FBR FAMILY OF FUNDS, N-1A EL/A, 1996-12-20

FBR FAMILY OF FUNDS
N-1A EL/A, 1996-12-20

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Reg. ICA No. 811-07665
File No. 333-05675

As filed with the Securities and Exchange Commission on December 20, 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. 2 |X|

Post-Effective Amendment No. |_|

and

REGISTRATION STATEMENT UNDER THE

INVESTMENT COMPANY ACT OF 1940 |X|

Amendment No. 2 |X|

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

___________________________________________________

Pursuant to Rule 24f-2 under the Investment Company Act of 1940 the
Registrant has declared that an indefinite number of shares of beneficial
interest of the Registrant be registered under the Securities Act of 1933. The
$500 filing fee required by said Rule was paid upon the initial filing.

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

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;
Additional Information About the Funds;
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 Repurchas 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 - Miscellaneous
Holders of Securities

16. Investment Advisory and Other Advisory & Other Contracts
Services

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

Prospectus For information, call toll free: 888-888-0025
December __, 1996 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 Financial Services Fund ("Financial
Services Fund"), FBR Small Cap Financial Fund ("Small Cap Financial Fund"), each
of which are diversified portfolios, FBR Small Cap Growth/Value Fund
("Growth/Value Fund"), and FBR Information Technologies Fund ("Information
Technologies Fund"), each of which are non-diversified portfolios (collectively
the portfolios are referred to as the "Funds"). This Prospectus relates to the
Small Cap Financial Fund, the Financial Services Fund and the Growth/Value Fund
only. 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" or "FBR"). 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 The FBR Family of Funds, Potomac Tower, 1001 Nineteenth Street North,
Arlington, Virginia 22209 or by calling 888-888-0025.

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
Additional Information About the Funds...................................... _
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

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<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 Information Technologies Fund and FBR Growth/Value
Fund. Currently, shares of the Information Technologies Fund are not being
offered.

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 $2,000. Subsequent investments must be $100 or more.
The minimum initial investment for IRAs, or pension, profit-sharing or other
employee benefit plans is $1,000 and minimum subsequent investments are $100.
See "How to Purchase Shares".

Shares of the Funds may be exchanged for shares of other funds advised by the
Adviser and the FBR 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 Financial Services Fund
and the Small Cap Financial Fund each concentrate their investments in a
particular industry and therefore are designed for those investors who are
interested in actively monitoring the progress of, and can accept the risks of,
industry-focused investing. The Small Cap Financial Fund and the Growth/Value
Fund will each, as a nonfundamental policy, invest at least 65% of its total
assets in smaller capitalization companies. The Funds may engage in short
selling. 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.

Shareholder Transaction Expenses (1)

Financial Small Cap Growth/
Services Fund Financial Fund Value Fund

<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a
percentage of the offering price) NONE NONE NONE

Maximum Sales Charge Imposed on Reinvested
Dividends NONE NONE NONE
Deferred Sales Charge NONE NONE NONE
Redemption Fees on Shares held 90 days or less (as
a % of redemption amount)(2) 1.00% 1.00% 1.00%

Exchange Fee NONE NONE NONE

Annual Fund Operating Expenses
(as a percentage of average daily net assets)
Management Fees .90% .90% .90%
Rule 12b-1 Fee (3) .25% .25% .25%

Other Expenses .50% .50% .50%
------ ----- -----
Total Fund Operating Expenses (4) 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) A $15.00 redemption fee will be charged for payments by wire.

(3) 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.

(4) 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
----------------------------

Financial Services Fund $17 $52
Small Cap Financial Fund $17 $52
Small Cap Growth/Value Fund $17 $52

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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.

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<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 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 total
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. 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's strategy in seeking to
achieve its investment objective may lead to investments in smaller companies
with less than $500 million capitalization at 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.
The Financial Services Fund may also invest in companies in the information
technology industries which provide products and/or services to these companies.

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 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.

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<PAGE>

These companies may also offer other financial services such as discount
brokerage services, insurance products, leasing services, and joint venture
financing. This may include, for example, mortgage banking companies, banks, and
other depository institutions. As a nonfundamental policy, under normal
conditions, the Small Cap Financial Fund will invest at least 65% of its total
assets in securities of smaller capitalization companies (companies of less than
$750 million capitalization at the time of purchase) principally engaged in the
business of providing financial services to consumers and industry. It is
expected that the Fund will focus its investments on companies with market
capitalizations below $200 million. 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 may also invest in companies in the information technology
industries which provide products and/or services to the companies described
above and may invest in real estate investment trusts. 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. Factors expected to continue
driving change among the smaller capitalization issues include regulatory
changes, consolidation, mutual conversion activity, management changes,
residential loan demand, credit quality trends, interest rate movements and new
business development.

Although at least 65% of the Small Cap Financial Fund's total assets will be
invested in smaller capitalization companies, 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 thinly traded and/or newly issued and not tested by market
demand.

See "Illiquid Investments and Restricted Securities" below.

The Financial Services Fund and the Small Cap Financial 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 and the
Financial Services 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 to achieve its objective of capital appreciation
primarily through equity investments in companies whose securities are believed
by the Adviser to be currently undervalued or may not yet reflect the prospect
for accelerating earnings/cash flow growth. The Growth/Value Fund invests
primarily in common stocks but may also invest 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.

As a nonfundamental policy, at least 65% of the Fund's assets will be invested
in companies of less than $1 billion capitalization at the time of purchase,
however, the Growth/Value Fund may 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. Because each Fund invests primarily in equity securities,

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<PAGE>

which fluctuate in value, each Fund's shares will fluctuate in value. When you
sell your shares, they may be worth more or less than what you paid for them.

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-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

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<PAGE>

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.

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.

Other Instruments may include securities of closed-end investment companies and
real estate-related investments.

LEAPS. 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 Growth/Value Fund will not
purchase these options with respect to more than 25% of the value of its net
assets .

Illiquid Investments and Restricted Securities. Each Fund may invest up to 15%
of its net 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
"Trustees"). The Adviser, under the supervision of the 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 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 certain restricted
securities, including Rule 144A securities and foreign 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

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<PAGE>

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 Trustees.
Each Fund will limit its securities lending to 33 1/3 % of its total assets.

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.

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. The seller is required to maintain the value of
collateral held pursuant to the agreement 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.

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.

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").

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<PAGE>

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.

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.

Additional Information About the Funds

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 Financial Services Fund and the Small Cap Financial 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 Growth/Value 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.

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

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<PAGE>

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.

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 $2,000, or $1,000 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. 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, another Authorized Dealer or the Transfer
Agent (the "trade date"). Payment for Fund shares generally is due to FBR or
another Authorized Dealer on the third business day (the "settlement date")
after the trade date.

Purchases can be made through the Transfer Agent.

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<PAGE>

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 (the "Transfer Agent"). Shares may be
purchased initially by completing the application (the "Application")
accompanying 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, 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:

PNC Bank, N.A.
Philadelphia, Pennsylvania

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 other 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 another 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 [Insert Fund Name] if purchased directly from
the Trust, and should be directed to the Transfer Agent: PFPC Inc., Attention:
The FBR Family of Funds [Insert Fund Name] 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 other Authorized Dealer. FBR or an investor's
Authorized Dealer is responsible for forwarding payment promptly to the Trust.
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, Presidents' Day,
Good Friday, Memorial Day, Independence Day (observed), Labor Day, Thanksgiving
Day

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<PAGE>

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. Shareholders may not
purchase shares of the Funds with a check issued by a third party and endorsed
over to the Funds.

Purchase orders received by FBR, another Authorized Dealer or the Transfer Agent
prior to 4:15 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 NYSE 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 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 4:15 p.m. New York time .

Shares of the Funds are sold on a continuous basis. Net asset value per share is
determined as of 4:15 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 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 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.

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<PAGE>

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 FBR 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 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. 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 the minimum account value required by the
Trust.

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<PAGE>

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.

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 FBR 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 FBR 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.

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<PAGE>

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
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 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. 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 $10,000. There is no maximum for proceeds sent by wire
transfer. The Funds may modify this redemption service at any time. A
transaction fee of $15.00 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.

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<PAGE>

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 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 $10,000 or more wired to the
shareholder's brokerage account or a commercial bank account designated by the
shareholder. A transaction fee of $15.00 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 another 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

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<PAGE>

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 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.

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.

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 "Tax 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 Tax 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, local, or foreign
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., 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

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<PAGE>

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 Delaware corporation on September 13, 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 $200 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, and options .

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 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.

David Ellison serves as portfolio manager for the Small Cap Financial Fund and
the Financial Services Fund and has since the commencement of operations.
Previously, Mr. Ellison was portfolio manager of the Home Finance Portfolio of
Fidelity Select Portfolios since December 1985. Charles Thomas Akre, Jr. serves
as portfolio manager

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<PAGE>

for the Growth/Value Fund and has since the commencement of operations. Mr. Akre
has been a registered representative with Friedman, Billings, Ramsey & Co., Inc.
since February, 1994 and senior vice president of Friedman, Billings, Ramsey,
Investment Management, Inc. since May, 1993. Prior to that, he was president of
The Akre Corporation, an investment manager.

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 certain operations 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 , 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.

Under the terms of an Administration and Accounting Services Agreement with the
Trust on behalf of the Funds, PFPC, Inc. provides certain administration and
accounting services to the Funds.

Custodian and Transfer Agent.

Custodial Trust Company, a wholly-owned subsidiary of The Bear Stearns Companies
Inc., 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.

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 . Distribution fees may be used by the Distributor for: (a)
costs of printing and distributing a Fund's prospectus, statement of additional
information and reports to prospective investors in the Fund; (b) costs involved
in preparing, printing and distributing sales literature pertaining to a Fund;
(c) an allocation of overhead and other branch office distribution-related
expenses of the Distributor; (d) payments to persons who provide support
services in connection with the distribution of a Fund's shares, including but
not limited to, office space and equipment, telephone facilities, answering
routine inquiries regarding a Fund, processing shareholder transactions and
providing any other shareholder services not otherwise provided by a Fund's
transfer agent; (e) accruals for interest on the amount of the foregoing
expenses that exceed the distribution fee; and (f) any other expense primarily
intended to result in the sale of a Fund's shares, including, without
limitation, payments to salesmen and selling dealers who have entered into
selected dealer agreements with the Distributor, at the time of the sale of
shares, if applicable, and continuing fees to each such salesmen and selling
dealers, which fee shall begin to accrue immediately after the sale of such
shares. 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

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<PAGE>

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.

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 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.

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<PAGE>

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 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>

The FBR Family of Funds

Prospectus For information, call toll free: 888-888-0025
______ __, 1996 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 Financial Services Fund, FBR Small
Cap Financial Fund, each of which are diversified portfolios, FBR Information
Technologies Fund and FBR Small Cap Growth/Value Fund, each of which are
non-diversified portfolios. This Prospectus relates to the FBR Information
Technologies Fund (the "Fund") only. FBR Fund Advisers, Inc. is the investment
adviser to the Fund (the "Adviser"). Friedman, Billings, Ramsey & Co., Inc., a
registered broker-dealer, is the Fund's distributor (the "Distributor" or
"FBR"). 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.

The Fund seeks capital appreciation.

Please read this Prospectus before investing. It is designed to provide you with
information and to help you decide if the Fund's goals match your own. Retain
this document for future reference. A Statement of Additional Information (dated
_______, 1996) for the Fund 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 The FBR Family of Funds, Potomac Tower, 1001 Nineteenth Street North,
Arlington, Virginia 22209 or by calling 888-888-0025.

<PAGE>

Table of Contents

Page

Highlights................................................................ 3
Investment Objective...................................................... 6
Investment Policies and Risk Factors...................................... 6
Additional Information Regarding the Fund's Investments................... 7
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

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<PAGE>

HIGHLIGHTS

Introduction.

Fund Management.

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

The FBR Information Technologies Fund.

The Fund seeks capital appreciation. There is no assurance that the Fund will
achieve its investment objective. See "Investment Objective" and "Investment
Policies and Risk Factors."

How to Purchase, Exchange and Redeem Shares.

Shares representing interests in the Fund 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 the Fund is $2,000. Subsequent investments must be $100 or more.
The minimum initial investment for IRAs, or pension, profit-sharing or other
employee benefit plans is $1000 and minimum subsequent investments are $100. See
"How to Purchase Shares."

Shares of the Fund may be exchanged for shares of other funds advised by the
Adviser and the FBR 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 Fund reserves 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 Fund
reserves 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 the Fund is subject to certain risks, as set forth in detail under
"Investment Policies and Risk Factors." The Fund's net asset value per share can
be expected to fluctuate. In addition, the Fund concentrates its investments in
the information technologies industry and therefore is designed for those
investors who are interested in actively monitoring the progress of, and can
accept the risks of, industry-focused investing. The Fund may engage in short
selling. Investors should consider the Fund 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 Fund. 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 Fund investment
objective, policies and risk factors.

Shareholder Transaction Expenses (1)

Information
Technologies
Fund

Maximum Sales Charge Imposed on Purchases (as a percentage of the
offering price) NONE

Maximum Sales Charge Imposed on Reinvested Dividends

NONE

Deferred Sales Charge NONE
Redemption Fees on Shares held 90 days or less (as a % of redemption
amount)(2) 1.00%

Exchange Fee NONE

Annual Fund Operating Expenses
(as a percentage of average daily net assets)

Management Fees .90%
Rule 12b-1 Fee (3) .25%
Other Expenses .50%
-----

Total Fund Operating Expenses (4) 1.65%

(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) A $15.00 redemption fee will be charged for payments by wire.

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

(4) 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 the Fund, including the investment advisory fee and Rule 12b-1
fees, do not exceed 1.65% of the 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
----------------------------

Information Technologies Fund $17 $52

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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 the Fund will bear directly or
indirectly. See "Fund Organization and Fees" for a more complete discussion of
annual operating expenses of the Fund. 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.

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<PAGE>

Investment Objective

The Fund seeks capital appreciation. The investment objective of the 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 the Fund will achieve its
investment objective.

Investment Policies and Risk Factors

Summary of Principal Investment Policies

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

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 electronic medium,
including the Internet. The following examples illustrate the wide range of
products and services provided by these industries: companies that provide
hardware, software and services to facilitate services and transactions of
financial institutions that execute traditional banking services and other
financial transactions over the Internet; computer hardware and software of any
kind, including, for example, semiconductors, minicomputers, and peripheral
equipment; telecommunications products and services; electronic 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 . As a
nonfundamental policy, under normal market conditions, the Fund will invest at
least 65% of its assets in securities of companies in the information technology
industries . As a nonfundamental policy, the Fund will invest at least 50% of
its assets in companies that provide hardware, software and services that
facilitate services and transactions of financial institutions that execute
traditional banking services and other financial transactions over the Internet.

The 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
Fund's assets to pursuing that opportunity than other mutual funds, and may
select investments for the Fund that would be inappropriate for less aggressive
mutual funds. In addition, unlike most other mutual funds, the Fund may engage
in short sales of securities which involve special risks.

The Fund's investment objective is capital appreciation. The 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 Fund concentrates its investments in that sector.

Although the 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 Fund's objective. The Fund may also engage
in short sales of securities it expects to decline in price.

- 6 -

<PAGE>

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 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 Fund is designed for those who are actively
interested in, and can accept the risks of, industry-focused investing. Because
of its narrow industry focus, the performance of the 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.

In general, the value of the 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 the
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 the Fund's net asset value.
Because the Fund invests primarily in equity securities, which fluctuate in
value, the Fund's shares will fluctuate in value.

Additional Information Regarding the Fund's Investments.

The following paragraphs provide a brief description of some of the types of
securities in which the Fund may invest, in accordance with its 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.

The Fund may, following notice to its shareholders, take advantage of other
investment practices which are not at present contemplated for use by the Fund
or which currently are not available but which may be developed, to the extent
such investment practices are both consistent with the 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 the Fund achieve its goals.

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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. The 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. The 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 the 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. The 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. 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 the Fund's normal investment programs. Accordingly,
for temporary defensive purposes, the Fund may hold up to 100% of its total
assets in cash and/or short-term obligations. To the extent that the 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.

LEAPS. The 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 Fund will not purchase these options with respect
to more than 25% of the value of its net assets .

Illiquid Investments and Restricted Securities. The Fund may invest up to 15% of
its net assets in illiquid investments (investments that cannot be readily sold
within seven days), including restricted securities which do not

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<PAGE>

meet the criteria for liquidity established by the Trust's Board of Trustees
(the "Trustees"). The Adviser, under the supervision of the Trustees, determines
the liquidity of the 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.

Securities Lending. In order to generate additional income, the Fund may, from
time to time, lend its portfolio securities. The 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 the 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. The 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. The Fund will limit its securities
lending to 33 1/3 % of its total assets.

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

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<PAGE>

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

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

Convertible Securities. The Fund 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.

Stripped Securities. The Fund 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").

Reverse Repurchase Agreements. The Fund may borrow funds for temporary purposes
by entering into reverse repurchase agreements. Pursuant to such agreements, the
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.

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<PAGE>

Other Money Market Securities may include commercial paper, certificates of
deposit, bankers' acceptances, and time deposits.

Options and Futures. The 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, the 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. The 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. The Fund may also buy and
sell index futures and options to increase its investment return.

Additional Information About the Fund

Diversification. Diversify in the 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 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. These limitations
do not apply to U.S. government securities.

Certain investment management techniques which the Fund may use, such as the
purchase and sale of futures and options may expose the Fund to special risks.
These products may be used to adjust the risk and return characteristics of the
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 Fund to
potentially greater risk of loss than more traditional equity investments.

Portfolio Transactions. The 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 the Fund's turnover rate and its transaction costs. High turnover will
generally result in higher brokerage costs and possible tax consequences for the
Fund.

From time to time, the 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 the 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

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<PAGE>

Fund's shareholders. It is expected that portfolio turnover for the Fund will
not exceed 250%. (See "Additional Tax Information" in the Statement of
Additional Information.)

NOTE: The Statement of Additional Information contains additional information
about the investment practices of the Fund and risk factors. The investment
policies and limitations of the Fund may be changed by the Trustees without any
vote of shareholders 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.

How to Purchase Shares

General.

The minimum initial investment is $2,000, or $1,000 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. 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.
The Fund, at its own discretion, reserves the right to suspend purchases of its
shares.

Purchases of the Fund's 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 Fund's shares also
may be made directly through the Transfer Agent.

Purchases are effected at the Fund's net asset value next determined after a
purchase order is received by FBR another Authorized Dealer or the Transfer
Agent (the "trade date"). Payment for Fund shares generally is due to FBR or
another 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 Fund are offered continuously for sale by
the Distributor and may be purchased without imposition of a sales charge
through PFPC, the Fund's transfer agent (the "Transfer Agent"). Shares may be
purchased initially by completing the application (the "Application")
accompanying 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
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.

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<PAGE>

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

PNC Bank, N.A.
Philadelphia, Pennsylvania

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 other 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 another 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 Information Technologies 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 Information Technologies
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 other Authorized
Dealer. FBR or an investor's Authorized Dealer is responsible for forwarding
payment promptly to the Trust. 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 Fund 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, Presidents' 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. Shareholders may not
purchase shares of the Fund with a check issued by a third party and endorsed
over to the Fund.

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<PAGE>

Purchase orders received by FBR, another Authorized Dealer or the Transfer Agent
before 4:15 p.m., New York time on any day the Fund calculates 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 NYSE are priced
as of the time the net asset value is next determined.

The Fund understands 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 Fund, 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 of the Fund, 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 the 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 Fund 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 4:15 p.m. New York time .

Shares of the Fund are sold on a continuous basis. Net asset value per share is
determined as of 4:15 p.m., New York time on each Business Day. The net asset
value per share of the Fund is computed by dividing the value of the Fund's net
assets (i.e., the value of its assets less liabilities) by the total number of
shares outstanding. The 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 the Fund's investments, see "Determination of Net Asset
Value" in the Fund's Statement of Additional Information.

Systematic Investment Plan.

The Systematic Investment Plan permits investors to purchase shares of the Fund
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 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 the 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.

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<PAGE>

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 FBR 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 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."

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 the 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.

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<PAGE>

investments. If any amount remains in the fund from which the exchange is being
made, such amount must not drop below the minimum account value required by the
Trust.

Retirement Plans.

Redirected Distribution Option.

The redirected distribution option permits investment of investors' dividends
and distributions in shares of other funds in the FBR Family.

This privilege is available only for existing accounts and may not be used to
open new accounts. Minimum subsequent investments do not apply. The Fund 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, the
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 the 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 FBR Money Market Portfolio of The
RBB Fund, Inc.

The 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.

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<PAGE>

Procedures.

Shareholders may redeem shares in several ways.

Redemption through FBR or Authorized Dealers

Redemption through the Transfer Agent

Redemption in Writing

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. 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 $10,000. There is no maximum for proceeds sent by wire
transfer. The Fund may modify this redemption service at any time. A transaction
fee of $15.00 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

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<PAGE>

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.

Other Information on Redemptions

The Fund is 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

Redemption In-kind

The Fund reserves the right, if conditions exist which make cash payments
undesirable, to honor any request for redemption of the 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 the 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 Fund has elected, however, to be governed by Rule 18f-1 under the
1940 Act, so that the 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 the Fund.

Additional Information about Redemptions

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<PAGE>

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 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.

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,
the 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

Dividends, Distributions and Taxes

The 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. The 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

The Fund intends to qualify as a regulated investment company by satisfying the
requirements of Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Tax Code"). The 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 Tax Code, so that the Fund will not be subject to
federal income taxes or the 4% excise tax on undistributed income.

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Distributions by the 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 the relevant Fund and must be designated by
the Fund as so qualifying). Distributions by the 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 the Fund at a loss before
holding such shares for more than six months, the loss will 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 the 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 the 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. The 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, local, or foreign
taxes on his or her investment in the Fund, depending on the laws of the
shareholder's jurisdiction. Investors considering an investment in the 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 the 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 the 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.

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<PAGE>

Yield will be computed by dividing the 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 the 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., 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 the 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 the
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 the Fund will not be reflected in
performance calculations.

Fund Organization and Fees

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 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 Fund and is responsible for the
purchase and sale of the Fund's investments.

For the services provided and expenses incurred pursuant to the investment
advisory agreement between the Trust and the Adviser on behalf of the Fund, 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 the Fund. The investment
advisory fee paid by the

Fund 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

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<PAGE>

advisory fees for the Fund have been determined to be fair and reasonable in
light of the services provided to the Fund. The Adviser may periodically waive
all or a portion of its advisory fee with respect to the Fund.

Under the investment advisory agreement between the Trust, on behalf of the
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 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, and
the Adviser will be as fully responsible to the Fund for the acts and omissions
of such persons as it is for its own acts and omissions.

________________ is primarily responsible for the investment management of the
Fund and has been since its inception.

Distributor

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

Administrator

Under the terms of an Administration Agreement with the Trust on behalf of the
Fund, Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary of
the Bear Stearns Companies Inc., generally supervises certain operations of the
Fund, 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 , which would have the
effect of lowering the Fund's expense ratio and increasing yield to investors at
the time such amounts are waived or assumed, as the case may be. The Fund will
not pay BSFM at a later time for any amounts it may waive.

Under the terms of an Administration and Accounting Services Agreement with the
Trust on behalf of the Funds, PFPC Inc. provides certain administration and fund
accounting services to the Fund.

Custodian and Transfer Agent

Custodial Trust Company, a wholly-owned subsidiary of The Bear Stearns Companies
Inc., 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 Fund.

Distribution Plan

The 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"), the Fund pays the Distributor for distributing
Fund shares a fee at the annual rate of .25% of the average daily net assets of
the Fund. Distribution fees may be used by the Distributor for: (a) costs of
printing and distributing a Fund's prospectus, statement of additional
information and reports to prospective investors in the Fund; (b) costs

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<PAGE>

involved in preparing, printing and distributing sales literature pertaining to
a Fund; (c) an allocation of overhead and other branch office
distribution-related expenses of the Distributor; (d) payments to persons who
provide support services in connection with the distribution of a Fund's shares,
including but not limited to, office space and equipment, telephone facilities,
answering routine inquiries regarding a Fund, processing shareholder
transactions and providing any other shareholder services not otherwise provided
by a Fund's transfer agent; (e) accruals for interest on the amount of the
foregoing expenses that exceed the distribution fee; and (f) any other expense
primarily intended to result in the sale of a Fund's shares, including, without
limitation, payments to salesmen and selling dealers who have entered into
selected dealer agreements with the Distributor, at the time of the sale of
shares, if applicable, and continuing fees to each such salesmen and selling
dealers, which fee shall begin to accrue immediately after the sale of such
shares. 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.

Independent Accountants

Arthur Andersen LLP serves as independent accountants to the Fund.

Additional Information

The Trust may issue an unlimited number of shares and classes of the Fund.
Shares of each class of the Fund 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 the 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 Fund 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 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 the Fund transaction
involving the same security, and (iii) transactions involving securities being
considered for investment by the Fund. 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

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<PAGE>

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 the Fund shareholder would be extremely remote.

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, the Fund offers only the class of shares that
is offered by this Prospectus. Subsequent to the date of this Prospectus, the
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 the 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 the 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 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 Fund at the address listed on the cover page
of this Prospectus or by calling 800-821-3460.

Inquiries regarding the Trust or the Fund 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.

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<PAGE>

PART B

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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION

THE FBR FAMILY OF FUNDS

FBR FINANCIAL SERVICES FUND

FBR SMALL CAP FINANCIAL FUND

FBR SMALL CAP GROWTH/VALUE FUND

December ___, 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
Potomac Tower, 1001 Nineteenth Street North, Arlington, Virginia 22209, or by
telephoning toll free 888-888-0025.

TABLE OF CONTENTS

INVESTMENT OBJECTIVES AND POLICIES........................................... 2
INVESTMENT LIMITATIONS AND RESTRICTIONS..................................... 13
VALUATION OF PORTFOLIO SECURITIES............................................14
PERFORMANCE..................................................................15
ADDITIONAL REDEMPTION INFORMATION............................................17
DIVIDENDS & DISTRIBUTIONS....................................................17
TAXES........................................................................18
TRUSTEES & OFFICERS..........................................................19
ADVISORY & OTHER CONTRACTS...................................................20
ADDITIONAL INFORMATION.......................................................23
APPENDIX.....................................................................26

FINANCIAL STATEMENTS
INVESTMENT ADVISER FBR Fund Advisers, Inc.

DISTRIBUTOR
Friedman, Billings, Ramsey & Co., Inc.

ADMINISTRATORS
Bear Stearns Funds Management Inc.
PFPC Inc.

TRANSFER AGENT
PFPC Inc.

CUSTODIAN

Custodial 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
Financial Services Fund (the "Financial Services Fund"), FBR Small Cap Financial
Fund (the "Small Cap Financial Fund"), the FBR Information Technologies Fund
(the "Information Technologies Fund") and the FBR Small Cap Growth/Value Fund
(the "Growth/Value Fund", and collectively with the Small Cap Financial Fund,
Financial Services Fund and the Information Technologies Fund, the "Funds").
This Statement of Additional Information relates to each fund, except FBR
Information Technologies Fund. Currently, shares of the Information Technologies
Fund are not being offered. 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 - Financial Services Fund and Small Cap Financial
Fund

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

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 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.

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.

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<PAGE>

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 and is expected to continue to change. Factors expected to continue
driving change among the smaller capitalization issues include regulatory
changes, consolidation, mutual conversion activity, management changes,
residential loan demand, credit trends, interest rate movements and new business
development.

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

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.

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.

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<PAGE>

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 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

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<PAGE>

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.

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. The effect of owning instruments which do not make current interest
payments is that a fixed yield is earned not only on the 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.

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<PAGE>

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
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.

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

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<PAGE>

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.

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.

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<PAGE>

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 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.

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<PAGE>

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.

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

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<PAGE>

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 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.

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<PAGE>

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 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.

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<PAGE>

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 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

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<PAGE>

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.

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

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<PAGE>

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 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. The Growth/Value Fund will not
purchase these options with respect to more than 25% of the value of its net
assets.

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 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

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<PAGE>

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.

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 the 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

-15-

<PAGE>

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 the Financial Services Fund and the Small Cap Financial
Fund, purchase the securities of any issuer if, as a result, less than 25% of a
Fund's total assets would be invested in the securities of issuers principally
engaged in the financial services industry ; 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 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.

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.

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<PAGE>

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.

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.

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<PAGE>

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 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
-----
(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

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<PAGE>

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 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.

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<PAGE>

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

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
Internal Revenue Code of 1986, as amended (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 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

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<PAGE>

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 and redemption proceeds 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 Fund
by U.S. shareholders. 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 law and associated 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 five Trustees, three 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.

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

<S> <C> <C>
Eric F. Billings, 44* Chairman, Trustee, Vice-Chairman and Director, FBR Fund
Potomac Tower President, Chief Advisers, Inc., Friedman, Billings, Ramsey
1001 Nineteenth Street North Financial Officer and & Co., Inc., Friedman, Billings, Ramsey,
Arlington, Virginia 22209 Treasurer Investment Management, Inc. and FBR
Offshore Management Inc.

Thomas D. Eckert, 49 Trustee President and Chief Operating Officer, Pulte
Pulte Home North Home North, an operating company of the
2100 Reston Parkway, Ste 450 Pulte Home Corporation.
Reston, Virginia 20191

Patrick J. Keeley, 48 Trustee Partner in the law firm of Fulbright &
Fulbright & Jaworski, L.L.P. Jaworski, L.L.P.
801 Pennsylvania Avenue, N.W.
Washington, D.C. 20004

</TABLE>

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<PAGE>

<TABLE>

<S> <C> <C>
Mark S. Ordan, 37 Trustee Private investor since September 1996;
1626 East Jefferson Street formerly, Chairman and CEO, Fresh Fields
Rockville, Maryland 20852 Markets, from November 1989 to September

1996

W. Russell Ramsey, 36* Trustee, Vice President and Director, FBR Fund Advisers,
Potomac Tower President, and Inc., Friedman, Billings, Ramsey & Co.,
1001 Nineteenth Street North Secretary Inc., Friedman, Billings, Ramsey,
Arlington, Virginia 22209 Investment Management, Inc. and FBR
Offshore Management Inc.

</TABLE>
- ------------------------
* Messrs. Billings and Ramsey are deemed to be "interested persons" of
the Trust under the 1940 Act.

The Board of Trustees presently has an audit committee, a valuation committee,
and a nominating committee. The members of each committee are Messrs. Eckert,
Keeley and Ordan. 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 Independent Trustee receives a fee of $1,000 for each regular meeting and
$500 for each committee meeting attended plus expenses and $250 for each
telephonic meeting.

The officers of the Trust, their ages, addresses and 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
- ---------------------- --------------- -------------------

<S> <C> <C>
Eric F. Billings, 44 Chairman, Trustee, Vice-Chairman and Director, FBR Fund
Potomac Tower President, Chief Advisers, Inc., Friedman, Billings, Ramsey
1001 Nineteenth Street North Financial Officer and & Co., Inc., Friedman, Billings, Ramsey,
Arlington, Virginia 22209 Treasurer Investment Management, Inc. and FBR
Offshore Management Inc.

W. Russell Ramsey, 36 Trustee, Vice President and Director, FBR Fund Advisers,
Potomac Tower President, and Inc., Friedman, Billings, Ramsey & Co.,
1001 Nineteenth Street North Secretary Inc., Friedman, Billings, Ramsey,
Arlington, Virginia 22209 Investment Management, Inc. and FBR
Offshore Management Inc.

