase Shares" and
"How to Redeem Shares".)

(2) As a result of Rule 12b-1 fees, a long-term investor in the Funds may
pay more than the economic equivalent of the maximum sales charge
allowed by the Rules of the National Association of Securities Dealers,
Inc.

(3) The Adviser may voluntarily waive a portion of its investment advisory
fee or bear other expenses to the extent necessary so that total fund
operating expenses of a Fund, including the investment advisory fee and
Rule 12b-1 fees, do not exceed 1.65% of a Fund's average daily net
assets for the current fiscal period.

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

1 YEAR 3 YEARS
---------------------------------

SMALL CAP FINANCIAL FUND $___ $___
FINANCIAL SERVICES FUND $___ $___
VIRTUAL INFORMATION FUND $___ $___
GROWTH/VALUE FUND $___ $___

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<PAGE>

The purpose of the table above is to assist the investor in understanding the
various costs and expenses that an investor in a Fund will bear directly or
indirectly. See "Fund Organization and Fees" for a more complete discussion of
annual operating expenses of the Funds. The foregoing example is based upon
estimated expenses for the current fiscal year. THE FOREGOING EXAMPLE SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

- 5 -

<PAGE>

INVESTMENT OBJECTIVES

Each of the Funds seeks capital appreciation. The investment objective of each
Fund is fundamental and may not be changed without a vote of the holders of a
majority of its outstanding voting securities (as defined in the Statement of
Additional Information). There can be no assurance that a Fund will achieve its
investment objective.

INVESTMENT POLICIES AND RISK FACTORS

SUMMARY OF PRINCIPAL INVESTMENT POLICIES

The SMALL CAP FINANCIAL FUND pursues its objective by investing primarily in
equity securities of companies providing financial services to consumers and
industry with an emphasis on those companies engaged in investing in real
estate, usually through mortgages and other consumer-related loans.

These companies may also offerothe r financial services such as discount
brokerage services, insurance products, leasing services, and joint venture
financing. This may include, for example, mortgage banking companies, real
estate investment trusts, banks, and other depository institutions. The Small
Cap Financial Fund also invests in companies in the information technology
industries which provide products and/or services to these companies. As a
nonfundamental policy, under normal conditions, the Small Cap Financial Fund
will invest at least 65% of its assets in securities of companies principally
engaged in investing in real estate. An issuer is considered to be principally
engaged in such business activity if at least 50% of its assets, gross income,
or net profits are committed to, or derived from, that activity. The Small Cap
Financial Fund will invest primarily in equity securities, although it may
invest in other types of instruments as well.

The residential real estate finance industry has changed rapidly over the last
decade and is expected to continue to change. Regulatory changes at federally
insured institutions, in response to a high failure rate, have mandated higher
capital ratios and more prudent underwriting. This reduced capacity has created
growth opportunities for uninsured companies and secondary market products to
fill unmet demand for home finance. Regulatory changes, interest rate movements,
home mortgage demand, and residential delinquency trends will affect the
industry.

It is anticipated that at least 65% of the Small Cap Financial Fund's assets
will be invested in smaller capitalization companies (companies of less than
$500 million capitalization at the time of purchase), however, the Small Cap
Fund may invest a portion of its assets in equity securities of companies with
larger market capitalizations. Smaller capitalization companies may have limited
product lines, markets, or financial resources. These conditions may make them
more susceptible to setbacks and reversals. Therefore their securities may be
subject to more abrupt or erratic movements than securities of larger companies.
Small capitalization stocks as a group may not respond to general market rallies
or downturns as much as other types of equity securities. In addition, the stock
of such companies may be more thinly traded. See "Illiquid Investments and
Restricted Securities" below.

The FINANCIAL SERVICES FUND pursues its objective by concentrating its
investments in equity securities of companies providing financial services to
consumers and industry. As a nonfundamental policy, under normal market
conditions, the Financial Services Fund will invest at least 65% of its assets
in such equity securities. Examples of companies in the financial services field
include commercial banks, savings and loan associations, brokerage companies,
insurance companies, real estate and leasing companies, companies that combine
some or all of these businesses and holding companies for each of the foregoing.
A company is principally engaged in the industry if it derives more than 15% of
revenues or profits from brokerage or investment management activities. Under
Commission regulations, the Financial Services Fund may not invest more than 5%
of its total assets in the equity securities of any company that derives more
than 15% of its revenues from brokerage or investment management activities. The
Financial Services Fund also invests in companies in the information technology
industries which provide products and/or services these companies. The Financial
Services Fund's strategy in seeking to achieve its investment objective may lead
to investments in smaller companies with less than $500 million capitalization
at

- 6 -

<PAGE>

the time of purchase. Securities of smaller companies, especially those whose
business involves emerging products or concepts, may be more volatile due to
their limited product lines, markets, or financial resources; or their
susceptibility to major setbacks or downturns.

Financial services companies are subject to extensive governmental regulation
which may limit both the amounts and types of loans and other financial
commitments they can make, and the interest rates and fees they can charge.
Changes in governmental policies and the need for regulatory approval may have a
material effect on these companies. Profitability is largely dependent on the
availability and cost of capital funds, and can fluctuate significantly when
interest rates change. Credit losses resulting from financial difficulties of
borrowers can negatively impact the industry. Insurance companies may be subject
to severe price competition. Legislation is currently being considered which
would reduce the separation between commercial and investment banking
businesses, and if enacted, could significantly impact financial services
companies and the Financial Services Fund.

Commercial banks, savings and loan institutions and their holding companies are
especially influenced by adverse effects of volatile interest rates, portfolio
concentrations in loans to particular businesses, such as real estate and
energy, and competition from new entrants in their areas of business. These
institutions are subject to extensive federal regulation and, in some cases, to
state regulation as well. However, neither federal insurance of deposits nor
regulation of the bank and savings and loan industries ensures the solvency or
profitability of commercial banks or savings and loan institutions or their
holding companies, or insures against the risk of investing in the equity
securities issued by these institutions.

Investment banking, securities and commodities brokerage and investment advisory
companies also are subject to governmental regulation and investments in those
companies are subject to the risks related to securities and commodities trading
and securities underwriting activities. Insurance companies also are subject to
extensive governmental regulation, including the imposition of maximum rate
levels, which may be inadequate for some lines of business. The performance of
insurance companies will be affected by interest rates, severe competition in
the pricing of services, claims activities, marketing competition and general
economic conditions.

The VIRTUAL INFORMATION FUND seeks capital appreciation. The Virtual Information
Fund seeks to achieve its objective by aggressive investing primarily in
companies within the information technology sector.

The Virtual Information Fund's investment strategies and portfolio investments
will differ from those of most other mutual funds. The Adviser seeks
aggressively to identify favorable securities, economic and market sectors, and
investment opportunities that other investors and investment advisers may not
have identified. When the Adviser identifies such an investment opportunity, it
may devote more of the Virtual Information Fund's assets to pursuing that
opportunity than other mutual funds, and may select investments for the Virtual
Information Fund that would be inappropriate for less aggressive mutual funds.
In addition, unlike most other mutual funds, the Virtual Information Fund may
engage in short sales of securities which involve special risks.

The Virtual Information Fund's investment objective is capital appreciation. The
Virtual Information Fund is designed for investors who believe that aggressive
investment in common stocks of companies in the information technology
industries provides significant opportunities for capital appreciation. While
ordinary mutual funds may place some of their portfolios in securities of
companies in the information technology sector, the Virtual Information Fund
concentrates its investments in that sector.

Although the Virtual Information Fund will seek to invest principally in common
stocks, it may also invest any portion of its assets in preferred stocks and
warrants if the Adviser believes they would help achieve the Virtual Information
Fund's objective. The Virtual Information Fund may also engage in short sales of
securities it expects to decline in price.

- 7 -

<PAGE>

Companies in the information technology industries include companies that the
Adviser considers to be principally engaged in the development, production, or
distribution of products or services related to the processing, storage,
transmission, or presentation of information or data in any medium, including
the Internet. The following examples illustrate the wide range of products and
services provided by these industries: financial institutions that execute
traditional banking services and other financial transactions over the Internet
and the companies that provide hardware, software and services to facilitate
such services and transactions; computer hardware and software of any kind,
including, for example, semiconductors, minicomputers, and peripheral equipment;
telecommunications products and services; multimedia products and services,
including, for example, goods and services used in the broadcast and media
industries; data processing products and services; and financial services
companies that collect or disseminate market, economic, and financial
information.

A particular company will be considered to be principally engaged in the
information technology industries if at the time of investment the Adviser
determines that at least 50% of the company's assets, gross income, or net
profits are committed to, or derived from, those industries. A company will also
be considered to be principally engaged in the information technology industries
if the Adviser considers that the company has the potential for capital
appreciation primarily as a result of particular products, technology, patents,
or other market advantages in those industries. As a nonfundamental policy,
under normal market conditions, the Virtual Information Fund will invest at
least 65% of its assets in securities of companies in the information technology
industries. As a nonfundamental policy, the Virtual Information Fund will invest
at least 50% of its assets in financial institutions that execute traditional
banking services and other financial transactions over the Internet and
companies that provide hardware, software and services to facilitate such
services and transactions.

Because the Virtual Information Fund's investments are concentrated in the
information technology industries, the value of its shares will be especially
affected by factors peculiar to those industries and may fluctuate more widely
than the value of shares of a portfolio which invests in a broader range of
industries. For example, many products and services are subject to risks of
rapid obsolescence caused by technological advances. Competitive pressures may
have a significant effect on the financial condition of companies in the
information technology industries. For example, if information technology
continues to advance at an accelerated rate, and the number of companies and
product offerings continues to expand, these companies could become increasingly
sensitive to short product cycles and aggressive price competition. In addition,
many of the activities of companies in the information technology industries are
highly capital intensive, and it is possible that a company which invests
substantial amounts of capital in the development of new products or services
will be unable to recover its investment or otherwise to meet its obligations.

The Small Cap Financial Fund, the Financial Services Fund and the Virtual
Information Fund may be appropriate for investors who want to pursue growth
aggressively by concentrating their investment on domestic and foreign
securities within an industry or group of industries. The Funds are designed for
those who are actively interested in, and can accept the risks of,
industry-focused investing. Because of their narrow industry focus, the
performance of the Small Cap Financial Fund, the Financial Services Fund and the
Virtual Information Fund is closely tied to and affected by, its industry.
Companies in an industry are often faced with the same obstacles, issues, or
regulatory burdens, and their securities may react similarly and move in unison
to these or other market conditions.

The GROWTH/VALUE FUND seeks capital appreciation primarily through equity
investments in companies whose valuation may not yet reflect the prospect for
accelerating earnings/cash flow growth. The Growth/Value Fund seeks to achieve
its objective by investing primarily in common stocks but also in preferred
stocks, convertible bonds, and warrants of companies which in the opinion of the
Growth/Value Fund's investment adviser are expected to achieve growth of
investment principal over time. The investment strategy is to focus on companies
that have a demonstrated record of achievement and with excellent prospects for
earnings and/or cash flow growth over a 3 to 5 year period.

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<PAGE>

It is anticipated that a greater emphasis will be placed on investments in
companies of less than $1 billion capitalization at the time of purchase,
however, the Growth/Value Fund will invest a portion of its assets in equity
securities of companies with larger market capitalizations.

In general, the value of a Fund's domestic and foreign investments varies in
response to many factors. Stock values fluctuate in response to the activities
of individual companies, and general market and economic conditions. Investments
in foreign securities may involve risks in addition to those of U.S.
investments, including increased political and economic risk, as well as
exposure to currency fluctuations. This is especially true for securities of
emerging markets, such as those found in developing countries of Asia and Latin
America.

The Adviser may use various investment techniques to hedge a portion of a Fund's
risks, but there is no guarantee that these strategies will work as the Adviser
intends. When you sell your shares, they may be worth more or less than what you
paid for them.

Changes in the value of portfolio securities will not affect cash income, if
any, derived from these securities but will affect a Fund's net asset value.
Because each Fund invests primarily in equity securities, which fluctuate in
value, each Fund's shares will fluctuate in value.

ADDITIONAL INFORMATION REGARDING THE FUNDS' INVESTMENTS

The following paragraphs provide a brief description of some of the types of
securities in which the Funds may invest, in accordance with their investment
objectives, policies and limitations, including certain transactions they may
make and strategies they may adopt. The following also contains a brief
description of certain risk factors. Each Fund may, following notice to its
shareholders, take advantage of other investment practices which are not at
present contemplated for use by the Funds or which currently are not available
but which may be developed, to the extent such investment practices are both
consistent with a Fund's investment objective and are legally permissible for
the Fund. Such investment practices, if they arise, may involve risks which
exceed those involved in the activities described in this Prospectus. The
Adviser may not buy all of these instruments or use all of these techniques to
the full extent permitted unless it believes that doing so will help a Fund
achieve its goals.

EQUITY SECURITIES may include common stocks, preferred stock, convertible
securities, and warrants. Common stocks, the most familiar type, represent an
equity (ownership) interest in a corporation. Although equity securities have a
history of long-term growth in value, their prices fluctuate based on changes in
a company's financial condition and on overall market and economic conditions.

DEBT SECURITIES. Bonds and other debt instruments are used by issuers to borrow
money from investors. The issuer pays the investor a fixed or variable rate of
interest, and must repay the amount borrowed at maturity. Some debt securities,
such as zero coupon bonds, do not pay current interest, but are purchased at a
discount from their face values. In general, bond prices rise when interest
rates fall, and vice versa. Debt securities, loans, and other direct debt have
varying degrees of quality and varying levels of sensitivity to changes in
interest rates. Longer-term bonds are generally more sensitive to interest rate
changes than short-term bonds.

Investment-grade debt securities are securities rated at the time of purchase
within the four highest rating categories assigned by a nationally recognized
statistical ratings organization ("NRSRO") or, if unrated, which the Adviser
determines to be of comparable quality. The applicable securities ratings are
described in the Appendix to the Statement of Additional Information. Some,
however, may possess speculative characteristics and may be more sensitive to
economic changes and to changes in the financial condition of issuers.

Lower-quality foreign government securities are often considered to be
speculative and involve greater risk of default or price changes, or they may
already be in default. These risks are in addition to the greater risks
associated with foreign securities.

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<PAGE>

Lower-rated debt securities, commonly referred to as "junk bonds" are considered
speculative and involve greater risk of default or price changes due to changes
in the issuer's creditworthiness than higher-rated debt securities. Each Fund
currently intends to limit its investments in lower-rated securities to no more
than 5% of its assets.

SHORT SALES. When the Adviser anticipates that the price of a security will
decline, it may sell the security short and borrow the same security from a
broker or other institution to complete the sale. A Fund may make a profit or
incur a loss depending upon whether the market price of the security decreases
or increases between the date of the short sale and the date on which the Fund
must replace the borrowed security.

All short sales must be fully collateralized, and a Fund will not sell
securities short if, immediately after and as a result of the sale, the value of
all securities sold short by the Fund exceeds 25% of its total assets. Each Fund
limits short sales of any one issuer's securities to 2% of the Fund's total
assets and to 2% of any one class of the issuer's securities.

SHORT-TERM OBLIGATIONS. With respect to each Fund there may be times when, in
the opinion of the Adviser, adverse market conditions exist, including any
period during which it believes that the return on certain money market type
instruments would be more favorable than that obtainable through a Fund's normal
investment programs. Accordingly, for temporary defensive purposes, each Fund
may hold up to 100% of its total assets in cash and/or short-term obligations.
To the extent that a Fund's assets are so invested, they will not be invested so
as to meet its investment objective. The instruments may include high grade
liquid debt securities such as variable amount master demand notes, commercial
paper, certificates of deposit, bankers' acceptances, repurchase agreements
which mature in less than seven days and obligations issued or guaranteed by the
U.S. Government, its agencies and instrumentalities. Bankers' acceptances are
instruments of the United States banks which are drafts or bills of exchange
"accepted" by a bank or trust company as an obligation to pay on maturity.

OTHER INSTRUMENTS may include securities of closed-end investment companies and
real estate-related investments.

LEAPS. The Virtual Information Fund and the Growth/Value Fund may purchase
long-term exchange-traded equity options called Long-Term Equity Anticipation
Securities ("LEAPs"). LEAPs provide a holder the opportunity to participate in
the underlying securities' appreciation in excess of a fixed dollar amount. The
Virtual Information Fund and the Growth/Value Fund will not purchase these
options with respect to more than 25% of the value of its net assets and will
limit the premiums paid for such options in accordance with the most restrictive
applicable state securities laws.

ILLIQUID INVESTMENTS AND RESTRICTED SECURITIES. Each Fund may invest up to 15%
of its assets in illiquid investments (investments that cannot be readily sold
within seven days), including restricted securities which do not meet the
criteria for liquidity established by the Trust's Board of Trustees. The
Adviser, under the supervision of the Trust's Board of Trustees, determines the
liquidity of each Fund's investments. The absence of a trading market can make
it difficult to ascertain a market value for illiquid investments. Disposing of
illiquid investments may involve time-consuming negotiation and legal expenses.
Restricted Securities are securities which cannot be sold to the public without
registration under the Securities Act of 1933. Unless registered for sale, these
securities can only be sold in privately negotiated transactions or pursuant to
an exemption from registration.

The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under a position of the staff of the Commission set
forth in the adopting release for Rule 144A under the Securities Act of 1933
(the "Rule"). The Rule is a nonexclusive 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

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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 Rule 144A. The Staff of the
Commission has left the question of determining the liquidity of all restricted
securities to the Trustees. The Trustees consider the following criteria in
determining the liquidity of certain restricted securities: the frequency of
trades and quotes for the security; the number of dealers willing to purchase or
sell the security and the number of other potential buyers; dealer undertakings
to make a market in the security; and the nature of the security and the nature
of the marketplace trades. The Trustees have delegated to the Adviser the daily
function of determining and monitoring the liquidity of restricted securities
pursuant to the above criteria and guidelines adopted by the Board of Trustees.
The Trustees will continue to monitor and periodically review the Adviser's
selection of Rule 144A securities as well as any determinations as to their
liquidity.

SECURITIES LENDING. In order to generate additional income, each Fund may, from
time to time, lend its portfolio securities. Each Fund must receive collateral
equal to 100% of the securities' value in the form of cash or U.S. Government
securities, plus any interest due, which collateral must be marked to market
daily by the Adviser. Should the market value of the loaned securities increase,
the borrower must furnish additional collateral to the Fund. During the time
portfolio securities are on loan, the borrower pays the Fund amounts equal to
any dividends or interest paid on such securities plus any interest negotiated
between the parties to the lending agreement. Loans are subject to termination
by a Fund or the borrower at any time. While a Fund does not have the right to
vote securities on loan, the Fund intends to terminate any loan and regain the
right to vote if that is considered important with respect to the Fund's
investment. 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 Trust's Board of Trustees (the "Trustees").
Each Fund will limit its securities lending to 33 1/3 % of its total assets.

Each Fund currently intends to limit its investment to no more than 5% of its
assets in the following instruments and techniques:

FOREIGN SECURITIES. The Funds may invest in equity securities of foreign
issuers, including securities traded in the form of American Depositary
Receipts. Each Fund currently intends to limit its investments in foreign
securities.

U.S. GOVERNMENT MONEY MARKET SECURITIES are short-term debt obligations issued
or guaranteed by the U.S. Treasury or by an agency or instrumentality of the
U.S. Government. Not all U.S. government securities are backed by the full faith
and credit of the United States. For example, securities issued by the Federal
Farm Credit Bank or by the Federal National Mortgage Association are supported
by the instrumentality's right to borrow money from the U.S. Treasury under
certain circumstances. However, securities issued by the Financing Corporation
are supported only by the credit of the entity that issued them.

FINANCIAL SERVICES INDUSTRY. Companies in the financial services industry are
subject to various risks related to that industry, such as government
regulation, changes in interest rates, and exposure on loans, including loans to
foreign borrowers. If a Fund invests substantially in this industry, its
performance may be affected by conditions affecting the industry.

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<PAGE>

ZERO COUPON BONDS. The Funds are permitted to purchase zero coupon securities
("zero coupon bonds"). Zero coupon bonds are purchased at a discount from the
face amount because the buyer receives only the right to receive a fixed payment
on a certain date in the future and does not receive any periodic interest
payments.

STRIPPED SECURITIES. The Funds may also purchase separately traded interest and
principal component parts of such obligations that are transferable through the
Federal book entry system, known as Separately Traded Registered Interest and
Principal Securities ("STRIPS") and Coupon Under Book Entry Safekeeping
("CUBES"). These instruments are issued by banks and brokerage firms and are
created by depositing Treasury notes and Treasury bonds into a special account
at a custodian bank; the custodian holds the interest and principal payments for
the benefit of the registered owner of the certificates or receipts. The
custodian arranges for the issuance of the certificates or receipts evidencing
ownership and maintains the register. Receipts include Treasury Receipts
("TRs"), Treasury Investment Growth Receipts ("TIGRs") and Certificates of
Accrual on Treasury Securities ("CATS").

ASSET-BACKED SECURITIES include interests in pools of mortgages, loans,
receivables, or other assets. Payments of principal and interest may be largely
dependent upon the cash flows generated by the assets backing the securities.

VARIABLE AND FLOATING RATE SECURITIES have interest rates that are periodically
adjusted either at specific intervals or whenever a benchmark rate changes.
These interest rate adjustments are designed to help stabilize the security's
price.

REPURCHASE AGREEMENTS. Under the terms of a repurchase agreement, a Fund
acquires securities from financial institutions or registered broker-dealers,
subject to the seller's agreement to repurchase such securities at a mutually
agreed upon date and price.

REVERSE REPURCHASE AGREEMENTS. The Funds may borrow funds for temporary purposes
by entering into reverse repurchase agreements. Pursuant to such agreements, a
Fund sells portfolio securities to financial institutions such as banks and
broker-dealers, and agrees to repurchase them at a mutually agreed-upon date and
price.

OTHER MONEY MARKET SECURITIES may include commercial paper, certificates of
deposit, bankers' acceptances, and time deposits.

OPTIONS AND FUTURES. Each Fund may buy and sell call and put options to hedge
against changes in net asset value or to attempt to realize a greater current
return. In addition, through the purchase and sale of futures contracts and
related options, a Fund may at times seek to hedge against fluctuations in net
asset value and to attempt to increase its investment return.

INDEX FUTURES AND OPTIONS. A Fund may buy and sell index futures contracts
("index futures") and options on index futures and on indices for hedging
purposes (or may purchase warrants whose value is based on the value from time
to time of one or more foreign securities indices). An index future is a
contract to buy or sell units of a particular bond or stock index at an agreed
price on a specified future date. Depending on the change in value of the index
between the time when the Fund enters into and terminates an index futures or
option transaction, the Fund realizes a gain or loss. A Fund may also buy and
sell index futures and options to increase its investment return.

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DIVERSIFICATION. Diversifying a Fund's investment portfolio may reduce the risks
of investing. This may include limiting the amount of money invested in any one
issuer or, on a broader scale, in any one industry. A fund that is not
diversified may be more sensitive to changes in the market value of a single
issuer or industry.

The Small Cap Financial Fund, the Financial Services Fund and the Virtual
Information Fund are considered diversified. With respect to 75% of total
assets, each Fund may not invest more than 5% of its total assets in any one
issuer. The Growth/Value Fund is considered non-diversified. The Fund may not
invest more than 25% of its total assets in any one issuer and, with respect to
50% of total assets, may not invest more than 5% of its total assets in any one
issuer. The Growth/Value Fund may not purchase the securities of an issuer if,
as a result, more than 25% of the Fund's total assets would be invested in the
securities of issuers whose principal business activities are in the same
industry. These limitations do not apply to U.S. government securities.

BORROWING. Each Fund may borrow from banks, other financial institutions or from
other funds advised by the Adviser, or though reverse repurchase agreements. If
a Fund borrows money, its share price may be subject to greater fluctuation
until the borrowing is paid off. If a Fund makes additional investments while
borrowings are outstanding, this may be considered a form of leverage. Each Fund
may borrow only for temporary or emergency purposes, but not in an amount
exceeding 33 1/3% of its total assets.

Certain investment management techniques which the Funds may use, such as the
purchase and sale of futures and options may expose the Funds to special risks.
These products may be used to adjust the risk and return characteristics of a
Fund's portfolio of investments. These various products may increase or decrease
exposure to fluctuation in security prices, interest rates, or other factors
that affect security values, regardless of the issuer's credit risk. Regardless
of whether the intent was to decrease risk or increase return, if market
conditions do not perform consistently with expectations, these products may
result in a loss. In addition, losses may occur if counterparties involved in
transactions do not perform as promised. These products may expose the Funds to
potentially greater risk of loss than more traditional equity investments.

PORTFOLIO TRANSACTIONS. Each Fund may engage in the technique of short-term
trading. Such trading involves the selling of securities held for a short time,
ranging from several months to less than a day. The object of such short-term
trading is to take advantage of what the Adviser believes are changes in market,
industry or individual company conditions or outlook. Any such trading would
increase a Fund's turnover rate and its transaction costs. High turnover will
generally result in higher brokerage costs and possible tax consequences for the
Funds.

From time to time, each Fund, to the extent consistent with its investment
objective, policies and restrictions, may invest in securities of issuers with
which the Adviser or its affiliates have a lending relationship.

The portfolio turnover of a Fund may vary greatly from year to year as well as
within a particular year. High turnover rates will generally result in higher
transaction costs and higher levels of taxable realized gains to the Fund's
shareholders. It is expected that portfolio turnover for the Funds will not
exceed 250%. (See "Additional Tax Information" in the Statement of Additional
Information.)

BROKERAGE ALLOCATION

Subject to the supervision of the Trustees, the Adviser is authorized to
allocate brokerage to affiliated broker-dealers on an agency basis to effect
portfolio transactions. The Trustees have adopted procedures incorporating the
standards of Rule 17e-1 of the Investment Company Act of 1940, as amended (the
"1940 Act"), which require that the commission paid to affiliated broker-dealers
must be reasonable and fair compared to the commission, fee or other
remuneration received, or to be received, by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time. It is expected that brokerage will be allocated to the Distributor,
Friedman, Billings, Ramsey & Co., Inc., an affiliate of the Adviser. Bear,
Stearns Securities Corp. an affiliate of the administrator and the custodian,
acts as clearing broker to the Distributor.

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NOTE: The Statement of Additional Information contains additional information
about the investment practices of the Funds and risk factors. The investment
policies and limitations of the Funds may be changed by the Trustees without any
vote of shareholders unless (1) a policy is expressly deemed to be a fundamental
policy of a Fund or (2) a policy is expressly deemed to be changeable only by
such majority vote.

HOW TO PURCHASE SHARES

GENERAL

The minimum initial investment is $1,000, or $500 if the investment is for
Individual Retirement Accounts ("IRAs"), or pension, profit-sharing or other
employee benefit plan ("Retirement Plans"). Subsequent investments ordinarily
must be at least $100 or $50 for Retirement Plans. The Trust reserves the right
to reject any purchase order. The Trust reserves the right to vary the initial
and subsequent investment minimum requirements at any time. Investments by
employees of the Adviser and its affiliates are not subject to minimum
investment requirements. Each Fund, at its own discretion, reserves the right to
suspend purchases of its shares.

Purchases of the Funds' shares may be made through a brokerage account
maintained with FBR or through certain investment dealers who are members of the
National Association of Securities Dealers, Inc. who have sales agreements with
the Distributor (an "Authorized Dealer"). Purchases of the Funds' shares also
may be made directly through the Transfer Agent.

Purchases are effected at a Fund's net asset value next determined after a
purchase order is received by FBR, an Authorized Dealer or the Transfer Agent
(the "trade date"). Payment for Fund shares generally is due to FBR or the
Authorized Dealer on the third business day (the "settlement date") after the
trade date.

PURCHASES CAN BE MADE THROUGH THE TRANSFER AGENT.

Shares representing interests in the Funds are offered continuously for sale by
the Distributor and may be purchased without imposition of a sales charge
through PFPC, the Funds' transfer agent. Shares may be purchased initially by
completing the application included in this Prospectus and forwarding the
application and payment to the Transfer Agent. Subsequent purchases of shares
may be effected by mailing a check or Federal Reserve Draft payable to the order
of "The FBR Family of Funds" c/o PFPC, P.O. Box 8994, Wilmington, Delaware
19899-8994. The name of the Fund for which shares are being purchased must also
appear on the check or Federal Reserve Draft. Federal Reserve Drafts are
available at national banks or any state bank which is a member of the Federal
Reserve System.

An investor may also purchase shares by having his bank or his broker wire
Federal Funds to the Transfer Agent. An investor's bank or broker may impose a
charge for this service. In order to ensure prompt receipt of an investor's
Federal Funds wire, for an initial investment, it is important that an investor
follows these steps:

A. Telephone the Fund's Transfer Agent, toll-free (800) 821-3460 (in Delaware
call collect (302) ________), and provide the Transfer Agent with your name,
address, telephone number, Social Security or Tax Identification Number, the
Fund selected, the amount being wired, and by which bank. The Transfer Agent
will then provide an investor with a Fund account number. Investors with
existing accounts should also notify the Transfer Agent prior to wiring funds.

B. Instruct your bank or broker to wire the specified amount, together with your
assigned account number, to PFPC's account with PNC:

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<PAGE>

PNC Bank, N.A.
ABA-0310-0005-3
CREDITING ACCOUNT NUMBER 86-1108-2435
FROM: (name of investor)
ACCOUNT NUMBER: (Investor's account number with the Fund)
FOR PURCHASE OF: (name of the Fund)
AMOUNT: (amount to be invested)

C. Fully complete and sign the Application and mail it to the address shown
thereon. The Transfer Agent will not process redemptions until it receives a
fully completed and signed Application.

For subsequent investments, an investor purchasing shares directly through the
Transfer Agent should follow steps A and B above.

PURCHASES CAN BE MADE THROUGH AUTHORIZED DEALERS.

Purchases through FBR account executives or Authorized Dealers may be made by
check (except that a check drawn on a foreign bank will not be accepted),
Federal Reserve draft or by wiring Federal Funds with funds held in brokerage
accounts at FBR or the Authorized Dealer. Checks or Federal Reserve drafts
should be made payable as follows: (i) to FBR or an investor's Authorized Dealer
or (ii) to The FBR Family of Funds-The FBR ___________ Fund if purchased
directly from the Trust, and should be directed to the Transfer Agent: PFPC
Inc., Attention: The FBR Family of Funds-The FBR __________ Fund, P.O. Box 8994,
Wilmington, Delaware 19899- 8994. Direct overnight deliveries to PFPC, Inc., 400
Bellevue Parkway, Suite 108, Wilmington, Delaware 19809. Payment by check or
Federal Reserve draft must be received within three business days of receipt of
the purchase order by FBR or an Authorized Dealer. Certain Authorized Dealers
may require payment be received within one business day of receipt of the
purchase order. Orders placed directly with the Transfer Agent must be
accompanied by payment. FBR or an investor's Authorized Dealer is responsible
for forwarding payment promptly to the Trust. Shareholder may not purchase
shares of the Funds with a check issued by a third party and endorsed over to
the Funds. Checks for investment must be made payable to The FBR Family of
Funds. The payment proceeds of a redemption of shares recently purchased by
check may be delayed as described under "How to Redeem Shares."

Shares of the Funds may be purchased on any Business Day. A "Business Day" is
any day that the New York Stock Exchange (the "NYSE") is open for business.
Currently, the NYSE is closed on weekends and New Year's Day, President's Day,
Good Friday, Memorial Day, Independence Day (observed), Labor Day, Thanksgiving
Day and Christmas Day (observed). Such shares are offered at the next determined
net asset value per share. In those cases where an investor pays for shares by
check, the purchase will be effected at the net asset value next determined
after the Transfer Agent receives payment in good order.

Purchase orders received by FBR, an Authorized Dealer or the Transfer Agent
before the close of regular trading on the New York Stock Exchange (currently
4:00 p.m., New York time) on any day the Funds calculate their net asset values
are priced according to applicable net asset value determined on that date.
Purchase orders received after the close of trading on the New York Stock
Exchange are priced as of the time the net asset value is next determined.

Shareholders whose shares are held in a street name account and who desire to
transfer such shares to another street name account should contact the record
holder of their current street name account.