</TABLE>

The mailing address of each of the officers of the Trust is Potomac Tower, 1001
Nineteenth Street North, Arlington, Virginia 22209.

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

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<PAGE>

ADVISORY AND OTHER CONTRACTS

Investment Adviser.

FBR Fund Advisers, Inc. is the investment adviser to the Funds. The Adviser
directs the investment of the Funds' 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 Delaware corporation on September 13, 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 $200 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
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 sub- adviser. 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.

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<PAGE>

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 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

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<PAGE>

Under the terms of an Administration and Accounting Services Agreement with the
Trust on behalf of the Funds, PFPC Inc. provides certain administration and
accounting services to the Funds.

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. Neither of them has any
part in determining the investment policies of the Funds 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 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 the 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.

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 certain expenses relating to its operations; such expenses
include, but are not limited to, the following: 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 fees, fees and out-of-pocket expenses of the custodian,
administrators 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.

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<PAGE>

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 FBR Small Cap Financial Fund, the FBR
Financial Services Fund, the FBR Information Technologies 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.

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<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.

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<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.

Appendix - 1

<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)

Appendix - 2

<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.

Appendix - 3

<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.

Appendix - 4

<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.

Appendix - 5
<PAGE>

FBR Financial Services Fund, FBR Small Cap Financial Fund and
FBR Small Cap Growth/Value Fund of The FBR Family of Funds

STATEMENT OF ASSETS AND LIABILITIES
December 16, 1996
<TABLE>
<CAPTION>
FBR Financial FBR Small Cap FBR Small Cap
Assets: Services Fund Financial Fund Growth/Value Fund
------------- -------------- -----------------
<S> <C> <C> <C>
Cash in Bank ................................................... $ 33,333 $ 33,333 $ 33,334
Deferred organization expenses (Note 3) ........................ 71,667 71,667 71,666
-------- -------- --------
Total Assets ........................................................ 105,000 105,000 105,000
-------- -------- --------
Liabilities -- Organization expenses payable ........................ 71,667 71,667 71,666
-------- -------- --------
Net Assets (as to each Fund, equivalent to
$12.00 per share on 2,778 shares of beneficial
interest (no par value) outstanding with an
indefinite number of authorized shares
of beneficial interest) (Notes 1 and 2) .......................... $ 33,333 $ 33,333 $ 33,334
======== ======== ========
Net Asset Value and Redemption Price
per share of beneficial interest (Note 4) ........................ $ 12.00 $ 12.00 $ 12.00
======== ======== ========
</TABLE>
- ------------------------------------

(1) The FBR Family of Funds (the "Trust") is a registered open-end management
investment company organized under the laws of Delaware on April 30, 1996.
The Trust currently has four separate portfolios registered under the
Investment Company Act of 1940, as amended, of which the three portfolios
indicated above are expected to commence operations on or about January 2,
1997. To date, the Trust has not had any transactions other than those
relating to organizational matters and the sale of 2,778 shares of
beneficial interest each in FBR Financial Services Fund, FBR Small Cap
Financial Fund and FBR Small Cap Growth/Value Fund (collectively, the
"Funds") to Friedman, Billings, Ramsey and Co., Inc. (the "Distributor").

(2) FBR Fund Advisers, Inc. will serve as investment adviser (the "Adviser") to
the Funds. The Adviser, an affiliate of Friedman, Billings, Ramsey & Co.,
Inc.) is entitled to receive annual advisory fees, which are paid monthly,
of 0.90% of the average daily net assets of each of the Funds. The Adviser
may periodically waive all or a portion of its advisory fee with respect to
the Funds.

The Trust has entered into a Distribution Agreement with the Distributor on
behalf of each of the Funds. Certain officers and/or Trustees of the Fund
are officers and/or directors of the Distributor.

(3) Deferred organization expenses will be amortized over a period from the
date each of the Funds commence operations not exceeding sixty months. In
the event that the Funds' initial shareholder or any transferee of the
Funds' initial shareholder redeems any of its original shares prior to the
end of the sixty month period, the proceeds of the redemption payable in
respect of such shares shall be reduced by the pro rata share (based on the
proportionate share of original shares outstanding at the time of
redemption) of the unamortized deferred organization expenses as of the
date of such redemption. In the event that the Funds are liquidated prior
to the end of the sixty month period, the Funds' initial shareholder or the
transferee of the Funds' initial shareholder shall bear the unamortized
deferred organization expenses.

(4) Shares held 90 days or less may be subject to a 1.00% redemption fee
(expressed as a percentage of redemption amount).

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and Board of Trustees of
The FBR Family of Funds:

We have audited the accompanying statements of assets and liabilities of the FBR
Financial Services Fund, the FBR Small Cap Financial Fund, and the FBR Small Cap
Growth/Value Fund each of which is a series of The FBR Family of Funds (a
Delaware business trust, the "Trust") as of December 16, 1996. These financial
statements are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial presentation. We believe
that our audit provides a reasonable basis for our opinion.

In our opinion, the statements of assets and liabilities referred to above
present fairly, in all material respects, the financial position of the FBR
Financial Services Fund, the FBR Small Cap Financial Fund, and the FBR Small Cap
Growth/Value Fund as of December 16, 1996, in conformity with generally accepted
accounting principles.

/s/Arthur Andersen & Co. LLP
----------------------------

Washington, D. C.
December 17, 1996

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

THE FBR FAMILY OF FUNDS

FBR INFORMATION TECHNOLOGIES FUND

December __, 1996

This Statement of Additional Information is not a Prospectus, but should be read
in conjunction with the Prospectus of The FBR Information Technologies Fund,
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 Potomac Tower, 1001 Nineteenth Street North, Arlington, Virginia
22209, or by telephoning toll free 888-888-0025.

TABLE OF CONTENTS

INVESTMENT OBJECTIVE AND POLICIES......................................... 2
INVESTMENT LIMITATIONS AND RESTRICTIONS.................................... 13
VALUATION OF PORTFOLIO SECURITIES.......................................... 14
PERFORMANCE................................................................ 15
ADDITIONAL REDEMPTION INFORMATION.......................................... 17
DIVIDENDS & DISTRIBUTIONS.................................................. 17
TAXES...................................................................... 18
TRUSTEES & OFFICERS........................................................ 19
ADVISORY & OTHER CONTRACTS................................................. 20
ADDITIONAL INFORMATION..................................................... 23
APPENDIX................................................................... 28

FINANCIAL STATEMENTS

INVESTMENT ADVISER
FBR Fund Advisers, Inc.

DISTRIBUTOR
Friedman, Billings, Ramsey & Co., Inc.

ADMINISTRATORS
Bear Stearns Funds Management Inc.
PFPC Inc.

TRANSFER AGENT
PFPC Inc.

CUSTODIAN

Custodial 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
Financial Services Fund, the FBR Small Cap Financial Fund, the FBR Information
Technologies Fund and the FBR Small Cap Growth/Value Fund. This Statement of
Additional Information relates to the FBR Information Technologies Fund (the
"Fund") only. 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 Fund should be made without first reading the Fund's Prospectus.

INVESTMENT OBJECTIVES AND POLICIES

Additional Fund Descriptions.

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 the Fund set
forth in the Prospectus. The 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.

-2-

<PAGE>

at a stated or determinable exchange ratio into underlying shares of common
stock. The 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, the 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.

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 the Fund. The
payment of principal and interest on structured securities may be largely
dependent on the cash flows generated by the underlying financial assets.

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
the 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 Fund is not limited to any particular form of swap agreement if the Adviser
determines it is consistent with the Fund's investment objective and policies.

Swap agreements will tend to shift the Fund's investment exposure from one type
of investment to another. For example, if the 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

-3-

<PAGE>

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 the 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 the Fund, the Fund must be prepared to make such payments when due.
In addition, if the counterparty's creditworthiness declined, the value of a
swap agreement would be likely to decline, potentially resulting in losses. The
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.

The Fund will maintain appropriate liquid assets in a segregated custodial
account to cover its current obligations under swap agreements. If the 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 Fund 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.

Receipts. The Fund 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").

-4-

<PAGE>

Resolution Funding Corporation (REFCORP) can also be stripped in this fashion.
REFCORP Strips are eligible investments for the Fund.

Zero Coupon Bonds. The Fund is 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. The effect of owning instruments which do not make current interest
payments is that a fixed yield is earned not only on the 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 the 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.

Foreign Investment. The Fund may, subject to its 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
Fund 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 Fund will acquire such securities only when the Adviser believes the risk
associated with such investments are minimal.

Foreign Currency Transactions. The 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. The 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

-5-

<PAGE>

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 the
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.

The 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
Fund. The Fund may also use swap agreements, indexed securities, and options and
futures contracts relating to foreign currencies for the same purposes.

When the 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, the 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 Fund
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 Fund may also use forward contracts to hedge against a decline in the value
of existing investments denominated in foreign currency. For example, if the
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.

The 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.

The 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 the 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 Fund will
segregate assets to cover currency forward contracts, if any, whose purpose is
essentially speculative. The Fund will not segregate assets to cover forward
contracts entered into for hedging purposes, including settlement hedges,
position hedges, and proxy hedges.

-6-

<PAGE>

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 the 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.

Repurchase Agreements. Under the terms of a repurchase agreement, the 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. The seller is required to maintain the value of
collateral held pursuant to the agreement 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, the 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 Fund intends to enter
into reverse repurchase agreements only to avoid otherwise selling securities
during unfavorable market conditions to meet redemptions. At the time the 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 the 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 the Fund under the 1940 Act.

Lower-Rated Debt Securities. The Fund 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.

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 Fund. In considering investments
for the Fund, 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.

-7-

<PAGE>

The 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 the Fund's investments and, through reports
from the Adviser, the Board monitors investments in illiquid instruments. In
determining the liquidity of the Fund's investments, the Adviser may 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 the Fund's rights and obligations
relating to the investment). Investments currently considered by the Fund 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, the 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 Fund 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 Fund 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 Fund 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.

-8-

<PAGE>

developments. There is no assurance that the Adviser will be able to anticipate
these potential events or counter their effects.

The Fund 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.

Futures Contracts. The Fund 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.

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. The 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, the 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, the
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.

-9-

<PAGE>

The 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. The 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. The 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 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 the Fund, has undertaken to restrict its futures
contract trading as follows: first, the Fund will not engage in transactions in
futures contracts for speculative purposes; second, the 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, the Fund will
disclose to all prospective shareholders the purpose of and limitations on its
commodity futures trading; fourth, the 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 the 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 the 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 the Fund "covers" a long
position. For example, instead of segregating assets, the 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 the 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. The
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. The 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 the 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, the 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

-10-

<PAGE>

them. The 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 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 the 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 the 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 the 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 the 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 Fund 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. The 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.

In return for the premium received when it writes a covered call option, the
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.

The Fund may terminate a call option that it has written before it expires by
entering into a closing purchase transaction. The 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.

-11-

<PAGE>

Covered Put Options. The 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, the 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 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.

The 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. The 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.

The 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.

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

Options on Foreign Securities. The Fund may purchase and sell options on foreign
securities if the 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 the Fund's Adviser will not forecast interest
rate or market movements correctly, that the 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 the 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, the 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.

-12-

<PAGE>

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 Fund's ability to purchase or sell options on particular
securities.

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

Special Expiration Price Options

The Fund may purchase over-the-counter ("OTC") puts and calls with respect to
specified securities ("special expiration price options") pursuant to which the
Fund 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 the Fund's profits if the special expiration price
options are exercised. The 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 Fund 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. The Fund will not purchase these options
with respect to more than 25% of the value of its net assets.

Short Sales. The Fund may seek to hedge investments or realize additional gains
through short sales. Short sales are transactions in which the 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. The Fund also will
incur transaction costs in effecting short sales.

The 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

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<PAGE>

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. The Fund may lend its portfolio securities to
broker-dealers, banks or institutional borrowers of securities. The 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 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. The 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.
The Fund will limit its securities lending to 33 1/3% of total assets.

Investment Company Securities. The 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 the 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. The Fund may purchase securities on a when-issued or
delayed delivery basis. These transactions are arrangements in which the Fund
purchases securities with payment and delivery scheduled for a future time. When
the 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. The 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. The 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 the 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 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).

The 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 the
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 the Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business). Investments by the Fund in
securities backed by mortgages on real estate or in marketable securities of
companies engaged in such activities are not hereby precluded.

-14-

<PAGE>

3. Issue any senior security (as defined in the Investment Company Act of 1940,
as amended (the "1940 Act")), except that (a) the 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) the 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, the Fund may borrow money as authorized by the
1940 Act.

4. Borrow money, except that (a) the 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)
the 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 the Fund's total assets must be
repaid before the Fund may make additional investments.

6. Underwrite securities issued by others, except to the extent that the 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 50% 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. Purchase the securities of any issuer if, as a result, less than 25% of a
Fund's total assets would be invested in the securities of issuers principally
engaged in the information technology 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. The Fund will not 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. The Fund will not 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. The Fund will not 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 the 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. The Fund will not 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

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<PAGE>

contracts and related options, in the manner otherwise permitted by the
investment restrictions, policies and investment program of the Fund.

5. The Fund may not 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 the 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 the 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 the 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 Fund's 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 Fund's
shares.

PERFORMANCE

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<PAGE>

Yield and total return information may be useful to investors in reviewing the
Fund's performance. The 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 the 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. The 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:

6
Standardized Yield = 2 [(a-b + 1)^ - 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
of the period, 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 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 the 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.

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<PAGE>

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.

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

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

From time to time the 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
the 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 the 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.

-18-

<PAGE>

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, the Fund's yield
or performance may not provide for comparison with 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 the Fund intends to redeem shares in cash, the Fund
reserves the right under certain circumstances to pay the redemption price in
whole or in part by a distribution of securities from the 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 Fund elected to be
governed by Rule 18F-1 of the 1940 Act under which the Fund is obligated to
redeem shares for any one shareholder in cash only up to the lesser of $250,000
or 1% of the 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 the 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

The Fund ordinarily declares and pays dividends from its net investment income.
The 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 the Fund's portfolio.

For this purpose, the net income of the 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 the 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

It is the policy of the Fund to seek to qualify for the favorable tax treatment
accorded regulated investment companies ("RICs") under Subchapter M of the
Internal Revenue Code of 1986, as amended (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

-19-

<PAGE>

respect to each taxable year, the 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, the 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 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 the Fund may engage in short-term
trading and concentrate investments. If the 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.

Certain investment and hedging activities of the 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 the 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 Funds and their shareholders.

The Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends and redemption proceeds 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 U.S. purchasers of shares of the
Fund. No attempt has been made to present a complete explanation of the federal
tax treatment of the Fund or its shareholders, and this discussion is not
intended as a substitute for careful tax planning. Accordingly, potential
purchasers of shares of the 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 law and associated regulations may be changed by
legislative, judicial or administrative action, sometimes with retroactive
effect.

TRUSTEES AND OFFICERS

Board of Trustees.

-20-

<PAGE>

currently five Trustees, three 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.

The Trustees of the Trust, their addresses, ages and their principal occupations
during the past five years are as follows:
<TABLE>
<CAPTION>
Position(s) Held Principal Occupation
Name, Address and Age With the Trust During Past 5 Years
- --------------------- -------------- -------------------
<S> <C> <C>

Eric F. Billings, 44* Chairman, Trustee, Vice-Chairman and Director, FBR Fund
Potomac Tower President, Chief Advisers, Inc., Friedman, Billings,
1001 Nineteenth Street North Financial Officer and Ramsey & Co., Inc., Friedman,
Arlington, Virginia 22209 Treasurer Billings, Ramsey, Investment
Management, Inc. and FBR Offshore
Management, Inc.

Thomas D. Eckert, 49 Trustee President and Chief Operating Officer,
Pulte Home North Pulte Home North, an operating
2100 Reston Parkway, Ste 450 company of the Pulte Home Corporation
Reston, Virginia 20191

Patrick J. Keeley, 48 Trustee Partner in the law firm of Fulbright &
Fulbright & Jaworski, L.L.P. Jaworski, L.L.P.
801 Pennsylvania Avenue, N.W.
Washington, D.C. 20004

Mark S. Ordan, 37 Trustee Private investor since September 1996;
1626 East Jefferson Street formerly, Chairman and CEO, Fresh
Rockville, Maryland 20852 Fields Markets, from November 1989 to

September 1996

W. Russell Ramsey, 36* Trustee, Vice President, President and Director, FBR Fund
Potomac Tower and Secretary Advisers, Inc., Friedman, Billings,
1001 Nineteenth Street North Ramsey & Co., Inc., Friedman,
Arlington, Virginia 22209 Billings, Ramsey, Investment
Management, Inc. and FBR Offshore
Management, Inc.
</TABLE>
- ------------------------
* Messrs. Billings and Ramsey are deemed to be "interested persons" of the
Trust under the 1940 Act.
The Board of Trustees presently has an audit committee, a valuation committee,
and a nominating committee. The members of each committee are Messrs. Eckert,
Keeley and Ordan. 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 Independent Trustee receives a fee of $1,000 for each regular meeting and
$500 for each committee meeting attended plus expenses and $250 for each
telephonic meeting.

-21-

<PAGE>

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

Position(s) Held Principal Occupation
Name, Address and Age With the Trust During Past 5 Years
- --------------------- -------------- -------------------
<S> <C> <C>
Eric F. Billings, 44 Chairman, Trustee, Vice-Chairman and Director, FBR Fund
Potomac Tower President, Chief Advisers, Inc., Friedman, Billings, Ramsey
1001 Nineteenth Street North Financial Officer and & Co., Inc., Friedman, Billings, Ramsey,
Arlington, Virginia 22209 Treasurer Investment Management, Inc. and FBR
Offshore Management, Inc.

W. Russell Ramsey, 36 Trustee, Vice President and Director, FBR Fund
Potomac Tower President, and Advisers, Inc., Friedman, Billings, Ramsey
1001 Nineteenth Street North Secretary & Co., Inc., Friedman, Billings, Ramsey,
Arlington, Virginia 22209 Investment Management, Inc. and FBR
Offshore Management, Inc.

</TABLE>

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's investments.

The Investment Advisory Agreement.

Unless sooner terminated, the Investment Advisory Agreement between the Adviser
and the Trust on behalf of the Fund (the "Investment Advisory Agreement")
provides that it will continue in effect as to the 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 the Fund (as defined under "Additional
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 the 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 the 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.

-22-

<PAGE>

Under the Investment Advisory Agreement, the Adviser may delegate a portion of
its responsibilities to a sub-adviser. 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
the Fund's investment objective and restrictions, which securities are to be
purchased and sold by the 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, the 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 the 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, the 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 the 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 the Fund invests. When a purchase or sale of the
same security is made at substantially the same time on behalf of the 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 instances, this investment procedure may affect the
price paid or received by the 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 the 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 the 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.

-23-

<PAGE>

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 Fund's 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

From time to time, BSFM may waive receipt of its fees which would have the
effect of lowering the Fund's expense ratio and increasing yield to investors at
the time such amounts are waived or assumed, as the case may be. The Fund will
not pay BSFM at a later time for any amounts it may waive.

Under the terms of an Administration and Accounting Services Agreement with the
Trust on behalf of the Fund, PFPC Inc. provides certain administration and
accounting services to the Funds.

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 Fund's transfer agent, dividend
disbursing agent and registrar (the "Transfer Agent"). The Transfer Agent also
provides certain administrative services to the Fund. 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 Fund.

Distribution Plan

Under a plan adopted by the Trust's Board of Trustees pursuant to Rule 12b-1
under the 1940 Act (the "Plan"), the 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 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 the Fund and
its shareholders. The Plan will continue in effect from year to year if
specifically approved annually (a) by the majority of the 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 the 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.

-24-

<PAGE>

Independent Accountants

Arthur Andersen LLP serves as independent accountants to the Fund.

Legal Counsel.

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

Expenses.

The Fund bears certain expenses relating to its operations; such expenses
include, but are not limited to, the following: 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 fees, fees and out-of-pocket expenses of the custodian,
administrators 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.

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 FBR Small Cap Financial Fund, the FBR
Financial Services Fund, the FBR information Technologies 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 the 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.

-25-

<PAGE>

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.

Shareholder and Trustee Liability.

Miscellaneous.

-26-

<PAGE>

As used in the Prospectus and in this Statement of Additional Information, a
"vote of a majority of the outstanding shares" of the 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.

-27-

<PAGE>

APPENDIX

Description of Security Ratings.

Long-Term Debt Ratings (may be assigned, for example, to corporate and municipal
bonds).

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.

Appendix - 1

<PAGE>

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.

Appendix - 2

<PAGE>

Short-Term Debt Ratings (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit)

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

- 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.

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."

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.

Appendix - 3

<PAGE>

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.

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.

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.

Appendix - 4

<PAGE>

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

Definitions of Certain Money Market Instruments.

Appendix - 5

<PAGE>

PART C. OTHER INFORMATION

ITEM 24. Financial Statements and Exhibits

(a) Financial statements.

In Part A:

None.

In Part B:

Statement of Assets and Liabilities as of December 16, 1996

In Part C:

None.

(b) Exhibits

EX-99.B1(a) Certificate of Trust. 1

EX-99.B1(b) Delaware Trust Instrument dated April 30, 1996. 1

EX-99.B2 Bylaws.1

EX-99.B3 None.

EX-99.B4 None.

EX-99.B5 Form of Investment Advisory Agreement between the
Registrant and FBR Fund Advisers, Inc. 2

EX-99.B6(a)
Form of Distribution Agreement between the Registrant and
Friedman, Billings, Ramsey & Co., Inc. 2

EX-99.B6(b) Form of Selected Dealer Agreement. 2

EX-99.B7 None.

EX-99.B8(a)
Form of Custodian Agreement between the Registrant and
Custodial Trust Company.

EX-99.B8(b) Form of Sub-Custodian Agreement between Custodial Trust
Company and Citibank N.A. 2

EX-99.B9(a) Form of Administration Agreement between the Registrant
and Bear Stearns Funds Management Inc. 2

EX-99.B9(b) Form of Administration and Accounting Services Agreement
between the Registrant and PFPC Inc. 2

EX-99.B9(c) Form of Transfer Agency Services Agreement between the
Registrant and PFPC Inc. 2

C-1

<PAGE>

EX-99.B10(a) Opinion of Kramer, Levin, Naftalis & Frankel. 2

EX-99.B10(b) Opinion of Morris, Nichols, Arsht & Tunnell. 2

EX-99.B11(a) Consent of Kramer, Levin, Naftalis & Frankel. 2

EX-99.B11(b) Consent of Arthur Andersen LLP. 2

EX-99.B12 None.

EX-99.B13 Investment Letters. 2

EX-99.B14 None.

EX-99.B15 (a) Form of Rule 12b-1 Distribution Plan. 2

EX-99.B16 Forms of performance computation. 1

EX-99.B17 None.

EX-99.B18 None.

EX-99.B19 Powers of Attorney

1 Incorporated by reference to the Registrant's Registration Statement
on Form N-1A as filed on June 11, 1996.

2 Filed herewith.

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 December 1, 1996

Financial Services Fund 0

Small Cap Financial Fund 0

Small Cap Growth/Value Fund 0

Information Technologies Fund 0

C-2

<PAGE>

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:

(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

C-3

<PAGE>

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.

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.

C-4

<PAGE>

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

<S> <C> <C>
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

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

</TABLE>

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

C-5

<PAGE>

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.

(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-6

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this amendment to
the Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Arlington, and the State
of Virginia on this 13th day of December, 1996.

THE FBR FAMILY OF FUNDS

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

As required by the Securities Act of 1933, this amendment to the
Registration Statement has been signed by the following persons in the
capacities indicated on the 13th day of December, 1996.

/s/Eric F. Billing Chairman, Trustee, President,
- -------------------- Chief Financial Officer and Treasurer
Eric F. Billings

/s/Thomas D. Eckert Truste
- -------------------
Thomas D. Eckert

/s/Patrick J. Keeley Trustee
- -------------------
Patrick J. Keeley

/s/Mark Ordan Trustee
- -------------------
Mark Ordan

/s/W. Russell Ramsey Trustee, Vice President and
- -------------------
W. Russell Ramsey Secretary

C-7

<PAGE>

EXHIBIT INDEX

EX-99.B5 Form of Investment Advisory Agreement.

EX-99.B6(a) Form of Distribution Agreement.

EX-99.B6(b) Form of Selected Dealer Agreement.

EX-99.B8(a) Form of Custodian Agreement.

EX-99.B8(b) Form of Sub-Custodian Agreement.

EX-99.B9(a) Form of Administration Agreement.

EX-99.B9(b) Form of Administration and Accounting Services Agreement.

EX-99.B9(c) Form of Transfer Agency Services Agreement.

EX-99.B10(a) Opinion of Kramer, Levin, Naftalis & Frankel.

EX-99.B10(b) Opinion of Morris, Nichols, Arsht & Tunnell.

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

EX-99.B11(b) Consent of Arthur Andersen LLP.

EX-99.B13 Investment Letter.

EX-99.B15(a) Form of Rule 12b-1 Distribution Plan.

EX-99.B19 Powers of Attorney

C-8

FORM OF

INVESTMENT ADVISORY AGREEMENT
between
THE FBR FAMILY OF FUNDS
and
FBR FUND ADVISERS, INC.

AGREEMENT made as of the ___ day of _______, 1996, by and between The FBR Family
of Funds, a Delaware business trust which may issue one or more series of shares
of beneficial interest (the "Trust"), and FBR Fund Advisers, Inc., a Delaware
corporation (the "Adviser").

WHEREAS, the Trust is registered as an open-end, management investment
company under the Investment Trust Act of 1940, as amended (the "1940 Act"); and

WHEREAS, the Trust desires to retain the Adviser to furnish investment
advisory services to the funds listed on Schedule A (each, a "Fund" and
collectively, the "Funds"), and the Adviser represents that it is willing and
possesses legal authority to so furnish such services;

NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed between the parties hereto as follows:

1. Appointment.

(a) General. The Trust hereby appoints the Adviser to act as
investment adviser to the Funds for the period and on the terms
set forth in this Agreement. The Adviser accepts such appointment
and agrees to furnish the services herein set forth for the
compensation herein provided.

(b) Employees of Affiliates. The Adviser may, in its discretion,
provide such services through its own employees or the employees
of one or more affiliated companies that are qualified to act as
an investment adviser to the Trust under applicable laws;
provided that (i) all persons, when providing services hereunder,
are functioning as part of an organized group of persons, and
(ii) such organized group of persons is managed at all times by
authorized officers of the Adviser.

(c) Sub-Advisers. It is understood and agreed that the Adviser may
from time to time employ or associate with such other entities or
persons as the Adviser believes appropriate to assist in the
performance of this Agreement with respect to a particular Fund
or Funds (each a "Sub-Adviser"), and that any such Sub-Adviser
shall have all of the rights and powers of the Adviser set forth
in this Agreement; provided that a Fund shall not pay any
additional compensation for any Sub-Adviser and the Adviser shall
be as fully responsible to the Trust for the acts and omissions
of the Sub-Adviser as it is for its own acts and omissions; and
provided further that the retention of any Sub-Adviser shall be
approved in advance by (i)
<PAGE>

the Board of Trustees of the Trust and (ii) the shareholders of
the relevant Fund if required under any applicable provisions of
the 1940 Act. The Adviser will review, monitor and report to the
Trust's Board of Trustees regarding the performance and
investment procedures of any Sub-Adviser. In the event that the
services of any Sub-Adviser are terminated, the Adviser may
provide investment advisory services pursuant to this Agreement
to the Fund without a Sub-Adviser and without further shareholder
approval, to the extent consistent with the 1940 Act. A
Sub-Adviser may be an affiliate of the Adviser.

2. Delivery of Documents. The Trust has delivered to the Adviser copies
of each of the following documents along with all amendments thereto through the
date hereof, and will promptly deliver to it all future amendments and
supplements thereto, if any:

(a) the Trust's Trust Instrument;

(b) the Bylaws of the Trust;

(d) the Trust's Registration Statement under the Securities Act of
1933, as amended (the "1933 Act"), and the 1940 Act, on Form N-1A
as filed with the Securities and Exchange Commission (the
"Commission");

(e) Notification of Registration of the Trust under the 1940 Act on
Form N-8A as filed with the Commission; and

(f) the currently effective Prospectus and Statement of Additional
Information of the Funds.

3. Investment Advisory Services.

(a) Management of the Funds. The Adviser hereby undertakes to act as
investment adviser to the Funds. The Adviser shall regularly
provide investment advice to the Funds and continuously supervise
the investment and reinvestment of cash, securities and other
property composing the assets of the Funds and, in furtherance
thereof, shall:

(i) superise all aspects of the operations of the Trust and
each Fund;

(ii) obtain and evaluate pertinent economic, statistical and
financial data, as well as other significant events and
developments, which affect the economy generally, the Funds'
investment programs, and the issuers of securities included
in the Funds' portfolios and the industries in which they
engage, or which may relate to securities or other
investments which the Adviser may deem desirable for
inclusion in a Fund's portfolio;

2
<PAGE>

(iii) determine which issuers and securities shall be included
in the portfolio of each Fund;

(iv) furnish a continuous investment program for each Fund;

(v) in its discretion and without prior consultation with
the Trust, buy, sell, lend and otherwise trade any
stocks, bonds and other securities and investment
instruments on behalf of each Fund; and

(vi) take, on behalf of each Fund, all actions the Adviser
may deem necessary in order to carry into effect such
investment program and the Adviser's functions as
provided above, including the making of appropriate
periodic reports to the Trust's Board of Trustees.

(b) Covenants. The Adviser shall carry out its investment advisory
and supervisory responsibilities in a manner consistent with
the investment objectives, policies, and restrictions provided
in: (i) each Fund's Prospectus and Statement of Additional
Information as revised and in effect from time to time; (ii)
the Trust's Trust Instrument, Bylaws or other governing
instruments, as amended from time to time; (iii) the 1940 Act;
(iv) other applicable laws; and (v) such other investment
policies, procedures and/or limitations as may be adopted by
the Trust with respect to a Fund and provided to the Adviser
in writing. The Adviser agrees to use reasonable efforts to
manage each Fund so that it will qualify, and continue to
qualify, as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended, and
regulations issued thereunder (the "Code"), except as may be
authorized to the contrary by the Trust's Board of Trustees.
The management of the Funds by the Adviser shall at all times
be subject to the review of the Trust's Board of Trustees.

(c) Books and Records. Pursuant to applicable law, the Adviser
shall keep each Fund's books and records required to be
maintained by, or on behalf of, the Funds with respect to
advisory services rendered hereunder. The Adviser agrees that
all records which it maintains for a Fund are the property of
the Fund and it will promptly surrender any of such records to
the Fund upon the Fund's request. The Adviser further agrees
to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act any such records of the Fund required to be preserved
by such Rule.

(d) Reports, Evaluations and other Services. The Adviser shall
furnish reports, evaluations, information or analyses to the
Trust with respect to the Funds and in connection with the
Adviser's services hereunder as the Trust's Board of Trustees
may request from time to time or as the Adviser may otherwise
deem to be desirable. The Adviser shall make recommendations
to the Trust's Board of Trustees with respect to Trust
policies, and shall carry out such policies as are adopted by
the Board of Trustees. The Adviser shall, subject to review by
the Board of Trustees, furnish such other services as the
Adviser shall from time to

3
<PAGE>

time determine to be necessary or useful to perform its
obligations under this Agreement.

(e) Purchase and Sale of Securities. The Adviser shall place all
orders for the purchase and sale of portfolio securities for
each Fund with brokers or dealers selected by the Adviser,
which may include brokers or dealers affiliated with the
Adviser to the extent permitted by the 1940 Act and the
Trust's policies and procedures applicable to the Funds. The
Adviser shall use its best efforts to seek to execute
portfolio transactions at prices which, under the
circumstances, result in total costs or proceeds being the
most favorable to the Funds. In assessing the best overall
terms available for any transaction, the Adviser shall
consider all factors it deems relevant, including the breadth
of the market in the security, the price of the security, the
financial condition and execution capability of the broker or
dealer, research services provided to the Adviser, and the
reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis. In no event
shall the Adviser be under any duty to obtain the lowest
commission or the best net price for any Fund on any
particular transaction, nor shall the Adviser be under any
duty to execute any order in a fashion either preferential to
any Fund relative to other accounts managed by the Adviser or
otherwise materially adverse to such other accounts.

(f) Selection of Brokers or Dealers. In selecting brokers or
dealers qualified to execute a particular transaction, brokers
or dealers may be selected who also provide brokerage and
research services (as those terms are defined in Section 28(e)
of the Securities Exchange Act of 1934) to the Adviser, the
Funds and/or the other accounts over which the Adviser
exercises investment discretion. The Adviser is authorized to
pay a broker or dealer who provides such brokerage and
research services a commission for executing a portfolio
transaction for a Fund which is in excess of the amount of
commission another broker or dealer would have charged for
effecting that transaction if the Adviser determines in good
faith that the total commission is reasonable in relation to
the value of the brokerage and research services provided by
such broker or dealer, viewed in terms of either that
particular transaction or the overall responsibilities of the
Adviser with respect to accounts over which it exercises
investment discretion. The Adviser shall report to the Board
of Trustees of the Trust regarding overall commissions paid by
the Funds and their reasonableness in relation to the benefits
to the Funds.

(g) Aggregation of Securities Transactions. In executing portfolio
transactions for a Fund, the Adviser may, to the extent
permitted by applicable laws and regulations, but shall not be
obligated to, aggregate the securities to be sold or purchased
with those of other Funds or its other clients if, in the
Adviser's reasonable judgment, such aggregation (i) will
result in an overall economic benefit to the Fund, taking into
consideration the advantageous selling or purchase price,
brokerage commission and other expenses, and trading
requirements, and (ii) is not inconsistent with the policies
set forth in the Trust's registration

<PAGE>

statement and the Fund's Prospectus and Statement of
Additional Information. In such event, the Adviser will
allocate the securities so purchased or sold, and the expenses
incurred in the transaction, in an equitable manner,
consistent with its fiduciary obligations to the Fund and such
other clients.

4. Representations and Warranties.

(a) The Adviser hereby represents and warrants to the Trust as follows:

(i) The Adviser is a corporation duly organized and in good
standing under the laws of the State of Virginia and is fully
authorized to enter into this Agreement and carry out its
duties and obligations hereunder.

(ii) The Adviser is registered as an investment adviser with the
Commission under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"), and is registered or licensed as
an investment adviser under the laws of all applicable
jurisdictions. The Adviser shall maintain such registrations
or licenses in effect at all times during the term of this
Agreement.

(iii) The Adviser at all times shall provide its best judgment and
effort to the Trust in carrying out the Adviser's obligations
hereunder.

(b) The Trust hereby represents and warrants to the Adviser as follows:

(i) The Trust has been duly organized as a business trust under
the laws of the State of Delaware and is authorized to enter
into this Agreement and carry out its terms.

(ii) The Trust is registered as an investment company with the
Commission under the 1940 Act and shares of each Fund are
registered for offer and sale to the public under the 1933 Act
and all applicable state securities laws where currently sold.
Such registrations will be kept in effect during the term of
this Agreement.

5. Compensation. As compensation for the services which the Adviser is
to provide or cause to be provided pursuant to Paragraph 3, each Fund shall pay
to the Adviser out of Fund assets an annual fee, computed and accrued daily and
paid in arrears on the first business day of every month, at the rate set forth
opposite each Fund's name on Schedule A, which shall be a percentage of the
average daily net assets of the Fund (computed in the manner set forth in the
Fund's most recent Prospectus and Statement of Additional Information)
determined as of the close of business on each business day throughout the
month. At the request of the Adviser,

<PAGE>

some or all of such fee shall be paid directly to a Sub-Adviser. The fee for any
partial monthunder this Agreement shall be calculated on a proportionate basis.
In the event that the total expenses of a Fund exceed the limits on investment
company expenses imposed by any statute or any regulatory authority of any
jurisdiction in which shares of such Fund are qualified for offer and sale, the
Adviser will bear the amount of such excess, except: (i) the Adviser shall not
be required to bear such excess to an extent greater than the compensation due
to the Adviser for the period for which such expense limitation is required to
be calculated unless such statute or regulatory authority shall so require, and
(ii) the Adviser shall not be required to bear the expenses of the Fund to an
extent which would result in the Fund's or Trust's inability to qualify as a
regulated investment company under the provisions of Subchapter M of the Code.

6. Interested Persons. It is understood that, to the extent consistent
with applicable laws, the Trustees, officers and shareholders of the Trust are
or may be or become interested in the Adviser as directors, officers or
otherwise and that directors, officers and shareholders of the Adviser are or
may be or become similarly interested in the Trust.

7. Expenses. As between the Adviser and the Funds, the Funds will pay
for all their expenses other than those expressly stated to be payable by the
Adviser hereunder, which expenses payable by the Funds shall include, without
limitation, (i) interest and taxes; (ii) brokerage commissions and other costs
in connection with the purchase or sale of securities and other investment
instruments, which the parties acknowledge might be higher than other brokers
would charge when a Fund utilizes a broker which provides brokerage and research
services to the Adviser as contemplated under Paragraph 3 above; (iii) fees and
expenses of the Trust's Trustees that are not employees of the Adviser; (iv)
legal and audit expenses; (v) administrator, custodian, pricing and bookkeeping,
registrar and transfer agent fees and expenses; (vi) fees and expenses related
to the registration and qualification of the Funds' shares for distribution
under state and federal securities laws; (vii) expenses of printing and mailing
reports and notices and proxy material to shareholders, unless otherwise
required; (viii) all other expenses incidental to holding meetings of
shareholders, including proxy solicitations therefor, unless otherwise required;
(ix) expenses of typesetting for printing Prospectuses and Statements of
Additional Information and supplements thereto; (x) expenses of printing and
mailing Prospectuses and Statements of Additional Information and supplements
thereto sent to existing shareholders; (xi) insurance premiums for fidelity
bonds and other coverage to the extent approved by the Trust's Board of
Trustees; (xii) association membership dues authorized by the Trust's Board of
Trustees; and (xiii) such non-recurring or extraordinary expenses as may arise,
including those relating to actions, suits or proceedings to which the Trust is
a party (or to which the Funds' assets are subject) and any legal obligation for
which the Trust may have to provide indemnification to the Trust's Trustees and
officers.

8. Non-Exclusive Services; Limitation of Adviser's Liability. The
services of the Adviser to the Funds are not to be deemed exclusive and the
Adviser may render similar services to others and engage in other activities.
The Adviser and its affiliates may enter into other agreements with the Funds
and the Trust for providing additional services to the Funds and

<PAGE>

the Trust which are not covered by this Agreement, and to receive additional
compensation for suchservices. In the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of obligations or duties hereunder on the
part of the Adviser, or a breach of fiduciary duty with respect to receipt of
compensation, neither the Adviser nor any of its directors, officers,
shareholders, agents, or employees shall be liable or responsible to the Trust,
the Funds or to any shareholder of the Funds for any error of judgment or
mistake of law or for any act or omission in the course of, or connected with,
rendering services hereunder or for any loss suffered by the Trust, a Fund or
any shareholder of a Fund in connection with the performance of this Agreement.

9. Effective Date; Modifications; Termination. This Agreement shall
become effective on _______ , 1996, provided that it shall have been approved by
a majority of the outstanding voting securities of each Fund, in accordance with
the requirements of the 1940 Act, or such later date as may be agreed by the
parties following such shareholder approval.

(a) This Agreement shall continue in force until ___________, 1998.
Thereafter, this Agreement shall continue in effect as to each
Fund for successive annual periods, provided such continuance is
specifically approved at least annually (i) by a vote of the
majority of the Trustees of the Trust who are not parties to this
Agreement or interested persons of any such party, cast in person
at a meeting called for the purpose of voting on such approval
and (ii) by a vote of the Board of Trustees of the Trust or a
majority of the outstanding voting shares of the Fund.

(b) The modification of any of the non-material terms of this
Agreement may be approved by a vote of a majority of those
Trustees of the Trust who are not interested persons of any party
to this Agreement, cast in person at a meeting called for the
purpose of voting on such approval.

(c) Notwithstanding the foregoing provisions of this Paragraph 9,
either party hereto may terminate this Agreement at any time on
sixty (60) days' prior written notice to the other, without
payment of any penalty. Such a termination by the Trust may be
effected severally as to any particular Fund, and shall be
effected as to any Fund by vote of the Trust's Board of Trustees
or by vote of a majority of the outstanding voting securities of
the Fund. This Agreement shall terminate automatically in the
event of its assignment.

10. Limitation of Liability of Trustees and Shareholders. The Adviser
acknowledges the following limitation of liability:

The terms "The FBR Family of Funds" and "Trustees" refer, respectively,
to the trust created and the Trustees, as trustees but not individually or
personally, acting from time to time under the Trust Instrument, to which
reference is hereby made, such reference being inclusive of any and all
amendments thereto so filed or hereafter filed. The obligations of "The FBR

<PAGE>

Family of Funds" entered into in the name or on behalf thereof by any of the
Trustees, representatives or agents are made not individually, but in such
capacities and are not binding upon any of the Trustees, shareholders or
representatives of the Trust personally, but bind only the assets of the Trust,
and all persons dealing with the Trust or a Fund must look solely to the assets
of the Trust or Fund for the enforcement of any claims against the Trust or
Fund.

11. Non-Exclusive Use of the Name "FBR". The Trust acknowledges that it
adopted its name through the permission of the Adviser. The Adviser hereby
consents to the non-exclusive use by the Trust of the name "FBR" only so long as
the Adviser serves as the Funds' adviser.

If the Adviser or any successor to its business shall cease to furnish
services to the Funds under this Agreement or similar contractual arrangement,
the Trust:

(a) as promptly as practicable, will take all necessary action to
cause its Certificate of Trust to be amended to accomplish a
change of name; and

(b) within 90 days after the termination of this Agreement or such
similar contractual arrangement, shall cease to use in any other
manner, including but not limited to use in any prospectus, sales
literature or promotional material, the name "FBR" or any name,
mark or logotype derived from it or similar to it or indicating
that the Funds are managed by or otherwise associated with the
Adviser.

12. Certain Definitions. The terms "vote of a majority of the
outstanding voting securities," "assignment," "control," and "interested
persons," when used herein, shall have the respective meanings specified in the
1940 Act. References in this Agreement to the 1940 Act and the Advisers Act
shall be construed as references to such laws as now in effect or as hereafter
amended, and shall be understood as inclusive of any applicable rules,
interpretations and/or orders adopted or issued thereunder by the Commission.

13. Independent Contractor. The Adviser shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise expressly
provided herein or authorized by the Board of Trustees of the Trust from time to
time, have no authority to act for or represent a Fund in any way or otherwise
be deemed an agent of a Fund.

14. Structure of Agreement. The Trust is entering into this Agreement
on behalf of the respective Funds severally and not jointly. The
responsibilities and benefits set forth in this Agreement shall refer to each
Fund severally and not jointly. No Fund shall have any responsibility for any
obligation of any other Fund arising out of this Agreement. Without otherwise
limiting the generality of the foregoing:

(a) any breach of any term of this Agreement regarding the Trust with
respect to any one Fund shall not create a right or obligation
with respect to any other Fund;

<PAGE>

(b) under no circumstances shall the Adviser have the right to set
off claims relating to a Fund by applying property of any other
Fund; and

(c) the business and contractual relationships created by this
Agreement, consideration for entering into this Agreement, and
the consequences of such relationship and consideration relate
solely to the Trust and the particular Fund to which such
relationship and consideration applies.

This Agreement is intended to govern only the relationships between the
Adviser, on the one hand, and the Trust and the Funds, on the other hand, and
(except as specifically provided above in this Paragraph 14) is not intended to
and shall not govern (i) the relationship between the Trust and any Fund or (ii)
the relationships among the respective Funds.

15. Governing Law. This Agreement shall be governed by the laws of the
State of [ ], provided that nothing herein shall be construed in a manner
inconsistent with the 1940 Act or the Advisers Act.

16. Severability. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby and, to this extent, the provisions
of this Agreement shall be deemed to be severable.

17. Notices. Notices of any kind to be given to the Trust hereunder by
the Adviser shall be in writing and shall be duly given if mailed or delivered
to ___________________Attention: _______; with a copy to Kramer, Levin, Naftalis
& Frankel, 555 13th Street NW, Suite 1300 East, Washington, D.C. 20004-1109,
Attention: Meyer Eisenberg, Esq., or at such other address or to such individual
as shall be so specified by the Trust to the Adviser. Notices of any kind to be
given to the Adviser hereunder by the Trust shall be in writing and shall be
duly given if mailed or delivered to the Adviser at Potomac Tower, 1001
Nineteenth Street Ninth, Arlington, Virginia 22209, Attention: _________________
or at such other address or to such individual as shall be so specified by the
Adviser to the Trust. Notices shall be effective upon delivery.

<PAGE>

IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
written above.

THE FBR FAMILY OF FUNDS FBR MUTUAL FUND ADVISERS, INC.

By:_____________________________ By:____________________________
Name: Name:
Title: Title:

<PAGE>

Schedule A

Name of Fund Fee*
- ------------ ----

1. FBR Small Cap Financial Fund .90%
2. FBR Financial Services Fund .90%
3. FBR Growth/Value Fund .90%
4. FBR Information Technologies Fund .90%

- --------------------
* As a percentage of average daily net assets. Note, however, that the
Adviser shall have the right, but not the obligation, to voluntarily waive
any portion of the advisory fee from time to time.

FORM OF
DISTRIBUTION AGREEMENT

THIS AGREEMENT made as of the ____ day of ________, 1996 by and between
THE FBR FAMILY OF FUNDS (the "Trust"), a Delaware business trust, and FRIEDMAN,
BILLINGS, RAMSEY & CO., INC. (the "Distributor").

W I T N E S S E T H:

In consideration of the mutual covenants herein contained and other
good and valuable consideration, the receipt of which is hereby acknowledged,
the parties hereto agree as follows:

FIRST: The Trust on behalf of each of its series and any new
series to be created hereby appoints the Distributor as its exclusive
underwriter to promote and arrange for the sale of shares of beneficial
interest of each series of the Trust in jurisdictions wherein shares
may legally be offered for sale. The Trust shall notify the Distributor
in writing of all states in which its shares are qualified for offer
and sale, including any limitations with respect to offers or sales in
such states. In addition, the Distributor shall receive payment for
certain distribution expenses pursuant to a Rule 12b-1 distribution
plan ("12b-1 Plan") adopted by the Trust.

The Trust agrees to sell and deliver its unissued shares of
each series, as from time to time shall be effectively registered under
the Securities Act of 1933 (the "1933 Act"), upon the terms hereinafter
set forth.

SECOND: The Trust hereby authorizes the Distributor, subject
to law and the Trust Instrument of the Trust (the "Trust Instrument"),
to accept, for the account of each series of the Trust, orders for the
purchase of shares, satisfactory to the Distributor, as of the time of
receipt of such orders or as otherwise described in the then current
Prospectuses and Statements of Additional Information of the Trust.

THIRD: The price at which the shares may be sold (the
"offering price") shall be the net asset value per share plus any sales
charge that may be imposed on any class of shares. For the purpose of
computing the offering price, the net asset value per share and the
sales charge, if any, shall be determined in the manner provided in the
Registration Statement of the Trust, as amended from time to time.

FOURTH: The Distributor shall use its best efforts with
reasonable promptness to promote and sell shares of each of the series
of the Trust. The Distributor, with the consent of the Trust, may enter
into agreements with selected broker-dealers ("Selected Dealers") for
the purpose of sale and redemption of shares of each of the series of
the Trust upon terms consistent with those found in this Agreement. The
Distributor shall not be obligated to sell any certain number of shares
of beneficial interest. Each series of the Trust reserves the right to
issue shares in connection with any merger or consolidation of the
Trust or any series with any other investment company or any personal
holding

<PAGE>

company or in connection with offers of exchange exempted from Section
11(a) of the Investment Company Act of 1940 (the "Act").

FIFTH: All sales literature and advertisements used by the
Distributor in connection with sales of shares of any series of the
Trust shall be subject to the approval of the Trust. The Trust
authorizes the Distributor in connection with the sale or arranging for
the sale of the shares to give only such information and to make only
such statements or representations as are contained in the then current
Prospectuses and Statements of Additional Information of the Trust or
in sales literature or advertisements approved for any series by the
Trust or in such financial statements and reports as are furnished to
the Distributor pursuant to this Agreement. The Trust shall not be
responsible in any way for any information, statements or
representations given or made by the Distributor or its representative
or agents other than such information, statements or representations
contained in the then current Prospectuses and Statements of Additional
Information or other financial statements of the Trust or any sales
literature or advertisements approved by the Trust.

SIXTH: The Distributor as agent of the Trust, and any Selected
Dealer entering into a Selected Dealer Agreement with the Distributor
are authorized, subject to the direction of the Trust, to accept shares
of the series of the Trust for redemption at their net asset value less
any applicable deferred sales charge, determined as prescribed in the
then current Prospectuses and Statements of Additional Information of
the Trust.

SEVENTH: The Trust shall cause to be delivered to the
Distributor all books, records, and other documents and papers relating
to the federal and state registration of Trust shares, as well as all
books, records and other documents and papers relating in any way to
the distribution of Trust shares.

EIGHTH: The Trust shall bear:

(A) The costs and expenses incurred in connection
with the registration of the shares of each series of the
Trust under the 1933 Act (including any amendment to any
Registration Statement or Prospectus or Statement of
Additional Information), and all expenses in connection with
preparing, printing and distributing the Prospectuses or
Statements of Additional Information except as set forth in
Paragraph NINTH hereof;

(B) the expenses of qualification of the shares of
each series of the Trust for sale in connection with such
public offerings in such states as shall be selected by the
Distributor and of continuing the qualification therein until
the Distributor notifies the Trust that it does not wish such
qualification continued; and

NINTH: The Distributor shall provide certain distribution
services including:

-2-

<PAGE>

(A) providing officers, clerical staff and office
space to use as the headquarters of the Trust;

(B) arranging for the printing, distribution and
filing of prospectuses and statements of additional
information;

(C) preparing, filing and maintaining all Trust
registrations with the securities regulatory agencies of all
states and other jurisdictions in which the Trust shares are
sold;

(D) making all required filings of advertising and
promotional materials with the National Association of
Securities Dealers, Inc.; and

(E) bearing the expenses of:

(i) the printing, distribution and filing of
prospectuses and statements of additional information
after such have been typeset (other than those
prospectuses and statements of additional information
required by applicable laws and regulations to be
distributed to the existing shareholders of the Trust
and pursuant to any 12b-1 Plan adopted by the Trust);

(ii) any promotional or sales literature
which are used by the Distributor or furnished by the
Distributor to purchasers or dealers in connection
with the Distributor's activities pursuant to this
Agreement (unless paid for by any 12b-1 Plan adopted
by the Trust);

(iii) any advertising used by the
Distributor in connection with such public offering
(unless paid for by any 12b-1 Plan adopted by the
Trust); and

(iv) all legal expenses in connection with
the foregoing.

TENTH: The Distributor will accept orders for shares of a
series of the Trust only to the extent of purchase orders actually
received and not in excess of such orders, and it will not avail itself
of any opportunity of making a profit by expediting or withholding
orders.

ELEVENTH: The Trust shall keep the Distributor fully informed
with regard to its affairs and shall furnish the Distributor with a
certified copy of all financial statements and any amendments to its
Registration Statement under the 1933 Act.

TWELFTH: The Trust shall register, from time to time as
necessary, additional shares with the Securities and Exchange
Commission, state and other regulatory bodies and pay the related
filing fees therefor and file such amendments, reports and other
documents as may be necessary in order that there may be no untrue
statement of a

-3-

<PAGE>

material fact in the Registration Statement, Prospectuses or Statements
of Additional Information necessary in order that there may be no
omission to state a material fact therein, in light of the
circumstances under which they were made, not misleading. As used in
this Agreement, the term "Registration Statement" shall mean the
Registration Statement most recently filed by the Trust with the
Securities and Exchange Commission and effective under the 1933 Act, as
such Registration Statement is amended at such time, and the term
"Prospectuses" and "Statements of Additional Information" shall mean
for the purposes of this Agreement the form of the then current
prospectuses and statements of additional information for each series
authorized by the Trust for use by the Distributor and by dealers.

THIRTEENTH:

(A) The Trust and the Distributor shall each comply
with all applicable provisions of the Act, the 1933 Act and
the rules and regulations of the National Association of
Securities Dealers, Inc. and of all other Federal and state
laws, rules and regulations governing the issuance and sale of
shares of the series of Trust.

(B) The Distributor shall not be liable for any error
of judgment or mistake of law or for any loss suffered by the
Trust in connection with the matters to which this Agreement
relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the Distributor's part in the
performance of its duties or from reckless disregard by it of
its obligations and duties under this Agreement.

(C) In the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of obligations or
duties hereunder on the part of the Distributor or any of its
officers, directors or employees, the Trust agrees to
indemnify the Distributor and any controlling person of the
Distributor against any and all claims, demands, liabilities
and expenses (including reasonable attorney's fees) which the
Distributor may incur (i) based on any act or omission in the
course of, or connected with, rendering services hereunder,
(ii) based on any representations made herein by the Trust;
(iii) based on any act or omission of any prior Distributor
(in its capacity as Distributor), Administrator or Adviser to
the Trust, including the registration or failure to register
any shares of the Trust in accordance with state or federal
laws or resulting from or relating to any books or records
delivered to the Distributor in connection with its
responsibilities under this Agreement and occurring prior to
the date of this Agreement; and (iv) under the 1933 Act, or
common law or otherwise, arising out of or based upon any
alleged untrue statement of a material fact contained in any
Registration Statement, Statements of Additional Information
or Prospectuses of the Trust, or any omission to state a
material fact therein, the omission of which makes any
statement contained therein misleading, unless such statement
or omission was made in reliance upon, and in conformity with
written information furnished to the Trust in connection
therewith by or on behalf of the Distributor.

-4-

<PAGE>

(D) The Distributor shall indemnify the Trust against
any and all claims, demands, liabilities and expenses which
the Trust may incur under the 1933 Act, or common law or
otherwise, arising out of or based upon any alleged untrue
statement of material fact contained in any Registration
Statement, Statements of Additional Information or
Prospectuses of the Trust, or any omission to state a material
fact therein if such statement or omission was made in
reliance upon, and in conformity with, written information
furnished to the Trust in connection therewith by the
Distributor.

FOURTEENTH: Nothing herein contained shall require the Trust
to take any action contrary to any provision of its Declaration of
Trust or to any applicable statute or regulation.

FIFTEENTH:

(A) This Agreement shall go into effect at the close
of business on the date hereof, and, unless terminated as
hereinafter provided, shall continue in effect for one year
thereafter and from year to year thereafter, but only so long
as such continuance is specifically approved at least annually
by the Trust's Board of Trustees, including the vote of a
majority of the Trustees who are not parties to this Agreement
or "interested persons" (as defined in the Act) of any such
party cast in person at a meeting called for the purpose of
voting on such approval, or by the vote of the holders of a
"majority" (as so defined) of the outstanding voting
securities of the applicable series and by such vote of the
Trustees.

(B) This Agreement may be terminated by the
Distributor at any time without penalty upon giving the Board
of Trustees of the Trust sixty (60) days' written notice
(which notice may be waived by the Trust) and may be
terminated by the Board of Trustees of the Trust at any time
without penalty upon giving the Distributor sixty (60) days'
written notice (which may be waived by the Distributor),
provided that such termination by the Board of Trustees of the
Trust shall be directed or approved by the vote of a majority
of all of its Trustees in office at the time, including a
majority of the Trustees who are not interested persons (as
defined in the Act) of the Trust, or by the vote of the
holders of a majority (as defined in the Act) of the voting
securities of each series of the Trust at the time outstanding
and entitled to vote. This Agreement shall automatically
terminate in the event of its assignment, the term
"Assignment" for this purpose having the meaning defined in
Section 2(a)(4) of the Act.

SIXTEENTH: The Distributor may at any time or times in its
discretion and at its own expense appoint (and may at any time remove)
an agent or agents to carry out such of the provisions of Article NINTH
herein as the Distributor may from time to time direct; provided,
however, that the appointment of any agent shall not relieve the
Distributor of its responsibilities or liabilities hereunder.

-5-

<PAGE>

SEVENTEENTH: A copy of the Certificate of Trust is on file
with the State of Delaware, and notice is hereby given that this
instrument is executed on behalf of the Trustees of the Trust as
Trustees and not individually, and that the obligations of this
instrument are not binding upon any of the Trustees or shareholders
individually but are binding only upon the assets and property of the
Trust, and all persons dealing with any class of shares of the Trust
must look solely to the Trust property belonging to such class for the
enforcement of any claims against the Trust.

EIGHTEENTH: Any notice under this Agreement shall be in
writing, addressed and delivered, or mailed, postage paid, to the other
party at such address as such other party may designate for the receipt
of such notices. Until further notice to the other party, it is agreed
that the address of the Trust and the Distributor shall be Potomac
Tower, 1001 Nineteenth Street North, Arlington, Virginia 22209

IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.

ATTEST: THE FBR FAMILY OF FUNDS

_________________________________ By:_________________________________

ATTEST: FRIEDMAN, BILLINGS, RAMSEY & CO., INC.

_________________________________ By:_________________________________

-6-

THE FBR FAMILY OF FUNDS
FORM OF

SELECTED DEALER AGREEMENT

AGREEMENT made this ____________ day of ________, 19____, between
Friedman, Billings, Ramsey & Co., Inc., a corporation organized under the laws
of the State of _________ with its principal place of business at Potomac Tower,
1001 Nineteenth Street North, Arlington, Virginia 22209 and
__________________________________, a member of the National Association of
Securities Dealers, Inc. ("Dealer").

WHEREAS, Friedman, Billings, Ramsey & Co., Inc. serves as the principal
underwriter (the "Distributor") for current and future series (each a "Fund" and
collectively the "Funds") of The FBR Family of Funds (the "Trust") pursuant to a
distribution agreement (the "Distribution Agreement") and, as described in the
Funds' Prospectus, may subcontract any or all of its functions to one or more
qualified sub-transfer agents or processing agents; and

WHEREAS, the Distributor and Dealer, acting as a Selected Dealer as
described in the Funds' Prospectuses, desire to document their procedures
regarding the purchase, redemption and transfer of Fund shares;

NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants herein contained and other valuable consideration, the Distributor and
Dealer agree as follows:

SECTION 1. SERVICES; COMPENSATION

Dealer shall perform some or all of the services described in Exhibit A
hereto (the "Services") in connection with its purchase and redemption of shares
of the Funds at the direction of, and as agent for, its customers. Dealer will
bear all expenses incurred by it or its agents in performing the Services.
Dealer shall receive no consideration under this agreement in consideration of
these Services. Dealer shall act only as agent for its customers in all purchase
and redemption transactions and in furnishing information regarding the Trust,
the Funds or the Trust shares and shall not act as agent for the Trust.

SECTION 2. RECORDKEEPING

Dealer represents to the Distributor and to the Trust that it will
comply with all recordkeeping, reporting, account maintenance and other
requirements imposed upon Dealer or the Trust by applicable state and Federal
laws. Dealer also represents that to the extent required by the Internal Revenue
Code of 1986 and applicable Internal Revenue Service regulation

<PAGE>

it will (i) obtain and maintain for each customer for which Dealer maintains an
account and, unless otherwise agreed to, for each customer to whom Dealer
otherwise provides service, a certified taxpayer identification number and (ii)
prepare and distribute all Form 1099s and Individual Retirement Account
reporting forms to each of Dealer's or its affiliates' customers who hold Fund
shares in "street name" or through an omnibus account with the Trust's transfer
agent.

SECTION 3. PURCHASE AND REDEMPTION ORDERS

Dealer shall purchase (with funds to be subsequently delivered as
provided in Section 4) and redeem (which for purposes hereof includes exchange)
shares of a Fund by written, including facsimile, or oral order ("Orders") for
the account of Dealer or Dealer's various customers, whether the records of the
customers' holdings of Fund shares are maintained by the Trust's transfer agent
or by Dealer on behalf of the customers. Dealer represents that it will have
appropriate power to transmit Orders on behalf of its customers. Upon the
Trust's request, to the extent necessary for the parties to comply with
applicable securities laws and not inconsistent with Dealer's agreement with its
customers, Dealer shall provide a list of all Trust shareholder accounts
maintained by Dealer, showing each account name, address and share holding.
Dealer shall provide the Trust with such other information as the Trust may
reasonably request concerning the location (by state) of accounts to which
shares are sold and the amounts thereof.

SECTION 4. ORDER PRICING; DELIVERY OF FUNDS; DIVIDENDS

(a) All Orders will be priced at and effected immediately after the
next determined net asset value of the applicable Fund after receipt of the
Order by the Trust's transfer agent in proper form and, if necessary,
confirmation of the Order. Orders may be confirmed by telephone call or
otherwise as the Trust's transfer agent deems appropriate.

(b) With respect to each purchase Order, Dealer shall deliver funds on
deposit at a Federal Reserve Bank ("Fed Funds") by wire or otherwise to the
applicable Fund's account as designated in the Fund's Prospectus or, as may be
agreed to by the Trust's transfer agent, Dealer and the Trust. Proceeds of any
redemption Order will be delivered by the Trust's transfer agent (i) to Dealer
to the account listed on Exhibit B or such other account as Dealer may designate
in writing (the "Account") on the day a redemption Order is effected or (ii) to
a shareholder of a Fund in accordance with the procedures contained in the
Fund's Prospectus.

<PAGE>

(in accordance with Section 4(a) or, if applicable, Section 5(c)) so long as the
Trust's transfer agent, on behalf of the Trust, has received Fed Funds form
Dealer by 4:00 p.m., Eastern Time, on that day.

SECTION 5. DELAYED PAYMENTS

(a) If the Trust's transfer agent, on behalf of the Trust, does not
receive a wire by the times indicated in Section 4 due to errors made by Dealer
or any of its affiliates or agents, Dealer will pay the Trust's transfer agent a
fee based on and in the same amount as any overdraft fees and interest charges
incurred by the Trust's transfer agent or the Trust with respect to the
transaction. If the Trust's transfer agent does not receive payment for shares
purchased on the same day as an Order, the Trust's transfer agent and the
Distributor reserve the right, without notice, either to cancel the sale or to
sell the shares purchased back to the Trust, and in either case, Dealer shall be
responsible for any loss, including loss of profit, suffered by the Trust's
transfer agent, the Distributor or the Trust resulting from Dealer's failure to
make payment.