The Funds understand that some broker-dealers (other than the Distributor),
financial institutions, securities dealers, financial planners and other
industry professionals ("Investment Professionals") may impose certain
conditions on their clients that invest in the Funds, which are in addition to
or different from those described in this Prospectus, and, to the extent
permitted by applicable regulatory authority may charge their clients direct
fees. Certain features

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of the Funds, such as the minimum initial or subsequent investments, may be
modified in these programs, and administrative charges may be imposed for the
services rendered. Therefore, a client or customer should contact the
organization acting on his behalf concerning the fees (if any) charged in
connection with a purchase or redemption of a Fund's shares and should read this
Prospectus in light of the terms governing his accounts with Investment
Professionals. Investment Professionals will be responsible for promptly
transmitting client or customer purchase and redemption orders to the Funds in
accordance with their agreements with clients or customers. If payment is not
received by such time, the Investment Professional could be held liable for
resulting fees or losses.

NET ASSET VALUE IS COMPUTED DAILY AS OF THE CLOSE OF REGULAR TRADING ON THE NEW
YORK STOCK EXCHANGE.

Shares of the Funds are sold on a continuous basis. Net asset value per share is
determined as of the close of regular trading on the floor of the NYSE
(currently 4:00 p.m., New York time) on each Business Day. The net asset value
per share of each Fund is computed by dividing the value of each Fund's net
assets (i.e., the value of its assets less liabilities) by the total number of
shares outstanding. Each Fund's investments are valued based on market value or,
where market quotations are not readily available, based on fair value as
determined in good faith by, or in accordance with procedures established by,
the Trust's Board of Trustees. For further information regarding the methods
employed in valuing a Fund's investments, see "Determination of Net Asset Value"
in the Funds' Statement of Additional Information.

Federal regulations require that investors provide a certified Taxpayer
Identification Number (a "TIN") upon opening or reopening an account. See
"Dividends, Distributions and Taxes." Failure to furnish a certified TIN to the
Trust could subject the investor to a $50 penalty imposed by the Internal
Revenue Service (the "IRS").

SYSTEMATIC INVESTMENT PLAN

The Systematic Investment Plan permits investors to purchase shares of a Fund
(minimum initial investment of $500 and minimum subsequent investments of $50
per transaction) at regular intervals selected by the investor. Provided the
investor's bank or other financial institution allows automatic withdrawals,
Fund shares may be purchased by transferring funds from the account designated
by the investor. At the investor's option, the account designated will be
debited in the specified amount, and Fund shares will be purchased once a month,
on or about the twentieth day. Only an account maintained at a domestic
financial institution which is an Automated Clearing House member may be so
designated. Investors desiring to participate in the Systematic Investment Plan
should call the Transfer Agent at 1-800-821-3460 (in Delaware call collect 302
__________) to obtain the appropriate forms. The Systematic Investment Plan does
not assure a profit and does not protect against loss in declining markets.
Since the Systematic Investment Plan involves the continuous investment in a
Fund regardless of fluctuating price levels of the Fund's shares, investors
should consider their financial ability to continue to purchase through periods
of low price levels. The Trust may modify or terminate the Systematic Investment
Plan at any time or charge a service fee. No such fee currently is contemplated.

SHAREHOLDER SERVICES

EXCHANGE PRIVILEGE

THE EXCHANGE PRIVILEGE PERMITS EASY PURCHASES OF OTHER FUNDS IN THE FBR FAMILY.

The exchange privilege is available to shareholders residing in any state in
which the Shares being acquired may be legally sold. A shareholder may exchange
shares of any one of the FBR Funds for shares of any other Fund advised by the
Adviser and the Money Market Portfolio of The RBB Fund Inc. Such exchange will
be effected at the net asset value of the exchanged Fund and the net asset value
of the Fund to be acquired next determined after the Transfer Agent's receipt of
a request for an exchange. In addition, FBR reserves the right to impose a $5.00

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administrative fee for each exchange. An exchange of shares will be treated as a
sale for Federal income tax purposes. See "Dividends, Distributions and Taxes."

A shareholder wishing to make an exchange may do so by sending a written request
to the Transfer Agent. Shareholders are automatically provided with telephone
exchange privileges when opening an account, unless they indicate on the account
application that they do not wish to use this privilege. To add a telephone
exchange feature to an existing account that previously did not provide for this
option, a Telephone Exchange Authorization Form must be filed with the Transfer
Agent. This form is available from the Transfer Agent. Once this election has
been made, the shareholder may simply contact the Transfer Agent by telephone to
request the exchange by calling (800) 821-3460 (in Delaware call collect (302)
________). The Trust will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and if the Trust does not
employ such procedures, it may be liable for any losses due to unauthorized or
fraudulent telephone instructions. Neither the Trust nor the Transfer Agent will
be liable for any loss, liability, cost or expense for following the Trust's
telephone transaction procedures described below or for following instructions
communicated by telephone that it reasonably believes to be genuine.

The Trust's telephone transaction procedures include the following measures: (1)
requiring the appropriate telephone transaction privilege forms; (2) requiring
the caller to provide the names of the account owners, the account social
security number and name of Fund, all of which must match the Trust's records;
(3) requiring the Trust's service representative to complete a telephone
transaction form, listing all of the above caller identification information;
(4) permitting exchanges only if the two account registrations are identical;
(5) requiring that redemption proceeds be sent only by check to the account
owners of record at the address of record, or by wire only to the owners of
record at the bank account of record; (6) sending a written confirmation for
each telephone transaction to the owners of record within five (5) business days
of the call; and (7) maintaining tapes of telephone transactions for six months,
if the fund elects to record shareholder telephone transactions.

For accounts held of record by Investment Professionals, additional
documentation or information regarding the scope of a caller's authority is
required. Finally, for telephone transactions in accounts held jointly,
additional information regarding other account holders is required. Telephone
transactions will not be permitted in connection with IRA or other retirement
plan accounts or by an attorney-in-fact under power of attorney.

If the exchanging shareholder does not currently own shares of the fund whose
shares are being acquired, a new account will be established with the same
registration, dividend and capital gain options as the account from which shares
are exchanged, unless otherwise specified in writing by the shareholder with all
signatures guaranteed by an Eligible Guarantor Institution, as defined by rules
issued by the Commission, including banks, brokers, dealers, credit unions,
national securities exchanges and savings associations. The exchange privilege
may be modified or terminated at any time, or from time to time, by the Trust,
upon 60 days' written notice to shareholders.

If an exchange is to a new fund, the dollar value of shares acquired must equal
or exceed the Trust's minimum for a new account; if to an existing account, the
dollar value must equal or exceed the Trust's minimum for subsequent
investments. If any amount remains in the Fund from which the exchange is being
made, such amount must not drop below minimum account value required by the
Trust.

RETIREMENT PLANS

Shares may be purchased in conjunction with IRAs, rollover IRAs, or pension,
profit-sharing or other employer benefit plans. For further information as to
annual fees, contact the Transfer Agent. To determine whether the benefits of an
IRA are available and/or appropriate, a shareholder should consult with a tax
adviser.

REDIRECTED DISTRIBUTION OPTION

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THE REDIRECTED DISTRIBUTION OPTION PERMITS INVESTMENT OF INVESTORS' DIVIDENDS
AND DISTRIBUTIONS IN SHARES OF OTHER FUNDS IN THE FBR FAMILY.

The Redirected Distribution Option enables a shareholder to invest automatically
dividends and/or capital gain distributions, if any, paid by in shares of
another fund advised by the Adviser of which the shareholder is an investor, or
the Money Market Portfolio of The RBB Fund, Inc. Shares of the other fund will
be purchased at the then-current net asset value.

This privilege is available only for existing accounts and may not be used to
open new accounts. Minimum subsequent investments do not apply. The Funds may
modify or terminate this privilege at any time or charge a service fee. No such
fee currently is contemplated.

HOW TO REDEEM SHARES

GENERAL

THE REDEMPTION PRICE WILL BE BASED ON THE NET ASSET VALUE NEXT COMPUTED AFTER
RECEIPT OF A REDEMPTION REQUEST.

Investors may request redemption of Fund shares at any time. Redemption requests
may be made as described below. When a request is received in proper form, a
Fund will redeem the shares at the next determined net asset value. The Trust
imposes no charges when shares are redeemed directly through the Transfer Agent,
however, if a shareholder sells shares of a Fund after holding them 90 days or
less, the Fund will deduct a redemption fee equal to 1.00% of the value of such
shares. This redemption fee will also be charged if an investor exchanges shares
which have been held 90 days or less into the Money Market Portfolio of The RBB
Fund, Inc.

Each Fund ordinarily will make payment for all shares redeemed within three days
after receipt by the Transfer Agent of a redemption request in proper form,
except as provided by the rules of the Commission. However, if an investor has
purchased Fund shares by check and subsequently submits a redemption request by
mail, the redemption proceeds will not be transmitted until the check used for
investment has cleared, which may take up to 15 days. The Trust will reject
requests to redeem shares by telephone or wire for a period of 15 days after
receipt by the Transfer Agent of the purchase check against which such
redemption is requested. This procedure does not apply to shares purchased by
wire payment.

The Trust reserves the right to redeem investor accounts at its option upon not
less than 60 days' written notice if the account's net asset value is $500 or
less, for reasons other than market conditions, and remains so during the notice
period.

PROCEDURES

SHAREHOLDERS MAY REDEEM SHARES IN SEVERAL WAYS.

REDEMPTION THROUGH FBR OR AUTHORIZED DEALERS

Clients with a brokerage account may submit redemption requests to their account
executives or Authorized Dealers in person or by telephone, mail or wire. As the
Trust's agent, FBR or an Authorized Dealer may honor a redemption request by
repurchasing Trust shares from a redeeming shareholder at the shares' net asset
value next computed after receipt of the request by the Authorized Dealer. Under
normal circumstances, within three days, redemption proceeds will be paid by
check or credited to the shareholder's brokerage account at the election of the

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shareholder. FBR account executives or Authorized Dealers are responsible for
promptly forwarding redemption requests to the Transfer Agent.

REDEMPTION THROUGH THE TRANSFER AGENT

REDEMPTION IN WRITING

Shareholders who are not clients with a brokerage account who wish to redeem
shares must redeem their shares through the Transfer Agent by mail; other
shareholders also may redeem Trust shares through the Transfer Agent. To do so,
a written request in proper form must be sent directly to The FBR Family of
Funds c/o PFPC, P.O. Box 8994, Wilmington, Delaware 19899-8994. Shareholders may
also place redemption requests through an Investment Professional, but such
Investment Professional might charge a fee for this service.

A request for redemption must be signed by all persons in whose names the shares
are registered. Signatures must conform exactly to the account registration. If
the proceeds of the redemption would exceed $10,000, or if the proceeds are not
to be paid to the record owner at the record address, or if the shareholder is a
corporation, partnership, trust or fiduciary, signatures must be guaranteed by
an Eligible Guarantor Institution. A signature guarantee verifies your
signature. You may call the Transfer Agent at (800) 821-3460 (in Delaware call
collect (302) ________) to determine whether the entity that will guarantee the
signature is an Eligible Guarantor Institution.

Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. Additional documentary evidence of authority
is also required in the event redemption is requested by a corporation,
partnership, trust, fiduciary, executor or administrator.

REDEMPTION BY TELEPHONE

Investors may redeem shares without charge by telephone if they have checked the
appropriate box and supplied the necessary information on the Application, or
have filed a Telephone Authorization with the Transfer Agent. An investor may
obtain a Telephone Authorization from the Transfer Agent by calling (800)
821-3460 (in Delaware call collect (302) _______). The Trust will employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine, and if the trust does not employ such procedures, it may be liable for
any losses due to unauthorized or fraudulent telephone instructions. The
proceeds will be mailed by check to an investor's registered address unless he
has designated in his Application or Telephone Authorization that such proceeds
are to be sent by wire transfer to a specified checking or savings account. If
proceeds are to be sent by wire transfer, a telephone redemption request
received prior to 4:00 p.m. will result in redemption proceeds being wired to
the investor's bank account on the next day that a wire transfer can be
effected. The minimum redemption for proceeds sent by wire transfer is $_____.
There is no maximum for proceeds sent by wire transfer. The Funds may modify
this redemption service at any time. A transaction fee of $7.50 will be charged
for payments by wire. FBR and the Transfer Agent reserve the right to refuse a
telephone redemption if they deem it advisable to do so. Neither the Trust, the
Transfer Agent nor the Distributor will be liable for any loss, liability, cost
or expense for following these procedures or for following instructions
communicated by telephone that it reasonably believes to be genuine. These
procedures are set forth under "Shareholder Services--Exchange Privilege" above.

If an investor authorizes telephone redemption, the Transfer Agent may act on
telephone instructions from any person representing himself or herself to be a
representative of FBR or the Authorized Dealer and reasonably believed by the
Transfer Agent to be genuine. The Trust will require the Transfer Agent to
employ reasonable procedures, such as requiring a form of personal
identification, to confirm that instructions are genuine and, if it does not
follow such procedures, the Transfer Agent or the Trust may be liable for any
losses due to unauthorized

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<PAGE>

or fraudulent instructions. Neither the Trust nor the Transfer Agent will be
liable for following telephone instructions reasonably believed to be genuine.

OTHER INFORMATION ON REDEMPTIONS

The Funds are not responsible for the efficiency of the Federal Wire System or a
shareholder's investment adviser, broker-dealer or bank. The shareholder is
responsible for any charges imposed by the shareholder's bank. To change the
name of the single designated bank account to receive redemptions, it is
necessary to send a written request (with a signature guaranteed by an Eligible
Guarantor Institution) to The FBR Family of Funds, c/o PFPC Inc., P.O. Box 8994,
Wilmington, Delaware 19899-8994. For Retirement Plan accounts, redemption
requirements may be different; consult your IRA plan document for further
details.

PAYMENT OF REDEMPTION PROCEEDS

In all cases, the redemption price is the net asset value per share next
determined after the request for redemption is received in proper form by the
Transfer Agent. Payment for shares redeemed is made by check mailed within three
days after acceptance by the Transfer Agent of the request and any other
necessary documents in proper order. Such payment may be postponed or the right
of redemption suspended as provided by the rules of the Commission. If the
shares to be redeemed have been recently purchased by check, the Transfer Agent
may delay mailing a redemption check, which may be a period of up to 15 days,
pending a determination that the check has cleared.

REDEMPTION IN-KIND

The Funds reserve the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption of a Fund's shares by making
payment in whole or in part in securities chosen by the fund and valued in the
same way as they would be valued for purposes of computing a Fund's net asset
value. If payment is made in securities, a shareholder may incur transaction
costs in converting these securities into cash after they have redeemed their
shares. The Funds have elected, however, to be governed by Rule 18f-1 under the
1940 Act, so that a Fund is obligated to redeem its shares solely in cash up to
the lesser of $250,000 or 1% of its net asset value during any 90-day period for
any one shareholder of a Fund.

ADDITIONAL INFORMATION ABOUT REDEMPTIONS

A shareholder may have redemption proceeds of _____ or more wired to the
shareholder's brokerage account or a commercial bank account designated by the
shareholder. A transaction fee of $7.50 will be charged for payments by wire.
Questions about this option, or redemption requirements generally, should be
referred to the shareholder's FBR account executive, to any Authorized Dealer,
or to the Transfer Agent if the shares are not held in a brokerage account.

Written redemption instructions must be received by the Transfer Agent in proper
form and signed exactly as the shares are registered. All signatures must be
guaranteed. The Transfer Agent has adopted standards and procedures pursuant to
which signature-guarantees in proper form generally will be accepted from
domestic banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations,
as well as from participants in the New York Stock Exchange Medallion Signature
Program, the Stock Exchanges Medallion Program and the Securities Transfer
Agents Medallion Program ("STAMP"). Such guarantees must be signed by an
authorized signatory thereof with "Signature Guaranteed" appearing with the
shareholder's signature. If the signature is guaranteed by a broker or dealer,
such broker or dealer must be a member of a clearing corporation and maintain
net capital of at least $100,000. Signature-guarantees may not be provided by
notaries public. Redemption requests by corporate and fiduciary shareholders
must be accompanied by appropriate documentation establishing the authority of
the person seeking to act on behalf of the account. Investors may obtain from
the Trust or the Transfer Agent forms of resolutions and other documentation
which have been prepared in

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<PAGE>

advance to assist compliance with the Funds' procedures. Any questions with
respect to signature-guarantees should be directed to the Transfer Agent by
calling 1-800-821-3460 (in Delaware call collect (302) _________).

During times of drastic economic or market conditions, investors may experience
difficulty in contacting FBR or Authorized Dealers by telephone to request a
redemption of Fund shares. In such cases, investors should consider using the
other redemption procedures described herein. Use of these other redemption
procedures may result in the redemption request being processed at a later time
than it would have been if telephone redemption had been used. During the delay,
a Fund's net asset value may fluctuate. The Trust intends to pay cash for all
shares redeemed, but under abnormal conditions which make payment in cash
unwise, the Trust may make payment wholly or partly in portfolio securities at
their then market value equal to the redemption price. In such cases, an
investor may incur brokerage costs in converting such securities to cash.

AUTOMATIC WITHDRAWAL

Automatic Withdrawal permits investors to request withdrawal of a specified
dollar amount (minimum of $100) on either a monthly or quarterly basis if the
investor has a $10,000 minimum account. An application for automatic withdrawal
can be obtained from FBR or the Transfer Agent. Automatic Withdrawal may be
ended at any time by the investor, the Trust or the Transfer Agent. Shares for
which certificates have been issued may not be redeemed through Automatic
Withdrawal. Purchases of additional shares concurrently with withdrawals
generally are undesirable.

DIVIDENDS, DISTRIBUTIONS AND TAXES

DIVIDENDS WILL BE AUTOMATICALLY REINVESTED IN ADDITIONAL FUND SHARES AT NET
ASSET VALUE, UNLESS PAYMENT IN CASH IS REQUESTED OR DIVIDENDS ARE REDIRECTED
INTO ANOTHER FUND PURSUANT TO THE REDIRECTED DISTRIBUTION OPTION.

Each Fund ordinarily pays dividends from its net investment income and
distributes net realized securities gains, if any, once a year, but it may make
distributions on a more frequent basis to comply with the distribution
requirements of the Code, in all events in a manner consistent with the
provisions of the 1940 Act. A Fund will not make distributions from net realized
securities gains unless capital loss carryovers, if any, have been utilized or
have expired. Dividends are automatically reinvested in additional Fund shares
at net asset value, unless payment in cash is requested. All expenses are
accrued daily and deducted before declaration of dividends to investors.

FEDERAL TAXES [SUBJECT TO REVIEW BY KL TAX DEPT.]

Each Fund intends to qualify as a regulated investment company by satisfying the
requirements under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "IRS Code"). Each Fund contemplates the distribution of all of its net
investment income and capital gains, if any, in accordance with the timing
requirements imposed by the IRS Code, so that the Funds will not be subject to
federal income taxes or the 4% excise tax on undistributed income.

Distributions by a Fund of its net investment income and the excess, if any, of
its net short-term capital gain over its net long-term capital loss are taxable
to shareholders as ordinary income. These distributions are treated as dividends
for federal income tax purposes, but only a portion thereof may qualify for the
70% dividends-received deduction for corporate shareholders (which portion may
not exceed the aggregate amount of qualifying dividends from domestic
corporations received by a Fund and must be designated by the Fund as so
qualifying). Distributions by a Fund of the excess, if any, of its net long-term
capital gain over its net short-term capital loss are designated as capital gain
dividends and are taxable to shareholders as long-term capital gain, regardless
of the length of time shareholders have held their shares. Such distributions
are not eligible for the dividends-received deduction. If a shareholder disposes
of shares in a Fund at a loss before holding such shares for more than six
months, the loss will

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<PAGE>

be treated as a long-term capital loss to the extent that the shareholder has
received a capital gain dividend on those shares.

Distributions to shareholders of a Fund will be treated in the same manner for
federal income tax purposes whether received in cash or in additional shares.
Distributions received by shareholders of a Fund in January of a given year will
be treated as received on December 31 of the preceding year provided that they
were declared to shareholders of record on a date in October, November, or
December of such preceding year. Each Fund sends tax statements to its
shareholders (with copies to the Internal Revenue Service (the "IRS")) by
January 31 showing the amounts and tax status of distributions made (or deemed
made) during the preceding calendar year.

Income from securities of foreign issuers may be subject to foreign withholding
taxes. Credit for such foreign taxes, if any, will not pass through to the
shareholders.

OTHER TAX INFORMATION

The information above is only a summary of some of the federal income tax
consequences generally affecting each Fund and its U.S. shareholders, and no
attempt has been made to discuss individual tax consequences. A prospective
investor should also review the more detailed discussion of federal income tax
considerations in the Statement of Additional Information. In addition to the
federal income tax, a shareholder may be subject to state or local taxes on his
or her investment in a Fund, depending on the laws of the shareholder's
jurisdiction. INVESTORS CONSIDERING AN INVESTMENT IN A FUND SHOULD CONSULT THEIR
TAX ADVISERS TO DETERMINE WHETHER THE FUND IS SUITABLE TO THEIR PARTICULAR TAX
SITUATION.

When investors sign their Account Application, they are asked to provide their
correct social security or taxpayer identification number and other required
certifications. If investors do not comply with IRS regulations, the IRS
requires each Fund to withhold 31% of amounts distributed to them by the Fund as
dividends or in redemption of their shares.

Because a shareholder's tax treatment depends on the shareholder's purchase
price and tax position, shareholders should keep their regular account
statements for use in determining their tax.

PERFORMANCE

From time to time, performance information for a Fund showing total return may
be presented in advertisements, sales literature and in reports to shareholders.
Such performance figures are based on historical performance and are not
intended to indicate future performance. Average annual total return will be
calculated over a stated period of more than one year. Average annual total
return is measured by comparing the value of an investment at the beginning of
the relevant period (as adjusted for sales charges, if any) to the redemption
value of the investment at the end of the period (assuming immediate
reinvestment of any dividends or capital gains distributions) and annualizing
that figure. Cumulative total return is calculated similarly to average annual
total return, except that the resulting difference is not annualized.

Yield will be computed by dividing a Fund's net investment income per share
earned during a recent thirty-day period by the Fund's maximum offering price
per share (reduced by any undeclared earned income expected to be paid shortly
as a dividend) on the last day of the period and annualizing the result.

Investors may also judge, and the Trust may at times advertise, the performance
of a Fund by comparing it to the performance of other mutual funds with
comparable investment objectives and policies, which performance may be
contained in various unmanaged mutual fund or market indices or rankings such as
those prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation, in
publications issued by Lipper Analytical Services, Inc.,

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<PAGE>

and in the following publications: IBC's Money Fund Reports, Value Line Mutual
Fund Survey, Morningstar, CDA/Wiesenberger, Money Magazine, Forbes, Barron's,
The Wall Street Journal, The New York Times, Business Week, American Banker,
Fortune, Institutional Investor, U.S.A. Today and local newspapers. In addition,
general information about a Fund that appears in publications such as those
mentioned above may also be quoted or reproduced in advertisements, sales
literature or in reports to shareholders.

Performance is a function of the type and quality of instruments held in a
Fund's portfolio, operating expenses, and market conditions. Consequently,
performance will fluctuate and data reported are not necessarily representative
of future results. Any fees charged by service providers with respect to
customer accounts for investing in shares of a Fund will not be reflected in
performance calculations.

FUND ORGANIZATION AND FEES

The FBR Family of Funds is an open-end management investment company, commonly
known as a mutual fund, and currently consisting of four series portfolios. The
FBR Family of Funds is a Delaware business trust. The Trust's offices are
located at Bellevue Corporate Center, 400 Bellevue Parkway, Wilmington, Delaware
19809.

Overall responsibility for management of the Trust rests with its Board of
Trustees, who are elected by the shareholders of the Trust.

INVESTMENT ADVISER

FBR Fund Advisers, Inc. is the investment adviser to the Funds. The Adviser
directs the investment of each Fund's assets, subject at all times to the
supervision of the Trust's Board of Trustees. The Adviser continually conducts
investment research and supervision for the Funds and is responsible for the
purchase and sale of the Funds' investments.

The Adviser was organized as a Virginia corporation on _________, 1996 and is
registered as an investment adviser under the Investment Advisers Act of 1940,
as amended. It is an affiliate of Friedman, Billings, Ramsey & Co., Inc.,
Friedman, Billings, Ramsey Investment Management, Inc. and FBR Offshore
Management, Inc. Affiliates of the Adviser manage approximately $118.5 million
for numerous clients including individuals, banks and thrift institutions,
investment companies, pension and profit sharing plans and trusts, estates and
charitable organizations. The Adviser is a new company and therefore has a short
operating history as an investment manager of mutual funds, but its officers and
employees are persons with extensive experience in managing investment
portfolios. The types of investments the Adviser's officers and employees offer
advice on include equity securities, corporate debt securities, commercial
paper, U.S. government securities, options and futures.

For the services provided and expenses incurred pursuant to the investment
advisory agreement between the Trust and the Adviser on behalf of the Funds, the
Adviser is entitled to receive a fee, computed daily and paid monthly, at an
annual rate of .90% of the average daily net assets of each Fund. The investment
advisory fee paid by the Funds is higher than the advisory fees paid by most
mutual funds, although the Trust' Board of Trustees believes such fees to be
comparable to advisory fees paid by many funds having similar objectives and
policies. The advisory fees for the Funds have been determined to be fair and
reasonable in light of the services provided to a Fund. The Adviser may
periodically waive all or a portion of its advisory fee with respect to a Fund.

Under the investment advisory agreement between the Trust, on behalf of each
Fund, and the Adviser (the "Investment Advisory Agreement"), the Adviser may
delegate a portion of its responsibilities to a sub-adviser. The Investment
Advisory Agreement provides that the Adviser may render services through its own
employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Funds and are under the common
control of FBR as long as all such persons are functioning as part of an
organized group of

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<PAGE>

persons, managed by authorized officers of the Adviser, and the Adviser will be
as fully responsible to the Funds for the acts and omissions of such persons as
it is for its own acts and omissions.

The person primarily responsible for the investment management of each Fund as
well as his/her previous experience is as follows:

PORTFOLIO MANAGING PREVIOUS
FUND MANAGER FUND SINCE EXPERIENCE
- ---- ------- ---------- ----------
Financial Commencement of
Services Fund Operations

Financial Commencement of
Services Fund Operations

Virtual Commencement of
Information Fund Operations

Growth/Value Commencement of
Fund Operations

DISTRIBUTOR

Friedman, Billings, Ramsey & Co, Inc., located at Potomac Tower, 1001 Nineteenth
Street North, Arlington, Virginia 22209 serves as the Funds' principal
underwriter and distributor of the Funds' shares pursuant to an agreement which
is renewable annually. The Distributor is entitled to receive payments under the
Funds' Distribution and Shareholder Servicing Plans described below.

ADMINISTRATOR

Under the terms of an Administration Agreement with the Trust on behalf of the
Funds, Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary of
the Bear Stearns Companies Inc., generally supervises all aspects of the
operation of the Funds, subject to the over-all authority of the Trust's Board
of Trustees in accordance with Delaware law.

From time to time, BSFM may waive receipt of its fees and/or voluntarily assume
certain Fund expenses, which would have the effect of lowering a Fund's expense
ratio and increasing yield to investors at the time such amounts are waived or
assumed, as the case may be. The Funds will not pay BSFM at a later time for any
amounts it may waive, nor will the Funds reimburse BSFM for any amounts it may
assume. Brokerage commissions may be paid to Bear, Stearns & Co. Inc. ("Bear
Stearns") for executing transactions if the use of Bear Stearns is likely to
result in price and execution at least as favorable as those of other qualified
broker-dealers. The allocation of brokerage transactions also may take into
account a broker's sales of a Fund's shares. See "Portfolio Transactions" in the
Statement of Additional Information.

CUSTODIAN AND TRANSFER AGENT

Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, is
the Funds' custodian. PFPC Inc., Bellevue Corporate Center, 400 Bellevue
Parkway, Wilmington, Delaware 19809, is the Funds' transfer agent, dividend
disbursing agent and registrar (the "Transfer Agent"). The Transfer Agent also
provides certain administrative services to the Funds.

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<PAGE>

DISTRIBUTION PLAN

EACH FUND HAS ADOPTED A RULE 12B-1 PLAN UNDER WHICH THE FUND PAYS THE
DISTRIBUTOR AT THE ANNUAL RATE OF .25% OF AVERAGE DAILY NET ASSETS.

Under a plan adopted by the Trust's Board of Trustees pursuant to Rule 12b-1
under the 1940 Act (the "Plan"), each Fund pays the Distributor for distributing
Fund shares a fee at the annual rate of .25% of the average daily net assets of
the respective Fund to finance activities which are primarily intended to result
in the sale of Fund shares and including, but not limited to, advertising,
printing of prospectuses and reports for other than existing shareholders and
preparation and distribution of advertising material and sales literature. Under
the Plan, the Distributor may pay third parties in respect of these services
such amount as it may determine. The fees paid to the Distributor under the Plan
are payable without regard to actual expenses incurred. The Trust understands
that these third parties also may charge fees to their clients who are
beneficial owners of Fund shares in connection with their client accounts. These
fees would be in addition to any amounts which may be received by them from the
Distributor under the Plan.

SHAREHOLDER SERVICING PLAN

The Trust has adopted a Shareholder Servicing Plan for each of the Funds. In
accordance with the Shareholder Servicing Plan, each Fund may enter into
Shareholder Service Agreements under which the Fund pays fees of up to .25% of
the average daily net assets for fees incurred in connection with the personal
service and maintenance of accounts holding the shares of the Fund. Such
agreements are entered into between the Trust and various shareholder servicing
agents, including the Distributor and its affiliates, and other financial
institutions and securities brokers (each, a "Shareholder Servicing Agent").
Among the services provided by Shareholder Servicing Agents are: answering
customer inquiries regarding account matters; assisting shareholders in
designating and changing various account options; aggregating and processing
purchase and redemption orders and transmitting and receiving funds for
shareholder orders; transmitting, on behalf of the Trust, proxy statements,
prospectuses and shareholder reports to shareholders and tabulating proxies;
processing dividend payments and providing subaccounting services for Fund
shares held beneficially; and providing such other services as the Trust or a
shareholder may request. Shareholder Servicing Agents may periodically waive all
or a portion of their respective shareholder servicing fees with respect to a
Fund.

INDEPENDENT ACCOUNTANTS

Arthur Andersen LLP serves as independent accountants to the Funds.

ADDITIONAL INFORMATION

The Trust may issue an unlimited number of shares and classes of each Fund.
Shares of each class of the Funds participate equally in dividends and
distributions and have equal voting, liquidation and other rights. When issued
and paid for, shares will be fully paid and nonassessable by the Trust and will
have no preference, conversion, exchange or preemptive rights. Shareholders are
entitled to one vote for each full share owned and fractional votes for
fractional shares owned. For those investors with qualified trust accounts, the
trustee will vote the shares at meetings of a Fund's shareholders in accordance
with the shareholder's instructions or will vote in the same percentage as
shares that are not so held in trust. The trustee will forward to these
shareholders all communications received by the trustee, including proxy
statements and financial reports. The Trust and the Funds are not required to
hold annual meetings of shareholders and in ordinary circumstances do not intend
to hold such meetings. The Trustees may call special meetings of shareholders
for action by shareholder vote as may be required by the 1940 Act or the
Declaration of Trust. Under certain circumstances, the Trustees may be removed
by action of the

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<PAGE>

Trustees or by the shareholders. Shareholders holding 10% or more of the Trust's
outstanding shares may call a special meeting of shareholders for the purpose of
voting upon the question of removal of Trustees.

The Trust's Board of Trustees may authorize the Trust to offer other funds which
may differ in the types of securities in which their assets may be invested.

The Adviser and the Trust have adopted a Code of Ethics (the "Code") which
requires investment personnel (a) to pre-clear all personal securities
transactions, (b) to file reports regarding such transactions, and (c) to
refrain from personally engaging in (i) short-term trading of a security, (ii)
transactions involving a security within seven days of a Fund transaction
involving the same security, and (iii) transactions involving securities being
considered for investment by the Funds. The Code also prohibits investment
personnel from purchasing securities in an initial public offering. Personal
trading reports are reviewed periodically by the Adviser and the Board of
Trustees reviews annually such reports (including information on any substantial
violations of the Code). Violations of the Code may result in censure, monetary
penalties, suspension or termination of employment.