(b) If Dealer does not receive redemption proceeds by the time
indicated in the then current Prospectus of the Trust, due to errors made by the
Trust's transfer agent, the Trust or the Trust's custodian (acting in that
capacity) or any of the Trust's transfer agent's affiliates or agents, the
Distributor will pay Dealer an amount equal to any overdraft fees and interest
charges that would be incurred by the Trust for an equivalent overdraft at its
custodian.

(c) If Dealer delivers Fed Funds with respect to an Order but fails to
notify the Trust's transfer agent of the Order prior to the time at which the
Order would be priced (had the Order been placed at the time of receipt of the
funds), the purchase will be priced at the net asset value determined on the
Fund Business Day (as defined in the applicable Prospectus) after the day the
funds are received.

SECTION 6. INFORMATION PERTAINING TO THE SHARES

(a) Dealer and its officers, employees and agents are not authorized to
make any representations concerning the Trust, the Funds or the Trust shares
except accurate communication of factual information contained in the
then-current prospectus and statement of additional information of the Trust and
in such printed information subsequently issued by the trust or the Distributor
as information supplemental to the prospectus and statement of additional
information.

(b) Dealer will not offer or sell any of the shares except under
circumstances that will result in compliance with the

<PAGE>

applicable Federal and state securities laws, including any applicable
requirements to deliver confirmations to its customers. In connection with sales
and offers to sell shares, Dealer will furnish to each person to whom any such
sale or offer is made, a copy of the Fund's then current prospectus. The
Distributor shall advise Dealer as to the states or other jurisdictions in which
shares of the Fund have been qualified for sale under, or are exempt from the
requirements of the respective securities laws of such states and jurisdictions.

(c) The Distributor shall be under no liability to Dealer except for
lack of good faith and for obligations expressly assumed by The Distributor
herein. Nothing herein contained, however, shall be deemed to be a condition,
stipulation or provision binding any persons acquiring any securities to waive
compliance with any provision of the Securities Act of 1933, the Securities
Exchange Act of 1934 or the Rules and Regulations of the Securities and Exchange
Commission or to relieve the parties hereto from any liability arising under the
Securities Act of 1933.

SECTION 7. CERTIFICATION

The person signing below on behalf of Dealer certifies that he has been
duly elected, is now legally holding the offices indicated and is authorized to
execute this Agreement. He further certifies that Dealer is duly organized and
existing and has the power to take the actions referred to herein. He certifies
and agrees that the certifications and authorizations described in this
Agreement will continue in effect until the Distributor and the Trust's transfer
agent receive actual written notice of any change thereof.

SECTION 8. MISCELLANEOUS

(a) This Agreement shall be construed in accordance with the laws of
the State of Delaware.

(b) This Agreement may be amended in writing at any time by the parties
hereto. In addition, this Agreement may be amended by the Distributor from time
to time by the following procedure in order to enable the Trust, the Distributor
or the Trust's transfer agent to comply with any regulatory requirements or
policy positions which may be imposed or adopted in the future by any
governmental authority with jurisdiction over the Trust, the Distributor or the
Trust's transfer agent. The Distributor will mail a copy of the amendment to
Dealer at the address listed above or such other address as Dealer shall in
writing provide to the Distributor. The amendment will be effective immediately
upon its being sent.

<PAGE>

(c) This Agreement will terminate automatically upon the termination of
either of the Transfer Agent Agreement or the Distribution Agreement. This
Agreement may be terminated at any time by any party hereto without cause by
giving the other parties at least sixty (60) days' written notice of its
intention to terminate.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed all as of the day and year first above written.

_______________________________________
By:
_______________________________________
Name:
_______________________________________
Title:

Friedman, Billings, Ramsey & Co., Inc.
_______________________________________
By:
_______________________________________
Name:
_______________________________________
Title:

<PAGE>

THE FBR FAMILY OF FUNDS
SELECTED DEALER AGREEMENT
Exhibit A

SERVICE PERFORMED BY DEALER

a. Maintain customer account detail for shares held for
customers.

b. Issue and deliver periodic statements to customers.

c. Receive from the Trust and break down and remit to customers
monies associated with their redemption of Trust shares.

d. Answer customer inquiries regarding account status and
history.

e. Fill customer requests for prospectuses and statements of
additional information.

f. Receive and process customer registration forms.

g. Receive records regarding the services to be performed, as
required by applicable law and regulations.

h. For any omnibus or similar account maintained with the
Trust's transfer agent, perform all subaccounting for
subaccounts, including:

(i) Break down daily dividend accruals and apply them to customer
account records.

(ii) Receive, break down and pay or, at customer's direction,
consolidate and reinvest customer dividends on payment dates.

(iii) Maintain all proof procedures between customer subaccounts and
the central account with the Trust.

(iv) Perform all special mailings to customers required by the Trust,
such as annual prospectus mailings, proxy solicitations, and
semi-annual and annual reports.

<PAGE>

THE FBR FAMILY OF FUNDS
SELECTED DEALER AGREEMENT
Exhibit B

WIRE RECEIPT ACCOUNT

Name of Bank ______________________________________________________________

Street Address ______________________________________________________________

City/State/Zip ______________________________________________________________

ABA Routing No. ______________________________________________________________

Account No. ______________________________________________________________

Title of Account ______________________________________________________________

Instructions ______________________________________________________________

______________________________________________________________

FORM OF
CUSTODY AGREEMENT

AGREEMENT, dated as of November __, 1996 by and between THE FBR FAMILY
OF FUNDS (the "Trust"), a business trust organized and existing under the laws
of the State of Delaware, acting with respect to and on behalf of each of the
series of the Trust that are identified on Exhibit A hereto (each, a
"Portfolio"), and CUSTODIAL TRUST COMPANY, a bank organized and existing under
the laws of the State of New Jersey (the "Custodian") and an affiliate of Bear,
Stearns & Co. Inc.

WHEREAS, the Trust desires that the securities, funds and other assets
of the Portfolios be held and administered by Custodian pursuant to this
Agreement;

WHEREAS, each Portfolio is an investment portfolio represented by a
series of Shares included among the shares of beneficial interest issued by the
Trust, an open-end management investment company registered under the 1940 Act;

WHEREAS, Custodian represents that it is a bank having the
qualifications prescribed in the 1940 Act to act as custodian for management
investment companies registered under the 1940 Act;

NOW, THEREFORE, in consideration of the mutual agreements herein made,
the Trust and Custodian hereby agree as follows:

ARTICLE I
DEFINITIONS

Whenever used in this Agreement, the following terms, unless the
context otherwise requires, shall mean:

<PAGE>

1.1 "Authorized Person" means any person authorized by resolution of
the Board of Trustees to give Oral Instructions and Written Instructions on
behalf of the Trust and identified, by name or by office, in Exhibit B hereto or
any person designated to do so by an investment adviser of any Portfolio who is
named by the Trust in Exhibit C hereto.

1.2 "Board of Trustees" means the Board of Trustees of the Trust or,
when permitted under the 1940 Act, the Executive Committee thereof, if any.

1.3 "Book-Entry System" means a book-entry system maintained by a
Federal Reserve Bank for securities of the United States government or of
agencies or instrumentalities thereof (including government-sponsored
enterprises).

1.4 "Business Day" means any day on which banks in the State of New
Jersey and New York are open for business.

1.5 "Custody Account" means, with respect to a Portfolio, the account
in the name of such Portfolio, which is provided for in Section 3.2 below.

1.6 "Domestic Securities Depository" means The Depository Trust Company
and any other clearing agency registered with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, which acts as a securities
depository.

1.7 "Eligible Domestic Bank" means a bank as defined in the
1940 Act.

1.8 "Eligible Foreign Entity" means any banking institution, trust
company or other entity organized under the laws of a country other than the
United States which is eligible under the 1940 Act

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to act as a custodian for securities and other assets of a Portfolio held
outside the United States.

1.9 "Foreign Securities Depository" means a foreign securities
depository or clearing agency as defined in the 1940 Act.

1.10 "Master Repurchase Agreement" means the Master Repurchase
Agreement of even date herewith between the Trust and Bear, Stearns & Co. Inc.
as it may from time to time be amended.

1.11 "Master Securities Loan Agreement" means the Master Securities
Loan Agreement of even date herewith between the Trust and Bear, Stearns
Securities Corp. as it may from time to time be amended.

1.12 "1940 Act" means the Investment Company Act of 1940, as
amended, and the rules and regulations thereunder.

1.13 "Oral Instructions" means instructions orally transmitted to and
accepted by Custodian which are (a) reasonably believed by Custodian to have
been given by an Authorized Person, (b) recorded and kept among the records of
Custodian made in the ordinary course of business, and (c) completed in
accordance with Custodian's requirements from time to time as to content of
instructions and their manner and timeliness of delivery by the Trust.

1.14 "Proper Instructions" means Oral Instructions or Written
Instructions. Proper Instructions may be continuing Written Instructions when
deemed appropriate by the Trust and Custodian.

1.15 "Securities Depository" means any Domestic Securities
Depository or Foreign Securities Depository.

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<PAGE>

1.16 "Shares" means, with respect to a Portfolio, those shares in a
series or class of beneficial interests of the Trust that represent interests in
such Portfolio.

1.17 "Written Instructions" means written communications received by
Custodian that are (a) reasonably believed by Custodian to have been signed or
sent by an Authorized Person, (b) sent or transmitted by letter, facsimile,
central processing unit connection, on-line terminal or magnetic tape, and (c)
completed in accordance with Custodian's requirements from time to time as to
content of instructions and their manner and timeliness of delivery by the
Trust.

ARTICLE II
APPOINTMENT OF CUSTODIAN

2.1 Appointment. The Trust hereby appoints Custodian as custodian of
all such securities, funds and other assets of each Portfolio as may be
acceptable to Custodian and from time to time delivered to it by the Trust or
others for the account of such Portfolio.

2.2 Acceptance. Custodian hereby accepts appointment as such custodian
and agrees to perform the duties thereof as hereinafter set forth.

ARTICLE III
CUSTODY OF SECURITIES, FUNDS AND OTHER ASSETS

3.1 Segregation. All securities and non-cash property of a Portfolio in
the possession of Custodian (other than securities maintained by Custodian with
a sub-custodian appointed pursuant to this Agreement or in a Securities
Depository or Book-Entry System) shall be physically segregated from other such
securities and non-cash property in the possession of Custodian. All cash,

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securities and other non-cash property of a Portfolio shall be identified as
belonging to such Portfolio.

3.2 Custody Account. (a) Custodian shall open and maintain in its trust
department a custody account in the name of each Portfolio, subject only to
draft or order of Custodian, in which Custodian shall enter and carry all
securities, funds and other assets of such Portfolio which are delivered to
Custodian and accepted by it.

(b) If, with respect to any Portfolio, Custodian at any time fails to
receive any of the documents referred to in Section 3.10(a) below, then, until
such time as it receives such document, it shall not be obligated to receive any
securities into the Custody Account of such Portfolio and shall be entitled to
return to such Portfolio any securities that it is holding in such Custody
Account.

3.3 Securities in Physical Form. Custodian may, but shall not be
obligated to, hold securities that may be held only in physical form.

3.4 Disclosure to Issuers of Securities. Custodian is authorized to
disclose the Trust's and any Portfolio's names and addresses, and the securities
positions in such Portfolio's Custody Account, to the issuers of such securities
when requested by them to do so.

3.5 Appointment of Domestic Sub-Custodians. In its discretion, and upon
prior written notice to the Trust, Custodian may at any time and from time to
time appoint, and at any time remove, any Eligible Domestic Bank as
sub-custodian to hold securities and other assets of a Portfolio that are
maintained in the United States and to carry out such other provisions of this
Agreement as it may determine. The appointment of any such sub-custodian shall

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be at Custodian's expense and shall not relieve Custodian of any of its
obligations or liabilities under this Agreement.

3.6 Appointment of Foreign Sub-Custodians. (a) At any time and from
time to time, Custodian in its discretion may appoint in accordance with the
1940 Act (i) any overseas branch of any Eligible Domestic Bank, or (ii) any
Eligible Foreign Entity, in ach case as a foreign sub-custodian for securities
and other assets of a Portfolio that are maintained outside the United States,
provided, however, that any such appointment shall be subject to prior written
approval thereof by the Trust and, further, to prior written approval by the
Trust of (A) the agreement pursuant to which Custodian proposes to employ such
overseas branch or Eligible Foreign Entity, and (B) in the case of any Eligible
Foreign Entity, the country or countries in which such Foreign Eligible Entity
is to be authorized to hold securities and other assets of such Portfolio.

(b) Set forth on Exhibit D hereto, with respect to each Portfolio, are
the foreign sub-custodians appointed pursuant to Section 3.6(a) above and the
countries in which pursuant to Section 3.6(a) above they may hold securities and
other assets of such Portfolio. Exhibit D shall be revised from time to time as
foreign sub-custodians and countries are added or deleted.

(c) The Trust shall inform Custodian sufficiently in advance of a
proposed investment which is to be held in a country not listed in Exhibit D
hereto to allow the Trust to consider and give the approvals required under
Section 3.6(a) above and for Custodian to put appropriate arrangements in place
with a foreign sub-custodian. If a Portfolio invests in a security or other
asset to be held outside the United States before such approvals are given and
such arrangements are put in place, then such security or other asset may be
held by such agent as Custodian, in its discretion, may appoint.

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(d) Custodian shall have no greater liability to any Portfolio or the
Trust for the actions or omissions of any foreign sub-custodian appointed
pursuant to this Agreement (or any agent appointed pursuant to Section 3.6(c)
above) than any such foreign sub-custodian (or such agent) has to Custodian, and
Custodian shall not be required to discharge any such liability which may be
imposed on it unless and until such foreign sub-custodian (or agent) has
effectively indemnified Custodian against it or has otherwise discharged its
liability to Custodian in full.

(e) Upon the request of the Trust, Custodian shall annually furnish to
the Trust information concerning all foreign sub-custodians appointed pursuant
to this Agreement which shall be similar in kind and scope to that furnished to
the Trust in connection with the initial approval by the Trust of the agreements
pursuant to which Custodian employs such foreign sub-custodians or as otherwise
required by the 1940 Act.

3.7 Appointment of Other Agents. Custodian may employ other suitable
agents, which may include affiliates of Custodian such as Bear, Stearns & Co.
Inc. ("Bear Stearns") or Bear, Stearns Securities Corp.("BS Securities"), both
of which are securities broker-dealers, provided, however, that Custodian shall
not employ (a) BS Securities to hold any collateral pledged by BS Securities
under the Master Securities Loan Agreement or any other securities loan
agreement between the Trust and BS Securities, whether now or hereafter in
effect, or (b) Bear Stearns to hold any securities purchased from Bear Stearns
under the Master Repurchase Agreement or any other repurchase agreement between
the Trust and Bear Stearns, whether now or hereafter in effect. The appointment
of any agent pursuant to this Section 3.7 shall not relieve Custodian of any of
its obligations or liabilities under this Agreement.

3.8 Bank Accounts. In its discretion and from time to time Custodian
may open and maintain one or more demand deposit accounts

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<PAGE>

with any Eligible Domestic Bank (any such accounts to be in the name of
Custodian and subject only to its draft or order), provided, however, that the
opening and maintenance of any such account shall be at Custodian's expense and
shall not relieve Custodian of any of its obligations or liabilities under this
Agreement.

3.9 Delivery of Assets to Custodian. Provided they are acceptable to
Custodian, the Trust shall deliver to Custodian the securities, funds and other
assets of each Portfolio, including (a) payments of income, payments of
principal and capital distributions received by such Portfolio with respect to
securities, funds or other assets owned by such Portfolio at any time during the
term of this Agreement, and (b) funds received by such Portfolio for the
issuance, at any time during such term, of Shares of such Portfolio. Custodian
shall not be under any duty or obligation to require the Trust to deliver to it
any securities or other assets owned by a Portfolio and shall have no
responsibility or liability for or on account of securities or other assets not
so delivered.

3.10 Domestic Securities Depositories and Book-Entry Systems. Custodian
and any sub-custodian appointed pursuant to Section 3.5 above may deposit and/or
maintain securities of any Portfolio in a Domestic Securities Depository or in a
Book-Entry System, subject to the following provisions:

(a) Prior to a deposit of securities of a Portfolio in any Domestic
Securities Depository or Book-Entry System, the Trust shall deliver to Custodian
a resolution of the Board of Trustees, certified by an officer of the Trust,
authorizing and instructing Custodian (and any sub-custodian appointed pursuant
to Section 3.5 above) on an on-going basis to deposit in such Domestic
Securities Depository or Book-Entry System all securities eligible for deposit
therein and to make use of such Domestic Securities Depository or Book-Entry
System to the extent possible and practical in

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<PAGE>

connection with the performance of its obligations hereunder (or under the
applicable sub-custody agreement in the case of such sub-custodian), including,
without limitation, in connection with settlements of purchases and sales of
securities, loans of securities, and deliveries and returns of collateral
consisting of securities.

(b) Securities of a Portfolio kept in a Book-Entry System or Domestic
Securities Depository shall be kept in an account ("Depository Account") of
Custodian (or of any sub-custodian appointed pursuant to Section 3.5 above) in
such Book-Entry System or Domestic Securities Depository which includes only
assets held by Custodian (or such sub-custodian) as a fiduciary, custodian or
otherwise for customers.

(c) The records of Custodian with respect to securities of a Portfolio
that are maintained in a Book-Entry System or Domestic Securities Depository
shall at all times identify such securities as belonging to such Portfolio.

(d) If securities purchased by a Portfolio are to be held in a
Book-Entry System or Domestic Securities Depository, Custodian (or any
sub-custodian appointed pursuant to Section 3.5 above) shall pay for such
securities upon (i) receipt of advice from the Book-Entry System or Domestic
Securities Depository that such securities have been transferred to the
Depository Account, and (ii) the making of an entry on the records of Custodian
(or of such sub-custodian) to reflect such payment and transfer for the account
of such Portfolio. If securities sold by a Portfolio are held in a Book-Entry
System or Domestic Securities Depository, Custodian (or such sub-custodian)
shall transfer such securities upon (A) receipt of advice from the Book-Entry
System or Domestic Securities Depository that payment for such securities has
been transferred to the Depository Account, and (B) the making of an entry on
the

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<PAGE>

records of Custodian (or of such sub-custodian) to reflect such transfer and
payment for the account of such Portfolio.

(e) Custodian shall provide the Trust with copies of any report
obtained by Custodian (or by any sub-custodian appointed pursuant to Section 3.5
above) from a Book-Entry System or Domestic Securities Depository in which
securities of a Portfolio are kept on the internal accounting controls and
procedures for safeguarding securities deposited in such Book-Entry System or
Domestic Securities Depository.

(f) At its election, the Trust shall be subrogated to the rights of
Custodian (or of any sub-custodian appointed pursuant to Section 3.5 above) with
respect to any claim against a Book-Entry System or Domestic Securities
Depository or any other person for any loss or damage to a Portfolio arising
from the use of such Book-Entry System or Domestic Securities Depository, if and
to the extent that such Portfolio has not been made whole for any such loss or
damage.

3.11 Foreign Securities Depositories. Custodian or any sub-custodian
appointed pursuant to Section 3.6 above may maintain securities of any Portfolio
in any Foreign Securities Depository in accordance with the 1940 Act. Set forth
on Exhibit D hereto are the Foreign Securities Depositories that Custodian or
any such sub-custodian are authorized in accordance with the 1940 Act to employ.
Exhibit D shall be revised from time to time as Foreign Securities Depositories
are added or deleted.

3.12 Relationship With Securities Depositories. No Book-Entry System,
Securities Depository, or other securities depository or clearing agency
(whether foreign or domestic) which it is or may become standard market practice
to use for the comparison and settlement of trades in securities shall be an
agent or

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sub-contractor of Custodian for purposes of Section 3.7 above or otherwise.

3.13 Payments from Custody Account. Upon receipt of Proper Instructions
with respect to a Portfolio but subject to its right to foreclose upon and
liquidate collateral pledged to it pursuant to Section 9.3 below, Custodian
shall make payments from the Custody Account of such Portfolio, but only in the
following cases, provided, first, that there are sufficient funds in such
Custody Account to make such payments, whether belonging to such Portfolio or
advanced to it by Custodian in its sole and absolute discretion as set forth in
Section 3.19 below, and, second, that after the making of such payments, such
Portfolio would not be in violation of any margin or other requirements agreed
upon pursuant to Section 3.19 below:

(a) For the purchase of securities for such Portfolio but only (i) in
the case of securities (other than options on securities, futures contracts and
options on futures contracts), against the delivery to Custodian (or any
sub-custodian appointed pursuant to this Agreement) of such securities
registered as provided in Section 3.21 below or in proper form for transfer or,
if the purchase of such securities is effected through a Book-Entry System or
Domestic Securities Depository, in accordance with the conditions set forth in
Section 3.10 above, and (ii) in the case of options, futures contracts and
options on futures contracts, against delivery to Custodian (or such
sub-custodian) of evidence of title thereto in favor of such Portfolio, the
Custodian, any such sub-custodian, or any nominee referred to in Section 3.21
below;

(b) In connection with the conversion, exchange or surrender, as set
forth in Section 3.14(f) below, of securities owned by such Portfolio;

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(c) For transfer in accordance with the provisions of any agreement
among the Trust, Custodian and a securities broker-dealer, relating to
compliance with rules of The Options Clearing Corporation and of any registered
national securities exchange (or of any similar organization or organizations)
regarding escrow or other arrangements in connection with transactions of such
Portfolio;

(d) For transfer in accordance with the provisions of any agreement
among the Trust, Custodian and a futures commission merchant, relating to
compliance with the rules of the Commodity Futures Trading Commission and/or any
contract market (or any similar organization or organizations) regarding margin
or other deposits in connection with transactions of such Portfolio;

(e) For the funding of any time deposit (whether certificated or not)
or other interest-bearing account with any banking institution (including
Custodian), provided that Custodian shall receive and retain such certificate,
advice, receipt or other evidence of deposit (if any) as such banking
institution may deliver with respect to any such deposit or account;

(f) For the purchase from a banking or other financial institution of
loan participations, but only if Custodian has in its possession a copy of the
agreement between the Trust and such banking or other financial institution with
respect to the purchase of such loan participations and provided that Custodian
shall receive and retain such participation certificate or other evidence of
participation (if any) as such banking or other financial institution may
deliver with respect to any such loan participation;

(g) For the purchase and/or sale of foreign currencies or of options to
purchase and/or sell foreign currencies, for spot or future delivery, for the
account of such Portfolio pursuant to

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contracts between the Trust and any banking or other financial institution
(including Custodian, any sub-custodian appointed pursuant to this Agreement and
any affiliate of Custodian);

(h) For transfer to a securities broker-dealer as margin for a short
sale of securities for such Portfolio, or as payment in lieu of dividends paid
on securities sold short for such Portfolio;

(i) For the payment as provided in Article IV below of any dividends,
capital gain distributions or other distributions declared on the Shares of such
Portfolio;

(j) For the payment as provided in Article IV below of the redemption
price of the Shares of such Portfolio;

(k) For the payment of any expense or liability incurred by such
Portfolio, including but not limited to the following payments for the account
of such Portfolio: interest, taxes, and administration, investment advisory,
accounting, auditing, transfer agent, custodian, trustee and legal fees, and
other operating expenses of such Portfolio; in all cases, whether or not such
expenses are to be in whole or in part capitalized or treated as deferred
expenses; and

(l) For any other proper purpose, but only upon receipt of Proper
Instructions, specifying the amount and purpose of such payment, certifying such
purpose to be a proper purpose of such Portfolio, and naming the person or
persons to whom such payment is to be made.

3.14 Deliveries from Custody Account. Upon receipt of Proper
Instructions with respect to a Portfolio but subject to its right to foreclose
upon and liquidate collateral pledged to it pursuant to Section 9.3 below,
Custodian shall release and deliver securities and other assets from the Custody
Account of such

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Portfolio, but only in the following cases, provided, first, that there are
sufficient amounts and types of securities or other assets in such Custody
Account to make such delivery, and, second, that after the making of such
delivery, such Portfolio would not be in violation of any margin or other
requirements agreed upon pursuant to Section 3.19 below:

(a) Upon the sale of securities for the account of such Portfolio but,
subject to Section 3.15 below, only against receipt of payment therefor or, if
such sale is effected through a Book-Entry System or Domestic Securities
Depository, in accordance with the provisions of Section 3.10 above;

(b) To an offeror's depository agent in connection with tender or other
similar offers for securities of such Portfolio; provided that, in any such
case, the funds or other consideration for such securities is to be delivered to
Custodian;

(c) To the issuer thereof or its agent when such securities are called,
redeemed or otherwise become payable, provided that in any such case the funds
or other consideration for such securities is to be delivered to Custodian;

(d) To the issuer thereof or its agent for exchange for a different
number of certificates or other evidence representing the same aggregate face
amount or number of units; provided that, in any such case, the new securities
are to be delivered to Custodian;

(e) To the securities broker through whom securities are being sold for
such Portfolio, for examination in accordance with the "street delivery" custom;

(f) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the issuer of
such securities, or pursuant to provisions for

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conversion contained in such securities, or pursuant to any deposit agreement,
including surrender or receipt of underlying securities in connection with the
issuance or cancellation of depository receipts; provided that, in any such
case, the new securities and funds, if any, are to be delivered to Custodian;

(g) In the case of warrants, rights or similar securities, to the
issuer of such warrants, rights or similar securities, or its agent, upon the
exercise thereof, provided that, in any such case, the new securities and funds,
if any, are to be delivered to Custodian;

(h) To the borrower thereof, or its agent, in connection with any loans
of securities for such Portfolio pursuant to any securities loan agreement
entered into by the Trust, but only against receipt by Custodian of such
collateral as is required under such securities loan agreement;

(i) To any lender, or its agent, as collateral for any borrowings from
such lender by such Portfolio that require a pledge of assets of such Portfolio,
but only against receipt by Custodian of the amounts borrowed;

(j) Pursuant to any authorized plan of liquidation,
reorganization, merger, consolidation or recapitalization of such
Portfolio or the Trust;

(k) For delivery in accordance with the provisions of any agreement
among the Trust, Custodian and a securities broker-dealer, relating to
compliance with the rules of The Options Clearing Corporation and of any
registered national securities exchange (or of any similar organization or
organizations) regarding escrow or other arrangements in connection with
transactions of such Portfolio;

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(l) For delivery in accordance with the provisions of any agreement
among the Trust, Custodian, and a futures commission merchant, relating to
compliance with the rules of the Commodity Futures Trading Commission and/or any
contract market (or any similar organization or organizations) regarding margin
or other deposits in connection with transactions of such Portfolio;

(m) For delivery to a securities broker-dealer as margin for
a short sale of securities for such Portfolio;

(n) To the issuer of American Depositary Receipts or International
Depositary Receipts (hereinafter, collectively, "ADRs") for such securities, or
its agent, against a written receipt therefor adequately describing such
securities, provided that such securities are delivered together with
instructions to issue ADRs in the name of Custodian or its nominee and to
deliver such ADRs to Custodian;

(o) In the case of ADRs, to the issuer thereof, or its agent, against a
written receipt therefor adequately describing such ADRs, provided that such
ADRs are delivered together with instructions to deliver the securities
underlying such ADRs to Custodian or an agent of Custodian; or

(p) For any other proper purpose, but only upon receipt of Proper
Instructions, specifying the securities or other assets to be delivered, setting
forth the purpose for which such delivery is to be made, certifying such purpose
to be a proper purpose of such Portfolio, and naming the person or persons to
whom delivery of such securities or other assets is to be made.

3.15 Delivery Prior to Final Payment. When instructed by the Trust to
deliver securities of a Portfolio against payment, Custodian shall be entitled,
but only if in accordance with generally accepted market practice, to deliver
such securities

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prior to actual receipt of final payment therefor and, exclusively in the case
of securities in physical form, prior to receipt of payment therefor. In any
such case, such Portfolio shall bear the risk that final payment for such
securities may not be made or that such securities may be returned or otherwise
held or disposed of by or through the person to whom they were delivered, and
Custodian shall have no liability for any of the foregoing.

3.16 Credit Prior to Final Payment. In its sole discretion and from
time to time, Custodian may credit the Custody Account of a Portfolio, prior to
actual receipt of final payment thereof, with (a) proceeds from the sale of
securities of such Portfolio which it has been instructed to deliver against
payment, (b) proceeds from the redemption of securities or other assets in such
Custody Account, and (c) income from securities, funds or other assets in such
Custody Account. Any such credit shall be conditional upon actual receipt by
Custodian of final payment and may be reversed if final payment is not actually
received in full. Custodian may, in its sole discretion and from time to time,
permit a Portfolio to use funds so credited to its Custody Account in
anticipation of actual receipt of final payment. Any funds so used shall
constitute an advance subject to Section 3.19 below.

3.17 Definition of Final Payment. For purposes of this Agreement,
"final payment" means payment in funds which are (or have become) immediately
available, under applicable law are irreversible, and are not subject to any
security interest, levy, lien or other encumbrance.

3.18 Payments and Deliveries Outside United States. Notwithstanding
anything to the contrary that may be required by Section 3.13 or Section 3.14
above, or elsewhere in this Agreement, in the case of securities and other
assets maintained outside the United States and in the case of payments made
outside the United States, Custodian and any sub-custodian appointed pursuant to
this

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Agreement may receive and deliver such securities or other assets, and may make
such payments, in accordance with the laws, regulations, customs, procedures and
practices applicable in the relevant local market outside the United States;

3.19 Clearing Credit. Custodian may, in its sole discretion and from
time to time, advance funds to the Trust to facilitate the settlement of a
Portfolio's transactions in the Custody Account of such Portfolio. Any such
advance (a) shall be repayable immediately upon demand made by Custodian, (b)
shall be fully secured as provided in Section 9.3 below, and (c) shall bear
interest at such rate, and be subject to such other terms and conditions, as
Custodian and the Trust may agree.

3.20 Actions Not Requiring Proper Instructions. Unless otherwise
instructed by the Trust, Custodian shall with respect to all securities and
other assets held for a Portfolio:

(a) Subject to Section 8.4 below, receive into the Custody Account of
such Portfolio any funds or other property, including payments of principal,
interest and dividends, due and payable on or on account of such securities and
other assets;

(b) Deliver securities of such Portfolio to the issuers of such
securities or their agents for the transfer thereof into the name of such
Portfolio, Custodian or any of the nominees referred to in Section 3.21 below;

(d) Surrender interim receipts or securities in temporary form for
securities in definitive form;

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(e) Execute, as custodian, any necessary declarations or certificates
of ownership under the federal income tax laws of the United States, or the laws
or regulations of any other taxing authority, in connection with the transfer of
such securities or other assets or the receipt of income or other payments with
respect thereto;

(f) Receive and hold for such Portfolio all rights and similar
securities issued with respect to securities or other assets of such Portfolio;

(g) As may be required in the execution of Proper Instructions,
transfer funds from the Custody Account of such Portfolio to any demand deposit
account maintained by Custodian pursuant to Section 3.8 above; and

(h) In general, attend to all non-discretionary details in connection
with the sale, exchange, substitution, purchase and transfer of, and other
dealings in, such securities and other assets.

3.21 Registration and Transfer of Securities. All securities held for a
Portfolio that are issuable only in bearer form shall be held by Custodian in
that form, provided that any such securities shall be held in a Securities
Depository or Book-Entry System if eligible therefor. All other securities and
all other assets held for a Portfolio may be registered in the name of (a)
Custodian as agent, (b) any sub-custodian appointed pursuant to this Agreement,
(c) any Securities Depository, or (d) any nominee or agent of any of them. The
Trust shall furnish to Custodian appropriate instruments to enable Custodian to
hold or deliver in proper form for transfer, or to register as in this Section
3.21 provided, any securities or other assets delivered to Custodian which are
registered in the name of a Portfolio.

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3.22 Records. (a) Custodian shall maintain complete and accurate
records with respect to securities, funds and other assets held for a Portfolio,
including (i) journals or other records of original entry containing an itemized
daily record in detail of all receipts and deliveries of securities and all
receipts and disbursements of funds; (ii) ledgers (or other records) reflecting
(A) securities in transfer, if any, (B) securities in physical possession, (C)
monies and securities borrowed and monies and securities loaned (together with a
record of the collateral therefor and substitutions of such collateral), (D)
dividends and interest received, and (E) dividends receivable and interest
accrued; and (iii) cancelled checks and bank records related thereto. Custodian
shall keep such other books and records with respect to securities, funds and
other assets of a Portfolio which are held hereunder as the Trust may reasonably
request.

(b) All such books and records maintained by Custodian for a Portfolio
shall (i) be maintained in a form acceptable to the Trust and in compliance with
rules and regulations of the Securities and Exchange Commission, (ii) be the
property of such Portfolio and at all times during the regular business hours of
Custodian be made available upon request for inspection by duly authorized
officers, employees or agents of the Trust and employees or agents of the
Securities and Exchange Commission, and (iii) if required to be maintained under
the 1940 Act, be preserved for the periods prescribed therein.

3.23 Account Reports by Custodian. Custodian shall furnish the Trust
with a daily activity statement, including a summary of all transfers to or from
the Custody Account of each Portfolio (in the case of securities and other
assets maintained in the United States, on the day following such transfers). At
least monthly and from time to time, Custodian shall furnish the Trust with a
detailed statement of the securities, funds and other assets held for each
Portfolio under this Agreement.

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3.24 Other Reports by Custodian. Custodian shall provide the Trust with
such reports as the Trust may reasonably request from time to time on the
internal accounting controls and procedures for safeguarding securities which
are employed by Custodian or any sub-custodian appointed pursuant to this
Agreement.

3.25 Proxies and Other Materials. (a) Unless otherwise instructed by
the Trust, Custodian shall promptly deliver to the Trust all notices of
meetings, proxies and proxy materials which it receives regarding securities
held in the Custody Account of a Portfolio. Before delivering them to the Trust,
Custodian shall cause all proxies relating to such securities which are not
registered in the name of a Portfolio to be promptly executed by the registered
holder of such securities, without indication of the manner in which such
proxies are to be voted. Unless otherwise instructed by the Trust, neither
Custodian nor any of its agents shall exercise any voting rights with respect to
securities held hereunder.

(b) Unless otherwise instructed by the Trust, Custodian shall promptly
transmit to the Trust all other written information received by Custodian from
issuers of securities held in the Custody Account of any Portfolio. With respect
to tender or exchange offers for such securities, Custodian shall promptly
transmit to the Trust all written information received by Custodian from the
issuers of the securities whose tender or exchange is sought and from the party
(or its agents) making the tender or exchange offer. If the Trust desires to
take action with respect to any tender offer, exchange offer or other similar
transaction, the Trust shall notify Custodian (i) in the case of securities
maintained outside the United States, such number of Business Days prior to the
date on which Custodian is to take such action as will allow Custodian to take
such action in the relevant local market for such securities in a timely
fashion, and (ii) in the case of

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all other securities, at least five Business Days prior to the date on which
Custodian is to take such action.

3.26 Co-operation. Custodian shall cooperate with and supply necessary
information to the entity or entities appointed by the Trust to keep the books
of account of a Portfolio and/or to compute the value of the assets of a
Portfolio.

ARTICLE IV
REDEMPTION OF PORTFOLIO SHARES;
DIVIDENDS AND OTHER DISTRIBUTIONS

4.1 Transfer of Funds. From such funds as may be available for the
purpose in the Custody Account of a Portfolio, and upon receipt of Proper
Instructions specifying that the funds are required to redeem Shares of such
Portfolio or to pay dividends or other distributions to holders of Shares of
such Portfolio, Custodian shall transfer each amount specified in such Proper
Instructions to such account of such Portfolio or of an agent thereof (other
than Custodian), at such bank, as the Trust may designate therein with respect
to such amount.

4.2 Sole Duty of Custodian. Custodian's sole obligation with respect to
the redemption of Shares of a Portfolio and the payment of dividends thereon and
of other distributions by a Portfolio shall be as set forth in Section 4.1
above, and Custodian shall not be required to make any payments to the various
holders from time to time of Shares of a Portfolio nor shall Custodian be
responsible for the payment or distribution by the Trust, or any agent
designated in Proper Instructions given pursuant to Section 4.1 above, of any
amount paid by Custodian to the account of the Trust or such agent in accordance
with such Proper Instructions.

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ARTICLE V
SEGREGATED ACCOUNTS

Upon receipt of Proper Instructions to do so, Custodian shall establish
and maintain a segregated account or accounts for and on behalf of any
Portfolio, into which account or accounts funds and/or securities may be
transferred, including securities maintained in a Securities Depository:

(a) in accordance with the provisions of any agreement among the Trust,
Custodian and a securities broker-dealer (or any futures commission merchant),
relating to compliance with the rules of The Options Clearing Corporation or of
any registered national securities exchange (or the Commodity Futures Trading
Commission or any registered contract market), or of any similar organization or
organizations, regarding escrow or other arrangements in connection with
transactions of such Portfolio,

(b) for purposes of segregating funds or securities in connection with
securities options purchased or written by such Portfolio or in connection with
financial futures contracts (or options thereon) purchased or sold by such
Portfolio,

(d) for purposes of compliance by such Portfolio with requirements
under the 1940 Act for the maintenance of segregated accounts by registered
management investment companies in connection with reverse repurchase
agreements, when-issued, delayed delivery and firm commitment transactions, and
short sales of securities, and

(e) for other proper purposes, but only upon receipt of Proper
Instructions, specifying the purpose or purposes of such segregated account and
certifying such purposes to be proper purposes of such Portfolio.

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ARTICLE VI
CERTAIN REPURCHASE TRANSACTIONS

6.1 Transactions. If and to the extent that the necessary funds and
securities of a Portfolio have been entrusted to it under this Agreement, and
subject to Custodian's right to foreclose upon and liquidate collateral pledged
to it pursuant to Section 9.3 below, Custodian, as agent of such Portfolio,
shall from time to time (and unless the Trust gives it Proper Instructions to do
otherwise) make for the account of such Portfolio the transfers of funds and
deliveries of securities which such Portfolio is required to make pursuant to
the Master Repurchase Agreement and shall receive for the account of such
Portfolio the transfers of funds and deliveries of securities which the seller
under the Master Repurchase Agreement is required to make pursuant thereto.
Custodian shall make and receive all such transfers and deliveries pursuant to,
and subject to the terms and conditions of, the Master Repurchase Agreement.

6.2 Collateral. Custodian shall daily mark to market the securities
purchased under the Master Repurchase Agreement and held in the Custody Account
of a Portfolio, and shall give to the seller thereunder any such notice as may
be required thereby in connection with such mark-to-market.

6.3 Events of Default. Custodian shall promptly notify the Trust of any
event of default under the Master Repurchase Agreement (as such term "event of
default" is defined therein) of which it has actual knowledge.

6.4 Master Repurchase Agreement. Custodian hereby acknowledges its
receipt from the Trust of a copy of the Master Repurchase Agreement. The Trust
shall provide Custodian, prior to the effectiveness thereof, with a copy of any
amendment to the Master Repurchase Agreement.

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ARTICLE VII
CERTAIN SECURITIES LENDING TRANSACTIONS

7.1 Transactions. If and to the extent that the necessary funds and
securities of a Portfolio have been entrusted to it under this Agreement, and
subject to Custodian's right to foreclose upon and liquidate collateral pledged
to it pursuant to Section 9.3 below, Custodian, as agent of such Portfolio,
shall from time to time (and unless the Trust gives it Proper Instructions to do
otherwise) make for the account of such Portfolio the transfers of funds and
deliveries of securities which such Portfolio is required to make pursuant to
the Master Securities Loan Agreement and shall receive for the account of such
Portfolio the transfers of funds and deliveries of securities which the borrower
under the Master Securities Loan Agreement is required to make pursuant thereto.
Custodian shall make and receive all such transfers and deliveries pursuant to,
and subject to the terms and conditions of, the Master Securities Loan
Agreement.

7.2 Collateral. Custodian shall daily mark to market, in the manner
provided for in the Master Securities Loan Agreement, all loans of securities
which may from time to time be outstanding thereunder.

7.3 Defaults. Custodian shall promptly notify the Trust of any default
under the Master Securities Loan Agreement (as such term "default" is defined
therein) of which it has actual knowledge.

7.4 Master Securities Loan Agreement. Custodian hereby acknowledges its
receipt from the Trust of a copy of the Master Securities Loan Agreement. The
Trust shall provide Custodian, prior to the effectiveness thereof, with a copy
of any amendment to the Master Securities Loan Agreement.

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ARTICLE VIII
CONCERNING THE CUSTODIAN

8.1 Standard of Care. Custodian shall be held to the exercise of
reasonable care in carrying out its obligations under this Agreement, and shall
be without liability to any Portfolio or the Trust for any loss, damage, cost,
expense (including attorneys' fees and disbursements), liability or claim which
does not arise from willful misfeasance, bad faith or negligence on the part of
Custodian. In no event shall Custodian be liable for special, incidental or
consequential damages, even if Custodian has been advised of the possibility of
such damages, or be liable in any manner whatsoever for any action taken or
omitted upon instructions from an Authorized Person.

8.2 Actual Collection Required. Custodian shall not be liable for, or
considered to be the custodian of, any funds belonging to a Portfolio or any
money represented by a check, draft or other instrument for the payment of
money, until Custodian or its agents actually receive such funds or collect on
such instrument.

8.3 No Responsibility for Title, etc. So long as and to the extent that
it is in the exercise of reasonable care, Custodian shall not be responsible for
the title, validity or genuineness of any assets or evidence of title thereto
received or delivered by it or its agents.

8.4 Limitation on Duty to Collect. Custodian shall promptly notify the
Trust whenever any money or property due and payable from or on account of any
securities or other assets held hereunder for a Portfolio is not timely received
by it. Custodian shall not, however, be required to enforce collection, by legal
means or otherwise, of any such money or other property not paid when due, but
shall receive the proceeds of such collections as may be effected by it or its
agents in the ordinary course of Custodian's custody and safekeeping business or
of the custody and safekeeping business of such agents.

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8.5 Express Duties Only. Custodian shall have no duties or obligations
whatsoever except such duties and obligations as are specifically set forth in
this Agreement, and no covenant or obligation shall be implied in this Agreement
against Custodian. Custodian shall have no discretion whatsoever with respect to
the management, disposition or investment of the Custody Account of any
Portfolio and is not a fiduciary to any Portfolio or the Trust. In particular,
Custodian shall not be under any obligation at any time to monitor or to take
any other action with respect to compliance by any Portfolio or the Trust with
the 1940 Act, the provisions of the Trust's charter documents or by-laws, or any
Portfolio's investment objectives, policies and limitations as in effect from
time to time.

ARTICLE IX
INDEMNIFICATION

9.1 Indemnification. Each Portfolio shall indemnify and hold harmless
Custodian, any sub-custodian appointed pursuant to this Agreement and any
nominee of any of them, from and against any loss, damages, cost, expense
(including attorneys' fees and disbursements), liability (including, without
limitation, liability arising under the Securities Act of 1933, the Securities
Exchange Act of 1934, the 1940 Act, and any federal, state or foreign securities
and/or banking laws) or claim arising directly or indirectly (a) from the fact
that securities or other assets in the Custody Account of such Portfolio are
registered in the name of any such nominee, or (b) from any action or inaction,
with respect to such Portfolio, by Custodian or such sub-custodian or nominee
(i) at the request or direction of or in reliance on the advice of the Trust or
any of its agents, or (ii) upon Proper Instructions, or (c) generally, from the
performance of its obligations under this Agreement with respect to such
Portfolio, provided that Custodian, any such sub-custodian or any nominee of any
of them shall not be indemnified and held harmless from and against any such
loss, damage, cost, expense, liability or claim arising from willful

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misfeasance, bad faith or negligence on the part of Custodian or any such
sub-custodian or nominee.

9.2 Indemnity to be Provided. If the Trust requests Custodian to take
any action with respect to securities or other assets of a Portfolio, which may,
in the opinion of Custodian, result in Custodian or its nominee becoming liable
for the payment of money or incurring liability of some other form, Custodian
shall not be required to take such action until such Portfolio shall have
provided indemnity therefor to Custodian in an amount and form satisfactory to
Custodian.

9.3 Security. As security for the payment of any present or future
obligation or liability of any kind which a Portfolio may have to Custodian with
respect to or in connection with the Custody Account of such Portfolio or this
Agreement, the Trust hereby pledges to Custodian all securities, funds and other
assets of every kind which are in such Custody Account or otherwise held for
such Portfolio pursuant to this Agreement, and hereby grants to Custodian a
lien, right of set-off and continuing security interest in such securities,
funds and other assets.

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ARTICLE X
FORCE MAJEURE

Custodian shall not be liable for any failure or delay in performance
of its obligations under this Agreement arising out of or caused, directly or
indirectly, by circumstances beyond its reasonable control, including, without
limitation, acts of God; earthquakes; fires; floods; wars; civil or military
disturbances; sabotage; strikes; epidemics; riots; power failures; computer
failure and any such circumstances beyond its reasonable control as may cause
interruption, loss or malfunction of utility, transportation, computer (hardware
or software) or telephone communication service; accidents; labor disputes; acts
of civil or military authority; actions by any governmental authority, de jure
or de facto; or inability to obtain labor, material, equipment or
transportation.

ARTICLE XI
REPRESENTATIONS AND WARRANTIES

11.1 Representations With Respect to Portfolios. The Trust represents
and warrants that (a) it has all necessary power and authority to perform the
obligations hereunder of each Portfolio, (b) the execution and delivery by it of
this Agreement, and the performance by it of the obligations hereunder of each
Portfolio, have been duly authorized by all necessary action and will not
violate any law, regulation, charter, by-law, or other instrument, restriction
or provision applicable to it or such Portfolio or by which it or such
Portfolio, or their respective assets, may be bound, and (c) this Agreement
constitutes a legal, valid and binding obligation of each Portfolio, enforceable
against it in accordance with its terms.

11.2 Representations of Custodian. Custodian represents and warrants
that (a) it has all necessary power and authority to perform its obligations
hereunder, (b) the execution and delivery

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by it of this Agreement, and the performance by it of its obligations hereunder,
have been duly authorized by all necessary action and will not violate any law,
regulation, charter, by-law, or other instrument, restriction or provision
applicable to it or by which it or its assets may be bound, and (c) this
Agreement constitutes a legal, valid and binding obligation of it, enforceable
against it in accordance with its terms.

ARTICLE XII
COMPENSATION OF CUSTODIAN

Each Portfolio shall pay Custodian such fees and charges as are set
forth in Exhibit E hereto, as such Exhibit E may from time to time be revised by
Custodian upon 14 days' prior written notice to the Trust. Any annual fee
payable by a Portfolio shall be calculated on the basis of the total market
value of the assets in the Custody Account of such Portfolio as determined on
the last Business Day of the month for which such fee is charged; and such fee,
and any transaction charges payable by such Portfolio, shall be paid monthly by
automatic deduction from such Custody Account. Out-of-pocket expenses incurred
by Custodian in the performance of its services hereunder, and all other proper
charges and disbursements of the Custody Account of any Portfolio, shall be
charged to such Custody Account by Custodian and paid therefrom.

ARTICLE XIII
TAXES

13.1 Taxes Payable by Portfolios. Any and all taxes, including any
interest and penalties with respect thereto, which may be levied or assessed
under present or future laws or in respect of the Custody Account of any
Portfolio or any income thereof shall be charged to such Custody Account by
Custodian and paid therefrom.

13.2 Tax Reclaims. Upon the written request of the Trust, Custodian
shall exercise, on behalf of any Portfolio, any tax

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reclaim rights of such Portfolio which arise in connection with foreign
securities in the Custody Account of such Portfolio.

ARTICLE XIV
AUTHORIZED PERSONS; NOTICES

14.1 Authorized Persons. Custodian may rely upon and act in accordance
with any notice, confirmation, instruction or other communication received by it
from the Trust which is reasonably believed by Custodian to have been given or
signed on behalf of the Trust by one of the Authorized Persons designated by the
Trust in Exhibit B hereto, as it may from time to time be revised. The Trust may
revise Exhibit B hereto at any time by notice in writing to Custodian given in
accordance with Section 14.4 below, but no revision of Exhibit B hereto shall be
effective until Custodian actually receives such notice.

14.2 Investment Advisers. Custodian may also act in accordance with any
Written or Oral Instructions given with respect to a Portfolio which are
reasonably believed by Custodian to have been given or signed by one of the
persons designated from time to time by any of the investment advisers of such
Portfolio who are specified in Exhibit C hereto (if any) as it may from time to
time be revised. The Trust may revise Exhibit C hereto at any time by notice in
writing to Custodian given in accordance with Section 14.4 below, and each
investment adviser specified in Exhibit C hereto (if any) may at any time by
like notice designate an Authorized Person or remove an Authorized Person
previously designated by it, but no revision of Exhibit C hereto (if any) and no
designation or removal by such investment adviser shall be effective until
Custodian actually receives such notice.

14.3 Oral Instructions. Custodian may rely upon and act in accordance
with Oral Instructions. All Oral Instructions shall be confirmed to Custodian in
Written Instructions. However, if Written Instructions confirming Oral
Instructions are not received by Custodian prior to a transaction, it shall in
no way affect the

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validity of the transaction authorized by such Oral Instructions or the
authorization given by an Authorized Person to effect such transaction.
Custodian shall incur no liability to any Portfolio or the Trust in acting upon
Oral Instructions. To the extent such Oral Instructions vary from any confirming
Written Instructions, Custodian shall advise the Trust of such variance but
unless confirming Written Instructions are timely received, such Oral
Instructions shall govern.

14.4 Addresses for Notices. Unless otherwise specified herein, all
demands, notices, instructions, and other communications to be given hereunder
shall be sent, delivered or given to the recipient at the address, or the
relevant telephone number, set forth after its name hereinbelow:

If to the Trust:

The FBR Family of Funds
for [INSERT NAME OF PORTFOLIO]
Potomac Tower
1001 Nineteenth Street North
Arlington, VA 22209
Attention: _____________________________
Telephone: (703) 312-9583
Facsimile: (703) -

If to Custodian:

Custodial Trust Company
101 Carnegie Center
Princeton, New Jersey 08540-6231
Attention: Vice President - Trust Operations
Telephone: (609) 951-2320
Facsimile: (609) 951-2327

or at such other address as either party hereto shall have provided to the other
by notice given in accordance with this Section 14.4. Writing shall include
transmissions by or through teletype, facsimile, central processing unit
connection, on-line terminal and magnetic tape.

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14.5 Remote Clearance. Written Instructions for the receipt, delivery
or transfer of securities may include, and Custodian shall accept, Remote
Clearance Instructions (as defined hereinbelow) and Bulk Input Instructions (as
defined hereinbelow), provided that such Instructions are given in accordance
with the procedures prescribed by Custodian from time to time as to content of
instructions and their manner and timeliness of delivery by Customer. Custodian
shall be entitled to conclusively assume that all Remote Clearance Instructions
and Bulk Input Instructions have been given by an Authorized Person, and
Custodian is hereby irrevocably authorized to act in accordance therewith. For
purposes of this Agreement, "Remote Clearance Instructions" means instructions
that are input directly via a remote terminal which is located on the premises
of the Trust, or of an investment adviser named in Exhibit C hereto, and linked
to Custodian; and "Bulk Input Instructions" means instructions that are input by
bulk input computer tape delivered to Custodian by messenger or transmitted to
it via such transmission mechanism as the Trust and Custodian shall from time to
time agree upon.

ARTICLE XV
EFFECTIVENESS; DURATION

This Agreement shall become effective on the day and year first above
written. It shall continue in effect until the first anniversary of such day and
year and, thereafter, for successive annual periods, provided that such
continuance is specifically approved at least annually by the Board of Trustees.

ARTICLE XVI
TERMINATION

Either party hereto may terminate this Agreement with respect to one or
more of the Portfolios by giving to the other party a notice in writing
specifying the date of such termination, which shall be not less than sixty (60)
days after the date of the giving

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of such notice. Upon the date set forth in such notice this Agreement shall
terminate with respect to each Portfolio specified in such notice, and Custodian
shall, upon receipt of a notice of acceptance by the successor custodian, on
that date (a) deliver directly to the successor custodian or its agents all
securities (other than securities held in a Book-Entry System or Securities
Depository) and other assets then owned by such Portfolio and held by Custodian
as custodian, and (b) transfer any securities held in a Book-Entry System or
Securities Depository to an account of or for the benefit of such Portfolio,
provided that such Portfolio shall have paid to Custodian all fees, expenses and
other amounts to the payment or reimbursement of which it shall then be
entitled.

ARTICLE XVII
LIMITATION OF LIABILITIES

Neither any trustee of the Trust, when acting in such capacity, nor any
officer thereof, when acting in such capacity, shall be personally liable to
Custodian for any act, omission or obligation of the Trust, of any Portfolio or
of any trustee or officer of the Trust.

ARTICLE XVIII
MISCELLANEOUS

18.1 Business Days. Nothing contained in this Agreement shall require
Custodian to perform any function or duty on a day other than a Business Day.

18.2 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York, without regard to the
conflict of law principles thereof.

18.3 References to Custodian. The Trust shall not circulate any printed
matter which contains any reference to Custodian without the prior written
approval of Custodian, excepting printed

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matter contained in the prospectus or statement of additional information for a
Portfolio and such other printed matter as merely identifies Custodian as
custodian for a Portfolio. The Trust shall submit printed matter requiring
approval to Custodian in draft form, allowing sufficient time for review by
Custodian and its counsel prior to any deadline for printing.

18.4 No Waiver. No failure by either party hereto to exercise, and no
delay by such party in exercising, any right hereunder shall operate as a waiver
thereof. The exercise by either party hereto of any right hereunder shall not
preclude the exercise of any other right, and the remedies provided herein are
cumulative and not exclusive of any remedies provided at law or in equity.

18.5 Amendments. This Agreement cannot be changed orally and no
amendment to this Agreement shall be effective unless evidenced by an instrument
in writing executed by the parties hereto.

18.6 Counterparts. This Agreement may be executed in one or more
counterparts, and by the parties hereto on separate counterparts, each of which
shall be deemed an original but all of which together shall constitute but one
and the same instrument.

18.7 Severability. If any provision of this Agreement shall be invalid,
illegal or unenforceable in any respect under any applicable law, the validity,
legality and enforceability of the remaining provisions shall not be affected or
impaired thereby.

18.8 Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns; provided, however, that this Agreement shall not be assignable by
either party hereto without the written consent of the other party. Any
purported assignment in violation of this Section 18.8 shall be void.

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18.9 Jurisdiction. Any suit, action or proceeding with respect to this
Agreement may be brought in the Supreme Court of the State of New York, County
of New York, or in the United States District Court for the Southern District of
New York, and the parties hereto hereby submit to the non-exclusive jurisdiction
of such courts for the purpose of any such suit, action or proceeding, and
hereby waive for such purpose any other preferential jurisdiction by reason of
their present or future domicile or otherwise.

18.10 Headings. The headings of sections in this Agreement are for
convenience of reference only and shall not affect the meaning or construction
of any provision of this Agreement.

IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its representative
thereunto duly authorized, all as of the day and year first above written.

THE FBR FAMILY OF FUNDS

By: ____________________
Name:
Title:

CUSTODIAL TRUST COMPANY

By: _____________________
Name:
Title:

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EXHIBIT A

PORTFOLIOS

- - FBR Small Cap Financial Fund

- - FBR Financial Services Fund

- - FBR Growth/Value Fund

- - FBR Information Technologies Fund

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<PAGE>

EXHIBIT B

AUTHORIZED PERSONS

Set forth below are the names and specimen signatures of the persons
authorized by the Trust to administer the Custody Accounts of the Portfolios.

Name Signature
---- ---------
______________________________ ______________________________

______________________________ ______________________________

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EXHIBIT C

INVESTMENT ADVISERS

ALL PORTFOLIOS

FBR Fund Advisers, Inc.

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EXHIBIT D

APPROVED FOREIGN SUB-CUSTODIANS AND SECURITIES DEPOSITORIES

ALL PORTFOLIOS

Foreign Sub-custodian Country(ies) Securities Depositories
- --------------------- ------------ -----------------------

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EXHIBIT E
CUSTODY FEES AND TRANSACTION CHARGES

All fees and charges set forth in this Exhibit E shall be calculated
and paid in the manner provided in Article XII above.

Domestic Fees. Each Portfolio shall pay Custodian the following fees
for assets maintained by such Portfolio in the United States ("Domestic Assets")
and charges for transactions by such Portfolio in the United States, all such
fees and charges to be payable monthly:

(1) an annual fee of the greater of 0.02% (two basis points) per annum
of the value of the Domestic Assets in the Custody Account of such Portfolio or
$6,000;

(2) a transaction charge of $15 for each receive or deliver of
book-entry securities into or from the Custody Account of such Portfolio (but
not for any such receive or deliver in a repurchase transaction representing a
cash sweep investment for such Portfolio's account);

(3) a transaction charge of $25 for each receive or deliver into or
from such Portfolio's Custody Account of securities in physical form;

(4) a transaction charge for each repurchase transaction in the Custody
Account of such Portfolio which represents a cash sweep investment for such
Portfolio's account, computed at a rate of 0.10% (ten basis points) per annum on
the amount of the purchase price paid by such Portfolio in such repurchase
transaction;

(5) a charge of $10 for each "free" transfer of funds from the
Custody Account of such Portfolio; and

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(6) a separately negotiated service charge for each holding of
securities or other assets of such Portfolio that are sold by way of private
placement or in such other manner as to require services by Custodian which in
its reasonable judgment are materially in excess of those ordinarily required
for the holding of publicly traded securities in the United States.

International Fees. Each Portfolio shall pay Custodian fees for assets
maintained by such Portfolio outside the United States ("Foreign Assets") and
charges for transactions by such Portfolio outside the United States (including,
without limitation, charges for funds transfers and tax reclaims) in accordance
with such schedule of fees and charges for each country in which Foreign Assets
of such Portfolio are held as Custodian shall from time to time provide to the
Trust. Any asset-based fee shall be based upon the total market value of the
applicable Foreign Assets as determined on the last Business Day of the month
for which such fee is charged.

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FUND DIRECT CUSTODY AGREEMENT
FOR CITIBANK, N.A., SUBSIDIARIES and AFFILIATES
and
CUSTODIAL TRUST COMPANY

<PAGE>

TABLE OF CONTENTS

SECTION PAGE

PREAMBLE............................................................... 1
1. DEFINITIONS............................................................ 2
2. APPOINTMENT OF CUSTODIAN............................................... 4
3. CITIBANK AFFILIATES.................................................... 5
4. PROPERTY ACCEPTED...................................................... 5
5. REPRESENTATIONS AND WARRANTIES......................................... 6
6. IDENTIFICATION AND SEGREGATION OF ASSETS............................... 7
7. PERFORMANCE BY THE CUSTODIAN........................................... 8
(a) Transactions not requiring Instructions....................... 8
(b) Transactions requiring Instructions........................... 10
8. REGISTRATION........................................................... 11
9. CLIENT DEPOSIT ACCOUNT PAYMENTS........................................ 11
10. CUSTODY ACCOUNT AND DEPOSIT ACCOUNT PROCEDURES......................... 12
11. REPORTS, RECORDS AND ACCESS............................................ 12
12. USE OF AGENTS, CLEARANCE SYSTEMS AND DEPOSITORIES...................... 14
13. CITICORP ORGANIZATION INVOLVEMENT...................................... 16
14. SCOPE OF RESPONSIBILITY................................................ 16
15. INDEMNITY.............................................................. 19
16. LIEN................................................................... 20
17. FEES AND EXPENSES...................................................... 21
18. AMENDMENT.............................................................. 21

<PAGE>

19. TERMINATION............................................................ 21
20. ASSIGNMENT............................................................. 22
21. DISCLOSURE............................................................. 22
22. NOTICES................................................................ 22
23. GOVERNING LAW AND JURISDICTION......................................... 23
24. PROVISION OF INFORMATION REGARDING PROPERTY HELD OUTSIDE THE
UNITED STATES.......................................................... 23
SIGNATURES............................................................. 24
COUNTRY SELECTIONS (Exhibit A)......................................... 26

<PAGE>

DIRECT CUSTODY AGREEMENT

THIS DIRECT CUSTODY AGREEMENT is made as of October 1, 1993 by and among
Citibank, N.A. (the "Bank") acting through its branch or office at
______________ as principal on its own behalf and as agent, with respect to
signature, on behalf of each of the Citibank affiliates listed on the attached
Exhibit A and selected by the Client in writing (each a "Citibank Affiliate",
which expression shall include any other Citibank affiliates as agreed in
writing between the Client as hereinafter defined and the Bank from time to time
and any branch or office of Citibank, N.A. whether or not having separate legal
personality or corporate existence as therein listed or as agreed as aforesaid)
and Custodial Trust Company (the "Client") having its office or principal place
of business at 101 Carnegie Center, Princeton, New Jersey 08540.

W I T N E S S E T H :

THAT WHEREAS, the Client wishes to open and maintain a custody account or
accounts with the Bank and certain Citibank Affiliates (if any) listed in the
attached Exhibit A to hold certain assets in accordance with this Custody
Agreement and on such other terms and conditions as may be set forth in the
Schedules attached hereto (if any) or as may be set forth in operating
procedures upon which Client and Custodian may from time to time agree in
writing (the Bank and the Citibank Affiliates selected by the Client from time
to time are and each of them is hereafter referred to as the "Custodian").

WHEREAS, the Custodian wishes to establish such custody account or accounts
under the terms and conditions of this Custody Agreement and the Schedules
attached hereto, if any (this Custody Agreement and such Schedules as both may
be amended from time to time, collectively, the "Agreement" or "Custody
Agreement");

<PAGE>

NOW, THEREFORE, in consideration of the premises and of the agreements
hereinafter set forth, the parties agree as follows:

1. DEFINITIONS

"Authorized Person(s)" means (i) any officers, employees or agents of the
Client as have been authorized by notice in writing to the Custodian to act on
its behalf in the performance of any acts, discretions or duties under this
Agreement, or (ii) any other person, firm or company holding a duly executed
Power-of-Attorney from the Client which is in a form acceptable to the
Custodian.

"Citicorp Organization" means Citicorp and any company of which Citicorp
is, now or hereafter, directly or indirectly a shareholder.

"Clearance System" means Cedel, S.A., the Euro-clear System, the First
Chicago Clearing Centre, The Depository Trust Company and such other clearing
agency, settlement system or depository as may from time to time be used in
connection with transactions relating to securities, and any depository or
clearing agency for any of the foregoing.