DELAWARE LAW

The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to stockholders of Delaware corporations and the Trust Instrument
provides that shareholders will not be personally liable for liabilities of the
Trust. In light of Delaware law, the nature of the Trust's business, and the
nature of its assets, management of the Trust believes that the risk of personal
liability to a Fund shareholder would be extremely remote.

In the unlikely event a shareholder is held personally liable for the Trust's
obligations, the Trust will be required to use its property to protect or
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 will occur
only if the Trust itself cannot meet its obligations to indemnify shareholders
and pay judgments against them.

Delaware law authorizes electronic or telephone communications between
shareholders and the Trust. Under Delaware law, the Trust will have the
flexibility to respond to future business contingencies. For example, the
Trustees will have the power to incorporate the Trust, to merge or consolidate
it with another entity, to cause each fund to become a separate trust, and to
change the Trust's domicile without a shareholder vote. This flexibility could
help reduce the expense and frequency of future shareholder meetings for
non-investment related issues.

MISCELLANEOUS

As of the date of this Prospectus, each Fund offers only the class of shares
that is offered by this Prospectus. Subsequent to the date of this Prospectus,
each Fund may offer additional classes of shares through a separate prospectus.
Any such additional classes may have different sales charges and other expenses,
which would affect investment performance. Further information may be obtained
by contacting your Authorized Dealer or by calling 800-821-3460.

Shareholders will receive Semi-Annual Reports, which are unaudited, and Annual
Reports, which are audited by independent public accountants ("Reports"),
describing the investment operations of each Fund. Each of these Reports, when
available for a particular fiscal year end or the end of a semi-annual period,
is incorporated herein by reference. The Trust may include information in its
Reports to shareholders that (a) describes general economic trends, (b)
describes general trends within the financial services industry or the mutual
fund industry, (c) describes past or anticipated portfolio holdings for a Fund
or (d) describes investment management strategies for the Trust. Such
information is provided to inform shareholders of the activities of the Trust
for the most recent fiscal year or

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<PAGE>

semi-annual period and to provide the views of the Adviser and/or the Trust's
officers regarding expected trends and strategies.

The Trust intends to eliminate duplicate mailings of Reports to an address at
which more than one shareholder of record with the same last name has indicated
that mail is to be delivered. Shareholders may receive additional copies of any
Report at no cost by writing to the Funds at the address listed on the cover
page of this Prospectus or by calling 800-821-3460.

Inquiries regarding the Trust or the Funds may be directed in writing to the
Trust at PFPC Inc., Bellevue Corporate Center, P.O. Box 8994, Wilmington,
Delaware 19899-8994, or by telephone, toll-free, at 800-821-3460.

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST
OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING BY THE TRUST
OR BY THE DISTRIBUTOR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.

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<PAGE>

PART B

-4-

<PAGE>
DRAFT

STATEMENT OF ADDITIONAL INFORMATION

THE FBR FAMILY OF FUNDS

_________, 1996

This Statement of Additional Information is not a Prospectus, but should be read
in conjunction with the Prospectus of The FBR Family of Funds, dated the same
date as the date hereof (the "Prospectus"). This Statement of Additional
Information is incorporated by reference in its entirety into the Prospectus.
Copies of the Prospectus may be obtained by writing The FBR Family of Funds at
[PFPC, Inc., P.O. Box 8994, Wilmington, Delaware 19899-8994], or by telephoning
toll free [800-821-3460.]

TABLE OF CONTENTS

INVESTMENT OBJECTIVES AND POLICIES...... 2 INVESTMENT ADVISER
INVESTMENT LIMITATIONS AND RESTRICTIONS.13 FBR Fund Advisers, Inc.
VALUATION OF PORTFOLIO SECURITIES.......14
PERFORMANCE.............................15 DISTRIBUTOR
ADDITIONAL REDEMPTION INFORMATION.......17 Friedman, Billings, Ramsey & Co.,Inc.
DIVIDENDS & DISTRIBUTIONS...............17
TAXES...................................18 ADMINISTRATOR
TRUSTEES & OFFICERS.....................19 Bear Stearns Funds Management Inc.
ADVISORY & OTHER CONTRACTS..............20
ADDITIONAL INFORMATION..................23 TRANSFER AGENT
APPENDIX................................26 PFPC Inc.

FINANCIAL STATEMENTS CUSTODIAN
Custodian Trust Company

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

The FBR Family of Funds (the "Trust") is an open-end management investment
company. The Trust currently consists of four series of units of beneficial
interest ("shares"). The outstanding shares represent interests in the FBR Small
Cap Financial Fund (the "Small Cap Financial Fund"), the FBR Financial Services
Fund (the "Financial Services Fund"), the FBR Virtual Information Fund (the
"Virtual Information Fund") and the FBR Growth/Value Fund (the "Growth/Value
Fund", and collectively with the Small Cap Financial Fund, Financial Services
Fund and the Virtual Information Fund, the "Funds"). Much of the information
contained in this Statement of Additional Information expands on subjects
discussed in the Prospectus. Capitalized terms not defined herein are used as
defined in the Prospectus. No investment in shares of the Funds should be made
without first reading the Funds' Prospectus.

INVESTMENT OBJECTIVES AND POLICIES

ADDITIONAL FUND DESCRIPTIONS - SMALL CAP FINANCIAL FUND, FINANCIAL SERVICES FUND
AND VIRTUAL INFORMATION FUND

The Small Cap Financial Fund and the Financial Services Fund invest primarily
within the investment areas described below.

SMALL CAP FINANCIAL FUND: Companies engaged in investing in real estate, usually
through mortgage and other consumer-related loans. These companies may also
offer other financial services such as discount brokerage services, insurance
products, leasing services, and joint venture financing. Investments may include
mortgage banking companies, government-sponsored enterprises, real estate
investment trusts, consumer finance companies, and similar entities, as well as
savings and loan associations, savings banks, building and loan associations,
cooperative banks, commercial banks, and similar depository institutions. The
Fund may hold securities of U.S. depository institutions whose customer deposits
are insured by the Savings Association Insurance Fund or the Bank Insurance
Fund.

The residential real estate finance industry has changed rapidly over the last
decade. Regulatory changes at federally insured institutions, in response to a
high failure rate, have mandated higher capital ratios and more prudent
underwriting. This reduced capacity has created growth opportunities for
uninsured companies and secondary market products to fill unmet demand for home
finance. Continued change in the origination, packaging, selling, holding, and
insuring of home finance products is expected going forward.

The Fund will be influenced by potential regulatory changes, interest rate
movements, the level of home mortgage demand, and residential delinquency
trends.

FINANCIAL SERVICES FUND: Companies providing financial services to consumers and
industry. Companies in the financial services field include: commercial banks
and savings and loan associations, consumer and industrial finance companies,
securities brokerage companies, real estate-related companies, leasing companies
and holding companies for each of the foregoing, and a variety of firms in all
segments of the insurance field such as multi-line, property and casualty, and
life insurance.

The financial services area is currently undergoing relatively rapid change as
existing distinctions between financial service segments become less clear. For
instance, recent business combinations have included insurance, finance, and
securities brokerage under single ownership. Some primarily retail corporations
have expanded into securities and insurance fields. Moreover, the federal laws
generally separating commercial and investment banking are currently being
studied by Congress.

Banks, savings and loan associations, and finance companies are subject to
extensive governmental regulation which may limit both the amounts and types of
loans and other financial commitments they can make and the interest rates and
fees they can charge. The profitability of these groups is largely dependent on
the availability and cost of capital funds, and can fluctuate significantly when
interest rates change. In addition, general economic conditions

-2-

<PAGE>

are important to the operations of these concerns, with exposure to credit
losses resulting from possible financial difficulties of borrowers potentially
having an adverse effect. Insurance companies are likewise subject to
substantial governmental regulation, predominantly at the state level, and may
be subject to severe price competition.

Commission regulations provide that the Fund may not invest more than 5% of its
assets in the securities of any one company that derives more than 15% of its
revenues from brokerage or investment management activities. These companies as
well as those deriving more than 15% of profits from brokerage and investment
management activities will be considered to be "principally engaged" in the
Fund's business activity.

VIRTUAL INFORMATION FUND: Companies in the information technology industries
include companies that the Adviser considers to be principally engaged in the
development, production, or distribution of products or services related to the
processing, storage, transmission, or presentation of information or data. The
following examples illustrate the wide range of products and services provided
by these industries: financial institutions that execute traditional banking
services and other financial transactions over the Internet and the companies
that provide hardware, software and services to facilitate such services and
transactions; computer hardware and software of any kind, including, for
example, semiconductors, minicomputers, and peripheral equipment;
telecommunications products and services; multimedia products and services,
including, for example, goods and services used in the broadcast and media
industries; data processing products and services; and financial services
companies that collect or disseminate market, economic, and financial
information.

Because the Fund's investments are concentrated in the information technology
industries, the value of its shares will be especially affected by factors
peculiar to those industries and may fluctuate more widely than the value of
shares of a portfolio which invests in a broader range of industries. For
example, many products and services are subject to risks of rapid obsolescence
caused by technological advances. Competitive pressures may have a significant
effect on the financial condition of companies in the information technology
industries. For example, if information technology continues to advance at an
accelerated rate, and the number of companies and product offerings continues to
expand, these companies could become increasingly sensitive to short product
cycles and aggressive price competition. In addition, many of the activities of
companies in the information technology industries are highly capital intensive,
and it is possible that a company which invests substantial amounts of capital
in the development of new products or services will be unable to recover its
investment or otherwise to meet its obligations.

ADDITIONAL INFORMATION REGARDING FUND INVESTMENTS.

The following descriptions supplement the investment policies of each Fund set
forth in the Prospectus. Each Fund's investments in the following securities and
other financial instruments are subject to the investment policies and
limitations described in the Prospectus and this Statement of Additional
Information.

MONEY MARKET SECURITIES are high-quality, short-term obligations issued by the
U.S. government, corporations, financial institutions and other entities. These
obligations may carry fixed, variable, or floating interest rates. A security's
credit may be enhanced by a bank, insurance company, or other entity. Some money
market securities employ a trust or other similar structure to modify the
maturity, price characteristics, or quality of financial assets so that they are
eligible investments for money market funds. If the structure does not perform
as intended, adverse tax or investment consequences may result.

CONVERTIBLE SECURITIES. The Funds may invest in all types of common stocks and
equivalents (such as convertible debt securities and warrants) and preferred
stocks. The Fund may invest in convertible securities which may offer higher
income than the common stocks into which they are convertible. The convertible
securities in which the Fund may invest consist of bonds, notes, debentures and
preferred stocks which may be converted or exchanged at a stated or determinable
exchange ratio into underlying shares of common stock. A Fund may be required to
permit the issuer of a convertible security to redeem the security, convert it
into the underlying common stock or sell it to a third party. Thus, a Fund may
not be able to control whether the issuer of a convertible security chooses to
convert that security. If the issuer chooses to do so, this action could have an
adverse effect on the Fund's ability to achieve its investment objectives.

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ASSET-BACKED SECURITIES include pools of mortgages, loans, receivables or other
assets. Payment of principal and interest may be largely dependent upon the cash
flows generated by the assets backing the securities, and, in certain cases,
supported by letters of credit, surety bonds, or other credit enhancements. The
value of asset-backed securities may also be affected by the creditworthiness of
the servicing agent for the pool, the originator of the loans or receivables, or
the financial institution(s) providing the credit support.

STRUCTURED SECURITIES employ a trust or other similar structure to modify the
maturity, price characteristics or quality of financial assets. For example,
structural features can be used to modify the maturity of a security or interest
rate adjustment features can be used to enhance price stability. If the
structure does not perform as intended, adverse tax or investment consequences
may result. Neither the Internal Revenue Service (IRS) nor any other regulatory
authority has ruled definitively on certain legal issues presented by structured
securities. Future tax or other regulatory determinations could adversely affect
the value, liquidity or tax treatment of the income received from these
securities or the nature and timing of distributions made by a Fund. The payment
of principal and interest on structured securities may be largely dependent on
the cash flows generated by the underlying financial assets.

VARIABLE OR FLOATING RATE SECURITIES provide for periodic adjustments of the
interest rate paid. Variable rate securities provide for a specific periodic
adjustment in the interest rate, while floating rate securities have interest
rates that change whenever there is a change in a designated benchmark rate.
Some variable or floating rate securities have put features.

SWAP AGREEMENTS. Swap agreements can be individually negotiated and structured
to include exposure to a variety of different types of investments or market
factors. Depending on their structure, swap agreements may increase or decrease
a Fund's exposure to long- or short-term interest rates (in the United States or
abroad), foreign currency values, mortgage securities, corporate borrowing
rates, or other factors such as security prices or inflation rates. Swap
agreements can take many different forms and are known by a variety of names.
The Funds are not limited to any particular form of swap agreement if the
Adviser determines it is consistent with a Fund's investment objective and
policies.

In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specific interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.

Swap agreements will tend to shift a Fund's investment exposure from one type of
investment to another. For example, if a Fund agreed to exchange payments in
dollars for payments in foreign currency, the swap agreement would tend to
decrease the Fund's exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an effect similar to
buying or writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a Fund's investments and its
share price.

The most significant factor in the performance of swap agreements is the change
in the specific interest rate, currency, or other factors that determine the
amounts of payments due to and from the Fund. If a swap agreement calls for
payments by a Fund, the Fund must be prepared to make such payments when due. In
addition, if the

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counterparty's creditworthiness declined, the value of a swap agreement would be
likely to decline, potentially resulting in losses. A Fund expects to be able to
eliminate its exposure under swap agreements whether by assignment or other
disposition, or by entering into an offsetting swap agreement with the same
party or a similarly creditworthy party.

Each Fund will maintain appropriate liquid assets in a segregated custodial
account to cover its current obligations under swap agreements. If a Fund enters
into a swap agreement on a net basis, it will segregate assets with a daily
value at least equal to the excess, if any, of the Fund's accrued obligations
under the swap agreement over the accrued amount the fund is entitled to receive
under the agreement. If the Fund enters into a swap agreement on other than a
net basis, it will segregate assets with a value equal to the full amount of the
fund's accrued obligations under the agreement.

INDEXED SECURITIES. The Funds may purchase securities whose prices are indexed
to the prices of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. Gold-indexed securities, for example, typically provide for a
maturity value that depends on the price of gold, resulting in a security whose
price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the value of a
number of different foreign currencies relative to each other.

The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the United
States and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may
decline substantially if the issuer's creditworthiness deteriorates. Recent
issuers of indexed securities have included banks, corporations, and certain
U.S. government agencies. Indexed securities may be more volatile than the
underlying instruments.

RECEIPTS. The Funds may also purchase separately traded interest and principal
component parts of such obligations that are transferable through the Federal
book entry system, known as Separately Traded Registered Interest and Principal
Securities ("STRIPS") and Coupon Under Book Entry Safekeeping ("CUBES"). These
instruments are issued by banks and brokerage firms and are created by
depositing Treasury notes and Treasury bonds into a special account at a
custodian bank; the custodian holds the interest and principal payments for the
benefit of the registered owner of the certificates or receipts. The custodian
arranges for the issuance of the certificates or receipts evidencing ownership
and maintains the register. Receipts include Treasury Receipts ("TRs"), Treasury
Investment Growth Receipts ("TIGRs") and Certificates of Accrual on Treasury
Securities ("CATS").

STRIPS, CUBES, TRs, TIGRs and CATS are sold as zero coupon securities, which
means that they are sold at a substantial discount and redeemed at face value at
their maturity date without interim cash payments of interest or principal. This
discount is amortized over the life of the security, and such amortization will
constitute the income earned on the security for both accounting and tax
purposes. Because of these features, these securities may be subject to greater
interest rate volatility than interest-paying U.S. Treasury obligations. Bonds
issued by the Resolution Funding Corporation (REFCORP) can also be stripped in
this fashion. REFCORP Strips are eligible investments for the Funds.

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<PAGE>

original investment but also, in effect, on all discount accretion during the
life of the obligations. This implicit reinvestment of earnings at the same rate
eliminates the risk of being unable to reinvest distributions at a rate as high
as the implicit yields on the zero coupon bond, but at the same time eliminates
the holder's ability to reinvest at higher rates in the future. For this reason,
zero coupon bonds are subject to substantially greater price fluctuations during
periods of changing market interest rates than are comparable securities which
pay interest currently, which fluctuation increases the longer the period of
maturity. Although zero coupon bonds do not pay interest to holders prior to
maturity, Federal income tax law requires the Fund to recognize as interest
income a portion of the bond's discount each year and this income must then be
distributed to shareholders along with other income earned by the Fund. To the
extent that any shareholders in a Fund elect to receive their dividends in cash
rather than reinvest such dividends in additional shares, cash to make these
distributions will have to be provided from the assets of the Fund or other
sources such as proceeds of sales of Fund shares and/or sales of portfolio
securities. In such cases, the Fund will not be able to purchase additional
income producing securities with cash used to make such distributions and its
current income may ultimately be reduced as a result.

REAL ESTATE-RELATED INSTRUMENTS include real estate investment trusts,
commercial and residential mortgage-backed securities, and real estate
financings. Real estate-related instruments are sensitive to factors such as
real estate values and property taxes, interest rates, cash flow of underlying
real estate assets, overbuilding, and the management skill and creditworthiness
of the issuer. Real estate-related instruments may also be affected by tax and
regulatory requirements, such as those relating to the environment.

FOREIGN INVESTMENT. The Funds may, subject to their investment objectives and
policies, invest in certain obligations or securities of foreign issuers.
Permissible investments include Eurodollar Certificates of Deposit ("ECDs")
which are U.S. dollar denominated certificates of deposit issued by branches of
foreign and domestic banks located outside the United States, Yankee
Certificates of Deposit ("Yankee CDs") which are certificates of deposit issued
by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the
United States, Eurodollar Time Deposits ("ETDs") which are U.S. dollar
denominated deposits in a foreign branch of a U.S. bank or a foreign bank, and
Canadian Time Deposits ("CTDs") which are U.S. dollar denominated certificates
of deposit issued by Canadian offices of major Canadian Banks. Investments in
securities issued by foreign branches of U.S. banks, foreign banks, or other
foreign issuers, including American Depository Receipts ("ADRs") and securities
purchased on foreign securities exchanges and over-the-counter, may subject the
Growth Funds to investment risks that differ in some respects from those related
to investment in obligations of U.S. domestic issuers or in U.S. securities
markets. Such risks include future adverse political and economic developments,
possible seizure, nationalization or expropriation of foreign investments, less
stringent disclosure requirements, the possible establishment of exchange
controls or taxation at the source, and the adoption of other foreign
governmental restrictions. Additional risks include less publicly available
information, the risk that companies may not be subject to the accounting,
auditing and financial reporting standards and requirements of U.S. companies,
the risk that foreign securities markets may have less volume and therefore many
securities traded in these markets may be less liquid and their prices more
volatile than U.S. securities, and the risk that custodian and brokerage costs
may be higher. Foreign issuers of securities or obligations are often subject to
accounting treatment and engage in business practices different from those
respecting domestic issuers of similar securities or obligations. Foreign
branches of U.S. banks and foreign banks may be subject to less stringent
reserve requirements than those applicable to domestic branches of U.S. banks.
The Funds will acquire such securities only when the Adviser believes the risk
associated with such investments are minimal.

FOREIGN CURRENCY TRANSACTIONS. Each Fund may conduct foreign currency
transactions on a spot (i.e., cash) basis or by entering into forward contracts
to purchase or sell foreign currencies at a future date and price. A Fund will
convert currency on a spot basis from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers
generally do not charge a fee for conversion, they do realize a profit based on
the difference between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one
rate, while offering a lesser rate of exchange should the Fund desire to resell
that currency to the dealer. Forward contracts are generally traded in an
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. The parties to a forward contract may
agree to offset or terminate the contract before its maturity, or may hold the
contract to maturity and complete the contemplated currency exchange.

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Each Fund may use currency forward contracts for any purpose consistent with its
investment objective. The following discussion summarizes the principal currency
management strategies involving forward contracts that could be used by the
Funds. The Funds may also use swap agreements, indexed securities, and options
and futures contracts relating to foreign currencies for the same purposes.

When a Fund agrees to buy or sell a security denominated in a foreign currency,
it may desire to "lock in" the U.S. dollar price of the security. By entering
into a forward contract for the purchase or sale, for a fixed amount of U.S.
dollars, of the amount of foreign currency involved in the underlying security
transaction, a Fund will be able to protect itself against an adverse change in
foreign currency values between the date the security is purchased or sold and
the date on which payment is made or received. This technique is sometimes
referred to as a "settlement hedge" or "transaction hedge." The Funds may also
enter into forward contracts to purchase or sell a foreign currency in
anticipation of future purchases or sales of securities denominated in foreign
currency, even if the specific investments have not yet been selected by the
Adviser.

The Funds may also use forward contracts to hedge against a decline in the value
of existing investments denominated in foreign currency. For example, if a Fund
owned securities denominated in pounds sterling, it could enter into a forward
contract to sell pounds sterling in return for U.S. dollars to hedge against
possible declines in the pound's value. Such a hedge, sometimes referred to as a
"position hedge," would tend to offset both positive and negative currency
fluctuations, but would not offset changes in security values caused by other
factors. A Fund could also hedge the position by selling another currency
expected to perform similarly to the pound sterling -- for example, by entering
into a forward contract to sell Deutschemarks or European Currency Units in
return for U.S. dollars. This type of hedge, sometimes referred to as a "proxy
hedge," could offer advantages in terms of cost, yield, or efficiency, but
generally would not hedge currency exposure as effectively as a simple hedge
into U.S. dollars. Proxy hedges may result in losses if the currency used to
hedge does not perform similarly to the currency in which the hedged securities
are denominated.

A Fund may enter into forward contracts to shift its investment exposure from
one currency into another. This may include shifting exposure from U.S. dollars
to a foreign currency, or from one foreign currency to another foreign currency.
For example, if a Fund held investment denominated in Deutschemarks, the Fund
could enter into forward contracts to sell Deutschemarks and purchase Swiss
Francs. This type of strategy, sometimes known as a "cross-hedge," will tend to
reduce or eliminate exposure to the currency that is sold, and increase exposure
to the currency that is purchased, much as if the Fund had sold a security
denominated in one currency and purchased an equivalent security denominated in
another. Cross-hedges protect against losses resulting from a decline in the
hedged currency, but will cause a Fund to assume the risk of fluctuations in the
value of the currency it purchases.

Under certain conditions, Commission guidelines require mutual funds to set
aside appropriate liquid assets in a segregated custodial account to cover
currency forward contracts. As required by Commission guidelines, the Funds will
segregate assets to cover currency forward contracts, if any, whose purpose is
essentially speculative. The Funds will not segregate assets to cover forward
contracts entered into for hedging purposes, including settlement hedges,
position hedges, and proxy hedges.

Successful use of currency management strategies will depend on the Adviser's
skill in analyzing and predicting currency values. Currency management
strategies may substantially change a Fund's investment exposure to changes in
currency exchange rates, and could result in losses to the Fund if currencies do
not perform as the Adviser anticipates. For example, if a currency's value rose
at a time when the Adviser had hedged a Fund by selling that currency in
exchange for dollars, the Fund would be unable to participate in the currency's
appreciation. If the Adviser hedges currency exposure through proxy hedges, the
Fund could realize currency losses from the hedge and the security position at
the same time if the two currencies do not move in tandem. Similarly, if the
Adviser increases a Fund's exposure to a foreign currency, and that currency's
value declines, the Fund will realize a loss. There is no assurance that the
Adviser's use of currency management strategies will be advantageous to a Fund
or that it will hedge at an appropriate time.

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at not less than the repurchase price (including accrued interest). If the
seller were to default on its repurchase obligation or become insolvent, the
Fund would suffer a loss to the extent that the proceeds from a sale of the
underlying portfolio securities were less than the repurchase price, or to the
extent that the disposition of such securities by the Fund was delayed pending
court action. Repurchase agreements are considered to be loans by the staff of
the Commission.

REVERSE REPURCHASE AGREEMENTS. As discussed in the Prospectus, a Fund may borrow
funds for temporary purposes by entering into reverse repurchase agreements in
accordance with the Fund's investment restrictions. Pursuant to such agreements,
the Fund would sell portfolio securities to financial institutions such as banks
and broker-dealers, and agree to repurchase the securities at the mutually
agreed-upon date and price. The Funds intend to enter into reverse repurchase
agreements only to avoid otherwise selling securities during unfavorable market
conditions to meet redemptions. At the time a Fund enters into a reverse
repurchase agreement, it will place in a segregated custodial account assets
consistent with the Fund's investment restrictions having a value equal to the
repurchase price (including accrued interest), and will subsequently monitor the
account to ensure that such equivalent value is maintained. Such assets will
include U.S. Government securities or other liquid, high-grade debt securities.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by a Fund may decline below the price at which the Fund is
obligated to repurchase the securities. Reverse repurchase agreements are
considered to be borrowing by a Fund under the 1940 Act.

LOWER-RATED DEBT SECURITIES. The Funds may purchase lower-rated debt securities
commonly referred to as "junk bonds" (those rated below the fourth highest grade
by an NRSRO and unrated securities judged by the Adviser to be of equivalent
quality), that have poor protection with respect to the payment of interest and
repayment of principal, or may be in default. These securities are often
considered to be speculative and involve greater risk of loss or price changes
due to changes in the issuer's capacity to pay. The market prices of lower-rated
debt securities may fluctuate more than those of higher-rated debt securities
and may decline significantly in periods of general economic difficulty, which
may follow periods of rising interest rates.

While the market for high-yield corporate debt securities has been in existence
for many years and has weathered previous economic downturns, the 1980s brought
a dramatic increase in the use of such securities to fund highly leveraged
corporate acquisitions and restructuring. Past experience may not provide an
accurate indication of future performance of the high yield bond market,
especially during periods of economic recession.

The market for lower-rated securities may be thinner and less active than that
for higher-rated debt securities, which can adversely affect the prices at which
the former are sold. If market quotations are not available, lower-rated debt
securities will be valued in accordance with procedures established by the Board
of Trustees, including the use of outside pricing services. Judgment plays a
greater role in valuing high-yield corporate debt securities than is the case
for securities for which more external sources for quotations and last-sale
information are available. Adverse publicity and changing investor perceptions
may affect the ability of outside pricing services to value lower-rated debt
securities and the Fund's ability to sell these securities.

Since the risk of default is higher for lower-rated debt securities, the
Adviser's research and credit analysis are an especially important part of
managing securities of this type held by the Funds. In considering investments
for the Funds, the Adviser will attempt to identify those issuers of
high-yielding debt securities whose financial condition is adequate to meet
future obligations, has improved, or is expected to improve in the future. The
Adviser's analysis focuses on relative values based on such factors as interest
or dividend coverage, asset coverage, earnings prospects, and the experience and
managerial strength of the issuer.

A Fund may choose, at its expense or in conjunction with others, to pursue
litigation or otherwise exercise its right as security holder to seek to protect
the interests of security holders if it determines this to be in the best
interest of the Fund's shareholders.

ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in the
ordinary course of business, within seven days, at approximately the prices at
which they are valued. Under the supervision of the Board of Trustees, the
Adviser determines the liquidity of each Fund's investments and, through reports
from the Adviser, the Board monitors investments in illiquid instruments. In
determining the liquidity of a Fund's investments, the Adviser may

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consider various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the security (including
any demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset a Fund's rights and obligations
relating to the investment). Investments currently considered by the Funds to be
illiquid include repurchase agreements not entitling the holder to payment of
principal and interest within seven days. Also, the Adviser may determine some
over-the-counter options, restricted securities and loans and other direct debt
instruments, and swap agreements to be illiquid. In the absence of market
quotations, illiquid investments are priced at fair value as determined in good
faith by a committee appointed by the Board of Trustees. If through a change in
values, net assets, or other circumstances, a Fund were in a position where more
than 15% of its net assets were invested in illiquid securities, it would seek
to take appropriate steps to protect liquidity.

LOANS AND OTHER DIRECT DEBT INSTRUMENTS are interests in amounts owed by a
corporate, governmental, or other borrower to another party. They may represent
amounts owed to lenders or lending syndicates (loans and loan participation), to
suppliers of goods or services (trade claims or other receivables), or to other
parties. Direct debt instruments involve a risk of loss in case of default or
insolvency of the borrower and may offer less legal protection to the Funds in
the event of fraud or misrepresentation. In addition, loan participations
involve a risk of insolvency of the lending bank or other financial
intermediary. Direct debt instruments may also include standby financing
commitments that obligate the Funds to supply additional cash to the borrower on
demand.

FOREIGN INVESTMENT. The Funds may invest in securities issued by foreign
branches of U.S. banks, foreign banks, or other foreign issuers, including
American Depository Receipts ("ADRs") and securities purchased on foreign
securities exchanges. Such investment may subject the Funds to significant
investment risks that are different from, and additional to, those related to
investments in obligations of U.S. domestic issuers or in U.S. securities
markets.

The value of securities denominated in or indexed to foreign currencies, and of
dividends and interest from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the U.S. dollar. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable to
those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial condition and operations.
In addition, the costs of foreign investing, including withholding taxes,
brokerage commissions, and custodial costs, are generally higher than for U.S.
investments.

Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.

Investing abroad also involves different political and economic risks. Foreign
investments may be affected by actions of foreign governments adverse to the
interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility of
default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic, or social instability, military action or unrest, or adverse
diplomatic developments. There is no assurance that the Adviser will be able to
anticipate these potential events or counter their effects.

The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.

The Funds may invest in foreign securities that impose restrictions on transfer
within the U.S. or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.

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FUTURES CONTRACTS. The Funds may enter into futures contracts, options on
futures contracts and stock index futures contracts and options thereon for the
purposes of remaining fully invested and reducing transaction costs. Futures
contracts provide for the future sale by one party and purchase by another party
of a specified amount of a specific security, class of securities, or an index
at a specified future time and at a specified price. A stock index futures
contract is a bilateral agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of trading of the
contracts and the price at which the futures contract is originally struck.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission ("CFTC"), a U.S. Government agency.

Although futures contracts by their terms call for actual delivery and
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. A futures
contract on a securities index is an agreement obligating either party to pay,
and entitling the other party to receive, while the contract is outstanding,
cash payments based on the level of a specified securities index. The
acquisition of put and call options on futures contracts will, respectively,
give the Funds the right (but not the obligation), for a specified price, to
sell or to purchase the underlying futures contract, upon exercise of the
option, at any time during the option period. Brokerage commissions are incurred
when a futures contract is bought or sold.

Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Initial margin deposits on futures contracts are customarily set at
levels much lower than the prices at which the underlying securities are
purchased and sold, typically ranging upward from less than 5% of the value of
the contract being traded.

After a futures contract position is opened, the value of the contract is
marked-to-market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. A Fund expects
to earn interest income while its margin deposits are held pending performance
on the futures contract.

When interest rates are expected to rise or market values of portfolio
securities are expected to fall, a Fund can seek through the sale of futures
contracts to offset a decline in the value of its portfolio securities. When
interest rates are expected to fall or market values are expected to rise, a
Fund, through the purchase of such contracts, can attempt to secure better rates
or prices for the Fund than might later be available in the market when it
effects anticipated purchases.

A Fund's ability to effectively utilize futures trading depends on several
factors. First, it is possible that there will not be a perfect price
correlation between the futures contracts and their underlying stock index.
Second, it is possible that a lack of liquidity for futures contracts could
exist in the secondary market, resulting in an inability to close a futures
position prior to its maturity date. Third, the purchase of a futures contract
involves the risk that the Fund could lose more than the original margin deposit
required to initiate a futures transaction.

RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. A Fund will only sell futures
contracts to protect securities it owns against price declines or purchase
contracts to protect against an increase in the price of securities it intends
to purchase. A Fund will not enter into futures contract transactions for
purposes other than bona fide hedging purposes to the extent that, immediately
thereafter, the sum of its initial margin deposits on open contracts exceeds 5%
of the market value of the Fund's total assets. In addition, the Fund will not
enter into futures contracts to the

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extent that the value of the futures contracts held would exceed 1/3 of the
Fund's total assets. Futures transactions will be limited to the extent
necessary to maintain the Fund's qualification as a regulated investment
company.

The Trust, on behalf of each Fund, has undertaken to restrict its futures
contract trading as follows: first, a Fund will not engage in transactions in
futures contracts for speculative purposes; second, a Fund will not market its
funds to the public as commodity pools or otherwise as vehicles for trading in
the commodities futures or commodity options markets; third, a Fund will
disclose to all prospective shareholders the purpose of and limitations on its
commodity futures trading; fourth, a Fund will submit to the CFTC special calls
for information. Accordingly, registration as a commodities pool operator with
the CFTC is not required.

In addition to the margin restrictions discussed above, transactions in futures
contracts may involve the segregation of funds pursuant to requirements imposed
by the Commission. Under those requirements, where a Fund has a long position in
a futures contract, it may be required to establish a segregated account (not
with a futures commission merchant or broker, except as may be permitted under
Commission rules) containing cash or certain liquid assets equal to the purchase
price of the contract (less any margin on deposit). For a short position in
futures or forward contracts held by a Fund, those requirements may mandate the
establishment of a segregated account (not with a futures commission merchant or
broker, except as may be permitted under Commission rules) with cash or certain
liquid assets that, when added to the amounts deposited as margin, equal the
market value of the instruments underlying the futures contracts (but are not
less than the price at which the short positions were established). However,
segregation of assets is not required if a Fund "covers" a long position. For
example, instead of segregating assets, a Fund, when holding a long position in
a futures contract, could purchase a put option on the same futures contract
with a strike price as high or higher than the price of the contract held by the
Fund. In addition, where a Fund takes short positions, or engages in sales of
call options, it need not segregate assets if it "covers" these positions. For
example, where the Fund holds a short position in a futures contract, it may
cover by owning the instruments underlying the contract. A Fund may also cover
such a position by holding a call option permitting it to purchase the same
futures contract at a price no higher than the price at which the short position
was established. Where the Fund sells a call option on a futures contract, it
may cover either by entering into a long position in the same contract at a
price no higher than the strike price of the call option or by owning the
instruments underlying the futures contract. A Fund could also cover this
position by holding a separate call option permitting it to purchase the same
futures contract at a price no higher than the strike price of the call option
sold by the Fund.

In addition, the extent to which a Fund may enter into transactions involving
futures contracts may be limited by the Internal Revenue Code's requirements for
qualification as a registered investment company and the Fund's intention to
qualify as such.

RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain the required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, the Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge them. A Fund will minimize
the risk that it will be unable to close out a futures contract by only entering
into futures contracts which are traded on national futures exchanges and for
which there appears to be a liquid secondary market.

The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. Because the deposit
requirements in the futures markets are less onerous than margin requirements in
the securities market, there may be increased participation by speculators in
the futures market which may also cause temporary price distortions. A
relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin

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deposit, before any deduction for the transaction costs, if the account were
then closed out. A 15% decrease would result in a loss equal to 150% of the
original margin deposit if the contract were closed out. Thus, a purchaser or
sale of a futures contract may result in losses in excess of the amount invested
in the contract. However, because the futures strategies engaged in by a Fund
are only for hedging purposes, the Adviser believes that the Fund is generally
not subject to risks of loss exceeding those that would be undertaken if,
instead of the futures contract, it had invested in the underlying financial
instrument and sold it after the decline.

Utilization of futures transactions by a Fund does involve the risk of imperfect
or no correlation where the securities underlying futures contract have
different maturities than the portfolio securities being hedged. It is also
possible that a Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by a Fund of margin deposits in the event of bankruptcy of a broker
with whom the Fund has an open position in a futures contract or related option.

OPTIONS

The Funds may purchase and sell put and call options on their portfolio
securities to enhance investment performance and to protect against changes in
market prices.

COVERED CALL OPTIONS. A Fund may write covered call options on its securities to
realize a greater current return through the receipt of premiums than it would
realize on its securities alone. Such option transactions may also be used as a
limited form of hedging against a decline in the price of securities owned by
the Fund.

A call option gives the holder the right to purchase, and obligates the writer
to sell, a security at the exercise price at any time before the expiration
date. A call option is "covered" if the writer, at all times while obligated as
a writer, either owns the underlying securities (or comparable securities
satisfying the cover requirements of the securities exchanges), or has the right
to acquire such securities through immediate conversion of securities.

In return for the premium received when it writes a covered call option, a Fund
gives up some or all of the opportunity to profit from an increase in the market
price of the securities covering the call option during the life of the option.
The Fund retains the risk of loss should the price of such securities decline.
If the option expires unexercised, the Fund realizes a gain equal to the
premium, which may be offset by a decline in price of the underlying security.
If the option is exercised, the Fund realizes a gain or loss equal to the
difference between the Fund's cost for the underlying security and the proceeds
of sale (exercise price minus commissions) plus the amount of the premium.

A Fund may terminate a call option that it has written before it expires by
entering into a closing purchase transaction. A Fund may enter into closing
purchase transactions in order to free itself to sell the underlying security or
to write another call on the security, realize a profit on a previously written
call option, or protect a security from being called in an unexpected market
rise. Any profits from a closing purchase transaction may be offset by a decline
in the value of the underlying security. Conversely, because increases in the
market price of a call option will generally reflect increases in the market
price of the underlying security, any loss resulting from a closing purchase
transaction is likely to be offset in whole or in part by unrealized
appreciation of the underlying security owned by the Fund.

COVERED PUT OPTIONS. A Fund may write covered put options in order to enhance
its current return. Such options transactions may also be used as a limited form
of hedging against an increase in the price of securities that the Fund plans to
purchase. A put option gives the holder the right to sell, and obligates the
writer to buy, a security at the exercise price at any time before the
expiration date. A put option is "covered" if the writer segregates cash and
high-grade short-term debt obligations or other permissible collateral equal to
the price to be paid if the option is exercised.

In addition to the receipt of premiums and the potential gains from terminating
such options in closing purchase transactions, a Fund also receives interest on
the cash and debt securities maintained to cover the exercise price of the
option. By writing a put option, the Fund assumes the risk that it may be
required to purchase the underlying

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security for an exercise price higher than its then current market value,
resulting in a potential capital loss unless the security later appreciates in
value.

A Fund may terminate a put option that it has written before it expires by a
closing purchase transaction. Any loss from this transaction may be partially or
entirely offset by the premium received on the terminated option.

PURCHASING PUT AND CALL OPTIONS. A Fund may also purchase put options to protect
portfolio holdings against a decline in market value. This protection lasts for
the life of the put option because the Fund, as a holder of the option, may sell
the underlying security at the exercise price regardless of any decline in its
market price. In order for a put option to be profitable, the market price of
the underlying security must decline sufficiently below the exercise price to
cover the premium and transaction costs that the Fund must pay. These costs will
reduce any profit the Fund might have realized had it sold the underlying
security instead of buying the put option.

A Fund may purchase call options to hedge against an increase in the price of
securities that the Fund wants ultimately to buy. Such hedge protection is
provided during the life of the call option since the Fund, as holder of the
call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. These costs will reduce any profit the Fund might have
realized had it bought the underlying security at the time it purchased the call
option.

A Fund may also purchase put and call options to attempt to enhance its current
return.

OPTIONS ON FOREIGN SECURITIES. The Funds may purchase and sell options on
foreign securities if a Fund's Adviser believes that the investment
characteristics of such options, including the risks of investing in such
options, are consistent with the Fund's investment objectives. It is expected
that risks related to such options will not differ materially from risks related
to options on U.S. securities. However, position limits and other rules of
foreign exchanges may differ from those in the U.S. In addition, options markets
in some countries, many of which are relatively new, may be less liquid than
comparable markets in the U.S.

RISKS INVOLVED IN THE SALE OF OPTIONS. Options transactions involve certain
risks, including the risks that a Fund's Adviser will not forecast interest rate
or market movements correctly, that a Fund may be unable at times to close out
such positions, or that hedging transactions may not accomplish their purpose
because of imperfect market correlations. The successful use of these strategies
depends on the ability of a Fund's Adviser to forecast market and interest rate
movements correctly.

An exchange-listed option may be closed out only on an exchange which provides a
secondary market for an option of the same series. There is no assurance that a
liquid secondary market on an exchange will exist for any particular option or
at any particular time. If no secondary market were to exist, it would be
impossible to enter into a closing transaction to close out an option position.
As a result, a Fund may be forced to continue to hold, or to purchase at a fixed
price, a security on which it has sold an option at a time when its Adviser
believes it is inadvisable to do so.

Higher than anticipated trading activity or order flow or other unforeseen
events might cause The Options Clearing Corporation or an exchange to institute
special trading procedures or restrictions that might restrict a Fund's use of
options. The exchanges have established limitations on the maximum number of
calls and puts of each class that may be held or written by an investor or group
of investors acting in concert. It is possible that the Trust and other clients
of the Adviser may be considered such a group. These position limits may
restrict the Funds' ability to purchase or sell options on particular
securities.

Options which are not traded on national securities exchanges may be closed out
only with the other party to the option transaction. For that reason, it may be
more difficult to close out unlisted options than listed options. Furthermore,
unlisted options are not subject to the protection afforded purchasers of listed
options by The Options Clearing Corporation.

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<PAGE>

Government regulations, particularly the requirements for qualification as a
"regulated investment company" under the Internal Revenue Code, may also
restrict the Funds' use of options.

SPECIAL EXPIRATION PRICE OPTIONS

Certain of the Funds may purchase over-the-counter ("OTC") puts and calls with
respect to specified securities ("special expiration price options") pursuant to
which the Funds in effect may create a custom index relating to a particular
industry or sector that the Adviser believes will increase or decrease in value
generally as a group. In exchange for a premium, the counterparty, whose
performance is guaranteed by a broker-dealer, agrees to purchase (or sell) a
specified number of shares of a particular stock at a specified price and
further agrees to cancel the option at a specified price that decreases straight
line over the term of the option. Thus, the value of the special expiration
price option is comprised of the market value of the applicable underlying
security relative to the option exercise price and the value of the remaining
premium. However, if the value of the underlying security increases (or
decreases) by a prenegotiated amount, the special expiration price option is
canceled and becomes worthless. A portion of the dividends during the term of
the option are applied to reduce the exercise price if the options are
exercised. Brokerage commissions and other transaction costs will reduce these
Funds' profits if the special expiration price options are exercised. A Fund
will not purchase special expiration price options with respect to more than 25%
of the value of its net assets, and will limit premiums paid for such options in
accordance with state securities laws.

LEAPS. The Virtual Information Fund and the Growth/Value may purchase certain
long-term exchange-traded equity options called Long-Term Equity Anticipation
Securities ("LEAPs"). LEAPs provide a holder the opportunity to participate in
the underlying securities' appreciation in excess of a fixed dollar amount. A
Fund will not purchase these options with respect to more than 25% of the value
of its net assets, and will limit the premiums paid for purchasing such options
in accordance with the most restrictive applicable state securities laws.

LEAPs are long-term call options that allow holders the opportunity to
participate in the underlying securities' appreciation in excess of a specified
strike price, without receiving payments equivalent to any cash dividends
declared on the underlying securities. A LEAP holder will be entitled to receive
a specified number of shares of the underlying stock upon payment of the
exercise price, and therefore the LEAP will be exercisable at any time the price
of the underlying stock is above the strike price. However, if at expiration the
price of the underlying stock is at or below the strike price, the LEAP will
expire worthless.

SHORT SALES. Each Fund may seek to hedge investments or realize additional gains
through short sales. Short sales are transactions in which a Fund sells a
security it does not own, in anticipation of a decline in the market value of
that security. To complete such a transaction, the Fund must borrow the security
to make delivery to the buyer. The Fund then is obligated to replace the
security borrowed by purchasing it at the market price at or prior to the time
of replacement. The price at such time may be more or less than the price at
which the security was sold by the Fund. Until the security is replaced, the
Fund is required to repay the lender any dividends or interest that accrue
during the period of the loan. To borrow the security, the Fund also may be
required to pay a premium, which would increase the cost of the security sold.
The net proceeds of the short sale will be retained by the broker (or by the
Fund's custodian in a special custody account), to the extent necessary to meet
margin requirements, until the short position is closed out. A Fund also will
incur transaction costs in effecting short sales.

A Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. The Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of the premium,
dividends, interest or expenses the Fund may be required to pay in connection
with a short sale.

SECURITIES LENDING. Each Fund may lend its portfolio securities to
broker-dealers, banks or institutional borrowers of securities. A Fund must
receive a minimum of 100% collateral, plus any interest due in the form of cash
or U.S. Government securities. This collateral must be valued daily and should
the market value of the loaned securities increase, the borrower must furnish
additional collateral to the Fund. During the time portfolio securities are on
loan, the borrower will pay the Fund any dividends or interest paid on such
securities plus any interest negotiated

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between the parties to the lending agreement. Loans will be subject to
termination by the Fund or the borrower at any time. While the Fund will not
have the right to vote securities on loan, it intends to terminate the loan and
regain the right to vote if that is considered important with respect to the
investment. 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. Each Fund will limit its
securities lending to 33 1/3% of total assets.

INVESTMENT COMPANY SECURITIES. Each Fund may invest up to 5% of its total assets
in the securities of any one investment company, but may not own more than 3% of
the securities of any one investment company or invest more than 10% of its
total assets in the securities of other investment companies. The Adviser will
waive its investment advisory fees as to all assets invested in other investment
companies. Because such other investment companies employ an investment adviser,
such investment by a Fund will cause shareholders to bear duplicative fees, such
as management fees, to the extent such fees are not waived by the Adviser.

WHEN-ISSUED SECURITIES. Each Fund 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. When
a Fund agrees to purchase securities on a when-issued basis, the Fund's
custodian must set aside cash or liquid portfolio securities equal to the amount
of that commitment in a separate account, and may be required to subsequently
place additional assets in the separate account to reflect any increase in the
Fund's commitment. Prior to delivery of when-issued securities, their value is
subject to fluctuation and no income accrues until their receipt. A Fund engages
in when-issued and delayed delivery transactions only for the purpose of
acquiring portfolio securities consistent with its investment objective and
policies, and not for investment leverage. In when-issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction; its
failure to do so may cause the Fund to miss a price or yield considered to be
advantageous.

TEMPORARY INVESTMENTS. Each Fund may also invest temporarily in high quality
investments or cash during times of unusual market conditions for defensive
purposes and in order to accommodate shareholder redemption requests although
currently it does not intend to do so. Any portion of a Fund's assets maintained
in cash will reduce the amount of assets in securities and may reduce the Fund's
total return.

INVESTMENT LIMITATIONS AND RESTRICTIONS

The following investment restrictions are fundamental with respect to each Fund
and may be changed only by a vote of a majority of the outstanding shares of the
Fund as defined in "Additional Information - Miscellaneous" of this Statement of
Additional Information).

EACH FUND MAY NOT:

1. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent a Fund
from purchasing or selling options and futures contracts or from investing in
securities or other instruments backed by physical commodities).

2. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent a Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business). Investments by a Fund in
securities backed by mortgages on real estate or in marketable securities of
companies engaged in such activities are not hereby precluded.

3. Issue any senior security (as defined in the Investment Company Act of 1940,
as amended (the "1940 Act")), except that (a) a Fund may engage in transactions
that may result in the issuance of senior securities to the extent permitted
under applicable regulations and interpretations of the 1940 Act or an exemptive
order; (b) a Fund may acquire other securities, the acquisition of which may
result in the issuance of a senior security, to the extent permitted under
applicable regulations or interpretations of the 1940 Act; (c) subject to the
restrictions set forth below, a Fund may borrow money as authorized by the 1940
Act.

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4. Borrow money, except that (a) a Fund may enter into commitments to purchase
securities in accordance with its investment program, including when issued
securities and reverse repurchase agreements, provided that the total amount of
any such borrowing does not exceed 33 1/3% of the Fund's total assets; and (b) a
Fund may borrow money for temporary or emergency purposes in an amount not
exceeding 5% of the value of its total assets at the time when the loan is made.
Any borrowing representing more than 5% of a Fund's total assets must be repaid
before the Fund may make additional investments.

5. Lend any security or make any other loan if, as a result, more than 33 1/3%
of its total assets would be lent to other parties, but this limitation does not
apply to purchases of publicly issued debt securities or to repurchase
agreements.

6. Underwrite securities issued by others, except to the extent that a Fund may
be considered an underwriter within the meaning of the Securities Act of 1933,
as amended (the "1933 Act") in the disposition of restricted securities.

7. With respect to 75% (50%, with respect to Virtual Information Fund and
Growth/Value Fund) of its total assets, purchase the securities of any issuer
(other than securities issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities) if, as a result, (a) more than 5% of the Fund's
total assets would be invested in the securities of that issuer, or (b) the Fund
would hold more than 10% of the outstanding voting securities of that issuer.

8. (a) with respect to Small Cap Financial Fund, Financial Services Fund and
Virtual Information Fund, purchase the securities of any issuer if, as a result,
less than 25% of the Fund's total assets would be invested in the securities of
issuers principally engaged in the business activities having the specific
characteristics denoted by the Fund; and (b) with respect to Growth/Value Fund,
purchase the securities of an issuer if, as a result, more than 25% of its total
assets would be invested in the securities of companies whose principal business
activities are in the same industry. These limitations do not apply to
securities issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities.

The following restrictions are not fundamental and may be changed without
shareholder approval:

1. No Fund will purchase or retain securities of any issuer if the officers or
Trustees of the Trust or the officers or directors of its investment adviser
owning beneficially more than one half of 1% of the securities of such issuer
together own beneficially more than 5% of such securities.

2. No Fund will invest more than 10% of its total assets in the securities of
issuers which together with any predecessors have a record of less than three
years of continuous operation.

3. No Fund will invest more than 15% of its net assets in illiquid securities.
Illiquid securities are securities that are not readily marketable or cannot be
disposed of promptly within seven days and in the usual course of business at
approximately the price at which a Fund has valued them. Such securities
include, but are not limited to, time deposits and repurchase agreements with
maturities longer than seven days. Securities that may be resold under Rule
144A, securities offered pursuant to Section 4(2) of, or securities otherwise
subject to restrictions on resale under the 1933 Act ("Restricted Securities"),
shall not be deemed illiquid solely by reason of being unregistered. The Adviser
determines whether a particular security is deemed to be liquid based on the
trading markets for the specific security and other factors. However, because
state securities laws may limit the Fund's investment in Restricted Securities
(regardless of the liquidity of the investment), investments in Restricted
Securities resalable under Rule 144A will continue to be subject to applicable
state law requirements until such time, if ever, that such limitations are
changed.

4. No Fund will make short sales of securities, other than short sales "against
the box," or purchase securities on margin except for short-term credits
necessary for clearance of portfolio transactions, provided that this
restriction will not be applied to limit the use of options, futures contracts
and related options, in the manner otherwise permitted by the investment
restrictions, policies and investment program of the Fund.

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5. Each Fund may invest up to 5% of its total assets in the securities of any
one investment company, but may not own more than 3% of the securities of any
one investment company or invest more than 10% of its total assets in the
securities of other investment companies.

GENERAL. The policies and limitations listed above supplement those set forth in
the Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of a Fund's assets that may be invested
in any security or other asset, or sets forth a policy regarding quality
standards, such standard or percentage limitation will be determined immediately
after and as a result of the Fund's acquisition of such security or other asset
except in the case of borrowing (or other activities that may be deemed to
result in the issuance of a "senior security" under the 1940 Act). Accordingly,
any subsequent change in values, net assets, or other circumstances will not be
considered when determining whether the investment complies with the Fund's
investment policies and limitations. If the value of a Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable at
the time of acquisition due to subsequent fluctuations in value or other
reasons, the Trustees will consider what actions, if any, are appropriate to
maintain adequate liquidity.

The investment policies of a Fund may be changed without an affirmative vote of
the holders of a majority of the Fund's outstanding voting securities unless (1)
a policy is expressly deemed to be a fundamental policy of the Fund or (2) a
policy is expressly deemed to be changeable only by such majority vote.

VALUATION OF PORTFOLIO SECURITIES

Portfolio securities are valued at the last sale price on the securities
exchange or national securities market on which such securities primarily are
traded. Securities not listed on an exchange or national securities market, or
securities in which there were no transactions, are valued at the average of the
most recent bid and asked prices, except in the case of open short positions
where the asked price is used for valuation purposes. Bid price is used when no
asked price is available. Short-term investments are carried at amortized cost,
which approximates value. Any securities or other assets for which recent market
quotations are not readily available are valued at fair value as determined in
good faith by the Funds' Board of Trustees. Expenses and fees, including the
management fee and distribution and service fees, are accrued daily and taken
into account for the purpose of determining the net asset value of the Funds'
shares.

Restricted securities, as well as securities or other assets for which market
quotations are not readily available, or are not valued by a pricing service
approved by the Board of Trustees, are valued at fair value as determined in
good faith by the Board of Trustees. The Board of Trustees will review the
method of valuation on a current basis. In making their good faith valuation of
restricted securities, the Trustees generally will take the following factors
into consideration: restricted securities which are, or are convertible into,
securities of the same class of securities for which a public market exists
usually will be valued at market value less the same percentage discount at
which purchased. This discount will be revised periodically by the Board of
Trustees if the Trustees believe that it no longer reflects the value of the
restricted securities. Restricted securities not of the same class as securities
for which a public market exists usually will be valued initially at cost. Any
subsequent adjustment from cost will be based upon considerations deemed
relevant by the Board of Trustees.

New York Stock Exchange Closings. The holidays (as observed)on which the New
York Stock Exchange is closed currently are: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas.

PERFORMANCE

From time to time the "standardized yield," "dividend yield," "average annual
total return," "total return," and "total return at net asset value" of an
investment in Fund shares may be advertised. An explanation of how yields and
total returns are calculated and the components of those calculations are set
forth below.

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Yield and total return information may be useful to investors in reviewing a
Fund's performance. A Fund's advertisement of its performance must, under
applicable Commission rules, include the average annual total returns for the
Fund for the 1, 5 and 10 year period (or the life of the Fund, if less) as of
the most recently ended calendar quarter. This enables an investor to compare
the Fund's performance to the performance of other funds for the same periods.
However, a number of factors should be considered before using such information
as a basis for comparison with other investments. An investment in a Fund is not
insured; its yield and total return are not guaranteed and normally will
fluctuate on a daily basis. When redeemed, an investor's shares may be worth
more or less than their original cost. Yield and total return for any given past
period are not a prediction or representation by the Trust of future yields or
rates of return on its shares. The yield and total returns of the Fund are
affected by portfolio quality, portfolio maturity, the type of investments the
Fund holds and operating expenses.

STANDARDIZED YIELD. A Fund's "yield" (referred to as "standardized yield") for a
given 30 day period for a class of shares is calculated using the following
formula set forth in rules adopted by the Commission that apply to all funds
that quote yields:

Standardized Yield = 2 [(a-b + 1)^6 - 1]
cd

The symbols above represent the following factors:

a = dividends and interest earned during the 30-day period.

b = expenses accrued for the period (net of any expense reimbursements).

c = the average daily number of shares of that
class outstanding during the 30-day period
that were entitled to receive dividends.

d = the maximum offering price per share of the class on the last day
of the period, adjusted for undistributed net investment income.

The standardized yield for a 30 day period may differ from its yield for any
other period. The Commission formula assumes that the standardized yield for a
30 day period occurs at a constant rate for a six month period and is annualized
at the end of the six month period. This standardized yield is not based on
actual distributions paid by a Fund to shareholders in the 30 day period, but is
a hypothetical yield based upon the net investment income from the Fund's
portfolio investments calculated for that period. The standardized yield may
differ from the "dividend yield," described below.

DIVIDEND YIELD AND DISTRIBUTION RETURNS. From time to time a Fund may quote a
"dividend yield" or a "distribution return." Dividend yield is based on the
share dividends derived from net investment income during a stated period.
Distribution return includes dividends derived from net investment income and
from realized capital gains declared during a stated period. Under those
calculations, the dividends and/or distributions declared during a stated period
of one year or less (for example, 30 days) are added together, and the sum is
divided by the maximum offering price per share of Fund) on the last day of the
period.

Dividend Yield = Dividends + Number of days (accrual period) x 365
-------------------
Max. Offering Price
(last day of period)

The maximum offering price for shares includes the maximum front-end sales
charge, if any.

From time to time similar yield or distribution return calculations may also be
made using the net asset value (instead of its respective maximum offering
price) at the end of the period.

TOTAL RETURNS. The "average annual total return" is an average annual compounded
rate of return for each year in a specified number of years. It is the rate of
return based on the change in value of a hypothetical initial

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investment of $1,000 ("P" in the formula below) held for a number of years ("n")
to achieve an Ending Redeemable Value ("ERV"), according to the following
formula:

(ERV)^1^n-1 = Average Annual Total Return
---
(P)

The cumulative "total return" calculation measures the change in value of a
hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but it
does not average the rate of return on an annual basis. Total return is
determined as follows:

(ERV)-1 = Total Return
---
(P)

From time to time a Fund may also quote an "average annual total return at net
asset value" or a cumulative "total return at net asset value." It is based on
the difference in net asset value per share at the beginning and the end of the
period for a hypothetical investment in that class of shares (without
considering front-end or contingent sales charges) and takes into consideration
the reinvestment of dividends and capital gains distributions.

PERFORMANCE COMPARISONS.

Yield and Total Return. From time to time, performance
information for a Fund showing its average annual total return and/or yield may
be included in advertisements or in information furnished to present or
prospective shareholders and the ranking of those performance figures relative
to such figures for groups of mutual funds categorized by Lipper Analytical
Services as having the same investment objectives may be included in
advertisements.

Total return and/or yield may also be used to compare the
performance of a Fund against certain widely acknowledged standards or indices
for stock and bond market performance. The Standard & Poor's Composite Index of
500 stocks (the "S&P 500") is a market value-weighted and unmanaged index
showing the changes in the aggregate market value of 500 stocks relative to the
base period 1941-43. The S&P 500 is composed almost entirely of common stocks of
companies listed on the New York Stock Exchange, although the common stocks of a
few companies listed on the American Stock Exchange or traded over-the-counter
are included. The 500 companies represented include 400 industrial, 60
transportation and 40 financial services concerns. The S&P 500 represents about
80% of the market value of all issues traded on the New York Stock Exchange.

The NASDAQ-OTC Price Index (the "NASDAQ Index") is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of approximately 3,500 stocks relative to the base measure of 100.00 on
February 5, 1971. The NASDAQ Index is composed entirely of common stocks of
companies traded over-the-counter and often through the National Association of
Securities Dealers Automated Quotations ("NASDAQ") system. Only those
over-the-counter stocks having only one market maker or traded on exchanges are
excluded.

The Shearson Lehman Government Bond Index (the "SL Government
Index") is a measure of the market value of all public obligations of the U.S.
Treasury; all publicly issued debt of all agencies of the U.S. Government and
all quasi-federal corporations; and all corporate debt guaranteed by the U.S.
Government. Mortgage backed securities, flower bonds and foreign targeted issues
are not included in the SL Government Index.

The Shearson Lehman Government/Corporate Bond Index (the "SL
Government/Corporate Index") is a measure of the market value of approximately
5,300 bonds with a face value currently in excess of $1.3 trillion. To be
included in the SL Government/Corporate Index, an issue must have amounts
outstanding in excess of $1 million, have at least one year to maturity and be
rated "Baa" or higher ("investment grade") by a nationally recognized
statistical rating agency.

Current yields or performance will fluctuate from time to time
and are not necessarily representative of future results. Accordingly, a Fund's
yield or performance may not provide for comparison with

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bank deposits or other investments that pay a fixed return for a stated period
of time. Yield and performance are functions of quality, composition, and
maturity, as well as expenses allocated to the Fund.

ADDITIONAL REDEMPTION INFORMATION

Redemption in Kind. Although each Fund intends to redeem shares in cash, each
Fund reserves the right under certain circumstances to pay the redemption price
in whole or in part by a distribution of securities from a Fund. To the extent
available, such securities will be readily marketable. Redemption in kind will
be made in conformity with applicable Commission rules, taking such securities
at the same value employed in determining NAV and selecting the securities in a
manner the Trustees determine to be fair and equitable. The Funds have elected
to be governed by Rule 18F-1 of the 1940 Act under which each Fund 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.

Suspension of Redemptions. The right of redemption may be suspended or the date
of payment postponed (a) during any period when the New York Stock Exchange is
closed (other than customary weekend and holiday closings), (b) when trading in
the markets a Fund ordinarily utilizes is restricted, or when an emergency
exists as determined by the Commission so that disposal of the Fund's
investments or determination of its net asset value is not reasonably
practicable, or (c) for such other periods as the Commission by order may permit
to protect Fund shareholders.

DIVIDENDS AND DISTRIBUTIONS

Each Fund ordinarily declares and pays dividends from its net investment income.
Each Fund distributes substantially all of its net investment income and net
capital gains, if any, to shareholders within each calendar year as well as on a
fiscal year basis to the extent required for the Fund to qualify for favorable
federal tax treatment.

The amount of distributions may vary from time to time depending on market
conditions and the composition of a Fund's portfolio.

For this purpose, the net income of a Fund, from the time of the immediately
preceding determination thereof, shall consist of all interest income accrued on
the portfolio assets of the Fund, dividend income, if any, income from
securities loans, if any, and realized capital gains and losses on the Fund's
assets, less all expenses and liabilities of the Fund chargeable against income.
Interest income shall include discount earned, including both original issue and
market discount, on discount paper accrued ratably to the date of maturity.
Expenses, including the compensation payable to the Adviser, are accrued each
day. The expenses and liabilities of a Fund shall include those appropriately
allocable to the Fund as well as a share of the general expenses and liabilities
of the Trust in proportion to the Fund's share of the total net assets of the
Trust.

TAXES

[Subject to review by KL tax dept.]

It is the policy of each Fund to seek to qualify for the favorable tax treatment
accorded regulated investment companies ("RICs") under Subchapter M of the IRS
Code (the "Code") for so long as such qualification is in the best interests of
its shareholders. By following such policy and distributing its income and gains
currently with respect to each taxable year, each Fund expects to eliminate or
reduce to a nominal amount the federal income and excise taxes to which it may
otherwise be subject.

In order to qualify as a RIC, a Fund must, among other things, (1) derive at
least 90% of its gross income from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of stock or
securities, foreign currencies or other income (including gains from options,
futures or forward contracts) derived with respect to its business of investing
in stock, securities or currencies, (2) derive less than 30% of its gross income
from the sale or other disposition of stock, securities, options, futures,
forward contracts, and certain foreign

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<PAGE>

currencies (or options, futures, or forward contracts on foreign currencies)
held for less than three months, and (3) diversify its holdings so that at the
end of each quarter of its taxable year (a) at least 50% of the market value of
the Fund's assets is represented by cash or cash items, U.S. Government
securities, securities of other RICs and other securities limited, in respect of
any one issuer, to an amount not greater than 5% of the value of the Fund's
total assets and 10% of the outstanding voting securities of such issuer, and
(b) not more than 25% of the value of its total assets is invested in the
securities of any one issuer (other than U.S. Government securities) or of two
or more issuers that the Fund controls and that are engaged in the same,
similar, or related trades or businesses. These requirements may restrict the
degree to which a Fund may engage in short-term trading and concentrate
investments. If a Fund qualifies as a RIC, it will not be subject to federal
income tax on the part of its net investment income and net realized capital
gains, if any, that it distributes to shareholders with respect to each taxable
year within the time limits specified in the Code.

A non-deductible excise tax is imposed on regulated investment companies that do
not distribute in each calendar year an amount equal to 98% of their ordinary
income for the year plus 98% of their capital gain net income for the 1-year
period ending on October 31 of such calendar year. The balance of such income
must be distributed during the following calendar year. If distributions during
a calendar year are less than the required amount, the fund is subject to a
non-deductible excise tax equal to 4% of the deficiency.

Certain investment and hedging activities of a Fund, including transactions in
options, futures contracts, hedging transactions, forward contracts, straddles,
foreign currencies, and foreign securities, are subject to special tax rules. In
a given case, these rules may accelerate income to a Fund, defer losses to the
Fund, cause adjustments in the holding periods of the Fund's securities, convert
short-term capital losses into long-term capital losses, or otherwise affect the
character of the Fund's income. These rules could therefore affect the amount,
timing and character of distributions to shareholders. The Trust will endeavor
to make any available elections pertaining to such transactions in a manner
believed to be in the best interest of the Fund and its shareholders.