"Instructions" means instructions from any Authorized Person received by
the Custodian, orally, via telephone, telex (whether tested or untested),
facsimile transmission, bank wire or other teleprocess or electronic instruction
system acceptable to the Custodian which have been transmitted with testing or
authentication on such terms and conditions as the Custodian may specify in
writing, provided that:

(i) Instructions delivered to the Custodian by telephone shall be promptly
confirmed in writing by an Authorized Person (which confirmation if
the Custodian agrees may bear a facsimile signature) although the
Custodian may, in its absolute

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<PAGE>

discretion, act upon such Instructions before any confirmation is
received and shall be fully protected in so acting even in the absence
of any such confirmation if such instructions are reasonably believed
by Custodian to be genuine and to have been given by an Authorized
Persons;

(ii) Instructions shall continue in full force and effect until cancelled
or superseded;

(iii)if any Instructions are unclear and/or ambiguous, the Custodian may in
its absolute discretion act upon what is reasonably believes such
instructions to be or without any liability on its part, refuse to
execute such Instructions until any ambiguity or conflict has been
resolved to its satisfaction;

(iv) Instructions shall be provided and carried out subject to the
operating procedures, marketing practices, rules and regulation of any
relevant stock exchange, Clearance System, depository or market where
they are to be executed, and can be acted upon by the Custodian only
during banking hours and on banking days when the applicable financial
markets are open for business. All such Instructions shall be carried
out subject to the local laws, regulations, customs, procedures and
practices applicable at the place of performance of such Instructions;
and to which the Custodian is otherwise subject and shall be governed
by and construed in accordance with the local law applicable;

(v) Instructions are to be given in the English language and the Custodian
shall be entitled to rely upon the continued authority of any
Authorized Person to give the same until the Custodian receives notice
from the Client to the contrary; and the Custodian shall be entitled
to rely upon any Instructions it reasonably believes to have been
given by any Authorized Person.

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<PAGE>

"Investment Company" means any investment company registered under the
Investment Company Act;

"Investment Company Act" means the U.S. Investment Company Act of 1940, as
amended from time to time;

"Person" means any person, firm, company, corporation, government, state or
agency thereof or any association or partnership (whether or not having separate
legal personality) of two or more of the foregoing;

"Property" means as the context requires, any Securities, precious metals,
cash or any other property held by the Custodian under the terms of this
Agreement;

"Securities" means bonds, debentures, notes, stocks, shares, units or other
securities and all moneys, rights or property which may at any time accrue or be
offered (whether by way of bonus, redemption, preference, option or otherwise)
in respect of any of the foregoing or evidencing or representing any other
rights or interests therein (including, without limitation, any of the foregoing
not constituted, evidenced or represented by a certificate or other document but
an entry in the books or other permanent records of the issuer, a trustee or
other fiduciary thereof, or a Clearance System).

2. APPOINTMENT OF CUSTODIAN

The Client authorizes the Custodian (as defined above) to establish on the
terms of this Agreement a custody account or accounts (the "Custody Account") in
the name of the Client, for the deposit of any Securities and other Property
(apart from cash) from time to time received by the Custodian for the account of
the Client, and a deposit account or accounts (the "Client Deposit Account") in
the name of the Client, for the deposit of funds in any currency from time

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<PAGE>

to time received by the Custodian for the account of the Client, whether by way
of deposit or arising out of or in connection with any Securities, or other
Property in the Custody Account.

3. CITIBANK AFFILIATES

The Client authorizes and directs the opening of and the holding of all or
any part of the Property in such further accounts forming part of the Custody
Account and the Client Deposit Account, as the case may be, with each Citibank
Affiliate as selected by the Client in Exhibit A hereof. In any case where
Custodian is a Citibank Affiliate, Client shall execute such further documents
and provide such materials and information as may be reasonably requested by
such Citibank Affiliate to facilitate the opening and maintenance of the Custody
Account and Client Deposit Account with such Citibank Affiliate. The Client
hereby understands and agrees that the opening of and the holding of all or any
part of the Property in such accounts and the performance of any activities
contemplated herein are subject to the local laws, regulations, customs,
procedures and practices to which such Citibank Affiliate is subject and such
further terms and conditions as may be referred to in the Schedules attached
hereto (if any) or as may be in operating procedures upon which Client and
Custodian may from time to time agree upon in writing. The Client understands
and agrees that obligations and duties hereunder of any Citibank Affiliate
selected by the Client shall be performed only by such selected Citibank
Affiliate, and shall not be deemed obligations or duties of any other member of
the Citibank Organization.

4. PROPERTY ACCEPTED

The Custodian agrees to accept for custody in the Custody Account at its
discretion and subject to the conditions set forth herein:

(i) Securities; and/or

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<PAGE>

(ii) any other form of Property (apart from cash) acceptable to the
Custodian and capable of deposit under the terms of the Agreement.

The Custodian agrees to accept for custody in the Client Deposit Account
any cash in any currency (which shall if necessary be credited by the Custodian
to different accounts in the currencies concerned).

5. REPRESENTATIONS AND WARRANTIES

(A) The Client hereby represents and warrants to Custodian that:

(a) during the term of this Agreement it (and any person on whose behalf
it may act as agent or otherwise in a representative capacity) has and
will continue to have full capacity and authority to enter into this
Agreement and to carry out all the transactions contemplated herein,
and has taken and will continue to take all action (including, without
limitation the obtaining of all necessary governmental consents in any
applicable jurisdiction and customer consents (where applicable)) to
authorize the execution, delivery and performance of this Agreement;
and

(b) the resolutions of its Board of Directors or other managing body
authorizing the execution, delivery and performance of this Agreement
have been obtained and that these remain and will continue to remain
in full force and effect as of the date hereof and during the term of
this Agreement without revocation or amendment.

(B) If Custodian is a Citibank Affiliate outside the United States, it hereby
represents and warrants to the Client that:

(a) (i) it is a branch of Citibank, N.A., a national banking association
organized under the laws of the United States or (ii) it is an
"eligible foreign custodian" as

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<PAGE>

that term is defined in Rule 17f-5 ("Rule 17f-5") promulgated under
the Investment Company Act, and that it shall promptly inform the
Bank, and the Bank shall thereafter promptly inform the Client, in the
event that there appears to be a substantial likelihood that it will
cease to so qualify under Rule 17f-5 as currently in effect or as
hereafter amended, or if in fact it does cease to qualify for any
reason;

(b) Property held in the Custody Account shall not be subject to any
right, charge, security interest, lien, or claim of any kind in favor
of such Citibank affiliate or any of its creditors except a claim of
payment for the safe custody and administration of such Property
pursuant to this Agreement;

(c) beneficial ownership of Property held in the Custody Account shall be
freely transferable without the payment of money or value other than
for safe custody or administration; and

(d) it shall maintain adequate insurance of Property held under the terms
of this Agreement.

6. IDENTIFICATION AND SEGREGATION OF ASSETS

With respect to Property in the Custody Account the Custodian shall
identify as belonging to the Client all Securities and other non-cash Property
which are held in the Custody Account and shall identify on Custodian's books
and records all Property held in the Accounts as belonging to the Client. All
Property in the Accounts which has been identified to Custodian as belonging to
a customer of Client which is an Investment Company shall be further identified
on Custodian's books and records as belonging to such Investment Company.

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<PAGE>

7. PERFORMANCE BY THE CUSTODIAN

(a) Transactions not requiring Instructions

In the absence of contrary Instructions, the Custodian is authorized by the
Client to carry out the following transactions relating to the Property without
Instructions from the Client:

(i) sign any affidavits, certificates of ownership or other certificates
relating to the Property which may be required under any laws or
regulations made by any tax authority or any other regulatory
authority in any relevant jurisdiction, whether governmental or
otherwise, and whether relating to ownership, income tax or capital
gains, or any other tax, duty or levy (and the Client further agrees
to ratify and to confirm or to do such things as may be necessary to
complete or evidence the Custodian's actions under this Section
7(a)(i) or otherwise under the terms of this Agreement);

(ii) (a) collect and receive, for the account of the Client, all income and
other payments and distributions in respect of the Property, and (in
the absence of contrary Instructions) credit the same to the Client
Deposit Account;
(b) take any action necessary and proper in connection with the
receipt of income and other payments and distributions as are referred
to in Section 7(a)(ii)(a) above, including (without limitation) the
presentation of coupons and other interest items;

(iii)(a) receive and hold for the account of the Client any capital
arising out of or in connection with the Property whether as a result
of its being called or redeemed or otherwise becoming payable and (in
the absence of contrary Instructions) credit the same to the Client
Deposit Account;

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<PAGE>

(b) take action necessary and proper in connection with the receipt of
any capital as is referred to in Section 7(a)(iii)(a) above, including
(without limitation) the presentation for payment of any property
which becomes payable as a result of its being called or redeemed or
otherwise becoming payable and the endorsement for collection of
checks, drafts and other negotiable instruments;

(iv) receive and hold for the account of the Client all Securities received
by the Custodian as a result of a stock dividend, share subdivision or
reorganization, capitalization of reserves or otherwise;

(v) exchange interim or temporary receipts for definitive certificates,
and old or overstamped certificates for new certificates;

(vi) make cash disbursements for any expenses incurred in handling the
Property and for similar items in connection with the Custodian's
duties under this Agreement, and, (in the absence of contrary
Instructions) debit the same to the Client Deposit Account; and

(vii)deliver to the Client all notices of meetings, proxies, proxy
materials and other announcements which Custodian receives regarding
Securities in the Custody Account and, prior to delivering them to the
Client, cause all such proxies relating to Securities which are not
registered in the name of Client, to be executed by the registered
holder of such Securities, without indication of the manner in which
such Securities are to be voted; and promptly notify and forward to
the Client all notices, reports and other financial information
relating to the Property when received by the Custodian, and promptly
seek Instructions as to any action to be taken in connection
therewith.

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<PAGE>

(b) Transactions requiring Instructions

The Custodian is authorized by the Client to carry out the following
transactions relating to Securities and other non-cash Property upon receipt of
specific Instructions;

(i) deliver Property sold by the Client against payment or as may be
specified by the Client in its Instructions;

(ii) against receipt thereof, make payment for and to receive Property
purchased by the Client, such payment to be made by the Custodian in
accordance with the prevailing rules, operating procedures or market
practice on any relevant stock exchange, Clearance System or market,
where or through which such payment is to be made, or as may be
specified by the Client in its Instructions;

(iii)deal with bonus or scrip issues, warrants and other similar interests
offered to or received by the Custodian (or its nominee company or
other agents) or to handle proxy forms, but only as may be specified
by the Client in its Instructions;

(iv) exercise any voting rights attached to Securities, but only as may be
specified by the Client in its Instructions;

(v) except as otherwise provided herein, to deliver or dispose of the
Property only as may be specified by the client in its Instructions;
and

(vi) insure the Property on the Client's behalf provided that the Client
makes available to the Custodian the cost of such insurance in advance
or authorizes the Custodian to debit such cost to the Client Deposit
Account or any other account of the Client with the Custodian.

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<PAGE>

8. REGISTRATION

The Client agrees and understands that, except as may be specified by the
Client in its Instructions, Securities held in registered form shall be
registered as the Custodian may direct in the name of either the Custodian or
its nominee company or its agent in the jurisdiction where the Securities are
required to be registered or otherwise held. Where feasible, the Custodian will
arrange on written request by the Client for registration of Securities with the
issuer or its agent in the name of the Client or its nominee. The Client
understands and agrees, however, that the Custodian shall have discretion to
judge whether such direct registration is feasible.

9. CLIENT DEPOSIT ACCOUNT PAYMENTS

Except as may be otherwise provided herein, the Custodian shall make or
cause its nominee company or agents to make, payments from the Client Deposit
Account only:

(i) as provided in Section 7(b) above, in the connection with the purchase
of Property for the account of the Client and its delivery to the
Client, or its crediting to the Custody Account or other account of
the Client;

(ii) for the payment for the account of the Client of taxes, management or
supervisory fees, agents and other advisers' fees and distributions;

(iii)for payments to be made in connection with the conversion, exchange
or surrender of Property held in the Custody Account;

(iv) for other proper purposes as may be specified by the Client in its
Instructions; or

(v) upon the termination of this Agreement on the terms hereof,

PROVIDED THAT the payments referred to above do not exceed the funds available
in the Client Deposit Account at any time and that nothing in this Agreement
shall oblige the Custodian to extend credit, grant financial accommodation or
otherwise advance moneys to the Client for

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<PAGE>

the purpose of meeting any such payments or part thereof or otherwise carrying
out any Instructions.

10. CUSTODY ACCOUNT AND DEPOSIT ACCOUNT PROCEDURES

Unless otherwise agreed to by the Custodian and the Client, the Custodian
shall, or shall instruct any other entity authorized to hold Property in
accordance with Section 12 hereof to, receive or deliver Securities and credit
or debit the Custody Account or Client Deposit Account, as the case may be, only
in accordance with proper Instructions or as otherwise specifically provided in
this Agreement. Any proceeds from the sale or exchange of Property purchased or
acquired in the Custody Account shall be credited to the Client Deposit Account
on the date such proceeds or such Property, as the case may be, are actually
received by the Custodian.

11. REPORTS, RECORDS AND ACCESS

(a) The Custodian shall supply to the Client from time to time as mutually
agreed upon between them, but no less frequently than monthly (i) a
written statement of account with respect to all Property in the
Custody Account and the Client Deposit Account, and (ii) a written
statement of all transactions in the Accounts, including all transfers
to and from the Accounts. In the event that the Client does not inform
the Custodian in writing of any exceptions or objections within 30
days after the client's receipt of such statement, the Client shall be
deemed to have approved such statement.

(b) If the Custodian has in place a system for providing telecommunication
access or other means of direct access by customers to the Custodian's
reporting system for property in the custody accounts or the client
deposit accounts, then, upon mutual agreement and arrangement between
the Client and the Custodian, the Custodian

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<PAGE>

shall provide the Client with such instructions and passwords and/or
access codes as may be necessary in order for the Client to have such
direct access through the Client's terminal device.

(c) Except as otherwise provided in this Agreement, during the Custodian's
regular banking hours and upon receipt of reasonable notice from the
Client, any officer or employee of the Client, any independent
accountant(s) selected by the Client or any customer of Client which
is an Investment Company, any officer or other representative of such
a customer of Client designated from time to time for such purpose in
writing by Client and any person designated by any regulatory
authority having jurisdiction over the Client shall be entitled to
examine on the Custodian's premises, Property held by the Custodian on
its premises and the Custodian's records regarding all Property held
hereunder deposited with entities authorized to hold Property in
accordance with Section 12 hereof, but only upon the Client's
furnishing the Custodian with Instructions to that effect, provided
-------- such examination shall be consistent with the Custodian's
obligations of confidentiality to other parties and provided, further,
that any such examination conducted by independent accountant(s)
selected by any such Investment Company or conducted by any such
officer or other representative of such an Investment Company shall be
limited to Property, and Custodian's records regarding Property,
belonging to such Investment Company. The Custodian's cost and
expenses in facilitating such examinations and providing such reports
and documents, including but not limited to the cost to the Custodian
of providing personnel in connection with examinations, shall be borne
by the Client or by the

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<PAGE>

person or agencies making such examinations or receiving such reports
or documents, provided that such costs and expenses shall not be
deemed to include the Custodian's costs in providing to the Client (i)
the "single audit report" (if any) of the independent certified public
accountants engaged by the Custodian; and (ii) such reports and
documents as this Agreement contemplates that the Custodian shall
furnish routinely to the Client.

The Custodian shall supply to the Client from time to time, written
operational procedures which shall govern the day to day operations of the
account. Such operating procedures are hereby incorporated herein by reference.

12. USE OF AGENTS, CLEARANCE SYSTEMS AND DEPOSITORIES

The Client agrees and understands that:

(i) subject to 120 days' prior written notice from Custodian to Client in
the case of the duty to maintain custody of the Client's property, and
Custodian's function under this Agreement in that regard, the
Custodian is authorized, subject to applicable laws, rules and
regulations to appoint agents (including any member of the Citicorp
Organization) to perform any of the duties of the Custodian under this
Agreement, and the Custodian may delegate to any agent so appointed
any of its functions under this Agreement, including (without
limitation) the collection of all payments due on the Property and
whether of an income or a capital nature;

(ii) in selecting and appointing agents the Custodian shall use reasonable
care to ensure that it appoints only reportedly competent persons
provided that the Custodian shall not be responsible (except as to the
negligence in the selection of

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<PAGE>

such agents) for the performance by such agents of any of the duties
delegated to them under this Agreement;

(iii)if the Custodian appoints any agent pursuant to Section 12(i) above,
it shall be entitled to pay all normal remuneration to such agent for
the account of the Client;

(iv) subject to the Client's prior approval, in the case of Property which
has been identified to Custodian as belonging to a customer of Client
which is an Investment Company, subject also to notice by the Client
that the approval of such Investment Company pursuant to said Rules
17f-4 or 17f-5, as applicable, has been obtained, the Custodian may
deposit any Property in any Clearance System deemed appropriate by the
Custodian, and any Property so held shall be subject to the rules and
operating procedures of such Clearance System and any applicable laws
and regulations whether of a governmental authority or otherwise;
provided that in the case of Property which has been identified to
Custodian as belonging to a customer of Client which is an Investment
Company any Clearance System in the United States be one which is
permitted to perform services for Investment Companies under Rule
17f-4 promulgated under the Investment Company Act; and provided
further that in the case of Property which has been identified to
Custodian as belonging to a customer of Client which is an Investment
Company any Clearance System outside the United States be one which
meets the terms of subdivision (c)(2)(iii) or (iv) of Rule 17f-5
promulgated under the Investment Company Act or is otherwise
acceptable to the Securities and Exchange Commission to perform
services for Investment Companies.

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<PAGE>

13. CITICORP ORGANIZATION INVOLVEMENT

(a) Subject to applicable laws, the Client hereby authorizes the Custodian
without the need for the Custodian to obtain the Client's prior consent:

(i) when acting on Instructions from the Client, to purchase and sell
Securities or any other Property from and to the Custodian or any
other member of the Citicorp Organization and through any member of
the Citicorp Organization, and from and to any other client of the
Custodian; and

(ii) to obtain and keep, without being liable to account to the Client, any
commission payable by any third party or any other member of the
Citicorp Organization in connection with dealings arising out of or in
connection with the Custody Account and/or the Client Deposit Account.

(b) The Client agrees and understands that if the Custodian, acting on
Instructions from the Client arranges for investment in the name of the
Custodian (but for the account of the Client) in any Securities or any other
Property, held, issued, or managed by any member of the Citicorp Organization,
then such member of the Citicorp Organization may retain a profit (other than
the charges, commissions, and fees payable by the Client under this Agreement)
without being liable to account to the Client for such profit.

(c) The Client agrees and understands that the Custodian may have banking
relationships with companies whose Securities or any other Property are held in
the Client Custody Account and/or Client Deposit Account or which are purchased
and sold for the Custody Account and/or Client Deposit Account.

14. SCOPE OF RESPONSIBILITY

The Client agrees and understands that:

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(i) subject to the terms hereof, the Custodian shall use all reasonable
care in the performance of its duties under this Agreement and shall
exercise the same standard of care that it exercises over its own
assets in the safekeeping, handling, servicing and disposition of the
Property, but shall not be responsible for any loss or damages
suffered by the Client or a customer of the Client as a result of the
Custodian or its agents performing such duties unless the same results
from an act of negligence, bad faith or willful misfeasance on the
part of the Custodian or reckless disregard of its duties under this
Agreement, in which event the liability of the Custodian in connection
with any Property shall be limited to direct damages resulting from
such negligence, bad faith, or willful default.

(ii) upon receipt of each and every transaction advice and/or statement of
account supplied to it by the Custodian pursuant to Section 11(a)
hereof, the Client shall examine the same and notify the Custodian
within thirty (30) days of Client's receipt of any such advice or
statement of any discrepancy between Instructions given and the
situation shown therein and/or of any other errors therein. In the
absence of any notification by the Client, the Custodian shall not (in
the absence of negligence or willful default on its own part) be
liable for the consequences of any discrepancy or error which was made
or existed during the period covered by the statement or the
transaction indicated by the advice, provided however, the Custodian
shall not (in the absence of negligence or willful default on its own
part) be liable for any such consequences during the period prior to
the receipt of any such notification;

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(iii) the Custodian or its nominee company or agents, as the case may be,
may (but without being under any duty or obligation) institute or
defend legal proceedings, or take or defend any other action arising
out of or in connection with the Property, provided that the Client
indemnifies the Custodian against any costs, charges and expenses
arising from such proceedings or other action and makes available to
the Custodian such security in respect of such costs, charges and
expenses as the Custodian in its absolute discretion deems necessary.

(iv) (a) the Custodian does not have any responsibility if for any reason
or cause beyond its control, including (without limitation)
nationalization, expropriation, currency restrictions, acts of war,
terrorism, insurrection, revolution, nuclear fusion, fission or acts
of God, the operation of the Custody Account and/or Client Deposit
Account and/or the Custodian's ability to carry out Instructions or
account to the Client is restricted, removed or subject to delay in
any way; provided that Custodian has taken reasonable measures to
prepare for any such event which are substantially in accordance with
those it is industry practice to take;

(b) Custodian does not guarantee the collection of any funds or other
property payable or distributable in respect of Property, nor shall it
be required to enforce any such collection, but Custodian shall
receive the proceeds of such collections as may be effected by it or
its agents in the ordinary course of its custodian business; all
collections of the Property and of any funds or other Property paid or
distributed in respect of the Property is made at the risk of the
Client.

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(c) the Custodian shall not be liable for any loss resulting from or
caused by its proper carrying out of any Instructions of the Client;

(v) the Client shall be responsible for all filings, tax returns and
reports on any transactions undertaken pursuant to this Agreement
which must be made to any relevant authority, whether governmental or
otherwise, and for the payment of all unpaid calls, taxes (including
without limitation any value added tax), imports, levies or duties due
on any principal or interest, or any other liability or payment
arising out of or in connection with the Property, and in so far as
the Custodian is under any obligation (whether of a governmental
nature or otherwise) to pay the same on behalf of the Client it may do
so out of any monies or assets held by the Custodian pursuant to the
terms of this Agreement;

(vi) the Custodian is not acting under this Agreement as investment manager
or investment adviser to the Client and the Custodian's duty is solely
to keep safe custody of the Property (with responsibility for the
selection, acquisition and disposal of the Property remaining with the
Client at all times); and

(vii) the Custodian may rely in the performance of its duties under this
Agreement and without liability on its part, upon any Instructions
reasonably believed by it to be genuine and to have been given by an
Authorized person.

15. INDEMNITY

The Client agrees to indemnify the Custodian and each of the Custodian's
nominees or other agents and to hold the Custodian and such nominees or agents
harmless, against all claims, actions, suits or proceedings at law or in equity
(and all costs and liabilities in connection

- 19 -

<PAGE>

therewith, including without limitation legal fees and disbursements) brought by
any third party and arising directly or indirectly:

(i) from the fact that the Property is registered in the name of or held
by the Custodian or any such nominees; or

(ii) without limiting the generality of Section 15(i) above, from any act
or thing which the Custodian or such nominee or agent allows, takes or
does or omits to allow, take or do in relation to the Property
pursuant to the terms of this Agreement or in accordance with any
Instructions reasonably believed by it to genuine and to have been
given by an Authorized Person;

PROVIDED THAT neither the Custodian nor its nominees shall be indemnified
against any liability arising out of the Custodian's or such nominee's own
willful misfeasance, bad faith, negligence or reckless disregard of its duties
under this Agreement.

16. LIEN

In addition to any general lien or other rights to which the Custodian may
be entitled under any applicable law, the Custodian shall have a general lien on
all Property held by it under this Agreement until the satisfaction of all
liabilities and obligations of the Client (whether actual or contingent) owed to
the Custodian hereunder for payment of the safe custody and administration of
the Property, including related expenses, provided, however, that any such lien
shall not extend to "government securities" as defined in Section 3(a)(42) of
the Securities Exchange Act of 1934. In the event of failure by the Client to
discharge any of such liabilities and obligations when due, the Custodian shall
be entitled to sell or otherwise realize any such Property and to apply any
moneys from time to time deposited with it under this Agreement and the proceeds
of such sale or realization in the satisfaction of such liabilities and
obligations; for

- 20 -

<PAGE>

the purpose of such application the Custodian may purchase with any moneys
standing to the credit of the Client Deposit Account such other currencies and
at such rate(s) of exchange as may be necessary to effect such application.

17. FEES AND EXPENSES

Without prejudice to any of its liabilities and obligations under this
Agreement, the Client agrees to pay to the Custodian from time to time such
fees/commission for its services pursuant to this Agreement as may be agreed
upon from time to time, in writing, by Custodian in its individual capacity and
Client, and the Custodian's proper out-of-pocket expenses incurred in the
performance of its duties hereunder (other than any overhead cost or expense
arising from such performance), including (but without limitation) all those
items referred to in Section 9 hereof and to hold the Custodian harmless from
any liability, loss or withholding, resulting from any taxes or other
governmental charges, and any expenses related thereto, which may be imposed, or
assessed in connection with or arising out of the Custody Account and/or the
Client Deposit Account. Subject to specific Instructions from the Client to the
contrary, the Custodian is further authorized to debit (as well after as before
the date of any termination pursuant to Section 19 hereof) any account of the
Client with the Custodian including (without limitation) the Client Deposit
Account for any amount owing to the Custodian from time to time under this
Agreement.

18. AMENDMENT

This Agreement shall not be amended except by writing signed by the parties
hereto.

19. TERMINATION

Either of the parties hereto may terminate this Agreement on giving not
less than 30 days written notice to the other party. Upon the expiration of such
notice period the Custodian shall,

- 21 -

<PAGE>

subject to Section 16 hereof, pay all cash in the Client Deposit Account to or
for the account of Client (at Client's expense) by banker's draft, wire
transfer, check or otherwise as may be agreed by Custodian and deliver all other
Property without undue delay to or for the account of Client (at Client's
expense) at such locations as Client and Custodian shall have agreed upon,
provided however, if the Custodian has effected any transaction on behalf of the
Client the contractual settlement date of which is or is likely to extend beyond
the expiration of such notice, then the Custodian shall be entitled in its
absolute discretion to close out or complete such transaction and to retain
sufficient funds from the Property for that purpose.

20. ASSIGNMENT

This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns, provided, however,
that neither this Agreement nor any rights or obligations hereunder shall be
assignable by either party hereto without the prior written consent of the other
party hereto.

21. DISCLOSURE

The Client agrees and understands that the Custodian or its agent may
disclose information regarding the Custody Account and/or the Client Deposit
Account if required to do so by any court order or similar process in any
relevant jurisdiction or by order of an authority having power to do so over the
Custodian or its agents within the jurisdiction of such court or authority. 22.
NOTICES

Except as otherwise provided herein, all notices and other communications,
to be given by under this Agreement, shall be in writing in the English language
and shall be made either by telex or facsimile, or by letter addressed to the
party concerned at the addresses set out above

- 22 -

<PAGE>

or, in the case of a Citibank Affiliate, in Exhibit A hereto (or at such other
addresses as may be notified in writing by one party to any other party from
time to time).

23. GOVERNING LAW AND JURISDICTION

As between the Bank and the Client, this Agreement shall be governed by and
construed in accordance with the laws of the State of New York (without giving
effect to the conflict of law principles thereof) and the Client agrees for the
benefit of the Bank and, without prejudice to the right of the Bank to take any
proceedings in relation hereto before any other court of competent jurisdiction,
that the courts of the State of New York shall have jurisdiction to hear and
determine any suit, action or proceeding and to settle any disputes, which may
arise out of or in connection with this Agreement, and, for such purposes,
irrevocably submits to the non-exclusive jurisdiction of such courts.

As between the Courts and each Citibank Affiliate, this Agreement shall be
governed by and construed in accordance with the local law applicable to the
place in which such Citibank Affiliate carries on business, and Client agrees
for the benefit of such Citibank Affiliate and, without prejudice to the right
of such Citibank Affiliate to take any proceedings in relation hereto before any
other court of competent jurisdiction, that the courts of the place in which
such Citibank Affiliate carries on business shall have jurisdiction to hear and
determine any suit, action or proceeding, and to settle any disputes, which may
arise out of or in connection with this Agreement and, for such purposes,
irrevocably submits to the non-exclusive jurisdiction of such courts.

24. PROVISION OF INFORMATION REGARDING PROPERTY HELD OUTSIDE
THE UNITED STATES

The Custodian shall use its best efforts to assist the Client in obtaining the
following:

- 23 -

<PAGE>

(A) Information concerning whether, and to what extent, applicable foreign
law would restrict the access afforded the Client's independent public
accountants to books and records kept by a Citibank Affiliate in a foreign
country or foreign Clearance System used in such country;

(B) Information concerning whether, and to what extent, applicable foreign
law would restrict the Client's ability to recover its own assets in the event
of the bankruptcy of a Citibank Affiliate in a foreign country or foreign
Clearance System used in such country;

(C) Information concerning whether, and to what extent, applicable foreign
law would restrict the Client's ability to recover assets that are lost while
under the control of a Citibank Affiliate in a foreign country or foreign
Clearance System used in such country;

(D) Information concerning whether under applicable foreign currency
exchange regulations of a foreign country, the Client's cash and cash
equivalents held in such country are readily convertible to U.S. dollars;

(E) Information relating to whether each Citibank Affiliate in a foreign
country or foreign Clearance System used would provide a level of safeguards for
maintaining the Client's assets not materially different from that provided by
the Bank in maintaining the Securities held in the United States;

(F) Information concerning whether each Citibank Affiliate in a foreign
country or foreign Clearance System used has offices in the United States in
order to facilitate the assertion of jurisdiction over and enforcement of
judgments against such Citibank Affiliate in a foreign country or foreign
Clearance System; and

(G) As to each foreign Clearance System used, information concerning the
number of participants in, and operating history of, such Clearance System.

- 24 -

<PAGE>

During the term of this Agreement, the Custodian shall use its best efforts to
provide the Client with prompt notice of any material changes in the facts or
circumstances upon which any of the foregoing information of statements were
based.

Notwithstanding any of the foregoing provisions of this Section 24, the
Custodian's undertaking to assist the Client in obtaining the information
referred to in this Section 24 shall neither increase the Custodian's duty of
care nor reduce the Client's responsibility to determine for itself the prudence
of entrusting its assets to any particular custodian in a foreign country or
foreign Clearance System.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement,
including the country selections in Exhibit A hereto and the Schedules hereto
(if any), to be executed by their respective officers thereunto duly authorized.