Each Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder who has failed to
provide a (or has provided an incorrect) tax identification number, or is
subject to withholding pursuant to a notice from the IRS for failure to properly
include on his or her income tax return payments of interest or dividends. This
"backup withholding" is not an additional tax, and any amounts withheld may be
credited against the shareholder's ultimate U.S. tax liability.

Information set forth in the Prospectus and this Statement of Additional
Information that relates to federal taxation is only a summary of certain key
federal tax considerations generally affecting purchasers of shares of the
Funds. No attempt has been made to present a complete explanation of the federal
tax treatment of a Fund or its shareholders, and this discussion is not intended
as a substitute for careful tax planning. Accordingly, potential purchasers of
shares of a Fund are urged to consult their tax advisers with specific reference
to their own tax circumstances. In addition, the tax discussion in the
Prospectus and this Statement of Additional Information is based on tax law in
effect on the date of the Prospectus and this Statement of Additional
Information; such laws and regulations may be changed by legislative, judicial
or administrative action, sometimes with retroactive effect.

TRUSTEES AND OFFICERS

BOARD OF TRUSTEES.

Overall responsibility for management of the Trust rests with the Trustees, who
are elected by the shareholders of the Trust. The Trust is managed by the
Trustees in accordance with the laws of the State of Delaware. There are
currently _____ Trustees, ___ of whom are not "interested persons" of the Trust
within the meaning of that term under the 1940 Act ("Independent Trustee"). The
Trustees, in turn, elect the officers of the Trust to actively supervise its
day-to-day operations.

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The Trustees of the Trust, their addresses, ages and their principal occupations
during the past five years are as follows:

Position(s) Held Principal Occupation
Name, Address and Age With the Trust During Past 5 Years
- --------------------- -------------- -------------------

[To be Determined]

The Board of Trustees presently has an audit committee, a valuation committee,
and a nominating committee. The members of each committee are _______________
and _________________. The function of the audit committee is to recommend
independent auditors and review and report on accounting and financial matters.
The function of the valuation committee is to determine and monitor the value of
the Funds' assets. The function of the nominating committee is to nominate
persons to serve as disinterested trustees and trustees to serve on committees
of the Board.

REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS.

[Each Trustee receives a fee of $500 for each meeting attended plus expenses.]

The officers of the Trust, their ages, addresses and principal occupations
during the past five years, are as follows:

[To be determined]

The mailing address of each of the officers of the Trust is____________________.

The officers of the Trust receive no compensation directly from the Trust for
performing the duties of their offices.

ADVISORY AND OTHER CONTRACTS

INVESTMENT ADVISER.

FBR Fund Advisers, Inc. is the investment adviser to the Fund. The Adviser
directs the investment of the Fund's assets, subject at all times to the
supervision of the Trust's Board of Trustees. The Adviser continually conducts
investment research and supervision for the Funds and is responsible for the
purchase and sale of the Fund investments.

The Adviser was organized as a Virginia corporation on _________, 1996 and is
registered as an investment adviser under the 1940 Act. It is an affiliate of
Friedman, Billings, Ramsey & Co., Inc., Friedman, Billings, Ramsey Investment
Management, Inc. and FBR Offshore Management, Inc. Affiliates of the Adviser
manage approximately $118.5 million for numerous clients including individuals,
banks and thrift institutions, investment companies, pension and profit sharing
plans and trusts, estates and charitable organizations.

THE INVESTMENT ADVISORY AGREEMENT.

Unless sooner terminated, the Investment Advisory Agreement between the Adviser
and the Trust on behalf of the Funds (the "Investment Advisory Agreement")
provides that it will continue in effect as to each Fund for an initial two-year
term and for consecutive one-year terms thereafter, provided that such
continuance is approved at least annually by the Trustees or by vote of a
majority of the outstanding shares of a Fund (as defined under "Additional

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Information"), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.

The Investment Advisory Agreement is terminable as to a Fund at any time on 60
days' written notice without penalty by the Trustees, by vote of a majority of
the outstanding shares of the Fund, or by the Adviser. The Investment Advisory
Agreement also terminates automatically in the event of any assignment, as
defined in the 1940 Act.

The Investment Advisory Agreement provides that the Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by a Fund
in connection with the performance of services pursuant to the Investment
Advisory Agreement, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith, or gross negligence on the part of the Adviser
in the performance of its duties, or from reckless disregard by it of its duties
and obligations thereunder.

Under the Investment Advisory Agreement, the Adviser may delegate a portion of
its responsibilities to a subadviser. In addition, the Investment Advisory
Agreement provides that the Adviser may render services through its own
employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of a Fund and are under the common
control of FBR as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of the Adviser.

PORTFOLIO TRANSACTIONS.

Pursuant to the Investment Advisory Agreement, the Adviser determines, subject
to the general supervision of the Trustees of the Trust, and in accordance with
each Fund's investment objective and restrictions, which securities are to be
purchased and sold by a Fund, and which brokers are to be eligible to execute
its portfolio transactions. Purchases from underwriters and/or broker-dealers of
portfolio securities include a commission or concession paid by the issuer to
the underwriter and/or broker-dealer and purchases from dealers serving as
market makers may include the spread between the bid and asked price. While the
Adviser generally seeks competitive spreads or commissions, a Fund may not
necessarily pay the lowest spread or commission available on each transaction,
for reasons discussed below.

Allocation of transactions to dealers is determined by the Adviser in its best
judgment and in a manner deemed fair and reasonable to shareholders. The primary
consideration is prompt execution of orders in an effective manner at the most
favorable price. Subject to this consideration, dealers who provide supplemental
investment research to the Adviser may receive orders for transactions by the
Trust. Information so received is in addition to and not in lieu of services
required to be performed by the Adviser and does not reduce the investment
advisory fees payable to the Adviser by a Fund. Such information may be useful
to the Adviser in serving both the Trust and other clients and, conversely, such
supplemental research information obtained by the placement of orders on behalf
of other clients may be useful to the Adviser in carrying out its obligations to
the Trust. The Trustees have authorized the allocation of brokerage to
affiliated broker-dealers on an agency basis to effect portfolio transactions.
The Trustees have adopted procedures incorporating the standards of Rule 17e-1
of the 1940 Act, which require that the commission paid to affiliated
broker-dealers must be "reasonable and fair compared to the commission, fee or
other remuneration received, or to be received, by other brokers in connection
with comparable transactions involving similar securities during a comparable
period of time." At times, a Fund may also purchase portfolio securities
directly from dealers acting as principals, underwriters or market makers. As
these transactions are usually conducted on a net basis, no brokerage
commissions are paid by the Fund.

Investment decisions for a Fund are made independently from those made for the
other funds of the Trust or any other investment company or account managed by
the Adviser. Such other funds, investment companies or accounts may also invest
in the same securities in which a Fund invests. When a purchase or sale of the
same security is made at substantially the same time on behalf of a Fund and
another fund, investment company or account, the transaction will be averaged as
to price, and available investments allocated as to amount, in a manner which
the Adviser believes to be equitable to the Fund and such other fund, investment
company or account. In some

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instances, this investment procedure may affect the price paid or received by a
Fund or the size of the position obtained by the Fund in an adverse manner
relative to the result that would have been obtained if only the Fund had
participated in or been allocated such trades. To the extent permitted by law,
the Adviser may aggregate the securities to be sold or purchased for a Fund with
those to be sold or purchased for the other funds of the Trust or for other
investment companies or accounts in order to obtain best execution. In making
investment recommendations for the Trust, the Adviser will not inquire or take
into consideration whether an issuer of securities proposed for purchase or sale
by the Fund is a customer of the Adviser, its parents or subsidiaries or
affiliates and, in dealing with their commercial customers, the Adviser, its
subsidiaries, and affiliates will not inquire or take into consideration whether
securities of such customers are held by the Trust.

PORTFOLIO TURNOVER.

The turnover rate is calculated by dividing the lesser of each Fund's purchases
or sales of portfolio securities for the year by the monthly average value of
the portfolio securities. The calculation excludes all securities whose
maturities, at the time of acquisition, were one year or less.

DISTRIBUTOR

Friedman, Billings, Ramsey & Co, Inc., located at Potomac Tower, 1001 Nineteenth
Street North, Arlington, Virginia 22209, serves as the Funds' principal
underwriter and distributor (the "Distributor") of the Funds' shares pursuant to
an agreement which is renewable annually. The Distributor is entitled to receive
payments under the Funds' Distribution and Shareholder Servicing Plans described
below.

ADMINISTRATOR

CUSTODIAN AND TRANSFER AGENT

Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, is
the Fund's custodian. PFPC Inc., Bellevue Corporate Center, 400 Bellevue
Parkway, Wilmington, Delaware 19809, is the Funds' transfer agent, dividend
disbursing agent and registrar (the "Transfer Agent"). The Transfer Agent also
provides certain administrative services to the Funds. Neither of them has any
part in determining the investment policies of the Fund or which securities are
to be purchased or sold by the Funds.

DISTRIBUTION PLAN

Under a plan adopted by the Trust's Board of Trustees pursuant to Rule 12b-1
under the 1940 Act (the "Plan"), each Fund pays the Distributor for distributing
Fund shares and for providing personal services to, and/or maintaining accounts
of, Fund shareholders a fee at the annual rate of .25% of the average daily net
assets of the Fund. Under the Plan, the Distributor may pay third parties in
respect of these services such amount as it may determine. The fees paid to the
Distributor under the Plan are payable without regard to actual expenses
incurred. The Trust understands that these third parties also may charge fees to
their clients who are beneficial owners of Fund shares

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in connection with their client accounts. These fees would be in addition to any
amounts which may be received by them from the Distributor under the Plan.

In approving the Plan in accordance with the requirements of Rule 12b-1 under
the 1940 Act, the Trustees (including the Independent Trustees, being Trustees
who are not "interested persons", as defined by the 1940 Act, of the Trust and
have no direct or indirect financial interest in the operation of the Plan or in
any agreements related to the Plan) considered various factors and determined
that there is a reasonable likelihood that the Plan will benefit Fund and its
shareholders. The Plan will continue in effect from year to year if specifically
approved annually (a) by the majority of such Fund's outstanding voting shares
or by the Board of Trustees and (b) by the vote of a majority of the Independent
Trustees. While the Plan remains in effect, the Trust's Principal Financial
Officer shall prepare and furnish to the Board of Trustees a written report
setting forth the amounts spent by each Fund under the Plan and the purposes for
which such expenditures were made. The Plan may not be amended to increase
materially the amount to be spent for distribution without shareholder approval
and all material amendments to the Plan must be approved by the Board of
Trustees and by the Independent Trustees cast in person at a meeting called
specifically for that purpose. While the Plan is in effect, the selection and
nomination of the Independent Trustees shall be made by those Independent
Trustees then in office.

SHAREHOLDER SERVICING PLAN

The Trust has adopted a Shareholder Servicing Plan for each Fund. In accordance
with the Shareholder Servicing Plan, the Fund may enter into Shareholder Service
Agreements under which each Fund pays fees of up to .25% of its average daily
net assets for fees incurred in connection with the personal service and
maintenance of accounts holding shares of a Fund. Such agreements are entered
into between the Trust and various shareholder servicing agents, including the
Distributor and its affiliates, and other financial institutions and securities
brokers (each, a "Shareholder Servicing Agent"). Shareholder Servicing Agents
may periodically waive all or a portion of their respective shareholder
servicing fees with respect to the Funds.

INDEPENDENT ACCOUNTANTS

Arthur Andersen LLP serves as independent accountants to the Funds.

LEGAL COUNSEL.

Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York 10022 is
the counsel to the Trust.

EXPENSES.

Each Fund bears the following expenses relating to its operations: taxes,
interest, brokerage fees and commissions, fees of the Trustees, Commission fees,
state securities qualification fees, costs of preparing and printing
prospectuses for regulatory purposes and for distribution to current
shareholders, outside auditing and legal expenses, advisory and administration
fees, fees and out-of-pocket expenses of the custodian and transfer agent,
certain insurance premiums, costs of maintenance of the Fund's existence, costs
of shareholders' reports and meetings, and any extraordinary expenses incurred
in the Fund's operation.

If total expenses borne by a Fund in any fiscal year exceeds expense limitations
imposed by applicable state securities regulations, the Adviser will waive its
fees to the extent such excess expenses exceed such expense limitation in
proportion to their respective fees. As of the date of this Statement of
Additional Information, the most restrictive expense limitation applicable to a
Fund limits its aggregate annual expenses, including management and advisory
fees but excluding interest, taxes, brokerage commissions, and certain other
expenses, to 2.5% of the first $30 million of its average net assets, 2.0% of
the next $70 million of its average net assets, and 1.5% of its remaining
average net assets. Any expenses to be borne by the Adviser will be estimated
daily and reconciled and paid on a monthly basis. Fees imposed upon customer
accounts by the Adviser's affiliates for cash management services are not fund
expenses for purposes of any such expense limitation.

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ADDITIONAL INFORMATION

DESCRIPTION OF SHARES.

The Trust is a Delaware business trust. The Delaware Trust Instrument authorizes
the Trustees to issue an unlimited number of shares, which are units of
beneficial interest, without par value. The Trust presently has three series of
shares, which represent interests in the Small Cap Financial Fund, the FBR
Financial Services Fund and the FBR Growth/Value Fund. The Trust's Trust
Instrument authorizes the Trustees to divide or redivide any unissued shares of
the Trust into one or more additional series by setting or changing in any one
or more aspects their respective preferences, conversion or other rights, voting
power, restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption.

Shares have no subscription or preemptive rights and only such conversion or
exchange rights as the Trustees may grant in their discretion. When issued for
payment as described in the Prospectus and this Statement of Additional
Information, the Trust's shares will be fully paid and non-assessable. In the
event of a liquidation or dissolution of the Trust, shares of a Fund are
entitled to receive the assets available for distribution belonging to the Fund,
and a proportionate distribution, based upon the relative asset values of the
respective funds of the Trust, of any general assets not belonging to any
particular fund which are available for distribution.

Shares of the Trust are entitled to one vote per share (with proportional voting
for fractional shares) on such matters as shareholders are entitled to vote. On
any matter submitted to a vote of the shareholders, all shares are voted
separately by individual series (funds), and whenever the Trustees determine
that the matter affects only certain series, may be submitted for a vote by only
such series, except (1) when required by the 1940 Act, shares are voted in the
aggregate and not by individual series; and (2) when the Trustees have
determined that the matter affects the interests of more than one series and
that voting by shareholders of all series would be consistent with the 1940 Act,
then the shareholders of all such series shall be entitled to vote thereon
(either by individual series or by shares voted in the aggregate, as the
Trustees in their discretion may determine). The Trustees may also determine
that a matter affects only the interests of one or more classes of a series, in
which case (or if required under the 1940 Act) such matter shall be voted on by
such class or classes. There will normally be no meetings of shareholders for
the purpose of electing Trustees unless and until such time as less than a
majority of the Trustees have been elected by the shareholders, at which time
the Trustees then in office will call a shareholders' meeting for the election
of Trustees. In addition, Trustees may be removed from office by a vote of the
holders of at least two-thirds of the outstanding shares of the Trust. A meeting
shall be held for such purpose upon the written request of the holders of not
less than 10% of the outstanding shares. Upon written request by ten or more
shareholders meeting the qualifications of Section 16(c) of the 1940 Act, (i.e.,
persons who have been shareholders for at least six months, and who hold shares
having a net asset value of at least $25,000 or constituting 1% of the
outstanding shares) stating that such shareholders wish to communicate with the
other shareholders for the purpose of obtaining the signatures necessary to
demand a meeting to consider removal of a Trustee, the Trust will provide a list
of shareholders or disseminate appropriate materials (at the expense of the
requesting shareholders). Except as set forth above, the Trustees shall continue
to hold office and may appoint their successors.

Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each fund of
the Trust affected by the matter. For purposes of determining whether the
approval of a majority of the outstanding shares of a fund will be required in
connection with a matter, a fund will not be deemed to be affected by a matter
unless it is clear that the interests of each fund in the matter are identical,
or that the matter does not affect any interest of the fund. Under Rule 18f-2,
the approval of an investment advisory agreement or any change in investment
policy would be effectively acted upon with respect to a fund only if approved
by a majority of the outstanding shares of such fund. However, Rule 18f-2 also
provides that the ratification of independent public accountants, the approval
of principal underwriting contracts, and the election of Trustees may be
effectively acted upon by shareholders of the Trust voting without regard to
series.

-26-

<PAGE>

SHAREHOLDER AND TRUSTEE LIABILITY.

The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to shareholders of Delaware corporations, and the Delaware Trust
Instrument provides that shareholders of the Trust shall not be liable for the
obligations of the Trust. The Delaware Trust Instrument also provides for
indemnification out of the trust property of any shareholder held personally
liable solely by reason of his or her being or having been a shareholder. The
Delaware Trust Instrument also provides that the Trust shall, upon request,
assume the defense of any claim made against any shareholder for any act or
obligation of the Trust, and shall satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
considered to be extremely remote.

The Delaware Trust Instrument states further that no Trustee, officer, or agent
of the Trust shall be personally liable in connection with the administration or
preservation of the assets of a Fund or the conduct of the Trust's business; nor
shall any Trustee, officer, or agent be personally liable to any person for any
action or failure to act except for his own bad faith, willful misfeasance,
gross negligence, or reckless disregard of his duties. The Declaration of Trust
also provides that all persons having any claim against the Trustees or the
Trust shall look solely to the assets of the Trust for payment.

MISCELLANEOUS.

As used in the Prospectus and in this Statement of Additional Information,
"assets belonging to a fund" means the consideration received by the Trust upon
the issuance or sale of shares of a fund, together with all income, earnings,
profits, and proceeds derived from the investment thereof, including any
proceeds from the sale, exchange, or liquidation of such investments, and any
funds or payments derived from any reinvestment of such proceeds and any general
assets of the Trust, which general liabilities and expenses are not readily
identified as belonging to a particular fund that are allocated to that fund by
the Trustees. The Trustees may allocate such general assets in any manner they
deem fair and equitable. It is anticipated that the factor that will be used by
the Trustees in making allocations of general assets to a particular fund of the
Trust will be the relative net asset value of each respective fund at the time
of allocation. Assets belonging to a particular fund are charged with the direct
liabilities and expenses in respect of that fund, and with a share of the
general liabilities and expenses of each of the funds not readily identified as
belonging to a particular fund, which are allocated to each fund in accordance
with its proportionate share of the net asset values of the Trust at the time of
allocation. The timing of allocations of general assets and general liabilities
and expenses of the Trust to a particular fund will be determined by the
Trustees and will be in accordance with generally accepted accounting
principles. Determinations by the Trustees as to the timing of the allocation of
general liabilities and expenses and as to the timing and allocable portion of
any general assets with respect to a particular fund are conclusive.

As used in the Prospectus and in this Statement of Additional Information, a
"vote of a majority of the outstanding shares" of a Fund means the affirmative
vote of the lesser of (a) 67% or more of the shares of the Fund present at a
meeting at which the holders of more than 50% of the outstanding shares of the
Fund are represented in person or by proxy, or (b) more than 50% of the
outstanding shares of the Fund.

The Trust is registered with the Commission as an open-end management investment
company. Such registration does not involve supervision by the Commission of the
management or policies of the Trust.

The Prospectus and this Statement of Additional Information omit certain of the
information contained in the Registration Statement filed with the Commission.
Copies of such information may be obtained from the Commission upon payment of
the prescribed fee.

THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION ARE NOT AN OFFERING
OF THE SECURITIES HEREIN DESCRIBED IN ANY STATE IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE. NO SALESMAN, DEALER, OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THE
PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION.

-27-

<PAGE>

APPENDIX

DESCRIPTION OF SECURITY RATINGS.

The nationally recognized statistical rating organizations (individually, an
"NRSRO") that may be utilized by the Adviser with regard to portfolio
investments for the Fund include Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc. ("Duff"), Fitch
Investors Service, Inc. ("Fitch"), IBCA Limited and its affiliate, IBCA Inc.
(collectively, "IBCA"), and Thompson BankWatch, Inc. ("Thompson"). Set forth
below is a description of the relevant ratings of each such NRSRO. The NRSROs
that may be utilized by the Adviser and the description of each NRSRO's ratings
is as of the date of this Statement of Additional Information, and may
subsequently change.

LONG-TERM DEBT RATINGS (may be assigned, for example, to corporate and municipal
bonds).

Description of the five highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (e.g., 1, 2, and 3) in each rating category to
indicate the security's ranking within the category):

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 risk 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 some time 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 in the future. Uncertainty of position
characterizes bonds in this class.

Description of the five highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):

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.

-28-

<PAGE>

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 is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposure to adverse conditions.

Description of the three highest long-term debt ratings by Duff:

AAA. Highest credit quality. The risk factors are negligible being only
slightly more than for risk-free U.S. Treasury debt.

AA+, AA, AA-. High credit quality protection factors are strong Risk is
modest but may vary slightly from time to time because of economic
conditions.

A+, A, A-. Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.

Description of the three highest long-term debt ratings by Fitch (plus or minus
signs are used with a rating symbol to indicate the relative position of the
credit within the rating category):

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 credit
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
issues is generally rated "[-]+."

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.

IBCA's description of its three highest long-term debt ratings:

AAA. Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.

AA. Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic, or financial
conditions may increase investment risk albeit not very significantly.

A. Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions
may lead to increased investment risk.

SHORT-TERM DEBT RATINGS (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit)

-29-

<PAGE>

Moody's description of its three highest short-term debt ratings:

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

- Leading market positions in well-established industries.

- High rates of return on funds employed.

- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.

- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.

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

Prime-2. Issuers rated Prime-2 (or supporting institutions) have a strong
capacity for repayment of senior short-term debt 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, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions.2 Ample alternate liquidity is maintained.

Prime-3. Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.

S&P's description of its three highest short-term debt ratings:

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

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

A-3. Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.

Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):

Duff 1+. Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S.
Treasury short-term obligations.

Duff 1. Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.

Duff 1-. High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are
very small.

Duff 2. Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk
factors are small.

-30-

<PAGE>

Duff 3. Satisfactory liquidity and other protection factors qualify
issue as to investment grade.

Risk factors are larger and subject to more variation. Nevertheless, timely
payment is expected.

Fitch's description of its four highest short-term debt ratings:

F-1+. Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.

F-1. Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.

F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ or F-1 ratings.

F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.

IBCA's description of its three highest short-term debt ratings:

A+. Obligations supported by the highest capacity for timely repayment.

A1. Obligations supported by a very strong capacity for timely
repayment.

A2. Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.

SHORT-TERM DEBT RATINGS. Thompson BankWatch, Inc. ("TBW") ratings are based upon
a qualitative and quantitative analysis of all segments of the organization
including, where applicable, holding company and operating subsidiaries.

TBW Ratings do not constitute a recommendation to buy or sell securities of any
of these companies. Further, TBW does not suggest specific investment criteria
for individual clients.

The TBW Short-Term Ratings apply to commercial paper, other senior short-term
obligations and deposit obligations of the entities to which the rating has been
assigned.

The TBW Short-Term Ratings apply only to unsecured instruments that have a
maturity of one year or less.

The TBW Short-Term Ratings specifically assess the likelihood of an untimely
payment of principal or interest.

TBW-1. The highest category; indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.

TBW-2. The second highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."

TBW-3. The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in a
timely fashion is considered adequate.

TBW-4. The lowest rating category; this rating is regarded as non-investment
grade and therefore speculative.

-31-

<PAGE>

DEFINITIONS OF CERTAIN MONEY MARKET INSTRUMENTS.

Commercial Paper. Commercial paper consists of unsecured promissory notes issued
by corporations. Issues of commercial paper normally have maturities of less
than nine months and fixed rates of return.

Certificates of Deposit. Certificates of Deposit are negotiable certificates
issued against funds deposited in a commercial bank or a savings and loan
association for a definite period of time and earning a specified return.

Bankers' Acceptances. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.

U.S. Treasury Obligations. U.S. Treasury Obligations are obligations issued or
guaranteed as to payment of principal and interest by the full faith and credit
of the U.S. Government. These obligations may include Treasury bills, notes and
bonds, and issues of agencies and instrumentalities of the U.S. Government,
provided such obligations are guaranteed as to payment of principal and interest
by the full faith and credit of the U.S. Government.

U.S. Government Agency and Instrumentality Obligations. Obligations issued by
agencies and instrumentalities of the U.S. Government include such agencies and
instrumentalities as the Government National Mortgage Association, the
Export-Import Bank of the United States, the Tennessee Valley Authority, the
Farmers Home Administration, the Federal Home Loan Banks, the Federal
Intermediate Credit Banks, the Federal Farm Credit Banks, the Federal Land
Banks, the Federal Housing Administration, the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, and the Student Loan
Marketing Association. Some of these obligations, such as those of the
Government National Mortgage Association are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Export-Import Bank of
the United States, are supported by the right of the issuer to borrow from the
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
No assurance can be given that the U.S. Government would provide financial
support to U.S. Government-sponsored instrumentalities if it is not obligated to
do so by law. A Fund will invest in the obligations of such instrumentalities
only when the investment adviser believes that the credit risk with respect to
the instrumentality is minimal.

-32-

<PAGE>

PART C. OTHER INFORMATION
-------------------------

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------

(a) Financial statements.

In Part A:

None.

In Part B:

To be filed by amendment.

In Part C:

None.

(b) Exhibits

EX-99.B1(a) Certificate of Trust is filed herewith.

EX-99.B1(b) Delaware Trust Instrument dated April 30, 1996 is filed
herewith.

EX-99.B2 Form of Bylaws are filed herewith.

EX-99.B3 None.

EX-99.B4 None.

EX-99.B5 To be filed.

EX-99.B6 To be filed.

EX-99.B7 None.

EX-99.B8 To be filed.

EX-99.B9(a)(i) To be filed.

EX-99.B9(a)(ii) To be filed.

EX-99.B9(b) To be filed.

EX-99.B9(c) To be filed.

EX-99.B10(a) To be filed.

EX-99.B10(b) To be filed.

EX-99.B11(a) Consent of Kramer, Levin, Naftalis & Frankel is filed
herewith.

EX-99.B12 None.

EX-99.B13 To be filed.

C-1

<PAGE>

EX-99.B14 None.

EX-99.B15 To be filed.

EX-99.B16 Forms of performance computation are filed herewith.

EX-99.B17 None.

EX-99.B18 None.

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
-------------------------------------------------------------

None.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES
-------------------------------

Title of Class; Shares of Number of Record Holders
beneficial interest as of June 1 , 1996
------------------------

Small Cap Financial Fund 0

Financial Services Fund 0

Virtual Information Fund 0

Growth/Value Fund 0

ITEM 27. INDEMNIFICATION
---------------

Article X, Section 10.02 of the Registrant's Delaware Trust Instrument,
incorporated herein as Exhibit 2 hereto, provides for the
indemnification of Registrant's Trustees and officers, as follows:

"SECTION 10.02 INDEMNIFICATION.

(a) Subject to the exceptions and limitations contained in Subsection
10.02(b):

(i) every person who is, or has been, a Trustee or officer of the
Trust (hereinafter referred to as a "Covered Person") shall be
indemnified by the Trust to the fullest extent permitted by law against
liability and against all expenses reasonably incurred or paid by him
in connection with any claim, action, suit or proceeding in which he
becomes involved as a party or otherwise by virtue of his being or
having been a Trustee or officer and against amounts paid or incurred
by him in the settlement thereof;

(ii) the words "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal or
other, including appeals), actual or threatened while in office or
thereafter, and the words "liability" and "expenses" shall include,
without limitation, attorneys' fees, costs, judgments, amounts paid in
settlement, fines, penalties and other liabilities.

(b) No indemnification shall be provided hereunder to a Covered
Person:

C-2

<PAGE>

(i) who shall have been adjudicated by a court or body before which
the proceeding was brought (A) to be liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of his office or (B) not to have acted in good faith in the reasonable
belief that his action was in the best interest of the Trust; or

(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office, (A) by the court or other
body approving the settlement; (B) by at least a majority of those
Trustees who are neither Interested Persons of the Trust nor are
parties to the matter based upon a review of readily available facts
(as opposed to a full trial-type inquiry); or (C) by written opinion of
independent legal counsel based upon a review of readily available
facts (as opposed to a full trial-type inquiry).

(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall
not be exclusive of or affect any other rights to which any Covered
Person may now or hereafter be entitled, shall continue as to a person
who has ceased to be a Covered Person and shall inure to the benefit of
the heirs, executors and administrators of such a person. Nothing
contained herein shall affect any rights to indemnification to which
Trust personnel, other than Covered Persons, and other persons may be
entitled by contract or otherwise under law.

(d) Expenses in connection with the preparation and presentation of
a defense to any claim, action, suit or proceeding of the character
described in Subsection (a) of this Section 10.02 may be paid by the
Trust or Series from time to time prior to final disposition thereof
upon receipt of an undertaking by or on behalf of such Covered Person
that such amount will be paid over by him to the Trust or Series if it
is ultimately determined that he is not entitled to indemnification
under this Section 10.02; provided, however, that either (i) such
Covered Person shall have provided appropriate security for such
undertaking, (ii) the Trust is insured against losses arising out of
any such advance payments or (iii) either a majority of the Trustees
who are neither Interested Persons of the Trust nor parties to the
matter, or independent legal counsel in a written opinion, shall have
determined, based upon a review of readily available facts (as opposed
to a trial-type inquiry or full investigation), that there is reason to
believe that such Covered Person will be found entitled to
indemnification under this Section 10.02."

Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to trustees, officers, and controlling
persons or Registrant pursuant to the foregoing provisions, or
otherwise, Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Investment Company Act of 1940, as
amended, and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a trustee, officer, or
controlling person of Registrant in the successful defense of any
action, suit, or proceeding) is asserted by such trustee, officer, or
controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.

C-3

<PAGE>

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
----------------------------------------------------

Describe any other business, profession, vocation or employment of a
substantial nature in which each investment adviser of the Registrant, and each
director, officer or partner of any such investment adviser, is or has been, at
any time during the past two fiscal years, engaged for his own account or in the
capacity of director, officer, employee, partner, or trustee.

FBR Fund Advisers, Inc. provides advisory services to the Registrant
and its series. The directors and officers of FBR Fund Advisers, Inc. have held
the following positions of a substantial nature:

Name Position with Adviser Other Business
- ---- --------------------- --------------

Eric F. Billings President Vice Chairman and Chief
Operating Officer - Friedman,
Billings, Ramsey & Co. Inc.,
Friedman, Billings, Ramsey
Investment Management, Inc.
and FBR Offshore
Management, Inc.

W. Russell Ramsey Secretary and Treasurer President and Secretary-
Friedman, Billings, Ramsey
& Co. Inc., Friedman,
Billings, Ramsey Investment
Management, Inc. and FBR
Offshore Management, Inc.

ITEM 29. PRINCIPAL UNDERWRITERS
----------------------

(a) Not applicable.

(b) Friedman, Billings, Ramsey & Co., Inc. serves as underwriter to the
Funds. The following information is provided with respect to each
director, officer or partner of the underwriter:

Name and principal Positions and offices Positions and offices
business address1 with Underwriter with Registrant
- ----------------- ---------------- ---------------

Emanuel J. Friedman Chairman, Chief Executive None
Officer, Treasurer and Assistant
Secretary

Eric F. Billings Vice Chairman and Chief None
Operating Officer

W. Russell Ramsey President and Secretary None

Eric Y. Generous Chief Financial Officer and None
Executive Vice President

- --------
1 The address of each person is Potomac Tower, 1001 Nineteenth Street,
Arlington, Virginia 22209.

C-4

<PAGE>

Nicholas Nichols Compliance Officer and Senior None
Vice President

Karen K. Edwards Managing Director - None
Investment Banking

Howard M. Giller Managing Director - None
Investment Banking

Robert H. Hartheimer Managing Director - None
Investment Banking

James R. Kleeblatt Managing Director - Syndicate None

James D. Locke Managing Director - Real Estate None

James C. Neuhauser Managing Director None
Investment Banking

Suzanne N. Richardson Managing Director - None
Investment Banking

Carl C. Shade Controller None

William R. Swanson Managing Director - Real Estate None

J. Rock Tonkel, Jr. Managing Director - None
Investment Banking

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
--------------------------------
The majority of the accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 (the "1940
Act") and the Rules thereunder are maintained at the offices of PFPC (the
Transfer Agent) and Bear Stearns Funds Management Inc. (the Administrator). The
records required to be maintained under Rule 31a-1(b)(1) with respect to
journals of receipts and deliveries of securities and receipts and disbursements
of cash are maintained at the offices of the Registrant's custodian, as listed
under "Advisory & Other Contracts" in Part B to this Registration Statement.

ITEM 31. MANAGEMENT SERVICES
-------------------

Not applicable.

ITEM 32. UNDERTAKINGS
------------

(1) Registrant undertakes to file a post-effective amendment, using
financial statements which need not be certified within four to six months from
the effective date of registrant's 1933 Act registration statement, or the
initial public offering thereof, whichever is later.

(2) Registrant undertakes that, if requested to do so by the holders of
at least 10% of the Registrant's outstanding shares, a shareholder meeting will
be called for the purpose of voting upon the removal of a director or directors
and that communications with other shareholders will be assisted as provided by
Section 16(c) of the 1940 Act.

C-5

<PAGE>

SIGNATURES

As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York and State of New York, on the 10th day of June, 1996.

THE FBR FAMILY OF FUNDS

By: /s/ Eric F. Billings
---------------------
Eric F. Billings, President

As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities indicated on the 10th of June,
1996.

/s/ Eric F. Billings President
--------------------
Eric F. Billings

/s/ Jules Buchwald Trustee
------------------
Jules Buchwald

/s/ Joanne Doldo Trustee
----------------
Joanne Doldo

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<PAGE>

EXHIBIT INDEX

Exhibit 99.B1(a) Certificate of Trust.

Exhibit 99.B1(b) Delaware Trust Instrument.

Exhibit 99.B2 Bylaws.

Exhibit 99.B11(a) Consent of Kramer, Levin, Naftalis & Frankel.

Exhibit 99.B16 Forms of performance computation.

C-7

CERTIFICATE OF TRUST

THE FBR FAMILY OF FUNDS

This Certificate of Trust is being executed as of April 30,
1996 for the purpose of organizing a business trust pursuant to the Delaware
Business Trust Act, 12 Del. C. ss.ss. 3801 et seq.

The undersigned hereby certifies as follows:

1. Name. The name of the business trust is The FBR
Family of Funds ("Trust").

2. Registered Investment Company. The Trust is or will
become a registered investment company under the Investment Company Act of 1940,
as amended.

3. Registered Office and Registered Agent. The
registered office of the Trust in the State of Delaware is located at 1201 North
Market Street, P.O. Box 1347, Wilmington, Delaware 19899-1347. The name of the
registered agent of the Trust for service of process at such location is
Delaware Corporation Organizers, Inc.

4. Notice of Limitation of Liabilities of Series. Notice
is hereby given that the Trust is or may hereafter be constituted a series
trust. The debts, liabilities, obligations and expenses incurred, contracted for
or otherwise existing with

<PAGE>

respect to any particular series shall be enforceable against the assets of such
series only, and not against the assets of the Trust generally.

IN WITNESS WHEREOF, the undersigned, being the sole trustees
of the Trust, have duly executed this Certificate of Trust as of the day and
year first above written.

Trustee Trustee

s/sJules Buchwald s/sJoanne Doldo
- ----------------- ---------------
Jules Buchwald Joanne Doldo

- 2 -

THE FBR FAMILY OF FUNDS

TRUST INSTRUMENT

DATED APRIL 30, 1996

<PAGE>

THE FBR FAMILY OF FUNDS

TABLE OF CONTENTS

Page
ARTICLE I - NAME AND DEFINITION............................................. 1
Section 1.01 Name................................................. 1
Section 1.02 Definitions.......................................... 1

ARTICLE II - BENEFICIAL INTEREST............................................ 2
Section 2.01 Shares of Beneficial Interest........................ 2
Section 2.02 Issuance of Shares................................... 2
Section 2.03 Register of Shares and Share Certificates............ 3
Section 2.04 Transfer of Shares................................... 3
Section 2.05 Treasury Shares...................................... 3
Section 2.06 Establishment of Series.............................. 3
Section 2.07 Investment in the Trust.............................. 4
Section 2.08 Assets and Liabilities of Series..................... 4
Section 2.09 No Preemptive Rights................................. 5
Section 2.10 No Personal Liability of Shareholder................. 5
Section 2.11 Assent to Trust Instrument........................... 5

ARTICLE III - THE TRUSTEES.................................................. 6
Section 3.01 Management of the Trust.............................. 6
Section 3.02 Initial Trustees..................................... 6
Section 3.03 Term of Office....................................... 6
Section 3.04 Vacancies and Appointments........................... 7
Section 3.05 Temporary Absence.................................... 7
Section 3.06 Number of Trustees................................... 7
Section 3.07 Effect of Ending of a Trustee's Service.............. 7
Section 3.08 Ownership of Assets of the Trust..................... 7

ARTICLE IV - POWERS OF THE TRUSTEES......................................... 8
Section 4.01 Powers............................................... 8
Section 4.02 Issuance and Repurchase of Shares.................... 11
Section 4.03 Trustees and Officers as Shareholders................ 11
Section 4.04 Action by the Trustees............................... 11
Section 4.05 Chairman of the Trustees............................. 11
Section 4.06 Principal Transactions............................... 11

ARTICLE V - EXPENSES OF THE TRUST........................................... 12

ARTICLE VI - INVESTMENT ADVISER, PRINCIPAL UNDERWRITER,
ADMINISTRATOR AND TRANSFER AGENT................................... 12
Section 6.01 Investment Adviser................................... 12
Section 6.02 Principal Underwriter................................ 13

<PAGE>

Section 6.03 Administration....................................... 13
Section 6.04 Transfer Agent....................................... 13
Section 6.05 Parties to Contract.................................. 13
Section 6.06 Provisions and Amendments............................ 14

ARTICLE VII - SHAREHOLDERS' VOTING POWERS AND MEETINGS...................... 14
Section 7.01 Voting Powers........................................ 14
Section 7.02 Meetings............................................. 15
Section 7.03 Quorum and Required Vote............................. 15

ARTICLE VIII - CUSTODIAN.................................................... 16
Section 8.01 Appointment and Duties............................... 16
Section 8.02 Central Certificate System........................... 16

ARTICLE IX - DISTRIBUTIONS AND REDEMPTIONS.................................. 17
Section 9.01 Distributions........................................ 17
Section 9.02 Redemptions.......................................... 17
Section 9.03 Determination of Net Asset
Value and Valuation of Portfolio Assets............................ 17
Section 9.04 Suspension of the Right of Redemption................ 18
Section 9.05 Redemption of Shares in Order to
Qualify as Regulated Investment Company............................ 19
Section 9.06 Redemption of Small Accounts......................... 19

ARTICLE X - LIMITATION OF LIABILITY AND INDEMNIFICATION..................... 19
Section 10.01 Limitation of Liability............................. 19
Section 10.02 Indemnification..................................... 19
Section 10.03 Shareholders........................................ 21

ARTICLE XI - MISCELLANEOUS.................................................. 21
Section 11.01 Trust Not A Partnership............................. 21
Section 11.02 Trustee's Good Faith Action, Expert Advice,
No Bond or Surety........................................ 21
Section 11.03 Establishment of Record Dates....................... 21
Section 11.04 Termination of Trust................................ 22
Section 11.05 Reorganization...................................... 23
Section 11.06 Filing of Copies, References, Headings.............. 23
Section 11.07 Applicable Law...................................... 24
Section 11.08 Amendments.......................................... 24
Section 11.09 Fiscal Year......................................... 24
Section 11.10 Name Reservation.................................... 25
Section 11.11 Provisions in Conflict With Law..................... 25

<PAGE>

THE FBR FAMILY OF FUNDS
April 30, 1996

TRUST INSTRUMENT, made by Jules Buchwald and Joanne Doldo (the
"Trustees").

WHEREAS, the Trustees desire to establish a business trust for the
investment and reinvestment of funds contributed thereto;

NOW THEREFORE, the Trustees declare that all money and property
contributed to the trust hereunder shall be held and managed in trust under this
Trust Instrument as herein set forth below.

ARTICLE I
NAME AND DEFINITION

SECTION 1.01 NAME. The name of the trust created hereby is "The FBR
Family of Funds."

SECTION 1.02 DEFINITIONS. Wherever used herein, unless otherwise
required by the context or specifically provided:

(a) The "1940 Act" means the Investment Company Act of 1940, as amended
from time to time. Whenever reference is made hereunder to the 1940 Act, such
references shall be interpreted as including any applicable order or orders of
the Commission or any rules or regulations adopted by the Commission thereunder
or interpretive releases of the Commission staff;

(b) "Bylaws" means the Bylaws of the Trust as adopted by the Trustees,
as amended from time to time;

(c) "Commission" has the meaning given it in the 1940 Act. In addition,
"Affiliated Person," "Interested Person" and "Principal Underwriter" shall have
the respective meanings given them in the 1940 Act;

(d) "Delaware Act" means the Delaware Business Trust Act, to Chapter 38
of Title 12 of the Delaware Code, as amended from time to time;

(e) "Net Asset Value" means the net asset value of each Series of the
Trust determined in the manner provided in Article IX, Section 9.03 hereof;

(f) "Outstanding Shares" means those Shares shown from time to time in
the books of the Trust or its transfer agent as then issued and outstanding, but
shall not include Shares which have been redeemed or repurchased by the Trust
and which are at the time held in the treasury of the Trust;

<PAGE>

(g) "Series" means a series of Shares of the Trust established in
accordance with the provisions of Article II, Section 2.06 hereof;

(h) "Shareholder" means a record owner of Outstanding Shares of the
Trust;

(i) "Shares" means the equal proportionate transferable units of
beneficial interest into which the beneficial interest of each Series of the
Trust or class thereof shall be divided and may include fractions of Shares as
well as whole Shares;

(j) The "Trust" means The FBR Family of Funds, a Delaware business
trust, and reference to the Trust when applicable to one or more Series of the
Trust, shall refer to any such Series;

(k) The "Trustees" means the person or persons who has or have signed
this Trust Instrument so long as he or they shall continue in office in
accordance with the terms hereof and all other persons who may from time to time
be duly qualified and serving as Trustees in accordance with the provisions of
Article III hereof, and reference herein to a Trustee or to the Trustees shall
refer to the individual Trustees in their respective capacity as Trustees
hereunder;

(l) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of one or
more of the Trust or any Series, or the Trustees on behalf of the Trust or any
Series.

ARTICLE II
BENEFICIAL INTEREST

SECTION 2.01 SHARES OF BENEFICIAL INTEREST. The beneficial interest in
the Trust shall be divided into such Shares of one or more separate and distinct
Series or classes of a Series as set forth in Section 2.06 or as the Trustees
shall otherwise from time to time create and establish as provided in Section
2.06. The number of Shares of each Series and class thereof authorized hereunder
is unlimited. Except as otherwise determined by the Trustees, each Share shall
have no par value. All Shares issued hereunder, including without limitation
Shares issued in connection with a dividend paid in Shares or a split or reverse
split of Shares, shall be fully paid and nonassessable.

SECTION 2.02 ISSUANCE OF SHARES. The Trustees in their discretion may,
from time to time, without a vote of the Shareholders, issue Shares, in addition
to the then issued and outstanding Shares and Shares held in the treasury, to
such party or parties and for such amount and type of consideration, subject to
applicable law, including cash or securities, at such time or times and on such
terms as the Trustees may deem appropriate, and may in such manner acquire other
assets (including the acquisition of assets subject to, and in connection with,
the assumption of liabilities) and businesses. In connection with any issuance
of Shares, the Trustees may issue fractional Shares and Shares held in the
treasury. The Trustees may from time to time divide or combine the Shares into a
greater or lesser number without thereby changing the proportionate beneficial
interests in the Trust. Contributions to the Trust may be

<PAGE>

accepted for, and Shares shall be redeemed as, whole Shares and/or 1/1000th of a
Share or integral multiples thereof. The Trustees or any person the Trustees may
authorize for the purpose may, in their discretion, reject any application for
the issuance of shares.

SECTION 2.03 REGISTER OF SHARES AND SHARE CERTIFICATES. A register
shall be kept at the principal office of the Trust or an office of the Trust's
transfer agent which shall contain the names and addresses of the Shareholders
of each Series, the number of Shares of that Series (or any class or classes
thereof) held by them respectively and a record of all transfers thereof. No
share certificates shall be issued by the Trust except as the Trustees may
otherwise authorize, and the persons indicated as shareholders in such register
shall be entitled to receive dividends or other distributions or otherwise to
exercise or enjoy the rights of Shareholders. No Shareholder shall be entitled
to receive payment of any dividend or other distribution, nor to have notice
given to him as herein or in the Bylaws provided, until he has given his address
to the transfer agent or such officer or other agent of the Trustees as shall
keep the said register for entry thereon.

SECTION 2.04 TRANSFER OF SHARES. Except as otherwise provided by the
Trustees, Shares shall be transferable on the records of the Trust only by the
record holder thereof or by his agent thereunto duly authorized in writing, upon
delivery to the Trustees or the Trust's transfer agent of a duly executed
instrument of transfer and such evidence of the genuineness of such execution
and authorization and of such other matters as may be required by the Trustees.
Upon such delivery the transfer shall be recorded on the register of the Trust.
Until such record is made, the Shareholder of record shall be deemed to be the
holder of such Shares for all purposes hereunder and neither the Trustees nor
the Trust, nor any transfer agent or registrar nor any officer, employee or
agent of the Trust shall be affected by any notice of the proposed transfer.

SECTION 2.05 TREASURY SHARES. Shares held in the treasury shall, until
reissued pursuant to Section 2.02 hereof, not confer any voting rights on the
Trustees, nor shall such Shares be entitled to any dividends or other
distributions declared with respect to the Shares.

SECTION 2.06 ESTABLISHMENT OF SERIES AND CLASSES. The Trust created
hereby shall consist initially of one Series which is specified by name on
Schedule A attached hereto, and such Series shall initially consist of such
classes of Shares as are designated on Schedule A. Such initial Series (or class
thereof, as applicable) shall have the investment objectives, purposes and
policies, and such relative rights, powers, duties and other attributes, as are
specified in the Registration Statement and related prospectus and statement of
additional information approved by the Trustees in connection with the
registration and offer of Shares of such Series (or class thereof). Distinct
records shall be maintained by the Trust for each Series and the assets and
liabilities associated with the Series shall be held and accounted for
separately from the assets and liabilities of the Trust or any other Series. The
Trustees shall have full power and authority, in their sole discretion and
without obtaining any prior authorization or vote of the Shareholders of any
Series, to establish and designate and to change in any manner any Series or any
classes of initial or additional Series and to fix such preferences, voting
powers, rights and privileges of such Series or classes thereof as the Trustees
may from time to time determine, to divide or combine the Shares or any Series
or classes thereof into a greater or lesser number, to classify or reclassify
any issued Shares or any Series or classes thereof into one or more Series or
classes

<PAGE>

of Shares, and to take such other action with respect to the Shares as the
Trustees may deem desirable. The establishment and designation of any Series
(other than those established pursuant to the first sentence of this Section
2.06) shall be effective upon the adoption of a resolution by a majority of the
Trustees setting forth such establishment and designation and the relative
rights and preferences of the Shares of such Series. A Series may issue any
number of Shares, but need not issue Shares. At any time that there are no
Shares outstanding of any particular Series previously established and
designated, the Trustees may by a majority vote abolish that Series and the
establishment and designation thereof.

All references to Shares in this Trust Instrument shall be deemed to be
Shares of any or all Series, or classes thereof as the context may require. All
provisions herein relating to the Trust shall apply equally to each Series of
the Trust, and each class thereof, except as the context otherwise requires.

Each Share of a Series of the Trust shall represent an equal beneficial
interest in the net assets of such Series. Each holder of Shares of a Series
shall be entitled to receive his proportionate share of all distributions made
with respect to such Series, based upon the number of full and fractional Shares
of the Series held. Upon redemption of his Shares, such Shareholder shall be
paid solely out of the funds and property of such Series of the Trust.

SECTION 2.07 INVESTMENT IN THE TRUST. The Trustees shall accept
investments in any Series from such persons and on such terms as they may from
time to time authorize. At the Trustees' discretion, such investments, subject
to applicable law, may be in the form of cash or securities in which the
affected Series is authorized to invest, valued as provided in Article IX
Section 9.03 hereof. Investments in a Series shall be credited to each
Shareholder's account in the form of full and fractional Shares at the net asset
value per Share next determined after the investment is received or accepted as
may be determined by the Trustees; provided, however, that the Trustees may, in
their sole discretion, (a) fix minimum amounts for initial and subsequent
investments or (b) impose a sales charge upon investments in such manner and at
such time determined by the Trustees.

SECTION 2.08 ASSETS AND LIABILITIES OF SERIES. All consideration
received by the Trust for the issue or sale of Shares of a particular Series,
together with all assets in which such consideration is invested or reinvested,
all income, earnings, profits, and proceeds thereof including any proceeds
derived from the sale, exchange or liquidation of such assets, and any funds or
payments derived from any reinvestment of such proceeds in whatever form the
same may be, shall be held and accounted for separately from the other assets of
the Trust and of every other Series and may be referred to herein as "assets
belonging to" that Series. The assets belonging to a particular Series shall
belong to that Series for all purposes, and to no other Series, and shall be
subject only to the rights of creditors of that Series. In addition, any assets,
income, earnings, profits or funds, or payments and proceeds with respect
thereto, which are not readily identifiable as belonging to any particular
Series shall be allocated by the Trustees between and among one or more of the
Series in such manner as the Trustees, in their sole discretion, deem fair and
equitable. Each such allocation shall be conclusive and binding upon the
Shareholders of all Series for all purposes, and such assets, income, earnings,
profits or funds, or payments and proceeds with respect thereto shall be assets
belonging to that Series.

<PAGE>

The assets belonging to a particular Series shall be so recorded upon the books
of the Trust, and shall be held by the Trustees in trust for the benefit of the
holders of Shares of that Series. The assets belonging to each particular Series
shall be charged with the liabilities of that Series and all expenses, costs,
charges and reserves attributable to that Series. Any general liabilities,
expenses, costs, charges or reserves of the Trust which are not readily
identifiable as belonging to any particular Series shall be allocated and
charged by the Trustees between or among any one or more of the Series in such
manner as the Trustees in their sole discretion deem fair and equitable. Each
such allocation shall be conclusive and binding upon the Shareholders of all
Series for all purposes. Without limitation of the foregoing provisions of this
Section 2.08, but subject to the right of the Trustees in their discretion to
allocate general liabilities, expenses, costs, changes or reserves as herein
provided, the debts, liabilities, obligations and expenses incurred, contracted
for or otherwise existing with respect to a particular Series shall be
enforceable against the assets of such Series only, and not against the assets
of the Trust generally. Notice of this contractual limitation on inter-Series
liabilities may, in the Trustee's sole discretion, be set forth in the
certificate of trust of the Trust (whether originally or by amendment) as filed
or to be filed in the Office of the Secretary of State of the State of Delaware
pursuant to the Delaware Act, and upon the giving of such notice in the
certificate of trust, the statutory provisions of Section 3804 of the Delaware
Act relating to limitations on inter-Series liabilities (and the statutory
effect under Section 3804 of setting forth such notice in the certificate of
trust) shall become applicable to the Trust and each Series. Any person
extending credit to, contracting with or having any claim against any Series may
look only to the assets of that Series to satisfy or enforce any debt, with
respect to that Series. No Shareholder or former Shareholder of any Series shall
have a claim on or any right to any assets allocated or belonging to any other
Series.

SECTION 2.09 NO PREEMPTIVE RIGHTS. Shareholders shall have no
preemptive or other right to subscribe to any additional Shares or other
securities issued by the Trust or the Trustees, whether of the same or other
Series.

SECTION 2.10 NO PERSONAL LIABILITY OF SHAREHOLDER. No Shareholder shall
be personally liable for the debts, liabilities, obligation and expenses
incurred by, contracted for, or otherwise existing with respect to, the Trust or
by or on behalf of any Series. The Trustees shall have no power to bind any
Shareholder personally or to call upon any Shareholder for the payment of any
sum of money or assessment whatsoever other than such as the Shareholder may at
any time personally agree to pay by way of subscription for any Shares or
otherwise. Every note, bond, contract or other understanding issued by or on
behalf of the Trust or the Trustees relating to the Trust or to a Series shall
include a recitation limiting the obligation represented thereby to the Trust or
to one or more Series and its or their assets (but the omission of such a
recitation shall not operate to bind any Shareholder or Trustee of the Trust).

SECTION 2.11 ASSENT TO TRUST INSTRUMENT. Every Shareholder, by virtue
of having purchased a Share shall become a Shareholder and shall be held to have
expressly assented and agreed to be bound by the terms hereof.

<PAGE>

ARTICLE III
THE TRUSTEES

SECTION 3.01 MANAGEMENT OF THE TRUST. The Trustees shall have exclusive
and absolute control over the Trust Property and over the business of the Trust
to the same extent as if the Trustees were the sole owners of the Trust Property
and business in their own right, but with such powers of delegation as may be
permitted by this Trust Instrument. The Trustees shall have power to conduct the
business of the Trust and carry on its operations in any and all of its branches
and maintain offices both within and without the State of Delaware, in any and
all states of the United States of America, in the District of Columbia, in any
and all commonwealths, territories, dependencies, colonies, or possessions of
the United States of America, and in any foreign jurisdiction and to do all such
other things and execute all such instruments as they deem necessary, proper or
desirable in order to promote the interests of the Trust although such things
are not herein specifically mentioned. Any determination as to what is in the
interests of the Trust made by the Trustees in good faith shall be conclusive.
In construing the provisions of this Trust Instrument, the presumption shall be
in favor of a grant of power to the Trustees.

The enumeration of any specific power in this Trust Instrument shall
not be construed as limiting the aforesaid power. The powers of the Trustees may
be exercised without order of or resort to any court.

Except for the Trustees named herein or appointed to fill vacancies
pursuant to Section 3.04 of this Article III and except as otherwise provided in
Section 3.02 of this Article III, the Trustees shall be elected by the
Shareholders owning of record a plurality of the Shares voting at a meeting of
Shareholders. Any Shareholder meeting held for such purpose shall be held on a
date fixed by the Trustees. In the event that less than a majority of the
Trustees holding office have been elected by Shareholders, the Trustees then in
office will call a Shareholders' meeting for the election of Trustees in
accordance with the provisions of the 1940 Act.

SECTION 3.02 INITIAL TRUSTEES. The initial Trustees shall be the
persons named herein. The initial Trustees shall appoint additional or
substitute Trustees at an organizational meeting of Trustees. Thereafter,
Trustees shall be appointed or elected as provided in Sections 3.01 and 3.04 of
this Article III.

SECTION 3.03 TERM OF OFFICE. The Trustees shall hold office during the
lifetime of this Trust, and until its termination as herein provided; except (a)
that any Trustee may resign his trust by written instrument signed by him and
delivered to the other Trustees, which shall take effect upon such delivery or
upon such later date as is specified therein; (b) that any Trustee may be
removed at any time by written instrument, signed by at least two-thirds of the
number of Trustees prior to such removal specifying the date when such removal
shall become effective; (c) that any Trustee who requests in writing to be
retired or who has died, become physically or mentally incapacitated by reason
of illness or otherwise, or is otherwise unable to serve, may be retired by
written instrument signed by a majority of the other Trustees, specifying the
date of his retirement; and (d) that a Trustee may be removed at any meeting of
the Shareholders of

<PAGE>

the Trust by a vote of Shareholders owning at least two-thirds of the
Outstanding Shares of the Trust.

SECTION 3.04 VACANCIES AND APPOINTMENTS. In case of a Trustee's
declination to serve, death, resignation, retirement, removal, physical or
mental incapacity by reason of illness, disease or otherwise, or if a Trustee is
otherwise unable to serve, or if there is an increase in the number of Trustees,
a vacancy shall occur. Whenever a vacancy in the Board of Trustees shall occur,
until such vacancy is filled, the other Trustees shall have all the powers
hereunder and the certificate of the other Trustees of such vacancy shall be
conclusive. In the case of a vacancy, the remaining Trustees shall fill such
vacancy by appointing such other person as they in their discretion see fit, to
the extent consistent with the limitations provided under the 1940 Act. Such
appointment shall be evidenced by a written instrument signed by a majority of
the Trustees in office or by resolution of the Trustees, duly adopted, which
shall be recorded in the minutes of a meeting of the Trustees, whereupon the
appointment shall take effect.

An appointment of a Trustee may be made by the Trustees then in office
in anticipation of a vacancy to occur by reason of retirement, resignation or
increase in number of Trustees effective at a later date, provided that said
appointment shall become effective only at or after the effective date of said
retirement, resignation or increase in number of Trustees. As soon as any person
appointed as a Trustee pursuant to this Section 3.04 shall have accepted this
Trust, the trust estate shall vest in the new Trustee or Trustees, together with
the continuing Trustees, without any further act or conveyance, and such person
shall be deemed a Trustee.

SECTION 3.05 TEMPORARY ABSENCE. Any Trustee may, by power of attorney,
delegate his power for a period not exceeding six months at any time to any
other Trustee or Trustees, provided that in no case shall fewer than two
Trustees personally exercise the other powers hereunder except as herein
otherwise expressly provided.

SECTION 3.06 NUMBER OF TRUSTEES. From and after the date of appointment
of Trustees by the initial Trustees named herein, the number of Trustees shall
be at least three (3), and thereafter shall be such number as shall be fixed
from time to time by a majority of the Trustees, provided, however, that the
number of Trustees shall in no event be more than twelve (12).

SECTION 3.07 EFFECT OF ENDING OF A TRUSTEE'S SERVICE. The declination
to serve, death, resignation, retirement, removal, incapacity, or inability of
the Trustees, or any one of them, shall not operate to terminate the Trust or to
revoke any existing agency created pursuant to the terms of this Trust
Instrument.

SECTION 3.08 OWNERSHIP OF ASSETS OF THE TRUST. The assets of the Trust
and of each Series shall be held separate and apart from any assets now or
hereafter held in any capacity other than as Trustee hereunder by the Trustees
or any successor Trustees. Legal title in all of the assets of the Trust and the
right to conduct any business shall at all times be considered as vested in the
Trustees on behalf of the Trust, except that the Trustees may cause legal title
to any Trust Property to be held by, or in the name of, the Trust or in the name
of any person as nominee. No Shareholder shall be deemed to have a severable
ownership in any individual asset of the Trust or of any Series or any right of
partition or possession thereof but each Shareholder

<PAGE>

shall have, except as otherwise provided for herein, a proportionate undivided
beneficial interest in the Trust or Series based upon the number of Shares
owned. The Shares shall be personal property giving only the rights specifically
set forth in this Trust Instrument.

ARTICLE IV
POWERS OF THE TRUSTEES

SECTION 4.01 POWERS. The Trustees in all instances shall act as
principals, and are and shall be free from the control of the Shareholders. The
Trustees shall have full power and authority to do any and all acts and to make
and execute any and all contracts and instruments that they may consider
necessary or appropriate in connection with the management of the Trust. The
Trustees shall not in any way be bound or limited by present or future laws or
customs in regard to trust investments, but shall have full authority and power
to make any and all investments which they, in their sole discretion, shall deem
proper to accomplish the purpose of this Trust without recourse to any court or
other authority. Subject to any applicable limitation in this Trust Instrument
or the Bylaws of the Trust, the Trustees shall have the power and authority:

(a) To invest and reinvest cash and other property (including
investment, notwithstanding any other provision hereof, of all of the assets of
any Series in a single open-end investment company, including investment by
means of transfer of such assets in exchange for an interest or interests in
such investment company), and to hold cash or other property of the Trust
uninvested, without in any event being bound or limited by any present or future
law or custom in regard to investments by trustees, and to sell, exchange, lend,
pledge, mortgage, hypothecate, write options on and lease any or all of the
assets of the Trust:

(b) To operate as and carry on the business of an investment company,
and exercise all the powers necessary and appropriate to the conduct of such
operations;

(c) To borrow money and in this connection issue notes or other
evidence of indebtedness; to secure borrowings by mortgaging, pledging or
otherwise subjecting as security the Trust Property; to endorse, guarantee, or
undertake the performance of an obligation or engagement of any other Person and
to lend Trust Property;

(d) To provide for the distribution of interests of the Trust either
through a principal underwriter in the manner hereinafter provided for or by the
Trust itself, or both, or otherwise pursuant to a plan of distribution of any
kind;

(e) To adopt Bylaws not inconsistent with this Trust Instrument
providing for the conduct of the business of the Trust and to amend and repeal
them to the extent that they do not reserve that right to the Shareholders; such
Bylaws shall be deemed incorporated and included in this Trust Instrument;

(f) To elect and remove such officers and appoint and terminate such
agents as they consider appropriate;

<PAGE>

(g) To employ one or more banks, trust companies or companies that are
members of a national securities exchange or such other entities as the
Commission may permit as custodians of any assets of the Trust subject to any
conditions set forth in this Trust Instrument or in the Bylaws;

(h) To retain one or more transfer agents and shareholder servicing
agents, or both;

(i) To set record dates in the manner provided herein or in the Bylaws;

(j) To delegate such authority as they consider desirable (with power
of subdelegation) to any officers or employees of the Trust and to any
investment adviser, manager, custodian, underwriter or other agent or
independent contractor;

(k) To sell or exchange any or all of the assets of the Trust, subject
to the provisions of Article XI, subsection 11.04(b) hereof;

(l) To vote or give assent, or exercise any rights of ownership, with
respect to stock or other securities or property, and to execute and deliver
powers of attorney to such person or persons as the Trustees shall deem proper,
granting to such person or persons such power and discretion with relation to
securities or property as the Trustees shall deem proper;

(m) To exercise powers and rights of subscription or otherwise which in
any manner arise out of ownership of securities;

(n) To hold any security or property in a form not indicating any
trust, whether in bearer, book entry, unregistered or other negotiable form; or
either in the name of the Trust or in the name of a custodian or a nominee or
nominees, subject in either case to proper safeguards according to the usual
practice of Delaware business trusts or investment companies;

(o) To establish separate and distinct Series with separately defined
investment objectives and policies and distinct investment purposes in
accordance with the provisions of Article II hereof and to establish classes of
such Series having relative rights, powers and duties as they may provide
consistent with applicable law;

(p) Subject to the provisions of Section 3804 of the Delaware Act, to
allocate assets, liabilities and expenses of the Trust to a particular Series or
to apportion the same between or among two or more Series, provided that any
liabilities or expenses incurred by a particular Series shall be payable solely
out of the assets belonging to that Series as provided for in Article II hereof;

(q) To consent to or participate in any plan for the reorganization,
consolidation or merger of any corporation or concern, any security of which is
held in the Trust; to consent to any contract, lease, mortgage, purchase, or
sale of property by such corporation or concern, and to pay calls or
subscriptions with respect to any security held in the Trust;

<PAGE>

(r) To compromise, arbitrate, or otherwise adjust claims in favor of or
against the Trust or any matter in controversy including, but not limited to,
claims for taxes;

(s) To make distributions of income and of capital gains to
Shareholders in the manner provided herein;

(t) To establish, from time to time, a minimum investment for
Shareholders in the Trust or in one or more Series or class, and to require the
redemption of the Shares of any Shareholders whose investment is less than such
minimum upon giving notice to such Shareholder;

(u) To establish one or more committees, to delegate any of the powers
of the Trustees to said committees and to adopt a committee charter providing
for such responsibilities, membership (including Trustees, officers or other
agents of the Trust therein) and any other characteristics of said committees as
the Trustees may deem proper. Notwithstanding the provisions of this Article IV,
and in addition to such provisions or any other provision of this Trust
Instrument or of the Bylaws, the Trustees may by resolution appoint a committee
consisting of less than the whole number of Trustees then in office, which
committee may be empowered to act for and bind the Trustees and the Trust, as if
the acts of such committee were the acts of all the Trustees then in office,
with respect to the institution, prosecution, dismissal, settlement, review or
investigation of any action, suit or proceeding which shall be pending or
threatened to be brought before any court, administrative agency or other
adjudicatory body;

(v) To interpret the investment policies, practices or limitations of
any Series;

(w) To establish a registered office and have a registered agent in the
state of Delaware; and

(x) In general to carry on any other business in connection with or
incidental to any of the foregoing powers, to do everything necessary, suitable
or proper for the accomplishment of any purpose or the attainment of any object
or the furtherance of any power hereinbefore set forth, either alone or in
association with others, and to do every other act or thing incidental or
appurtenant to or growing out of or connected with the aforesaid business or
purposes, objects or powers.

The foregoing clauses shall be construed as objects and powers, and the
foregoing enumeration of specific powers shall not be held to limit or restrict
in any manner the general powers of the Trustees. Any action by one or more of
the Trustees in their capacity as such hereunder shall be deemed an action on
behalf of the Trust or the applicable Series, and not an action in an individual
capacity.

The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust.

No one dealing with the Trustees shall be under any obligation to make
any inquiry concerning the authority of the Trustees, or to see the application
of any payments made or property transferred to the Trustees or upon their
order.

<PAGE>

SECTION 4.02 ISSUANCE AND REPURCHASE OF SHARES. The Trustees shall have
the power to issue, sell, repurchase, redeem, retire, cancel, acquire, hold,
resell, reissue, dispose of and otherwise deal in Shares and, subject to the
provisions set forth in Article II and Article IX, to apply to any such
repurchase, redemption, retirement, cancellation or acquisition of Shares any
funds or property of the Trust, or the particular Series of the Trust, with
respect to which such Shares are issued.

SECTION 4.03 TRUSTEES AND OFFICERS AS SHAREHOLDERS. Any Trustee,
officer or other agent of the Trust may acquire, own and dispose of Shares to
the same extent as if he were not a Trustee, officer or agent; and the Trustees
may issue and sell or cause to be issued and sold Shares to and buy such Shares
from any such person or any firm or company in which he is interested, subject
only to the general limitations herein contained as to the sale and purchase of
such Shares; and all subject to any restrictions which may be contained in the
Bylaws.

SECTION 4.04 ACTION BY THE TRUSTEES. In any action taken by the
Trustees hereunder, unless otherwise specified, the Trustees shall act by
majority vote at a meeting duly called or by unanimous written consent without a
meeting or by telephone meeting provided a quorum of Trustees participate in any
such telephone meeting, unless the 1940 Act requires that a particular action be
taken only at a meeting at which the Trustees are present in person. At any
meeting of the Trustees, a majority of the Trustees shall constitute a quorum.
Meetings of the Trustees may be called orally or in writing by the Chairman of
the Board of Trustees or by any two other Trustees. Notice of the time, date and
place of all meetings of the Trustees shall be given by the person calling the
meeting to each Trustee by telephone, facsimile or other electronic mechanism
sent to his home or business address at least twenty-four hours in advance of
the meeting or by written notice mailed to his home or business address at least
seventy-two hours in advance of the meeting. Notice need not be given to any
Trustee who attends the meeting without objecting to the lack of notice or who
executes a written waiver of notice with respect to the meeting. Any meeting
conducted by telephone shall be deemed to take place at the principal office of
the Trust, as determined by the Bylaws or by the Trustees. Subject to the
requirements of the 1940 Act, the Trustees by majority vote may delegate to any
one or more of their number their authority to approve particular matters or
take particular actions on behalf of the Trust. Written consents or waivers of
the Trustees may be executed in one or more counterparts. Execution of a written
consent or waiver and delivery thereof to the Trust may be accomplished by
facsimile or other similar electronic mechanism.

SECTION 4.05 CHAIRMAN OF THE TRUSTEES. The Trustees shall appoint one
of their number to be Chairman of the Board of Trustees. The Chairman shall
preside at all meetings of the Trustees, shall be responsible for the execution
of policies established by the Trustees and the administration of the Trust, and
may be (but is not required to be) the chief executive, financial and/or
accounting officer of the Trust.

SECTION 4.06 PRINCIPAL TRANSACTIONS. Except to the extent prohibited by
applicable law, the Trustees may, on behalf of the Trust, buy any securities
from or sell any securities to, or lend any assets of the Trust to, any Trustee
or officer of the Trust or any firm of which any such Trustee or officer is a
member acting as principal, or have any such dealings with any investment
adviser, administrator, distributor or transfer agent for the Trust or with any
Interested Person of

<PAGE>

such person; and the Trust may employ any such person, or firm or company in
which such person is an Interested Person, as broker, legal counsel, registrar,
investment adviser, administrator, distributor, transfer agent, dividend
disbursing agent, custodian or in any other capacity upon customary terms.

ARTICLE V
EXPENSES OF THE TRUST

Subject to the provisions of Article II, Section 2.08 hereof, the
Trustees are authorized to pay or cause to be paid from the Trust estate or the
assets belonging to the appropriate Series, expenses and disbursements,
including, without limitation, interest charges, taxes, brokerage fees and
commissions; expenses of issue, repurchase and redemption of Shares; certain
insurance premiums; applicable fees, interest charges and expenses of third
parties, including the Trust's investment advisers, managers, administrators,
distributors, custodian, transfer agent and fund accountant; fees of pricing,
interest, dividend, credit and other reporting services; costs of membership in
trade associations; telecommunications expenses; funds transmission expenses;
auditing, legal and compliance expenses; costs of forming the Trust and
maintaining its existence; costs of preparing and printing the Trust's
prospectuses, statements of additional information and shareholder reports and
delivering them to existing Shareholders; expenses of meetings of Shareholders
and proxy solicitations therefor; costs of maintaining books and accounts; costs
of reproduction, stationery and supplies; fees and expenses of the Trust's
trustees; compensation of the Trust's officers and employees and costs of other
personnel performing services for the Trust; costs of Trustee meetings;
Commission registration fees and related expenses; state or foreign securities
laws registration fees and related expenses and for such non-recurring items as
may arise, including litigation to which the Trust (or a Trustee acting as such)
is a party, and for all losses and liabilities by them incurred in administering
the Trust, and for the payment of such expenses, disbursements, losses and
liabilities the Trustees shall have a lien on the assets belonging to the
appropriate Series, or in the case of an expense allocable to more than one
Series, on the assets of each such Series, prior to any rights or interests of
the Shareholders thereto. This section shall not preclude the Trust from
directly paying any of the aforementioned fees and expenses.

ARTICLE VI
INVESTMENT ADVISER, PRINCIPAL UNDERWRITER,
ADMINISTRATOR AND TRANSFER AGENT

SECTION 6.01 INVESTMENT ADVISER. (a) The Trustees may in their
discretion, from time to time, enter into an investment advisory contract or
contracts with respect to the Trust or any Series whereby the other party or
parties to such contract or contracts shall undertake to furnish the Trustees
with such investment advisory, statistical and research facilities and services
and such other facilities and services, if any, all upon such terms and
conditions (including any Shareholder vote) that may be required under the 1940
Act, as may be prescribed in the Bylaws, or as the Trustees may in their
discretion determine (such terms and conditions not to be inconsistent with the
provisions of this Trust Instrument or of the Bylaws). Notwithstanding any other
provision

<PAGE>

of this Trust Instrument, the Trustees may authorize any investment adviser
(subject to such general or specific instructions as the Trustees may from time
to time adopt) to effect purchases, sales or exchanges of portfolio securities,
other investment instruments of the Trust, or other Trust Property on behalf of
the Trustees, or may authorize any officer, agent, or Trustee to effect such
purchases, sales or exchanges pursuant to recommendations of the investment
adviser (and all without further action by the Trustees). Any such purchases,
sales and exchanges shall be deemed to have been authorized by all of the
Trustees.

(b) The Trustees may authorize the investment adviser to employ, from
time to time, one or more sub-advisers to perform such of the acts and services
of the investment adviser, and upon such terms and conditions, as may be agreed
upon between the investment adviser and subadviser (such terms and conditions
not to be inconsistent with the provisions of this Trust Instrument or of the
Bylaws). Any reference in this Trust Instrument to the investment adviser shall
be deemed to include such sub-advisers, unless the context otherwise requires;
provided that no Shareholder approval shall be required with respect to any
sub-adviser unless required under the 1940 Act or other law, contract or order
applicable to the Trust.

SECTION 6.02 PRINCIPAL UNDERWRITER. The Trustees may in their
discretion from time to time enter into an exclusive or non-exclusive
underwriting contract or contracts providing for the sale of Shares, whereby the
Trust may either agree to sell Shares to the other party to the contract or
appoint such other party its sales agent for such Shares. In either case, the
contract shall be on such terms and conditions as may be prescribed in the
Bylaws and as the Trustees may in their discretion determine (such terms and
conditions not to be inconsistent with the provisions of this Trust Instrument
or of the Bylaws); and such contract may also provide for the repurchase or sale
of Shares by such other party as principal or as agent of the Trust.

SECTION 6.03 ADMINISTRATION. The Trustees may in their discretion from
time to time enter into one or more management or administrative contracts
whereby the other party or parties shall undertake to furnish the Trustees with
management or administrative services. The contract or contracts shall be on
such terms and conditions as may be prescribed in the Bylaws and as the Trustees
may in their discretion determine (such terms and conditions not to be
inconsistent with the provisions of this Trust Instrument or of the Bylaws).

SECTION 6.04 TRANSFER AGENT. The Trustees may in their discretion from
time to time enter into one or more transfer agency and shareholder service
contracts whereby the other party or parties shall undertake to furnish the
Trustees with transfer agency and shareholder services. The contract or
contracts shall be on such terms and conditions as may be prescribed in the
Bylaws and as the Trustees may in their discretion determine (such terms and
conditions not to be inconsistent with the provisions of this Trust Instrument
or of the Bylaws).

SECTION 6.05 PARTIES TO CONTRACT. Any contract of the character
described in Sections 6.01, 6.02, 6.03 and 6.04 of this Article VI or any
contract of the character described in Article VIII hereof may be entered into
with any corporation, firm, partnership, trust or association, although one or
more of the Trustees or officers of the Trust may be an officer, director,
trustee, shareholder, or member of such other party to the contract, and no such
contract shall be invalidated or rendered void or voidable by reason of the
existence of any relationship, nor shall

<PAGE>

any person holding such relationship be disqualified from voting on or executing
the same in his capacity as Shareholder and/or Trustee, nor shall any person
holding such relationship be liable merely by reason of such relationship for
any loss or expense to the Trust under or by reason of said contract or
accountable for any profit realized directly or indirectly therefrom, provided
that the contract when entered into was not inconsistent with the provisions of
this Article VI or Article VIII hereof or of the Bylaws. The same person
(including a corporation, firm, partnership, trust, or association) may be the
other party to contracts entered into pursuant to Sections 6.01, 6.02, 6.03 and
6.04 of this Article VI or pursuant to Article VIII hereof and any individual
may be financially interested or otherwise affiliated with persons who are
parties to any or all of the contracts mentioned in this Section 6.05.

SECTION 6.06 PROVISIONS AND AMENDMENTS. Any contract entered into
pursuant to Section 6.01 or 6.02 of this Article VI shall be consistent with and
subject to the requirements of Section 15 of the 1940 Act, if applicable, or
other applicable Act of Congress hereafter enacted with respect to its
continuance in effect, its termination, and the method of authorization and
approval of such contract or renewal thereof, and no amendment to any contract
entered into pursuant to Section 6.01 of this Article VI shall be effective
unless assented to in a manner consistent with the requirements of said Section
15, as modified by any applicable rule, regulation or order of the Commission.

ARTICLE VII
SHAREHOLDERS' VOTING POWERS AND MEETINGS

SECTION 7.01 VOTING POWERS. (a) The Shareholders shall have power to
vote only (a) for the election of Trustees to the extent provided in Article
III, Section 3.01 hereof, (b) for the removal of Trustees to the extent provided
in Article III, Section 3.03(d) hereof, (c) with respect to any investment
advisory contract to the extent provided in Article VI, Section 6.01 hereof, (d)
with respect to an amendment of this Trust Instrument, to the extent provided in
Article XI, Section 11.08, and (e) with respect to such additional matters
relating to the Trust as may be required by law, by this Trust Instrument, or
any registration of the Trust with the Commission or any State, or as the
Trustees may consider desirable.

(b) Notwithstanding paragraph (a) of this Section 7.01 or any other
provision of this Trust Instrument (including the Bylaws) which would by its
terms provide for or require a vote of Shareholders, the Trustees may take
action without a Shareholder vote if (i) the Trustees shall have obtained an
opinion of counsel that a vote or approval of such action by Shareholders is not
required under (A) the 1940 Act or any other applicable laws, or (B) any
registrations, undertakings or agreements of the Trust known to such counsel,
and the Trustees determine in good faith that the taking of such action without
a Shareholder vote would be consistent with the best interests of the
Shareholders.

(c) On any matter submitted to a vote of the Shareholders, all Shares
shall be voted separately by individual Series, and whenever the Trustees
determine that the matter affects only certain Series, may be submitted for a
vote by only such Series, except (i) when required by the 1940 Act, Shares shall
be voted in the aggregate and not by individual Series; and (ii) when the

<PAGE>

Trustees have determined that the matter affects the interests of more than one
Series and that voting by shareholders of all Series would be consistent with
the 1940 Act, then the Shareholders of all such Series shall be entitled to vote
thereon (either by individual Series or by Shares voted in the aggregate, as the
Trustees in their discretion may determine). The Trustees may also determine
that a matter affects only the interests of one or more classes of a Series, in
which case (or if required under the 1940 Act) such matter shall be voted on by
such class or classes. Each whole Share shall be entitled to one vote as to any
matter on which it is entitled to vote, and each fractional Share shall be
entitled to a proportionate fractional vote. There shall be no cumulative voting
in the election of Trustees. Shares may be voted in person or by proxy or in any
manner provided for in the Bylaws. A proxy may be given in writing. The Bylaws
may provide that proxies may also, or may instead, be given by any electronic or
telecommunications device or in any other manner. Notwithstanding anything else
herein or in the Bylaws, in the event a proposal by anyone other than the
officers or Trustees of the Trust is submitted to a vote of the Shareholders, or
in the event of any proxy contest or proxy solicitation or proposal in
opposition to any proposal by the officers or Trustees of the Trust, Shares may
be voted only in person or by written proxy. Until Shares are issued, the
Trustees may exercise all rights of Shareholders and may take any action
required or permitted by law, this Trust Instrument or any of the Bylaws of the
Trust to be taken by Shareholders.

SECTION 7.02 MEETINGS. Meetings of Shareholders may be held within or
without the State of Delaware. Special meetings of the Shareholders of any
Series for the purpose of voting upon the removal of a Trustee or Trustees may
be called by the Trustees and shall be called by the Trustees upon the written
request of Shareholders owning at least one tenth of the Outstanding Shares of
the Trust entitled to vote. Whenever ten or more Shareholders meeting the
qualifications set forth in Section 16(c) of the 1940 Act, as the same may be
amended from time to time, seek the opportunity of furnishing materials to the
other Shareholders with a view to obtaining signatures on such a request for a
meeting, the Trustees shall comply with the provisions of said Section 16(c)
with respect to providing such Shareholders access to the list of the
Shareholders of record of the Trust or the mailing of such materials to such
Shareholders of record, subject to any rights provided to the Trust or any
Trustees provided by said Section 16(c). Notice shall be sent, by First Class
Mail or such other means determined by the Trustees, at least 10 days prior to
any such meeting. Notwithstanding anything to the contrary in this Section 7.02,
the Trustees shall not be required to call a special meeting of the Shareholders
of any Series or to provide Shareholders seeking the opportunity of furnishing
the materials to other Shareholders with a view to obtaining signatures on a
request for a meeting except to the extent required under the 1940 Act.

SECTION 7.03 QUORUM AND REQUIRED VOTE. One-third of Shares outstanding
and entitled to vote in person or by proxy as of the record date for a
Shareholders' meeting shall be a quorum for the transaction of business at such
Shareholders' meeting, except that where any provision of law or of this Trust
Instrument permits or requires that holders of any Series shall vote as a Series
(or that holders of a class shall vote as a class), then one-third of the
aggregate number of Shares of that Series (or that class) entitled to vote shall
be necessary to constitute a quorum for the transaction of business by that
Series (or that class). Any meeting of Shareholders may be adjourned from time
to time by a majority of the votes properly cast upon the question of adjourning
a meeting to another date and time, whether or not a quorum is present. Any

<PAGE>

adjourned session or sessions may be held, within a reasonable time after the
date set for the original meeting, without the necessity of further notice.
Except when a larger vote is required by law or by any provision of this Trust
Instrument or the Bylaws, a majority of the Shares voted in person or by proxy
at a meeting at which a quorum is present shall decide any questions and a
plurality shall elect a Trustee, provided that where any provision of law or of
this Trust Instrument permits or requires that the holders of any Series shall
vote as a Series (or that the holders of any class shall vote as a class), then
a majority of the Shares voted in person or by proxy at a meeting of that Series
(or class), at which a quorum is present shall decide that matter insofar as
that Series (or class) is concerned. Shareholders may act by unanimous written
consent, to the extent not inconsistent with the 1940 Act, and any such actions
taken by a Series (or class) may be consented to unanimously in writing by
Shareholders of that Series (or class).

ARTICLE VIII
CUSTODIAN

SECTION 8.01 APPOINTMENT AND DUTIES. The Trustees shall employ a bank,
a company that is a member of a national securities exchange, or a trust
company, that in each case shall have capital, surplus and undivided profits of
at least twenty million dollars ($20,000,000) and that is a member of the
Depository Trust Company (or such other person or entity as may be permitted to
act as custodian of the Trust's assets under the 1940 Act) as custodian with
authority as its agent, but subject to such restrictions, limitations and other
requirements, if any, as may be contained in the Bylaws of the Trust: (a) to
hold the securities owned by the Trust and deliver the same upon written order
or oral order confirmed in writing; (b) to receive and receipt for any moneys
due to the Trust and deposit the same in its own banking department or elsewhere
as the Trustees may direct; and (c) to disburse such funds upon orders or
vouchers.

The Trustees may also authorize the custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services of the
custodian, and upon such terms and conditions, as may be agreed upon between the
custodian and such sub-custodian and approved by the Trustees, provided that in
every case such sub-custodian shall be a bank, a company that is a member of a
national securities exchange, or a trust company organized under the laws of the
United States or one of the states thereof and having capital, surplus and
undivided profits of at least twenty million dollars ($20,000,000) and that is a
member of the Depository Trust Company or such other person or entity as may be
permitted by the Commission or is otherwise able to act as custodian of the
Trust's assets in accordance with the 1940 Act.

SECTION 8.02 CENTRAL CERTIFICATE SYSTEM. Subject to the 1940 Act and
such other rules, regulations and orders as the Commission may adopt, the
Trustees may direct the custodian to deposit all or any part of the securities
owned by the Trust in a system for the central handling of securities
established by a national securities exchange or a national securities
association registered with the Commission under the Securities Exchange Act of
1934, as amended, or such other person as may be permitted by the Commission, or
otherwise in accordance with the 1940 Act, pursuant to which system all
securities of any particular class or series of any issuer deposited within the
system are treated as fungible and may be transferred or pledged by bookkeeping
entry without physical delivery of such securities, provided that all such
deposits

<PAGE>

shall be subject to withdrawal only upon the order of the Trust or its
custodians, sub-custodians or other agents.

ARTICLE IX
DISTRIBUTIONS AND REDEMPTIONS

SECTION 9.01 DISTRIBUTIONS.

(a) The Trustees may from time to time declare and pay dividends or
other distributions with respect to any Series and/or class of a Series. The
amount of such dividends or distributions and the payment of them and whether
they are in cash or any other Trust Property shall be wholly in the discretion
of the Trustees.

(b) Dividends and other distributions may be paid or made to the
Shareholders of record at the time of declaring a dividend or other distribution
or among the Shareholders of record at such other date or time or dates or times
as the Trustees shall determine, which dividends or distributions, at the
election of the Trustees, may be paid pursuant to a standing resolution or
resolutions adopted only once or with such frequency as the Trustees may
determine. The Trustees may adopt and offer to Shareholders such dividend
reinvestment plans, cash dividend payout plans or related plans as the Trustees
shall deem appropriate.

(c) Anything in this Trust Instrument to the contrary notwithstanding,
the Trustees may at any time declare and distribute a share dividend to the
Shareholders of a particular Series, or class thereof, as of the record date of
that Series fixed as provided in Subsection 9.01(b) hereof.

SECTION 9.02 REDEMPTIONS. In case any holder of record of Shares of a
particular Series desires to dispose of his Shares or any portion thereof he may
deposit at the office of the transfer agent or other authorized agent of that
Series a written request or such other form of request as the Trustees may from
time to time authorize, requesting that the Series purchase the Shares in
accordance with this Section 9.02; and, subject to Section 9.04 hereof, the
Shareholder so requesting shall be entitled to require the Series to purchase,
and the Series or the principal underwriter of the Series shall purchase his
said Shares, but only at the Net Asset Value thereof (as described in Section
9.03 of this Article IX). The Series shall make payment for any such Shares to
be redeemed, as aforesaid, in cash or property from the assets of that Series
and, subject to Section 9.04 hereof, payment for such Shares shall be made by
the Series or the principal underwriter of the Series to the Shareholder of
record within seven (7) days after the date upon which the request is effective.
Upon redemption and unless otherwise determined by the Trustees shares shall
become Treasury shares and may be re-issued from time to time.

SECTION 9.03 DETERMINATION OF NET ASSET VALUE AND VALUATION OF
PORTFOLIO ASSETS. The term "Net Asset Value" of any Series shall mean that
amount by which the assets of that Series exceed its liabilities, all as
determined by or under the direction of the Trustees. The Trustees may delegate
any of their powers and duties under this Section 9.03 with respect to valuation
of assets and liabilities. Such value shall be determined separately for each
Series and shall be determined on such days and at such times as the Trustees
may determine. Such determination

<PAGE>

shall be made with respect to securities for which market quotations are readily
available, at the market value of such securities; and with respect to other
securities and assets, at the fair value as determined in good faith by the
Trustees; provided, however, that the Trustees, without Shareholder approval,
may alter the method of valuing portfolio securities insofar as permitted under
the 1940 Act. The resulting amount, which shall represent the total Net Asset
Value of the particular Series, shall be divided by the total number of shares
of that Series outstanding at the time and the quotient so obtained shall be the
Net Asset Value per Share of that Series. At any time the Trustees may cause the
Net Asset Value per Share last determined to be determined again in similar
manner and may fix the time when such redetermined value shall become effective.

The Trustees shall not be required to adopt, but may at any time adopt,
discontinue or amend a practice of seeking to maintain the Net Asset Value per
Share of the Series at a constant amount. If, for any reason, the net income of
any Series, determined at any time, is a negative amount, the Trustees shall
have the power with respect to that Series (a) to offset each Shareholder's pro
rata share of such negative amount from the accrued dividend account of such
Shareholder, (b) to reduce the number of Outstanding Shares of such Series by
reducing the number of Shares in the account of each Shareholder by a pro rata
portion of that number of full and fractional Shares which represents the amount
of such excess negative net income, (c) to cause to be recorded on the books of
such Series an asset account in the amount of such negative net income (provided
that the same shall thereupon become the property of such Series with respect to
such Series and shall not be paid to any Shareholder), which account may be
reduced by the amount of dividends declared thereafter upon the Outstanding
Shares of such Series on the day such negative net income is experienced, until
such asset account is reduced to zero; (d) to combine the methods described in
clauses (a) and (b) and (c) of this sentence; or (e) to take any other action
they deem appropriate, in order to cause (or in order to assist in causing) the
Net Asset Value per Share of such Series to remain at a constant amount per
Outstanding Share immediately after each such determination and declaration. The
Trustees shall also have the power not to declare a dividend out of net income
for the purpose of causing the Net Asset Value per Share to be increased.

In the event that any Series is divided into classes, the provisions of
this Section 9.03, to the extent applicable as determined in the discretion of
the Trustees and consistent with the 1940 Act and other applicable law, may be
equally applied to each such class.

SECTION 9.04 SUSPENSION OF THE RIGHT OF REDEMPTION. The Trustees may
declare a suspension of the right of redemption or postpone the date of payment
if permitted under the 1940 Act. Such suspension shall take effect at such time
as the Trustees shall specify but not later than the close of business on the
business day next following the declaration of suspension, and thereafter there
shall be no right of redemption or payment until the Trustees shall declare the
suspension at an end. In the case of a suspension of the right of redemption, a
Shareholder may either withdraw his request for redemption or receive payment
based on the Net Asset Value per Share next determined after the termination of
the suspension.

SECTION 9.05 REDEMPTION OF SHARES IN ORDER TO QUALIFY AS REGULATED
INVESTMENT COMPANY. If the Trustees shall, at any time and in good faith, be of
the opinion that direct or indirect ownership of Shares of any Series has or may
become concentrated in any Person to an

<PAGE>

extent which would disqualify any Series as a regulated investment company under
the Internal Revenue Code, then the Trustees shall have the power (but not the
obligation) by lot or other means deemed equitable by them (a) to call for
redemption by any such person of a number, or principal amount, of Shares
sufficient to maintain or bring the direct or indirect ownership of Shares into
conformity with the requirements for such qualification and (b) to refuse to
transfer or issue Shares to any person whose acquisition of Shares in question
would result in such disqualification. The redemption shall be effected at the
redemption price and in the manner provided in this Article IX.

The holders of Shares shall upon demand disclose to the Trustees in
writing such information with respect to direct and indirect ownership of Shares
as the Trustees deem necessary to comply with the requirements of any taxing
authority or this Section 9.05.

SECTION 9.06 REDEMPTION OF SMALL ACCOUNTS. Subject to the
requirements of the 1940 Act, the Trustees may cause the Trust to redeem, at the
price and in the manner provided in this Article IX, Shares of any Series or
class of a Series held by any Shareholder (i) if such Shareholder is no longer
qualified to hold such Shares in accordance with such qualifications as may be
established by the Trustees, (ii) if the net asset value of such Shares is below
$500 or such other amount as determined by the Trustees or (iii) if otherwise
deemed by the Trustees to be in the best interest of the Trust or that
particular Series (or class) as a whole.

ARTICLE X
LIMITATION OF LIABILITY AND INDEMNIFICATION

SECTION 10.01 LIMITATION OF LIABILITY. Neither a Trustee nor an officer
of the Trust, when acting in such capacity, shall be personally liable to any
person other than the Trust or the Shareholders for any act, omission or
obligation of the Trust, any Trustee or any officer of the Trust. Neither a
Trustee nor an officer of the Trust shall not be liable for any act or omission
or any conduct whatsoever in his capacity as Trustee or as an officer of the
Trust, provided that nothing contained herein or in the Delaware Act shall
protect any Trustee or any officer of the Trust against any liability to the
Trust or to Shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of the office of Trustee or officer of the Trust
hereunder.

SECTION 10.02 INDEMNIFICATION.

(a) Subject to the exceptions and limitations contained in Subsection 10.02(b):

(i) every person who is, or has been, a Trustee or officer of
the Trust (hereinafter referred to as a "Covered Person") shall be
indemnified by the Trust to the fullest extent permitted by law against
liability and against all expenses reasonably incurred or paid by him
in connection with any claim, action, suit or proceeding in which he
becomes involved as a party or otherwise by virtue of his being or
having been a Trustee or officer and against amounts paid or incurred
by him in the settlement thereof;

<PAGE>

(ii) the words "claim," "action," "suit," or "proceeding"
shall apply to all claims, actions, suits or proceedings (civil,
criminal or other, including appeals), actual or threatened while in
office or thereafter, and the words "liability" and "expenses" shall
include, without limitation, attorneys' fees, costs, judgments, amounts
paid in settlement, fines, penalties and other liabilities.

(b) No indemnification shall be provided hereunder to a Covered Person:

(i) who shall have been adjudicated by a court or body before
which the proceeding was brought (A) to be liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct
of his office or (B) not to have acted in good faith in the reasonable
belief that his action was in the best interest of the Trust; or

(c) The rights of indemnification herein provided may be insured
against by policies maintained by the Trust, shall be severable, shall not be
exclusive of or affect any other rights to which any Covered Person may now or
hereafter be entitled, shall continue as to a person who has ceased to be a
Covered Person and shall inure to the benefit of the heirs, executors and
administrators of such a person. Nothing contained herein shall affect any
rights to indemnification to which Trust personnel, other than Covered Persons,
and other persons may be entitled by contract or otherwise under law.

(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character described in
Subsection (a) of this Section 10.02 may be paid by the Trust or Series from
time to time prior to final disposition thereof upon receipt of an undertaking
by or on behalf of such Covered Person that such amount will be paid over by him
to the Trust or Series if it is ultimately determined that he is not entitled to
indemnification under this Section 10.02; provided, however, that either (i)
such Covered Person shall have provided appropriate security for such
undertaking, (ii) the Trust is insured against losses arising out of any such
advance payments or (iii) either a majority of the Trustees who are neither
Interested Persons of the Trust nor parties to the matter, or independent legal
counsel in a written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such Covered Person will be
found entitled to indemnification under this Section 10.02.

SECTION 10.03 SHAREHOLDERS. In case any Shareholder of any Series shall
be held to be personally liable solely by reason of his being or having been a
Shareholder of such Series and

<PAGE>

not because of his acts or omissions or for some other reason, the Shareholder
or former Shareholder (or his heirs, executors, administrators or other legal
representatives, or, in the case of a corporation or other entity, its corporate
or other general successor) shall be entitled out of the assets belonging to the
applicable Series to be held harmless from and indemnified against all loss and
expense arising from such liability. The Trust, on behalf of the affected
Series, shall, upon request by the Shareholder, assume the defense of any claim
made against the Shareholder for any act or obligation of the Series and satisfy
any judgment thereon from the assets of the Series.

ARTICLE XI
MISCELLANEOUS

SECTION 11.01 TRUST NOT A PARTNERSHIP. It is hereby expressly declared
that a trust and not a partnership is created hereby. No Trustee hereunder shall
have any power to bind personally either the Trust officers or any Shareholder.
All persons extending credit to, contracting with or having any claim against
the Trust or the Trustees shall look only to the assets of the appropriate
Series or (if the Trustees shall have yet to have established Series) of the
Trust for payment under such credit, contract or claim; and neither the
Shareholders nor the Trustees, nor any of their agents, whether past, present or
future, shall be personally liable therefor. Nothing in this Trust Instrument
shall protect a Trustee against any liability to the Trust or a Shareholder to
which the Trustee would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee hereunder.

SECTION 11.02 TRUSTEE'S GOOD FAITH ACTION, EXPERT ADVICE, NO BOND OR
SURETY. The exercise by the Trustees or the officers of the Trust of their
powers and discretion hereunder in good faith and with reasonable care under the
circumstances then prevailing shall be binding upon everyone interested. Subject
to the provisions of Article X hereof and to Section 11.01 of this Article XI,
the Trustees and the officers of the Trust shall not be liable for errors of
judgment or mistakes of fact or law. The Trustees and the officers of the Trust
may take advice of counsel or other experts with respect to the meaning and
operation of this Trust Instrument, and subject to the provisions of Article X
hereof and Section 11.01 of this Article XI, shall be under no liability for any
act or omission in accordance with such advice or for failing to follow such
advice. The Trustees and the officers of the Trust shall not be required to give
any bond as such, nor any surety if a bond is obtained.

SECTION 11.03 ESTABLISHMENT OF RECORD DATES. The Trustees may close the
Share transfer books of the Trust for a period not exceeding sixty (60) days
preceding the date of any meeting of Shareholders, or the date for the payment
of any dividends or other distributions, or the date for the allotment of
rights, or the date when any change or conversion or exchange of Shares shall go
into effect; or in lieu of closing the stock transfer books as aforesaid, the
Trustees may fix in advance a date, not exceeding sixty (60) days preceding the
date of any meeting of Shareholders, or the date for payment of any dividend or
other distribution, or the date for the allotment of rights, or the date when
any change or conversion or exchange of Shares shall go into effect, as a record
date for the determination of the Shareholders entitled to notice of, and to
vote at, any such meeting, or entitled to receive payment of any such dividend
or other distribution,

<PAGE>

or to any such allotment of rights, or to exercise the rights in respect of any
such change, conversion or exchange of Shares, and in such case such
Shareholders and only such Shareholders as shall be Shareholders of record on
the date so fixed shall be entitled to such notice of, and to vote at, such
meeting, or to receive payment of such dividend or other distribution, or to
receive such allotment or rights, or to exercise such rights, as the case may
be, notwithstanding any transfer of any Shares on the books of the Trust after
any such record date fixed as aforesaid.

SECTION 11.04 TERMINATION OF TRUST.

(a) This Trust shall continue without limitation of time but subject to
the provisions of Subsection 11.04(b).

(b) The Trustees may, subject to any necessary Shareholder, Trustee,
and regulatory approvals:

(i) sell and convey all or substantially all of the assets of
the Trust or any affected Series to another trust, partnership,
association or corporation, or to a separate series of shares thereof,
organized under the laws of any state which trust, partnership,
association or corporation is an open-end management investment company
as defined in the 1940 Act, or is a series thereof, for adequate
consideration which may include the assumption of all outstanding
obligations, taxes and other liabilities, accrued or contingent, of the
Trust or any affected Series, and which may include shares of
beneficial interest, stock or other ownership interests of such trust,
partnership, association or corporation or of a series thereof;

(ii) enter into a plan of liquidation in order to terminate
and liquidate any Series (or class) of the Trust, or the Trust; or

(iii) at any time sell and convert into money all of the
assets of the Trust or any affected Series.

Upon making reasonable provision, in the determination of the Trustees, for the
payment of all liabilities by assumption or otherwise, the Trustees shall
distribute the remaining proceeds or assets (as the case may be) of each Series
(or class) ratably among the holders of Shares of the affected Series, based
upon the ratio that each Shareholder's Shares bears to the number of Shares of
such Series (or class) then outstanding.

(c) Upon completion of the distribution of the remaining proceeds or
the remaining assets as provided in Subsection 11.04(b), the Trust or any
affected Series shall terminate and the Trustees and the Trust shall be
discharged of any and all further liabilities and duties hereunder and the
right, title and interest of all parties with respect to the Trust or Series
shall be cancelled and discharged.

Upon termination of the Trust, following completion of winding up of
its business, the Trustees shall cause a certificate of cancellation of the
Trust's certificate of trust to be filed in

<PAGE>

accordance with the Delaware Act, which certificate of cancellation may be
signed by any one Trustee.

SECTION 11.05 REORGANIZATION.

(a) Notwithstanding anything else herein, the Trustees, in order to
change the form or jurisdiction of organization of the Trust, may (i) cause the
Trust to merge or consolidate with or into one or more trusts, partnerships
(general or limited), associations or corporations so long as the surviving or
resulting entity is an open-end management investment company under the 1940
Act, or is a series thereof, that will succeed to or assume the Trust's
registration under that Act and which is formed, organized or existing under the
laws of a state, commonwealth, possession or colony of the United States or (ii)
cause the Trust to incorporate under the laws of Delaware.

(b) The Trustees may, subject to a vote of a majority of the Trustees
and any shareholder vote required under the 1940 Act, if any, cause the Trust to
merge or consolidate with or into one or more Trusts, partnerships (general or
limited), associations, limited liability companies or corporations formed,
organized or existing under the laws of a state, commonwealth, possession or
colony of the United States.

(c) Any agreement of merger or consolidation or certificate of merger
or consolidation may be signed by a majority of Trustees and facsimile
signatures conveyed by electronic or telecommunication means shall be valid.

(d) Pursuant to and in accordance with the provisions of Section
3815(f) of the Delaware Act, and notwithstanding anything to the contrary
contained in this Trust Instrument, an agreement of merger or consolidation
approved by the Trustees in accordance with paragraph (a) or (b) this Section
11.05 may effect any amendment to the Trust Instrument or effect the adoption of
a new trust instrument of the Trust if it is the surviving or resulting trust in
the merger or consolidation.

SECTION 11.06 FILING OF COPIES, REFERENCES, HEADINGS. The original or a
copy of this Trust Instrument and of each amendment hereof or Trust Instrument
supplemental hereto shall be kept at the office of the Trust where it may be
inspected by any Shareholder. Anyone dealing with the Trust may rely on a
certificate by an officer or Trustee of the Trust as to whether or not any such
amendments or supplements have been made and as to any matters in connection
with the Trust hereunder, and with the same effect as if it were the original,
may rely on a copy certified by an officer or Trustee of the Trust to be a copy
of this Trust Instrument or of any such amendment or supplemental Trust
Instrument. In this Trust Instrument or in any such amendment or supplemental
Trust Instrument, references to this Trust Instrument, and all expressions such
as "herein," "hereof" and "hereunder," shall be deemed to refer to this Trust
Instrument as amended or affected by any such supplemental Trust Instrument. All
expressions such as "his," "he" and "him," shall be deemed to include the
feminine and neuter, as well as masculine, genders. Headings are placed herein
for convenience of reference only and in case of any conflict, the text of this
Trust Instrument, rather than the headings, shall control. This Trust Instrument
may be executed in any number of counterparts each of which shall be deemed an
original.

<PAGE>

SECTION 11.07 APPLICABLE LAW. The trust set forth in this instrument is
made in the State of Delaware, and the Trust and this Trust Instrument, and the
rights and obligations of the Trustees and Shareholders hereunder, are to be
governed by and construed and administered according to the Delaware Act and the
laws of said State; provided, however, that there shall not be applicable to the
Trust, the Trustees or this Trust Instrument (a) the provisions of Section 3540
of Title 12 of the Delaware Code or (b) any provisions of the laws (statutory or
common) of the State of Delaware (other than the Delaware Act) pertaining to
trusts which relate to or regulate (i) the filing with any court or governmental
body or agency of trustee accounts or schedules of trustee fees and charges,
(ii) affirmative requirements to post bonds for trustees, officers, agents or
employees of a trust, (iii) the necessity for obtaining court or other
governmental approval concerning the acquisition, holding or disposition of real
or personal property, (iv) fees or other sums payable to trustees, officers,
agents or employees of a trust, (v) the allocation of receipts and expenditures
to income or principal, (vi) restrictions or limitations on the permissible
nature, amount or concentration of trust investments or requirements relating to
the titling, storage or other manner of holding of trust assets, or (vii) the
establishment of fiduciary or other standards of responsibilities or limitations
on the acts or powers of trustees, which are inconsistent with the limitations
or liabilities or authorities and powers of the Trustees set forth or referenced
in this Trust Instrument. The Trust shall be of the type commonly called a
"business trust," and without limiting the provisions hereof, the Trust may
exercise all powers which are ordinarily exercised by such a trust under
Delaware law. The Trust specifically reserves the right to exercise any of the
powers or privileges afforded to trusts or actions that may be engaged in by
trusts under the Delaware Act, and the absence of a specific reference herein to
any such power, privilege or action shall not imply that the Trust may not
exercise such power or privilege or take such actions.

SECTION 11.08 AMENDMENTS. Except as specifically provided herein, the
Trustees may, without shareholder vote, amend or otherwise supplement this Trust
Instrument by making an amendment, a Trust Instrument supplemental hereto or an
amended and restated trust instrument. Shareholders shall have the right to vote
(a) on any amendment which would affect their rights to vote granted in Section
7.01 of Article VII hereof, (b) on any amendment to this Section 11.08, (c) on
any amendment as may be required by law or by the Trust's registration statement
filed with the Commission and (d) on any amendment submitted to them by the
Trustees. Any amendment required or permitted to be submitted to Shareholders
which, as the Trustees determine, shall affect the Shareholders of one or more
Series shall be authorized by vote of the Shareholders of each Series affected
and no vote of shareholders of a Series not affected shall be required.
Notwithstanding any other provision of this Trust Instrument, any amendment to
Article X hereof shall not limit the rights to indemnification or insurance
provided therein with respect to action or omission of Covered Persons prior to
such amendment.

SECTION 11.09 FISCAL YEAR. The fiscal year of the Trust shall end on a
specified date as set forth in the Bylaws, provided, however, that the Trustees
may change the fiscal year of the Trust.

SECTION 11.10 NAME RESERVATION. The Trustees on behalf of the Trust
acknowledge that Friedman, Billings, Ramsey & Co. Inc. has licensed to the Trust
the non-exclusive right to use the initials "FBR" as part of the name of the
Trust, and has reserved the right to grant the non-

<PAGE>

exclusive use of the initials "FBR" or any derivative thereof to any other
party. In addition, FBR Fund Advisers, Inc. reserves the right to grant the
non-exclusive use of the initials "FBR" to, and to withdraw such right from, any
other business or other enterprise. FBR Fund Advisers, Inc. reserves the right
to withdraw from the Trust the right to use said initials "FBR" and will
withdraw such right if the Trust ceases to employ, for any reason, FBR Fund
Advisers, Inc., an affiliate or any successor as adviser of the Trust.

SECTION 11.11 PROVISIONS IN CONFLICT WITH LAW. The provisions of this
Trust Instrument are severable, and if the Trustees shall determine, with the
advice of counsel, that any of such provisions is in conflict with the 1940 Act,
the regulated investment company provisions of the Internal Revenue Code or with
other applicable laws and regulations, the conflicting provision shall be deemed
never to have constituted a part of this Trust Instrument; provided, however,
that such determination shall not affect any of the remaining provisions of this
Trust Instrument or render invalid or improper any action taken or omitted prior
to such determination. If any provision of this Trust Instrument shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such jurisdiction and
shall not in any matter affect such provision in any other jurisdiction or any
other provision of this Trust Instrument in any jurisdiction.

IN WITNESS WHEREOF, the undersigned, being the initial Trustees of the
Trust, have executed this instrument as of date first written above.

/s/Jules Buchwald /s/Joanne Doldo
Jules Buchwald, as Trustee Joanne Doldo, as Trustee
and not individually and not individually

<PAGE>

SCHEDULE A

FBR Small Cap Financial Fund Series
FBR Financial Services Fund Series
FBR Virtual Information Fund Series
FBR Growth/Value Fund Series

THE FBR FAMILY OF FUNDS

BYLAWS

April 30, 1996

<PAGE>

THE FBR FAMILY OF FUNDS

BYLAWS

These Bylaws of The FBR Family of Funds (the "Trust"), a
Delaware business trust, are subject to the Trust Instrument of the Trust, dated
April 30, 1996, as from time to time amended, supplemented or restated (the
"Trust Instrument"). Capitalized terms used herein which are defined in the
Trust Instrument are used as therein defined.

ARTICLE I
PRINCIPAL OFFICE

The principal office of the Trust shall be located in
Arlington, Virginia or such other location as the Trustees may, from time to
time, determine. The Trust may establish and maintain such other offices and
places of business as the Trustees may, from time to time, determine.

ARTICLE II
OFFICERS AND THEIR ELECTION

SECTION 2.01 OFFICERS. The officers of the Trust shall be a
President, a Treasurer, a Secretary, and such other officers as the Trustees may
from time to time elect. The Trustees may delegate to any officer or committee
the power to appoint any subordinate officers or agents. It shall not be
necessary for any Trustee or other officer to be a holder of Shares in the
Trust.

SECTION 2.02 ELECTION OF OFFICERS. The Treasurer and Secretary
shall be chosen by the Trustees. The President shall be chosen by and from the
Trustees. Two or more offices may be held by a single person except the offices
of President and Secretary. Subject to the provisions of Section 3.13 hereof the
President, the Treasurer and the Secretary shall each hold office until their
successors are chosen and qualified and all other officers shall hold office at
the pleasure of the Trustees.

SECTION 2.03 RESIGNATIONS. Any officer of the Trust may
resign, notwithstanding Section 2.02 hereof, by filing a written resignation
with the President, the Trustees or the Secretary, which resignation shall take
effect on being so filed or at such time as may be therein specified.

ARTICLE III
POWERS AND DUTIES OF OFFICERS AND TRUSTEES

SECTION 3.01 MANAGEMENT OF THE TRUST. The business and affairs
of the Trust shall be managed by, or under the direction

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<PAGE>

of the Trustees, and they shall have all powers necessary and desirable to carry
out their responsibilities, so far as such powers are not inconsistent with the
laws of the State of Delaware, the Trust Instrument or with these Bylaws.

SECTION 3.02 EXECUTIVE AND OTHER COMMITTEES. The Trustees may
elect from their own number an executive committee, which shall have any or all
of the powers of the Board of Trustees while the Board of Trustees is not in
session. The Trustees may also elect from their own number other committees from
time to time. The number composing such committees and the powers conferred upon
the same are to be determined by vote of a majority of the Trustees. All members
of such committees shall hold such offices at the pleasure of the Trustees. The
Trustees may abolish any such committee at any time. Any committee to which the
Trustees delegate any of their powers or duties shall keep records of its
meetings and shall report its actions to the Trustees. The Trustees shall have
power to rescind any action of any committee, but no such rescission shall have
retroactive effect.

SECTION 3.03 COMPENSATION. Each Trustee and each committee
member may receive such compensation for his services and reimbursement for his
expenses as may be fixed from time to time by resolution of the Trustees.

SECTION 3.04 CHAIRMAN OF THE TRUSTEES. The Trustees may
appoint from among their number a Chairman who shall serve as such at the
pleasure of the Trustees. When present, he shall preside at all meetings of the
Shareholders and the Trustees, and he may, subject to the approval of the
Trustees, appoint a Trustee to preside at such meetings in his absence. He shall
perform such other duties as the Trustees may from time to time designate.

SECTION 3.05 PRESIDENT. The President shall be the chief
executive officer of the Trust and, subject to the direction of the Trustees,
shall have general administration of the business and policies of the Trust.
Except as the Trustees may otherwise order, the President shall have the power
to grant, issue, execute or sign such powers of attorney, process, agreements or
other documents as may be deemed advisable or necessary in the furtherance of
the interests of the Trust or any Series thereof. He shall also have the power
to employ attorneys, accountants and other advisors and agents and counsel for
the Trust. The President shall perform such duties additional to all of the
foregoing as the Trustees may from time to time designate.

SECTION 3.06 TREASURER. The Treasurer shall be the principal
financial and accounting officer of the Trust. He shall deliver all funds and
securities of the Trust which may come into his hands to such company as the
Trustees shall employ as Custodian in accordance with the Trust Instrument and

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<PAGE>

applicable provisions of law. He shall make annual reports regarding the
business and condition of the Trust, which reports shall be preserved in Trust
records, and he shall furnish such other reports regarding the business and
condition of the Trust as the Trustees may from time to time require. The
Treasurer shall perform such additional duties as the Trustees may from time to
time designate.

SECTION 3.07 SECRETARY. The Secretary shall record in books
kept for the purpose all votes and proceedings of the Trustees and the
Shareholders at their respective meetings. He shall have the custody of the seal
of the Trust. The Secretary shall perform such additional duties as the Trustees
may from time to time designate.

SECTION 3.08 VICE PRESIDENT. Any Vice President of the Trust
shall perform such duties as the Trustees or the President may from time to time
designate. At the request or in the absence or disability of the President, the
Vice President (or, if there are two or more Vice Presidents, then the senior of
the Vice Presidents) present and able to act may perform all the duties of the
President and, when so acting, shall have all the powers of and be subject to
all the restrictions upon the President.

SECTION 3.09 ASSISTANT TREASURER. Any Assistant Treasurer of
the Trust shall perform such duties as the Trustees or the Treasurer may from
time to time designate, and, in the absence of the Treasurer, the senior
Assistant Treasurer, present and able to act, may perform all the duties of the
Treasurer and, when so acting, shall have all the powers of and be subject to
all the restrictions upon the Treasurer.

SECTION 3.10 ASSISTANT SECRETARY. Any Assistant Secretary of
the Trust shall perform such duties as the Trustees or the Secretary may from
time to time designate, and, in the absence of the Secretary, the senior
Assistant Secretary, present and able to act, may perform all the duties of the
Secretary and, when so acting, shall have all the powers of and be subject to
all the restrictions upon the Secretary.

SECTION 3.11 SUBORDINATE OFFICERS. The Trustees from time to
time may appoint such officers or agents as they may deem advisable, each of
whom shall have such title, hold office for such period, have such authority and
perform such duties as the Trustees may determine. The Trustees from time to
time may delegate to one or more officers or committees of Trustees the power to
appoint any such subordinate officers or agents and to prescribe their
respective terms of office, authorities and duties.

SECTION 3.12 SURETY BONDS. The Trustees may require any
officer or agent of the Trust to execute a bond (including without limitation,
any bond required by the 1940 Act and the

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<PAGE>

rules and regulations of the Commission) to the Trust in such sum and with such
surety or sureties as the Trustees may determine, conditioned upon the faithful
performance of his duties to the Trust including responsibility for negligence
and for the accounting of any of the Trust's property, funds or securities that
may come into his hands.

SECTION 3.13 REMOVAL. Any officer may be removed from office,
with or without cause, whenever in the judgment of the Trustees the best
interest of the Trust will be served thereby, by the vote of a majority of the
Trustees given at any regular meeting or any special meeting of the Trustees. In
addition, any officer or agent appointed in accordance with the provisions of
Section 3.10 hereof may be removed, either with or without cause, by any officer
upon whom such power of removal shall have been conferred by the Trustees.

SECTION 3.14 REMUNERATION. The salaries or other compensation,
if any, of the officers of the Trust shall be fixed from time to time by
resolution of the Trustees.

ARTICLE IV
SHAREHOLDERS' MEETINGS

SECTION 4.01 SPECIAL MEETINGS. A special meeting of the
shareholders shall be called by the Secretary whenever (a) ordered by the
Trustees or (b) requested in writing by the holder or holders of at least 10% of
the Outstanding Shares entitled to vote for the purpose of voting upon the
question of removal of Trustees. If the meeting is a meeting of the Shareholders
of one or more Series or classes of Shares, but not a meeting of all
Shareholders of the Trust, then only special meetings of the Shareholders of
such one or more Series or classes shall be called and only the shareholders of
such one or more Series or classes shall be entitled to notice of and to vote at
such meeting.

SECTION 4.02 NOTICES. Except as provided in Section 4.01,
notices of any meeting of the Shareholders shall be given by the Secretary by
delivering or mailing, postage prepaid, to each Shareholder entitled to vote at
said meeting, written or printed notification of such meeting at least ten (10)
days before the meeting, to such address as may be registered with the Trust by
the Shareholder. Notice of any Shareholder meeting need not be given to any
Shareholder if a written waiver of notice, executed before or after such
meeting, is filed with the records of such meeting, or to any Shareholder who
shall attend such meeting in person or by proxy. Notice of adjournment of a
Shareholder's meeting to another time or place need not be given, if such time
and place are announced at the meeting or reasonable notice is given to persons
present at the meeting and the adjourned meeting is held within a reasonable
time after the date set for the original meeting.

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<PAGE>

SECTION 4.03 VOTING-PROXIES. Subject to the provisions of the
Trust Instrument, shareholders entitled to vote may vote either in person or by
proxy, provided that either (a) an instrument authorizing such proxy to act is
executed by the Shareholder in writing and dated not more than eleven (11)
months before the meeting, unless the instrument specifically provides for a
longer period or (b) the Trustees adopt by resolution an electronic, telephonic,
computerized or other alternative to execution of a written instrument
authorizing the proxy to act, which authorization is received not more than
eleven (11) months before the meeting. Proxies shall be delivered to the
Secretary of the Trust or other person responsible for recording the proceedings
before being voted. A proxy with respect to shares held in the name of two or
more persons shall be valid if executed by one of them unless at or prior to
exercise of such proxy the Trust receives a specific written notice from any one
of them. Unless otherwise specifically limited by their terms, proxies shall
entitle the holder thereof to vote at any adjournment of a meeting. A proxy
purporting to be exercised by or on behalf of a Shareholder shall be deemed
valid unless challenged at or prior to its exercise and the burden of proving
invalidity shall rest on the challenger. At all meetings of the Shareholders,
unless the voting is conducted by inspectors, all questions relating to the
qualifications of voters, the validity of proxies, and the acceptance or
rejection of votes shall be decided by the Chairman of the meeting. Except as
otherwise provided herein or in the Trust Instrument, as these Bylaws or such
Trust Instrument may be amended or supplemented from time to time, all matters
relating to the giving, voting or validity of proxies shall be governed by the
General Corporation Law of the State of Delaware relating to proxies, and
judicial interpretations thereunder, as if the Trust were a Delaware corporation
and the Shareholders were shareholders of a Delaware corporation.

SECTION 4.04 PLACE OF MEETING. All special meetings of the
Shareholders shall be held at the principal place of business of the Trust or at
such other place in the United States as the Trustees may designate.

SECTION 4.05 ACTION WITHOUT A MEETING. Any action to be taken
by Shareholders may be taken without a meeting if all Shareholders entitled to
vote on the matter consent to the action in writing and the written consents are
filed with the records of meetings of Shareholders of the Trust. Such consent
shall be treated for all purposes as a vote at a meeting of the Shareholders
held at the principal place of business of the Trust.

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<PAGE>

ARTICLE V
TRUSTEES' MEETINGS

SECTION 5.01 SPECIAL MEETINGS. Special meetings of the
Trustees may be called orally or in writing by the Chairman of the Board of
Trustees or any two other Trustees.

SECTION 5.02 REGULAR MEETINGS. Regular meetings of the
Trustees may be held at such places and at such times as the Trustees may from
time to time determine; each Trustee present at such determination shall be
deemed a party calling the meeting and no call or notice will be required to
such Trustee provided that any Trustee who is absent when such determination is
made shall be given notice of the determination by the Chairman or any two other
Trustees, as provided for in Section 4.04 of the Trust Instrument.

SECTION 5.03 QUORUM. A majority of the Trustees shall
constitute a quorum for the transaction of business at any meeting and an action
of a majority of the Trustees in attendance constituting a quorum shall
constitute action of the Trustees.

SECTION 5.04 NOTICE. Except as otherwise provided, notice of
any special meeting of the Trustees shall be given by the party calling the
meeting to each of the Trustees, as provided for in Section 4.04 of the Trust
Instrument. A written notice may be mailed, postage prepaid, addressed to him at
his address as registered on the books of the Trust or, if not so registered, at
his last known address.

SECTION 5.05 PLACE OF MEETING. All special meetings of the
Trustees shall be held at the principal place of business of the Trust or such
other place as the Trustees may designate. Any meeting may adjourn to any place.

SECTION 5.06 SPECIAL ACTION. When all the Trustees shall be
present at any meeting however called or wherever held, or shall assent to the
holding of the meeting without notice, or shall sign a written assent thereto
filed with the records of such meeting, the acts of such meeting shall be valid
as if such meeting had been regularly held.

SECTION 5.07 ACTION BY CONSENT. Any action by the Trustees may
be taken without a meeting if a written consent thereto is signed by all the
Trustees and filed with the records of the Trustees' meeting. Such consent shall
be treated, for all purposes, as a vote at a meeting of the Trustees held at the
principal place of business of the Trustees.

SECTION 5.08 PARTICIPATION IN MEETINGS BY CONFERENCE
TELEPHONE. Except when presence in person is required at a meeting under the
1940 Act or other applicable laws, Trustees may participate in a meeting of
Trustees by conference telephone or similar communications equipment by means of
which all persons

- 6 -

<PAGE>

participating in the meeting can hear each other, and such participation shall
constitute presence in person at such meeting. Any meeting conducted by
telephone shall be deemed to take place at and from the principal office of the
Trust.

ARTICLE VI
FISCAL YEAR; REGISTERED OFFICE AND REGISTERED AGENT

SECTION 6.01 FISCAL YEAR. The fiscal year of the Trust and of
each Series of the Trust shall end on June 30 of each year; provided that the
last fiscal year of the Trust and each Series shall end on the date on which the
Trust or each such Series is terminated, as applicable; and further provided
that the Trustees by resolution and without a Shareholder vote may at any time
change the fiscal year of the Trust and of any or all Series (and the Trust and
each Series may have different fiscal years as determined by the Trustees).

SECTION 6.02 REGISTERED OFFICE AND REGISTERED AGENT. The
initial registered office of the Trust in the State of Delaware shall be located
at 1201 North Market Street, P.O. Box 1347, Wilmington, Delaware 19899-1347. The
registered agent of the Trust at such location shall be Delaware Corporation
Organizers, Inc.; provided that the Trustees by resolution and without a
Shareholder vote may at any time change the Trust's registered office or its
registered agent, or both.

ARTICLE VII
INSPECTION OF BOOKS

The Trustees shall from time to time determine whether and to
what extent, and at what times and places, and under what conditions and
regulations the accounts and books of the Trust or any of them shall be open to
the inspection of the Shareholders; and no Shareholder shall have any right to
inspect any account or book or document of the Trust except as conferred by law
or otherwise by the Trustees or by resolution of the Shareholders.

ARTICLE VIII
INSURANCE OF OFFICERS, TRUSTEES, AND EMPLOYEES

The Trust may purchase and maintain insurance on behalf of any
Covered Person (as defined in Section 10.02 of the Trust Instrument) or employee
of the Trust, including any Covered Person or employee of the Trust who is or
was serving at the request of the Trust as a Trustee, officer or employee of a
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him and claimed by him in any such capacity or
arising out of his status as such, whether or not the Trustees would have the
power to indemnify him against such liability.

- 7 -

<PAGE>

The Trust may not acquire or obtain a contract for insurance
that protects or purports to protect any Trustee or officer of the Trust against
any liability to the Trust or its Shareholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties involved in the conduct of his office.

ARTICLE IX
SEAL

The seal of the Trust shall be circular in form bearing the
inscription:

"THE FBR FAMILY OF FUNDS, APRIL 30, 1996
THE STATE OF DELAWARE"

ARTICLE X
AMENDMENTS

These Bylaws may be amended from time to time by action of the
Trustees, without requirement for the vote or approval of shareholders.

- 8 -

<PAGE>

TABLE OF CONTENTS

ARTICLE I
PRINCIPAL OFFICE............................................................ 1

ARTICLE II
OFFICERS AND THEIR ELECTION................................................. 1
Section 2.01 Officers.............................................. 1
Section 2.02 Election of Officers.................................. 1
Section 2.03 Resignations.......................................... 1

ARTICLE III
POWERS AND DUTIES OF OFFICERS AND TRUSTEES.................................. 1
Section 3.01 Management of the Trust............................... 1
Section 3.02 Executive And Other Committees........................ 2
Section 3.03 Compensation.......................................... 2
Section 3.04 Chairman Of The Trustees.............................. 2
Section 3.05 President............................................. 2
Section 3.06 Treasurer............................................. 2
Section 3.07 Secretary............................................. 3
Section 3.08 Vice President........................................ 3
Section 3.09 Assistant Treasurer................................... 3
Section 3.10 Assistant Secretary................................... 3
Section 3.11 Subordinate Officers.................................. 3
Section 3.12 Surety Bonds.......................................... 3
Section 3.13 Removal............................................... 4
Section 3.14 Remuneration.......................................... 4

ARTICLE IV
SHAREHOLDERS' MEETINGS...................................................... 4
Section 4.01 Special Meetings...................................... 4
Section 4.02 Notices............................................... 4
Section 4.03 Voting-Proxies........................................ 5
Section 4.04 Place of Meeting...................................... 5
Section 4.05 Action Without a Meeting.............................. 5

ARTICLE V
TRUSTEES' MEETINGS.......................................................... 6
Section 5.01 Special Meetings...................................... 6
Section 5.02 Regular Meetings...................................... 6
Section 5.03 Quorum................................................ 6
Section 5.04 Notice................................................ 6
Section 5.05 Place of Meeting...................................... 6
Section 5.06 Special Action........................................ 6
Section 5.07 Action by Consent..................................... 6
Section 5.08 Participation in Meetings By Conference
Telephone................................................. 6

ARTICLE VI
FISCAL YEAR; REGISTERED OFFICE AND REGISTERED AGENT......................... 7
Section 6.01 Fiscal Year........................................... 7
Section 6.02 Registered Office and Registered Agent................ 7

ARTICLE VII

- i -

<PAGE>

INSPECTION OF BOOKS.......................................................... 7

ARTICLE VIII
INSURANCE OF OFFICERS, TRUSTEES, AND EMPLOYEES............................... 7

ARTICLE IX
SEAL......................................................................... 8

ARTICLE X
AMENDMENTS................................................................... 8

- ii -

Kramer, Levin, Naftalis & Frankel
9 1 9 T H I R D A V E N U E
NEW YORK, N.Y. 10022 - 3852
(212) 715 - 9100

ARTHUR H. AUFSES III Richard Marlin Sherwin Kamin
THOMAS D. BALLIETT Thomas E. Molner Arthur B. Kramer
JAY G. BARIS Thomas H. Moreland Maurice N. Nessen
SAUL E. BURIAN Ellen R. Nadler Founding Partners
BARRY MICHAEL CASS Gary P. Naftali Counsel
THOMAS E. CONSTANCE Michael J. Nassa --------
MICHAEL J. DELL Michael S. Nelson Martin Balsam
KENNETH H. ECKSTEIN Jay A. Neveloff Joshua M. Berman
CHARLOTTE M. FISCHMAN Michael S.Oberman Jules Buchwald
DAVID S. FRANKEL Paul S. Pearlman Rudolph De Winter
MARVIN E. FRANKEL Susan J. Penry-Williams Meyer Eisenberg
ALAN R. FRIEDMAN Bruce Rabb Arthur D. Emil
CARL FRISCHLING Allan E. Reznick Maxwell M. Rabb
MARK J. HEADLEY Scott S. Rosenblum James Schreiber
ROBERT M. HELLER Michele D. Ross Counsel
PHILIP S. KAUFMAN Max J. Schwartz -------
PETER S. KOLEVZON Mark B. Segall M. Frances Buchinsky
KENNETH P. KOPELMAN Judith Singer Debora K. Grobman
MICHAEL PAUL KOROTKIN Howard A. Sobel Christian S. Herzeca
KEVIN B. LEBLANG Steven C. Todrys Pinchas Mendelson
DAVID P. LEVIN Jeffrey S. Trachtman Lynn R. Saidenberg
EZRA G. LEVIN D. Grant Vingoe Jonathan M. Wagner
LARRY M. LOEB Harold P. Weinberger Special Counsel
MONICA C. LORD E. Lisk Wyckoff, Jr. -------
FAX
(212) 715-8000
---
WRITER'S DIRECT NUMBER
(212)715-9100
-------------
New York, New York
June 10, 1996

The FBR Family of Funds
Potomac Tower
1001 Nineteenth Street North
Arlington, VA 22209

Re: The FBR Family Funds
--------------------

Gentlemen:

We hereby consent to the reference to our firm as Counsel in this
Registration Statement on Form N-1A.

Very truly yours,

/s/Kramer, Levin, Naftalis & Frankel
------------------------------------

EXHIBIT 16

FORM OF COMPUTATION OF PERFORMANCE QUOTATION

YIELDS. A Fund's "yield" (referred to as "standardized yield") for a given
30-day period for a class of shares is calculated using the following formula
set forth in rules adopted by the Securities and Exchange Commission that apply
to all funds that quote yields:

Standardized Yield = 2 [(a-b + 1)^6 - 1]
---
cd

The symbols above represent the following factors:

a = dividends and interest earned during the 30-day period.

b = expenses accrued for the period (net of any expense
reimbursements).

c = the average daily number of shares outstanding during the
30-day period that were entitled to receive dividends.

d = the maximum offering price per share of the class on the last
day of the period, adjusted for undistributed net investment
income.

<PAGE>

EXHIBIT 16

FORM OF COMPUTATION OF PERFORMANCE QUOTATION

TOTAL RETURNS. The "average annual total return" of each class of a fund is an
average annual compounded rate of return for each year in a specified number of
years. It is the rate of return based on the change in value of a hypothetical
initial investment of $1,000 ("P in the formula below) held for a number of
years ("n") to achieve an Ending Redeemable Value ("ERV"), according to the
following formula:

( ERV )^1n - 1 = Average Annual Total Return ("T")
-----
( P )

Where: P = A hypothetical initial payment of $1000
T = Average annual total return
n = Number of years
ERV = Ending redeemable value of a hypothetical $1,000
payment made at the beginning of the one, five, or 10
year periods at the end of the one, five, or 10 year
periods (or fractionable portion thereof).