CITIBANK, N.A. on its own CUSTODIAL TRUST COMPANY

behalf and as agent for each

Citibank Affiliate

By:______________________________ By:_____________________________

Title:___________________________ Title:__________________________

Attest:__________________________ Attest:_________________________

Attachments

- 25 -

<PAGE>

EXHIBIT A - FOR US REGISTERED INVESTMENT COMPANIES
Citibank Affiliates
<TABLE>
<CAPTION>

Country Selection* (X) Custodian and Address Client Signature
- -------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
Argentina ( ) Citibank, N.A. _________________________
Bartolome Mitre 502/30 Name, Title & Date
1036 Buenos Aires, Argentina

Brazil ( ) Citibank, N.A. _________________________
Avenida Paulista 1111 Name, Title & Date
Sao Paulo
Brazil 01311

Canada ( ) Citibank Canada _________________________
Citibank Place Name, Title & Date
123 Front Street West, Suite 1900
Toronto, Ontario M5J 2M3
Canada

Chile ( ) Citibank, N.A. _________________________
Ahumada 48 Name, Title & Date
Santiago, Chile
Germany
Citibank Aktiengesellschaft _________________________
Neue Mainzer Strasse 75 Name, Title & Date
Postfach 110333
6000 Frankfurt/Main
Germany

Greece ( ) Citibank, N.A. _________________________
4, Othonos Str. Name, Title & Date
Athens, Greece

Hong Kong ( ) Citibank, N.A. _________________________
Citicorp tower Name, Title & Date
Citicorp Plaza
3 Garden Road
Central
Hong Kong

Indonesia ( ) Citibank, N.A. _________________________
Landmark Building Name, Title & Date
JL Jend, Sudirman No. 1
Jakarta P.O. Box 2463
Indonesia
</TABLE>

*
- --------------------------
Country Selections are subect to the laws, regulations and operating procedures
applicable in the jurisdiction of the selected Custodian and subject to the
local customs and practices as referred to in the Schedules, attached hereto (if
any), as such Schedules may be amended from time to time, and the Terms and
Conditions or Operating Procedures, if any, applicable to such selected
Custodians.

- 26 -

<PAGE>

EXHIBIT A - Citibank Affiliates (continued)
<TABLE>
<CAPTION>
Country Selection* (X) Custodian and Address Client Signature
- -------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C>
India ( ) Citibank, N.A. _________________________
Sakhar Bhavan Name, Title & Date
230 Backbay Reclamation
Nariman Point
Bombay 400 021
India

Ireland ( ) Citibank, N.A. _________________________
71 St. Stephen's Green Name, Title & Date
Dublin 2
Ireland

Italy ( ) Citibank, N.A. _________________________
Foro Buonaparte 16 Name, Title & Date
20121 Milano
Italy

Japan ( ) Citibank, N.A. _________________________
Shinkawa Sanko Bldg. Name, Title & Date
1-3-7 Shinkawa, Chuo-ku
Tokyo, Japan

Korea ( ) Citibank, N.A. _________________________
KPO Box 749 Name, Title & Date
Citicorp Center Building
89-29, 2-KA
Sinmun-Ro, Chongro-Ku
Seoul
Korea

Malaysia ( ) Citibank, N.A. _________________________
28 Medan Pesar Name, Title & Date
50050 Kuala Lumpur
Malaysia

Mexico ( ) Citibank, N.A. _________________________
Paseo de la Reforma 390 Name, Title & Date
Mexico City 06695
Mexico

</TABLE>
*
- --------------------------
Country Selections are subect to the laws, regulations and operating procedures
applicable in the jurisdiction of the selected Custodian and subject to the
local customs and practices as referred to in the Schedules, attached hereto (if
any), as such Schedules may be amended from time to time, and the Terms and
Conditions or Operating Procedures, if any, applicable to such selected
Custodians.

-27-

<PAGE>

EXHIBIT A - Citibank Affiliates (continued)
<TABLE>
<CAPTION>

Country Selection* (X) Custodian and Address Client Signature
- -------------------------------------------------------------------------------------------------------------------

Netherlands ( ) Citibank, N.A. _________________________
EUROPLAZA Name, Title & Date
Hoogoorddreef 54 B
1101 BE Amsterdam Z.O.
The Netherlands

Pakistan ( ) Citibank, N.A. (Pakistan) _________________________
P.O. Box 4889 Name, Title & Date
11 Chundrigar Road
Karachi 74200
Pakistan

Philippines ( ) Citibank, N.A. _________________________
Citibank Center Name, Title & Date
8741 Paseo de Roxas
Makati Metro, Manila
Philippines

Puerto Rico ( ) Citibank, N.A. _________________________
252 Ponce De Leon Avenue Name, Title & Date
San Juan
Puerto Rico 00936

Singapore ( ) Citibank, N.A. _________________________
UIC Building #01-00 Name, Title & Date
5 Shenton Way
Singapore, 0106

Spain ( ) Citibank, N.A. _________________________
Jose Oretga y Gasset 29 Name, Title & Date
Madrid 28006
Spain

Sri Lanka ( ) Citibank, N.A. _________________________
P.O. Box 888 Name, Title & Date
67, Dharmapala Mawatha
Colombo 7
Sri Lanka
</TABLE>

-28-

<PAGE>

EXHIBIT A - Citibank Affiliates (continued)
Citibank Affiliates
<TABLE>
<CAPTION>

Country Selection* (X) Custodian and Address Client Signature
- -------------------------------------------------------------------------------------------------------------------

Taiwan ( ) Citibank, N.A. _________________________
Citicorp Center Name, Title & Date
No. 52 Ming Sheng East Road, Sec. 4
Taipei
Taiwan (Republic of China)

Thailand ( ) Citibank, N.A. _________________________
127 South Sethorn Road Name, Title & Date
Yannawa Bangkok 10120
Thailand

Turkey ( ) Citibank, N.A. _________________________
Abdi Ipekci Cadderi 65 Name, Title & Date
802000 Magka
Istanbul, Turkey

United Kingdom ( ) Citibank, N.A. _________________________
Lewisham Name, Title & Date
25 Molesworth Street
London SE13 7EX
United Kingdom

United States ( ) Citibank, N.A. _________________________
111 Wall Street Name, Title & Date
New York, New York 10043
U.S.A.

Uruguay ( ) Citibank, N.A. _________________________
Cerrito 455 Name, Title & Date
P.O. Box 690
Montevideo, Uruguay

Venezuela ( ) Citibank, N.A. _________________________
Carmelitas a Altagracia Name, Title & Date
P.O. Box 1289
Carcas 1010, Venezuela
</TABLE>

- 29 -

FORM OF
ADMINISTRATION AGREEMENT

ADMINISTRATION AGREEMENT, made as of the _______ day of , 1996 between
The FBR Family of Funds, a Delaware business trust (the "Fund"), and Bear
Stearns Funds Management Inc., a New York corporation (the "Administrator").

W I T N E S S E T H:

WHEREAS, the Fund, consisting of the series named on Schedule I,
hereto, as such Schedule may be revised from time to time (each a "Series"), is
a open-end management investment company registered under the Investment Company
Act of 1940, as amended (the "Investment Company Act"); and

WHEREAS, the Fund has retained an investment adviser for the purpose of
investing its assets in securities and desires to retain the Administrator for
certain administrative services, and the Administrator is willing to furnish
such administrative services on the terms and conditions hereinafter set forth;

NOW, THEREFORE, the parties hereto agree as follows:

1. Appointment. The Fund hereby appoints the Administrator to provide
the services set forth below, subject to the overall supervision of the Board of
Trustees of the Fund (the "Board") for the period and on the terms set forth in
this Agreement. The Administrator hereby accepts such appointment and agrees
during such period to render the services herein described and to assume the
obligations herein set forth; for the compensation herein provided.

2. Description of Services. Subject to the supervision of the Board and
the officers of the Fund, the Administrator shall provide office facilities and
personnel to assist the officers of the Fund in the performance of the following
services:

(a) Review of all materials filed with the Securities and Exchange
Commission ("SEC") on behalf of the Fund (e.g., N-SAR, amendments to
registration statements on Form N- 1A, periodic reports to shareholders, proxy
statements, etc.) and monitor EDGAR filing of the same;

(b) Assist in the negotiation of fees for services rendered to the
Series;

(c) Assist both the Adviser and the Series in the preparation of
materials for periodic Board meetings and committees thereof;

<PAGE>

(d) Oversee the determination and publication of each Series' net asset
value in accordance with each Series' policy as adopted from time to time by the
Board;

(e) Oversee the maintenance by PFPC Inc. of certain books and records
of each Series as required under the Investment Company Act, and maintain (or
oversee the maintenance by such other persons as approved by the Board) such
other books and records (other than those maintained by the Adviser) required by
law or for the proper operation of each Series;

(f) Assist in the preparation and review of each Series' federal, state
and local income tax returns and any other required tax return (other than those
filings relating to a shareholder's holdings in each Series, which will be
performed by PFPC Inc., in its capacity of transfer agent);

(g) Assist in the preparation and review of year-end shareholder tax
notifications for dividends and distributions paid by each Series during the
calendar and/or fiscal year;

(h) Assist with the preparation, review and approval by officers of the
Fund and the Adviser, the financial information for each Series' semi-annual,
annual and other periodic reports, proxy statements and other communications
with shareholders or otherwise to be sent to each Series' shareholders, and
coordinate for the printing and dissemination of such reports and communications
to shareholders;

(i) Assist with the preparation and dissemination of statistical
information and research data to outside reporting agencies;

(j) Prepare and/or assist with the preparation of reports relating to
the business and affairs of the Fund as may be mutually agreed upon and not
otherwise appropriately prepared by the Adviser, custodian, sub-administrator
and accounting agent, transfer and dividend disbursing agent, legal counsel or
independent accountants;

(k) Consult with the Fund's officers, independent accountants, legal
counsel, custodian, sub-administrator and accounting agent, and transfer and
dividend disbursing agent in establishing the accounting policies of each
Series;

(l) Review and assist with the computation of the amount of dividends
and distributions to be paid by each Series;

(m) Provide communication and coordination services with regard to the
Adviser, transfer and dividend disbursing agent, custodian and other service
providers that render recordkeeping or shareholder communication services to the
Fund; and

<PAGE>

(n) Develop and implement procedures to assist the Adviser in
monitoring, on a monthly basis, the Series' compliance with regulatory
requirements, specifically compliance with the Fund's prospectus,
diversification and other requirements under the Investment Company Act, and
each Series' income diversification requirements under Subchapter M of the
Internal Revenue Code of 1986, as amended.

All services are to be furnished through the medium of any directors,
officers or employees of the Administrator as the Administrator deems
appropriate in order to fulfill its obligations hereunder.

Each party shall bear all its own expenses incurred in connection with
this Agreement, except as noted below.

3. Compensation. The Fund will pay the Administrator a monthly fee at
the annual rate of 0.075 of 1% on the first $250 million of each Series' average
net assets and 0.050% of 1% of net assets in excess of $250 million; based on
the net asset value on each day the New York Stock Exchange is open for
business. Such fee will be subject to a minimum annual fee of $75,000, payable
monthly by each Series. In addition to the fee, the Fund, on behalf of each
Series, may be required to reimburse to the Administrator all out-of-pocket
expenses incurred by the Administrator for attendance at any meeting (outside of
the New York metropolitan area) of the Board, or any committees of such Board,
or at any other meetings or presentations for which the Administrator is
required to attend.

4. Responsibility of the Administrator.

(a) The Administrator shall be under no duty to take any action on
behalf of the Fund or any Series except as specifically set forth herein or as
may be specifically agreed to by the Administrator in writing. The Administrator
shall be obligated to exercise care and diligence in the performance of its
duties hereunder, to act in good faith and to use its best efforts, within
reasonable limits, in performing services provided for under this Agreement. The
Administrator shall be liable for any damages arising out of the Administrator's
failure to perform its duties under this Agreement to the extent such damages
arise out of the Administrator's willful misfeasance, bad faith, gross
negligence or reckless disregard of such duties.

(b) Without limiting the generality of the foregoing or of any other
provision of this Agreement, (i) the Agreement shall not be liable for losses
beyond its control, provided that the Administrator has acted in accordance with
the standard of care set forth above; and (ii) the Administrator shall not be
liable for (A) the validity of invalidity or authority or lack thereof of any
oral instruction or written instruction, notice or other instrument which
conforms to the applicable requirements of this Agreement, and which the
Administrator reasonably believes to be genuine; or (B) delays or errors or loss
of data occurring by reason of circumstances beyond the Administrator's control,
including acts of civil or military authority, national emergencies, labor
difficulties, fire, flood, catastrophe, acts of God, insurrection, war, riots or
failure of the

<PAGE>

mails, transportation, communication or power supply.

(c) Notwithstanding anything in this Agreement to the contrary, neither
the Administrator not its affiliates shall be liable to the Fund or to any
Series for any consequential, special or indirect losses or damages which the
Fund or any Series may incur or suffer by or as a consequence of the
Administrator's or any affiliates' performance of the services provided
hereunder, whether or not the likelihood of such losses or damages was known by
the Administrator or its affiliates.

5. Indemnification. The Administrator shall not be liable to the Fund
for any action taken or omitted to be taken by the Administrator in connection
with the performance of any of its duties or obligations under this Agreement,
and the Fund shall indemnify the Administrator and hold it harmless from and
against all damages, liabilities, costs and expenses (including reasonable
attorneys' fees and amounts reasonably paid in settlement) incurred by the
Administrator in or by reason of any pending, threatened or completed action,
suit, investigation or other proceeding (including an action or suit by or in
the right of the Fund or its security shareholders) arising out of or otherwise
based upon any action actually or allegedly taken or omitted to be taken by the
Administrator in connection with the performance of any of its duties or
obligations under this Agreement; provided, however, that nothing contained
herein shall protect or be deemed to protect the Administrator against or
entitle or be deemed to entitle the Administrator to indemnification in respect
of any liability to the Fund or its security holders to which the Administrator
would otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties, or by reason of its reckless
disregard of its duties and obligations under this Agreement.

6. Duration and Termination. This Agreement shall become effective as
of the date hereof and shall thereafter continue in effect unless terminated as
herein provided. This Agreement may be terminated by either party hereto
(without penalty) at any time by giving not less than 60 days' prior written
notice to the other party hereto.

7. Services to Others. The services of the Administrator to the Fund
hereunder are not exclusive and nothing in this Agreement shall limit or
restrict the right of the Administrator to engage in any other business or to
render services of any kind to any other corporation, firm, individual or
association. The Administrator shall be deemed to be an independent contractor,
unless otherwise expressly provided or authorized by this Agreement.

8. References to the Administrator. During the term of this Agreement,
the Fund agrees to furnish the Administrator at the principal office of the
Administrator prior to use thereof all prospectuses, proxy statements, reports
to shareholders, sales literature, or other material prepared for distribution
to shareholders of the Fund or the public that refer in any way to the
Administrator. If the Administrator reasonably objects in writing to such
references within five business days (or such other time as may be mutually
agreed) after receipt thereof, the Fund will modify such references in a manner
reasonably satisfactory to the Administrator.

<PAGE>

In the event of termination of this Agreement, the Fund will continue to furnish
to the Administrator copies of any of the above-mentioned materials that refer
in any way to the Administrator and, as soon as practicable after such
termination, shall eliminate all references to the Administrator in all written
materials used thereafter. The Fund shall furnish or otherwise make available to
the Administrator such other information relating to the business affairs of the
Fund as the Administrator at any time, or from time to time, reasonably requests
in order to discharge its obligations hereunder.

9. Amendments. This Agreement may be amended only by mutual written
consent.

10. Notices. Any notice or other communication required to be given
pursuant to this Agreement shall be deemed duly given if delivered or mailed by
registered mail, postage prepaid, (1) to the Administrator at 245 Park Avenue,
15th floor, New York, New York 10167, Attention: Frank J. Maresca, Executive
Vice President or (2) to the Fund at Potomac Tower, 1001 Nineteenth Street
North, Arlington, Virginia 22209, Attention: Carl C. Shade, [ ].

11. Entire Agreement. This Agreement sets forth the entire agreement
and understanding of the parties hereto solely with respect to the matters
covered hereby and the relationship between the Fund and Bear Stearns Funds
Management Inc. as Administrator. Nothing in this Agreement shall govern,
restrict or limit in any respect any other business dealings between the parties
hereto unless otherwise expressly provided herein.

12. Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.

13. Partial Invalidity. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not
be affected thereby.

14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York without reference to choice of
law principles thereof and in accordance with the Investment Company Act. In the
case of any conflict the Investment Company Act shall control.

<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.

ATTEST: THE FBR FAMILY OF FUNDS

______________________________ By: ___________________________________
Name: Carl C. Shade
Title:[ ]

ATTEST: BEAR STEARNS FUNDS MANAGEMENT INC.

______________________________ By: ___________________________________
Name: Frank J. Maresca
Title: Executive Vice President

<PAGE>

SCHEDULE 1
<TABLE>
<CAPTION>

<S> <C> <C> <C>
Name of Series Annual Fees* Reapproval Date Reapproval Day

FBR Small Cap Fund
FBR Financial Services Fund
FBR Growth/Value Fund
FBR Information Technologies Fund
</TABLE>

*As a Percentage of Average Daily Net Assets

ADMINISTRATION AND ACCOUNTING SERVICES AGREEMENT

THIS AGREEMENT is made as of , 1996 by and between THE FBR FAMILY OF
FUNDS, a Delaware business trust (the "Fund"), and PFPC INC., a Delaware
corporation ("PFPC"), which is an indirect wholly owned subsidiary of PNC Bank
Corp.

W I T N E S S E T H :

WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and

WHEREAS, the Fund wishes to retain PFPC to provide administration and
accounting services to its investment portfolios listed on Exhibit A attached
hereto and made a part hereof, as such Exhibit A may be amended from time to
time (each a "Portfolio"), and PFPC wishes to furnish such services.

NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, and intending to be legally bound hereby the parties
hereto agree as follows:

1. Definitions. As Used in this Agreement:

(a) "1933 Act" means the Securities Act of 1933, as amended.

(b) "1934 Act" means the Securities Exchange Act of 1934, as
amended.

<PAGE>

Trustees to give Oral Instructions and Written Instructions on behalf of the
Fund and listed on the Authorized Persons Appendix attached hereto and made a
part hereof or any amendment thereto as may be received by PFPC. An Authorized
Person's scope of authority may be limited by the Fund by setting forth such
limitation in the Authorized Persons Appendix.

(d) "CEA" means the Commodities Exchange Act, as amended.

(e) "Oral Instructions" mean oral instructions received by PFPC from
an Authorized Person or from a person reasonably believed by PFPC to be an
Authorized Person.

(f) "SEC" means the Securities and Exchange Commission.

(g) "Securities Laws" means the 1933 Act, the 1934 Act, the 1940 Act
and the CEA.

(h) "Shares" mean the shares of beneficial interest of any series or
class of the Fund.

(i) "Written Instructions" mean written instructions signed by an
Authorized Person and received by PFPC. The instructions may be delivered by
hand, mail, tested telegram, cable, telex or facsimile sending device.

2. Appointment. The Fund hereby appoints PFPC to provide administration
and accounting services to the each of the Portfo- lios, in accordance with the
terms set forth in this Agreement. PFPC accepts such appointment and agrees to
furnish such services.

3. Delivery of Documents. The Fund has provided or, where applicable,
will provide PFPC with the following:

2
<PAGE>

(a) certified or authenticated copies of the resolutions of the
Fund's Board of Trustees, approving the appointment of PFPC or
its affiliates to provide services to each Portfolio and
approving this Agreement;

(b) a copy of Fund's most recent effective registration statement;

(d) a copy of the distribution agreement with respect to each class
of Shares representing an interest in a Portfolio;

(e) a copy of any additional administration agreement with respect to
a Portfolio;

(f) a copy of any shareholder servicing agreement made in respect of
the Fund or a Portfolio; and

(f) copies (certified or authenticated, where applica- ble) of any
and all amendments or supplements to the foregoing.

4. Compliance with Rules and Regulations.

PFPC undertakes to comply with all applicable requirements of the
Securities Laws, and any laws, rules and regulations of governmental authorities
having jurisdiction with respect to the duties to be performed by PFPC
hereunder. Except as specifically set forth herein, PFPC assumes no
responsibility for such compliance by the Fund or any Portfolio.

5. Instructions.

(a) Unless otherwise provided in this Agreement, PFPC shall act only
upon Oral Instructions and Written Instructions.

(b) PFPC shall be entitled to rely upon any Oral Instructions and
Written Instructions it receives from an Authorized Person (or from a person
reasonably believed by PFPC to be an

3
<PAGE>

Authorized Person) pursuant to this Agreement. PFPC may assume that any Oral
Instruction or Written Instruction received hereunder is not in any way
inconsistent with the provisions of organizational documents or this Agreement
or of any vote, resolution or proceeding of the Fund's Board of Trustees or of
the Fund's shareholders, unless and until PFPC receives Written Instructions to
the contrary.

(c) The Fund agrees to forward to PFPC Written Instructions confirming
Oral Instructions (except where such Oral Instructions are given by PFPC or its
affiliates) so that PFPC receives the Written Instructions by the close of
business on the same day that such Oral Instructions are received. The fact that
such confirming Written Instructions are not received by PFPC shall in no way
invalidate the transactions or enforceability of the transactions authorized by
the Oral Instructions. Where Oral Instructions or Written Instructions
reasonably appear to have been received from an Authorized Person, PFPC shall
incur no liability to the Fund in acting upon such Oral Instructions or Written
Instructions provided that PFPC's actions comply with the other provisions of
this Agreement.

6. Right to Receive Advice.

(a) Advice of the Fund. If PFPC is in doubt as to any action it
should or should not take, PFPC may request directions or advice, including Oral
Instructions or Written Instructions, from the Fund.

(b) Advice of Counsel. If PFPC shall be in doubt as to

4
<PAGE>

any question of law pertaining to any action it should or should not take, PFPC
may request advice at its own cost from such counsel of its own choosing (who
may be counsel for the Fund, the Fund's investment adviser or PFPC, at the
option of PFPC).

(c) Conflicting Advice. In the event of a conflict between directions,
advice or Oral Instructions or Written Instructions PFPC receives from the Fund
and the advice PFPC receives from counsel, PFPC may rely upon and follow the
advice of counsel. In the event PFPC so relies on the advice of counsel, PFPC
remains liable for any action or omission on the part of PFPC which constitutes
willful misfeasance, bad faith, gross negligence or reckless disregard by PFPC
of any duties, obligations or responsibilities set forth in this Agreement.

(d) Protection of PFPC. PFPC shall be protected in any action it takes
or does not take in reliance upon directions, advice or Oral Instructions or
Written Instructions it receives from the Fund or from counsel and which PFPC
believes, in good faith, to be consistent with those directions, advice and Oral
Instructions or Written Instructions. Nothing in this section shall be construed
so as to impose an obligation upon PFPC (i) to seek such directions, advice or
Oral Instructions or Written Instructions, or (ii) to act in accordance with
such directions, advice or Oral Instructions or Written Instructions unless,
under the terms of other provisions of this Agreement, the same is a condition
of PFPC's properly taking or not taking such action. Nothing in this subsection
shall excuse PFPC when an action or

5
<PAGE>

omission on the part of PFPC constitutes willful misfeasance, bad faith, gross
negligence or reckless disregard by PFPC of any duties, obligations or
responsibilities set forth in this Agreement.

7. Records; Visits.

(a) The books and records pertaining to the Fund and the Portfolios
which are in the possession or under the control of PFPC shall be the property
of the Fund. Such books and records shall be prepared and maintained as required
by the 1940 Act and other applicable securities laws, rules and regulations. The
Fund and Authorized Persons shall have access to such books and records at all
times during PFPC's normal business hours. Upon the reasonable request of the
Fund, copies of any such books and records shall be provided by PFPC to the Fund
or to an Authorized Person, at the Fund's expense.

(b) PFPC shall keep the following records:

(i) all books and records with respect to each Portfolio's
books of account;

(ii) records of each Portfolio's securities transactions; and

(iii) all other books and records as PFPC is required to
maintain pursuant to Rule 31a-1 of the 1940 Act in
connection with the services provided hereunder.

6
<PAGE>

that such consent shall not be unreasonably withheld and may not be withheld
where PFPC may be exposed to civil or criminal contempt proceedings or when
required to divulge such information or records to duly constituted authorities.

9. Liaison with Accountants. PFPC shall act as liaison with the Fund's
independent public accountants and shall provide account analyses, fiscal year
summaries, and other audit-related schedules with respect to each Portfolio.
PFPC shall take all reasonable action in the performance of its duties under
this Agreement to assure that the necessary information is made available to
such accountants for the expression of their opinion, as required by the Fund.

10. Disaster Recovery. PFPC shall enter into and shall maintain in
effect with appropriate parties one or more agreements making reasonable
provisions for emergency use of electronic data processing equipment to the
extent appropriate equipment is available. In the event of equipment failures,
PFPC shall, at no additional expense to the Fund, take reasonable steps to
minimize service interruptions. PFPC shall have no liability with respect to the
loss of data or service interruptions caused by equipment failure, provided such
loss or interruption is not caused by PFPC's own willful misfeasance, bad faith,
gross negligence or reckless disregard of its duties or obligations under this
Agreement.

11. Compensation. As compensation for services rendered by PFPC during
the term of this Agreement, the Fund, on behalf of each Portfolio, will pay to
PFPC a fee or fees as may be agreed to in

7
<PAGE>

writing by the Fund and PFPC.

12. Indemnification. The Fund, on behalf of each Portfolio, agrees to
indemnify and hold harmless PFPC and its affiliates from all taxes, charges,
expenses, assessments, claims and liabilities (including, without limitation,
liabilities arising under the Securities Laws and any state or foreign
securities and blue sky laws, and amendments thereto), and expenses, including
(without limitation) attorneys' fees and disbursements arising directly or
indirectly from any action or omission to act which PFPC takes (i) at the
request or on the direction of or in reliance on the advice of the Fund or (ii)
upon Oral Instructions or Written Instructions. Neither PFPC, nor any of its
affiliates', shall be indemnified against any liability (or any expenses
incident to such liability) arising out of PFPC's or its affiliates' own willful
misfeasance, bad faith, gross negligence or reckless disregard of its duties and
obligations under this Agreement. Any amounts payable by the Fund hereunder
shall be satisfied only against the relevant Portfolio's assets and not against
the assets of any other investment portfolio of the Fund.

13. Responsibility of PFPC.

(a) PFPC shall be under no duty to take any action on behalf of the
Fund or any Portfolio except as specifically set forth herein or as may be
specifically agreed to by PFPC in writing. PFPC shall be obligated to exercise
care and diligence in the performance of its duties hereunder, to act in good
faith and to use its best efforts, within reasonable limits, in performing

8
<PAGE>

services provided for under this Agreement. PFPC shall be liable for any damages
arising out of PFPC's failure to perform its duties under this Agreement to the
extent such damages arise out of PFPC's willful misfeasance, bad faith, gross
negligence or reckless disregard of such duties.

(b) Without limiting the generality of the foregoing or of any other
provision of this Agreement, (i) PFPC shall not be liable for losses beyond its
control, provided that PFPC has acted in accordance with the standard of care
set forth above; and (ii) PFPC shall not be liable for (A) the validity or
invalidity or authority or lack thereof of any Oral Instruction or Written
Instruction, notice or other instrument which conforms to the applicable
requirements of this Agreement, and which PFPC reasonably believes to be
genuine; or (B) subject to Section 10, delays or errors or loss of data
occurring by reason of circumstances beyond PFPC's control, including acts of
civil or military authority, national emergencies, labor difficulties, fire,
flood, catastrophe, acts of God, insurrection, war, riots or failure of the
mails, transportation, communication or power supply.

(c) Notwithstanding anything in this Agreement to the contrary,
neither PFPC nor its affiliates shall be liable to the Fund or to any Portfolio
for any consequential, special or indirect losses or damages which the Fund or
any Portfolio may incur or suffer by or as a consequence of PFPC's or any
affiliates' performance of the services provided hereunder, whether or not the
likelihood of such losses or damages was known by PFPC or its

9
<PAGE>

affiliates.

14. Description of Accounting Services on a Continuous Basis.

PFPC will perform the following accounting services with respect to
each Portfolio:

(i) Journalize investment, capital share and income and
expense activities;

(ii) Verify investment buy/sell trade tickets when received
from the investment adviser for a Portfolio (the
"Adviser") and transmit trades to the Fund's custodian
(the "Custodian") for proper settlement;

(iii) Maintain individual ledgers for investment securities;

(iv) Maintain historical tax lots for each security;

(v) Reconcile cash and investment balances of the Fund with
the Custodian, and provide the Adviser with the
beginning cash balance available for investment
purposes;

(vi) Update the cash availability throughout the day as
required by the Adviser;

(vii) Post to and prepare the Statement of Assets and
Liabilities and the Statement of Opera- tions;

(viii) Calculate various contractual expenses (e.g., advisory
and custody fees);

(ix) Monitor the expense accruals and notify an officer of
the Fund of any proposed adjustments;

(x) Control all disbursements and authorize such
disbursements upon Written Instructions;

(xi) Calculate capital gains and losses;

(xii) Determine net income;

(xiii) Obtain security market quotes from independent pricing
services approved by the

10
<PAGE>

Adviser, or if such quotes are unavailable, then obtain
such prices from the Adviser, and in either case
calculate the market value of each Portfolio's
Investments;

(xiv) Transmit or mail a copy of the daily portfolio valuation
to the Adviser;

(xv) Compute net asset value;

(xvi) As appropriate, compute yields, total return, expense
ratios, portfolio turnover rate, and, if required,
portfolio average dollar-weighted maturity; and

(xvii) Prepare a monthly financial statement, which will
include the following items:

Schedule of Investments
Statement of Assets and
Liabilities Statement of
Operations Statement of
Changes in Net Assets Cash
Statement Schedule of
Capital Gains and Losses.

15. Description of Administration Services on a Continuous Basis.

PFPC will perform the following administration services
with respect to each Portfolio:

(i) Prepare quarterly broker security transactions
summaries;

(ii) Prepare monthly security transaction listings;

(iii) Supply various normal and customary Portfolio and Fund
statistical data as requested on an ongoing basis;

(iv) Prepare for execution and file the Fund's Federal and
state tax returns;

(v) Prepare and file the Fund's Semi-Annual Reports with the
SEC on Form N-SAR;

(vi) Prepare and file with the SEC the Fund's annual,
semi-annual, and quarterly shareholder reports;

11
<PAGE>

(vii) Assist in the preparation of registration statements and
other filings relating to the registration of Shares;

(viii) Monitor each Portfolio's status as a regulated
investment company under Sub-chapter M of the Internal
Revenue Code of 1986, as amended;

(ix) Coordinate contractual relationships and communications
between the Fund and its contractual service providers;
and

(x) Monitor the Fund's compliance with the amounts and
conditions of each state qualification.

16. Duration and Termination. This Agreement shall continue until
terminated by either party on sixty (60) days' prior written notice to the other
party.

17. Notices. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. If notice is sent by confirming telegram, cable, telex
or facsimile sending device, it shall be deemed to have been given immediately.
If notice is sent by first-class mail, it shall be deemed to have been given
three days after it has been mailed. If notice is sent by messenger, it shall be
deemed to have been given on the day it is delivered. Notices shall be addressed
(a) if to PFPC, at 400 Bellevue Parkway, Wilmington, Delaware 19809; (b) if to
the Fund, at________________________________, Attn:___________________________;
or (c) if to neither of the foregoing, at such other address as shall have been
provided by like notice to the sender of any such notice or other communication
by the other party.

18. Amendments. This Agreement, or any term thereof, may be

12
<PAGE>

changed or waived only by written amendment, signed by the party against whom
enforcement of such change or waiver is sought.

19. Delegation; Assignment. PFPC may assign its rights and delegate its
duties hereunder to any wholly-owned direct or indirect subsidiary of PNC Bank,
National Association or PNC Bank Corp., provided that (i) PFPC gives the Fund
thirty (30) days' prior written notice; (ii) the delegate (or assignee) agrees
with PFPC and the Fund to comply with all relevant provisions of the 1940 Act;
and (iii) PFPC and such delegate (or assignee) promptly provide such information
as the Fund may request, and respond to such questions as the Fund may ask,
relative to the delegation (or assignment), including (without limitation) the
capabilities of the delegate (or assignee).

20. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

21. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.

22. Miscellaneous.

(a) Entire Agreement. This Agreement embodies the entire agreement
and understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the parties
may embody in one or more separate documents their agreement, if any, with
respect to delegated duties and Oral Instructions.

<PAGE>

(b) Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.

(c) Governing Law. This Agreement shall be deemed to be a contract
made in Delaware and governed by Delaware law, without regard to principles of
conflicts of law.

(d) Partial Invalidity. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.

(e) Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and permitted assigns.

(f) Facsimile Signatures. The facsimile signature of any party to
this Agreement shall constitute the valid and binding
execution hereof by such party.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.

PFPC INC.

By:___________________________

Title:________________________

THE FBR FAMILY OF FUNDS

14
<PAGE>

By:___________________________

Title:________________________

15
<PAGE>

EXHIBIT A

THIS EXHIBIT A, dated as of ________________, 1996, is Exhibit A to
that certain Administration and Accounting Services Agreement dated as of
_________________________, 1996 between PFPC Inc. and THE FBR FAMILY OF FUNDS.

PORTFOLIOS

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

16
<PAGE>

AUTHORIZED PERSONS APPENDIX

NAME (Type) SIGNATURE

__________________________________ ________________________________

17
<PAGE>

________________________, 1996

THE FBR FAMILY OF FUNDS

Re: Administration and Accounting Services Fees

Dear Sir/Madam:

This letter constitutes our agreement with respect to compensation to
be paid to PFPC Inc. ("PFPC") for services provided under the terms of an
Administration and Accounting Services Agreement dated ______, 1996 between The
FBR Family of Funds (the "Fund") and PFPC (the "Agreement"). Pursuant to
paragraph 11 of that Agreement, and in consideration of the services to be
provided to the Portfolios listed on Exhibit A to the Agreement, the Fund will
pay PFPC an annual administration and accounting fee, to be calculated daily and
paid monthly. The Fund will also reimburse PFPC for its out-of-pocket expenses
incurred on its behalf, including, but not limited to: postage and mailing,
telephone, telex, federal express and outside independent pricing service
charges, and record retention/storage.

The annual administration and accounting fees shall be an asset based
fee of .075% of each Portfolio's first $1 billion of average daily net assets;
and .05% of each Portfolio's average daily net assets over $1 billion. These
fees are exclusive of out-of-pocket expenses.

The minimum monthly fee shall be $6,250 for each Portfolio, exclusive
of out-of-pocket expenses. For each Portfolio with more than one class or
sub-class, there shall be an additional minimum monthly fee of $1,875 per class
or sub-class with respect to that Portfolio for each class or sub-class beyond
the first one.

The fee for the period from the day of the year this Agreement is
entered into until the end of that year shall be prorated according to the
proportion which such period bears to the full annual period.

If during the first three years of a Portfolio's operations, PFPC is
removed from the Administration and Accounting Services Agreement referenced
above, the Fund shall pay any costs of time and material associated with the
conversion and PFPC will recoup 100% of the fees waived with respect to that
Portfolio during the Portfolio's first year of operations.

18
<PAGE>

If the foregoing accurately sets forth our agreement and you intend to
be legally bound thereby, please execute a copy of this letter and return it to
us.

Very truly yours,

PFPC INC.

By:____________________________

Accepted:

THE FBR FAMILY OF FUNDS

By:________________________________

<PAGE>

________________________, 1996

THE FBR FAMILY OF FUNDS

Re: ADMINISTRATION AND ACCOUNTING SERVICES FEE WAIVER

Dear Sir/Madam:

PFPC Inc. ("PFPC") agrees to waive certain fees under an Administration
and Accounting Services Agreement dated ________, 1996 between PFPC and THE FBR
FAMILY OF FUNDS as follows: for the first two months of each Portfolio's
operations PFPC shall waive 100% of its minimum base fee (excluding
miscellaneous fees and out-of-pocket costs) to the extent the minimum fee is
applicable; thereafter, PFPC's minimum fee shall be charged in increments of 10%
per month. Thus, during the third calendar month of operations, each Portfolio
will pay 10% of the minimum fee rates; 20% during the fourth month; 30% during
the fifth month; etc.; and 100% during the twelfth month and thereafter.

Very truly yours,

PFPC INC.

By: ___________________________________
Title:

Acknowledged:

THE FBR FAMILY OF FUNDS

By: _______________________
Title:

TRANSFER AGENCY SERVICES AGREEMENT

THIS AGREEMENT is made as of , 1996 by and between PFPC INC., a Delaware
corporation ("PFPC"), and THE FBR FAMILY OF FUNDS, a Delaware business trust
(the "Fund").

W I T N E S S E T H:

WHEREAS, the Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and

WHEREAS, the Fund wishes to retain PFPC to serve as transfer agent,
registrar, dividend disbursing agent and shareholder servicing agent to its
investment portfolios listed on Exhibit A attached hereto and made a part
hereof, as such Exhibit A may be amended from time to time (each a "Portfolio"),
and PFPC wishes to furnish such services.

NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, the parties hereto
agree as follows:

1. Definitions. As Used in this Agreement

(a) "1933 Act" means the Securities Act of 1933, as amended.

(b) "1934 Act" means the Securities Exchange Act of 1934, as amended.

<PAGE>

(d) "CEA" means the Commodities Exchange Act, as amended.

(e) "Oral Instructions" mean oral instructions received by PFPC from an
Authorized Person or from a person reasonably believed by PFPC to be an
Authorized Person.

(f) "SEC" means the Securities and Exchange Commission.

(g) "Securities Laws" mean the 1933 Act, the 1934 Act, the 1940 Act and
the CEA.

(h) "Shares" mean the shares of beneficial interest of any series or
class of the Fund.

2. Appointment. The Fund hereby appoints PFPC to serve as transfer agent,
registrar, dividend disbursing agent and shareholder servicing agent to the Fund
in accordance with the terms set forth in this Agreement. PFPC accepts such
appointment and agrees to furnish such services.

3. Delivery of Documents. The Fund has provided or, where

<PAGE>

applicable, will provide PFPC with the following:

(a) Certified or authenticated copies of the resolutions of the
Fund's Board of Trustees, approving the appointment of PFPC
or its affiliates to provide services to the Fund and
approving this Agreement;

(b) A copy of the Fund's most recent effective registration
statement;

(d) A copy of the distribution agreement with respect to each
class of Shares of the Fund;

(e) A copy of each Portfolio's administration agreements if PFPC
is not providing the Portfolio with such services;

(f) Copies of any shareholder servicing agreements made in
respect of the Fund or a Portfolio; and

(g) Copies (certified or authenticated where applicable) of any
and all amendments or supplements to the foregoing.

4. Compliance with Rules and Regulations. PFPC undertakes to comply with
all applicable requirements of the Securities Laws and any laws, rules and
regulations of governmental authorities having jurisdiction with respect to the
duties to be performed by PFPC hereunder. Except as specifically set forth
herein, PFPC assumes no responsibility for such compliance by the Fund or any of
its investment portfolios.

5. Instructions.

(a) Unless otherwise provided in this Agreement, PFPC shall act only
upon Oral Instructions and Written Instructions.

(b) PFPC shall be entitled to rely upon any Oral

<PAGE>

Instructions and Written Instructions it receives from an Authorized Person (or
from a person reasonably believed by PFPC to be an Authorized Person) pursuant
to this Agreement. PFPC may assume that any Oral Instruction or Written
Instruction received hereunder is not in any way inconsistent with the
provisions of organizational documents or this Agreement or of any vote,
resolution or proceeding of the Fund's Board of Trustees or of the Fund's
shareholders, unless and until PFPC receives Written Instructions to the
contrary.
(c) The Fund agrees to forward to PFPC Written Instructions
confirming Oral Instructions so that PFPC receives the Written Instructions by
the close of business on the same day that such Oral Instructions are received.
The fact that such confirming Written Instructions are not received by PFPC
shall in no way invalidate the transactions or enforceability of the
transactions authorized by the Oral Instructions. Where Oral Instructions or
Written Instructions reasonably appear to have been received from an Authorized
Person, PFPC shall incur no liability to the Fund in acting upon such Oral
Instructions or Written Instructions provided that PFPC's actions comply with
the other provisions of this Agreement.

6. Right to Receive Advice.

(a) Advice of the Fund. If PFPC is in doubt as to any action it should
or should not take, PFPC may request directions or advice, including Oral
Instructions or Written Instructions, from the Fund.

<PAGE>

(b) Advice of Counsel. If PFPC shall be in doubt as to any question of
law pertaining to any action it should or should not take, PFPC may request
advice at its own cost from such counsel of its own choosing (who may be counsel
for the Fund, the Fund's investment adviser or PFPC, at the option of PFPC).

(c) Conflicting Advice. In the event of a conflict between directions,
advice or Oral Instructions or Written Instructions PFPC receives from the Fund,
and the advice it receives from counsel, PFPC may rely upon and follow the
advice of counsel. In the event PFPC so relies on the advice of counsel, PFPC
remains liable for any action or omission on the part of PFPC which constitutes
willful misfeasance, bad faith, gross negligence or reckless disregard by PFPC
of any duties, obligations or responsibilities set forth in this Agreement.

(d) Protection of PFPC. PFPC shall be protected in any action it takes
or does not take in reliance upon directions, advice or Oral Instructions or
Written Instructions it receives from the Fund or from counsel and which PFPC
believes, in good faith, to be consistent with those directions, advice or Oral
Instructions or Written Instructions. Nothing in this section shall be construed
so as to impose an obligation upon PFPC (i) to seek such directions, advice or
Oral Instructions or Written Instructions, or (ii) to act in accordance with
such directions, advice or Oral Instructions or Written Instructions unless,
under the terms of other provisions of this Agreement, the same is a condition
of PFPC's properly taking or not taking such action.

<PAGE>

Nothing in this subsection shall excuse PFPC when an action or omission on the
part of PFPC constitutes willful misfeasance, bad faith, gross negligence or
reckless disregard by PFPC of any duties, obligations or responsibilities set
forth in this Agreement.

7. Records; Visits. The books and records pertaining to the Fund, which are
in the possession or under the control of PFPC, shall be the property of the
Fund. Such books and records shall be prepared and maintained as required by the
1940 Act and other applicable securities laws, rules and regulations. The Fund
and Authorized Persons shall have access to such books and records at all times
during PFPC's normal business hours. Upon the reasonable request of the Fund,
copies of any such books and records shall be provided by PFPC to the Fund or to
an Authorized Person, at the Fund's expense.

8. Confidentiality. PFPC agrees to keep confidential all records of the
Fund and information relating to the Fund and its shareholders, unless the
release of such records or information is otherwise consented to, in writing, by
the Fund. The Fund agrees that such consent shall not be unreasonably withheld
and may not be withheld where PFPC may be exposed to civil or criminal contempt
proceedings or when required to divulge such information or records to duly
constituted authorities.

9. Cooperation with Accountants. PFPC shall cooperate with the Fund's
independent public accountants and shall take all reasonable actions in the
performance of its obligations under this

<PAGE>

Agreement to ensure that the necessary information is made available to such
accountants for the expression of their opinion, as required by the Fund.

10. Disaster Recovery. PFPC shall enter into and shall maintain in effect
with appropriate parties one or more agreements making reasonable provisions for
emergency use of electronic data processing equipment to the extent appropriate
equipment is available. In the event of equipment failures, PFPC shall, at no
additional expense to the Fund, take reasonable steps to minimize service
interruptions. PFPC shall have no liability with respect to the loss of data or
service interruptions caused by equipment failure, provided such loss or
interruption is not caused by PFPC's own willful misfeasance, bad faith, gross
negligence or reckless disregard of its duties or obligations under this
Agreement.

11. Compensation. As compensation for services rendered by PFPC during the
term of this Agreement, the Fund will pay to PFPC a fee or fees as may be agreed
to from time to time in writing by the Fund and PFPC.

12. Indemnification. The Fund agrees to indemnify and hold harmless PFPC
and its affiliates from all taxes, charges, expenses, assessments, claims and
liabilities (including, without limitation, liabilities arising under the
Securities Laws and any state and foreign securities and blue sky laws, and
amendments thereto), and expenses, including (without limitation) attorneys'
fees and disbursements, arising directly or indirectly from any action or
omission to act which PFPC takes (i) at the request or on the

<PAGE>

direction of or in reliance on the advice of the Fund or (ii) upon Oral
Instructions or Written Instructions. Neither PFPC, nor any of its affiliates,
shall be indemnified against any liability (or any expenses incident to such
liability) arising out of PFPC's or its affiliates' own willful misfeasance, bad
faith, gross negligence or reckless disregard of its duties and obligations
under this Agreement.

13. Responsibility of PFPC.

(a) PFPC shall be under no duty to take any action on behalf of the
Fund except as specifically set forth herein or as may be specifically agreed to
by PFPC in writing. PFPC shall be obligated to exercise care and diligence in
the performance of its duties hereunder, to act in good faith and to use its
best efforts, within reasonable limits, in performing services provided for
under this Agreement. PFPC shall be liable for any damages arising out of PFPC's
failure to perform its duties under this Agreement to the extent such damages
arise out of PFPC's willful misfeasance, bad faith, gross negligence or reckless
disregard of such duties.

(b) Without limiting the generality of the foregoing or of any other
provision of this Agreement, (i) PFPC, shall not be liable for losses beyond its
control, provided that PFPC has acted in accordance with the standard of care
set forth above; and (ii) PFPC shall not be under any duty or obligation to
inquire into and shall not be liable for (A) the validity or invalidity or
authority or lack thereof of any Oral Instruction or Written Instruction, notice
or other instrument which conforms to the applicable

<PAGE>

requirements of this Agreement, and which PFPC reasonably believes to be
genuine; or (B) subject to Section 10, delays or errors or loss of data
occurring by reason of circumstances beyond PFPC's control, including acts of
civil or military authority, national emergencies, labor difficulties, fire,
flood, catastrophe, acts of God, insurrection, war, riots or failure of the
mails, transportation, communication or power supply.

(c) Notwithstanding anything in this Agreement to the contrary, neither
PFPC nor its affiliates shall be liable to the Fund for any consequential,
special or indirect losses or damages which the Fund may incur or suffer by or
as a consequence of PFPC's or its affiliates' performance of the services
provided hereunder, whether or not the likelihood of such losses or damages was
known by PFPC or its affiliates.

14. Description of Services.

(a) Services Provided on an Ongoing Basis, If Applicable.

(i) Calculate 12b-1 payments;

(ii) Maintain proper shareholder registrations;

(iii)Review new applications and correspond with
shareholders to complete or correct information;

(iv) Direct payment processing of checks or wires;

(v) Prepare and certify stockholder lists in con- junction
with proxy solicitations;

(vi) Countersign share certificates;

(vii)Prepare and mail to shareholders confirmation of
activity;

<PAGE>

(viii) Provide toll-free lines for direct shareholder use,
plus customer liaison staff for on-line inquiry
response;

(ix) Mail duplicate confirmations to broker-dealers of their
clients' activity, whether executed through the
broker-dealer or directly with PFPC;

(x) Provide periodic shareholder lists and statistics to
the clients;

(xi) Provide detailed data for underwriter/broker
confirmations;

(xii)Prepare periodic mailing of year-end tax and statement
information;

(xiii) Notify on a timely basis the investment adviser,
accounting agent, and custodian of fund activity; and

(xiv)Perform other participating broker-dealer shareholder
services as may be agreed upon from time to time.

(b) Services Provided by PFPC Under Oral Instructions or Written
Instructions.

(i) Accept and post daily Fund purchases and redemptions;

(ii) Accept, post and perform shareholder transfers and
exchanges;

(iii) Pay dividends and other distributions;

(iv) Solicit and tabulate proxies; and

(v) Issue and cancel certificates (when requested in
writing by the shareholder).

(c) Purchase of Shares. PFPC shall issue and credit an account of an
investor, in the manner described in the Fund's prospectus, once it receives:

(i) A purchase order;

(ii) Proper information to establish a shareholder

<PAGE>

account; and

(iii)Confirmation of receipt or crediting of funds for such
order to the Fund's custodian.

(d) Redemption of Shares. PFPC shall redeem Shares only if that
function is properly authorized by the certificate of incorporation or
resolution of the Fund's Board of Trustees. Shares shall be redeemed and payment
therefor shall be made in accordance with the Fund's prospectus, when the
recordholder tenders Shares in proper form and directs the method of redemption.
If Shares are received in proper form, Shares shall be redeemed before the funds
are provided to PFPC from the Fund's custodian (the "Custodian"). If the
recordholder has not directed that redemption proceeds be wired, when the
Custodian provides PFPC with funds, the redemption check shall be sent to and
made payable to the recordholder, unless:

(i) the surrendered certificate is drawn to the order of an
assignee or holder and transfer authorization is signed
by the recordholder; or

(ii) Transfer authorizations are signed by the recordholder
when Shares are held in book- entry form.

When a broker-dealer notifies PFPC of a redemption desired by a customer, and
the Custodian provides PFPC with funds, PFPC shall prepare and send the
redemption check to the broker-dealer and made payable to the broker-dealer on
behalf of its customer.

(e) Dividends and Distributions. Upon receipt of a resolution of the
Fund's Board of Trustees authorizing the declaration and payment of dividends
and distributions, PFPC shall

<PAGE>

issue dividends and distributions declared by the Fund in Shares, or, upon
shareholder election, pay such dividends and distributions in cash, if provided
for in the Fund's prospectus. Such issuance or payment, as well as payments upon
redemption as described above, shall be made after deduction and payment of the
required amount of funds to be withheld in accordance with any applicable tax
laws or other laws, rules or regulations. PFPC shall mail to the Fund's
shareholders such tax forms and other information, or permissible substitute
notice, relating to dividends and distributions paid by the Fund as are required
to be filed and mailed by applicable law, rule or regulation.

PFPC shall prepare, maintain and file with the IRS and other appropriate
taxing authorities reports relating to all dividends above a stipulated amount
paid by the Fund to its shareholders as required by tax or other law, rule or
regulation.

(f) Shareholder Account Services

(i) PFPC may arrange, in accordance with the pro-spectus,
for issuance of Shares obtained through:

- Any pre-authorized check plan; and

- Direct purchases through broker wire orders, checks and
applications.

(ii) PFPC may arrange, in accordance with the pro-spectus,
for a shareholder's:

- Exchange of Shares for shares of another fund with
which the Fund has exchange privileges;

- Automatic redemption from an account where that
shareholder participates in a automatic

<PAGE>

redemption plan; and/or

- Redemption of Shares from an account with a
checkwriting privilege.

(g) Communications to Shareholders. Upon timely Written Instructions,
PFPC shall mail all communications by the Fund to its shareholders, including:

(i) Reports to shareholders;

(ii) Confirmations of purchases and sales of Fund shares;

(iii) Monthly or quarterly statements;

(iv) Dividend and distribution notices;

(v) Proxy material; and

(vi) Tax form information.

In addition, PFPC will receive and tabulate the proxy cards for the
meetings of the Fund's shareholders.

(h) Records. PFPC shall maintain records of the accounts for each
shareholder showing the following information:

(i) Name, address and United States Tax Identification or
Social Security number;

(ii) Number and class of Shares held and number and class of
Shares for which certificates, if any, have been
issued, including certificate numbers and
denominations;

(iii)Historical information regarding the account of each
shareholder, including dividends and distributions paid
and the date and price for all transactions on a
shareholder's account;

(iv) Any stop or restraining order placed against a
shareholder's account;

(v) Any correspondence relating to the current maintenance
of a shareholder's account;

<PAGE>

(vi) Information with respect to withholdings; and

(vii)Any information required in order for the transfer
agent to perform any calculations contemplated or
required by this Agreement.

(i) Lost or Stolen Certificates. PFPC shall place a stop notice against
any certificate reported to be lost or stolen and comply with all applicable
federal regulatory requirements for reporting such loss or alleged
misappropriation. A new certificate shall be registered and issued only upon:

(i) The shareholder's pledge of a lost instrument bond or
such other appropriate indemnity bond issued by a
surety company approved by PFPC; and

(ii) Completion of a release and indemnification agreement
signed by the shareholder to protect PFPC and its
affiliates.

(j) Shareholder Inspection of Stock Records. Upon a request from any
Fund shareholder to inspect stock records, PFPC will notify the Fund and the
Fund will issue instructions granting or denying each such request. Unless PFPC
has acted contrary to the Fund's instructions, the Fund agrees and does hereby,
release PFPC from any liability for refusal of permission for a particular
shareholder to inspect the Fund's stock records

(k) Withdrawal of Shares and Cancellation of Certificates.

Upon receipt of Written Instructions, PFPC shall cancel outstanding
certificates surrendered by the Fund to reduce the total amount of outstanding
shares by the number of shares surrendered by the Fund.

15. Duration and Termination. This Agreement shall continue

<PAGE>

until terminated by the Fund or by PFPC on sixty (60) days' prior written notice
to the other party.

16. Notices. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. Notices shall be addressed (a) if to PFPC, at 103
Bellevue Parkway, Wilmington, Delaware 19809; (b) if to the Fund, at , Attn: or
(c) if to neither of the foregoing, at such other address as shall have been
given by like notice to the sender of any such notice or other communication by
the other party. If notice is sent by confirming telegram, cable, telex or
facsimile sending device, it shall be deemed to have been given immediately. If
notice is sent by first-class mail, it shall be deemed to have been given three
days after it has been mailed. If notice is sent by messenger, it shall be
deemed to have been given on the day it is delivered.

17. Amendments. This Agreement, or any term thereof, may be changed or
waived only by a written amendment, signed by the party against whom enforcement
of such change or waiver is sought.

18. Delegation; Assignment. PFPC may assign its rights and delegate its
duties hereunder to any wholly-owned direct or indirect subsidiary of PNC Bank,
National Association or PNC Bank Corp., provided that (i) PFPC gives the Fund
thirty (30) days' prior written notice; (ii) the delegate (or assignee) agrees
with PFPC and the Fund to comply with all relevant provisions of the 1940 Act;
and (iii) PFPC and such delegate (or assignee) promptly

<PAGE>

provide such information as the Fund may request, and respond to such questions
as the Fund may ask, relative to the delegation (or assignment), including
(without limitation) the capabilities of the delegate (or assignee).

19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

20. Further Actions. Each party agrees to perform such further acts and
execute such further documents as are necessary to effectuate the purposes
hereof.

21. Miscellaneous.

(a) Entire Agreement. This Agreement embodies the entire agreement and
understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the parties
may embody in one or more separate documents their agreement, if any, with
respect to delegated duties and Oral Instructions.

(c) Governing Law. This Agreement shall be deemed to be a contract made
in Delaware and governed by Delaware law, without regard to principles of
conflicts of law.

(d) Partial Invalidity. If any provision of this Agreement shall be
held or made invalid by a court decision,

<PAGE>

statute, rule or otherwise, the remainder of this Agreement shall
not be affected thereby.

(e) Successors and Assigns. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns.

(f) Facsimile Signatures. The facsimile signature of any party to this
Agreement shall constitute the valid and binding execution hereof by such party.

<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
PFPC INC.

By: __________________________

Title:_______________________

THE FBR FAMILY OF FUNDS

By: __________________________

Title: _______________________

<PAGE>

EXHIBIT A

THIS EXHIBIT A, dated as of , 1996, is Exhibit A to that certain Transfer
Agency Services Agreement dated as of , 1996 between PFPC Inc. and THE FBR
FAMILY OF FUNDS.

PORTFOLIOS

FBR SMALL CAP FINANCIAL FUND
FBR FINANCIAL SERVICES FUND
FBR VIRUTAL INFORMATION FUND
FBR GROWTH/VALUE FUND

<PAGE>

AUTHORIZED PERSONS APPENDIX

Name (Type) Signature

___________________ ____________________

<PAGE>

________, 1996

THE FBR FAMILY OF FUNDS

Re: TRANSFER AGENCY SERVICES FEE WAIVER

Dear Sir/Madam:

PFPC Inc. ("PFPC") agrees to waive certain fees under a Transfer Agency
Services Agreement dated _______, 1996 between PFPC and THE FBR FAMILY OF FUNDS
as follows: for the first two months of each Portfolio's operations PFPC shall
waive 100% of its minimum base fee (excluding account charges, transaction
charges, miscellaneous fees and out-of-pocket costs) to the extent the base fee
is applicable; thereafter, PFPC's base fee shall be charged in increments of 10%
per month. Thus, during the third calendar month of operations, each Portfolio
will pay 10% of the base fee rates; 20% during the fourth month; 30% during the
fifth month; etc.; and 100% during the twelfth month and thereafter.

Very truly yours,

PFPC INC.

By: ______________________________
Title:
Acknowledged:

THE FBR FAMILY OF FUNDS

By: _______________________________
Title:

<PAGE>

_______, 1996

THE FBR FAMILY OF FUNDS

Re: Transfer Agency Services Fees

Dear Sir/Madam:

This letter constitutes our agreement with respect to compensation to
be paid to PFPC Inc. ("PFPC") under the terms of a Transfer Agency Agreement
dated ____________, 1996 between you (the "Fund") and PFPC (the "Agreement").
Pursuant to Paragraph 11 of that Agreement, and in consideration of the services
to be provided to the Portfolios listed on Exhibit A to the Agreement (the
"Portfolios"), you will pay PFPC on behalf of the Portfolios certain fees and
reimburse PFPC for certain out-of-pocket expenses incurred on behalf of each
Portfolio, as follows:

1) Account Fee:

Annual, Semi-Annual Dividend: $10.00 per account per annum
Quarterly Dividend: $12.00 per account per annum
Monthly Dividend: $15.00 per account per annum
Daily Accrual Dividend: $18.00 per account per annum

Inactive Account: $ .30 per account per month

For contingent deferred sales charge funds, our per account charges
will increase by 12% per account.

Fees shall be calculated and paid monthly based on one-twelfth (1/12th)
of the annual fee. An inactive account is defined as having a zero
balance with no dividend payable. Inactive accounts are purged annually
after year-end tax reporting.

2) Transaction Charges:

Master/Omnibus Account: $1.50 per purchase/redemption
Wire order desk: $6.00 per broker call to place
transactions
New Account Opening: $ .40 per account (electronic
interface)
$5.00 per account (paper)

<PAGE>

Checkwriting: $ 1.85 per account per year
.50 per check (returned)
.10 per check (not returned)
Commission Cycle: $ .25 per account per
calculation
12b-1 Calculation: $ .25 per account per
calculation

3) Fundserv/Networking:

PNC System Access Charges*:

Base Facility Use Fee: $500.00 per month per fund family

Transaction Fees per month per transaction based on total transactions
each month as follows:

$ .50 per transaction for
1 to 1000 transactions
.46 per transaction for
1000 to 2000
transactions
.40 per transaction for
over 2000 transactions

4) NSCC Networking:

PNC System Access Charges*:

Base Facility Use Fee: $325.00 per month per fund family

Sub-Account Fees: $ .05 per month per sub-account

Position File Fee: $100.00 per position file per
CUSIP for more than 2
position files per CUSIP
per month

Note: NSCC will deduct its monthly fee on the 15th of each month from
PNC's cash settlement that day. PNC will include these charges on its
next bill as out-of-pocket expenses.

*Plus: out-of-pocket expenses for settlements; wire charges; NSCC
pickup charges; hardware, CRT's, modems; line (if required); etc.

<PAGE>

5) Additional Out-of-Pocket Expenses

a. Toll-free lines (if required)
b. Forms, envelopes, checks, checkbooks
c. Postage (bulk, pre-sort, first-class current prevailing
rates)
d. Federal Express, delivery, courier services, mailgrams
e. Hardware/phone lines for data transmissions and remote
terminal(s) (if required)
f. Data transmissions: $20.00 per transmission, per end
point
g. Microfiche/microfilm
h. Wire fee for receipt: $15.00 per domestic wire
$15.00 per international
wire
Wire fee for disbursement: $15.00 per domestic wire
$15.00 per international
wire
i. ACH Transaction charge: $.20 per item
j. Mailing fee: Approximately $.08 per item, standard
inserts $.015 each
k. Cost of proxy solicitation, mailing and tabulation:

Processing $350.00 base fee
$ .30 per proxy issued (5,000 accounts
and up)
$ .45 per proxy issued (less than 5,000
accounts)
$100.00 plus travel expenses for judge of
elections
Postal and Federal Express as incurred
l. Certificate issuance fee: $2.00 per certificate, any
additional reports/services to be negotiated
m. Record retention storage
n. "B"/"C" notice mailing and IRS levies: $3.00 per item
o. Locating lost shareholders in anticipation of escheating:
$7.50 per name
p. Consolidated statements: one annual statement included in
pricing; additional productions: $.25 per page, per
production
q. Class "B" to "A" aging exchanges: $100.00 per run; plus
$.40 per account
r. Sales tracking system interfaces: negotiated time and
material
s. Fulfillment
t. Audio Response System
u. Creation of user tapes: $100.00 per occurrence
v. Labels: $.06 each; $100.00 minimum
w. Reruns for bad price, dividend factors, etc.: time and
material cost
x. Ad hoc reports: Standard $.01 per record processed
plus $100.00 set up fee
y. Individual state tax filing

<PAGE>

z. PC Fax: $5.00 per fax
aa. Retroactive record dates $100.00 plus $.025 per account
bb. Development/programming cost: negotiated time and
material
cc. Conversion expenses: to be determined
dd. Disaster recovery (as incurred)
ee. Travel expenses as required
ff. Training expenses as required ($75.00 per hour)

6) Additional Expenses (Which May be Paid by Shareholders):

a. IRA/Keough Processing: $10.00 per account per fund per annum
5.00 new account set-up fee
2.50 per distribution
10.00 per transfer in
18.00 per transfer out

b. Exchange Fee: $ 5.00

c. Checkwriting: $ 9.50 each stop payment
$25.00 each non-sufficient funds
2.50 each check copy

d. Account Transcripts:
(within 3 most
recent years) $35.00 each

(more than 3 years) $50.00 each

e. Returned purchase
checks: $20.00 each

f. Lost certificate
bonding: $35.00 service charge and
replacement value charged
by the Insurance Company at
the prevailing rate

g. Federal express
charges if requested
by shareholder: $15.00

h. Wire fee for
disbursement if
requested by
shareholder: $15.00 domestic
$15.00 international

<PAGE>

7) Monthly Minimum Fee:

$3,000 for each portfolio or class of shares plus per account charges,
exclusive of transaction and access charges and out-of-pocket expenses.

Any fee or out-of-pocket expenses not paid within 30 days of the date of
the original invoice will be charged a late payment fee of 1% per month until
payment of the fees are received by PFPC.

If during the next three years, PFPC is removed from the Transfer Agency
Services Agreement referenced above, the Fund shall pay any costs of time and
material associated with the deconversion and PFPC will recoup 100% of the fees
waived during the first year, if any.

The fee for the period from the date hereof until the end of the year shall
be prorated according to the proportion which such period bears to the full
annual period.

If the foregoing accurately sets forth our agreement and you intend to be
legally bound thereby, please execute a copy of this letter and return it to us.

Very truly yours,

PFPC INC.

By: ____________________________
Title:

ACCEPTED: THE FBR FAMILY OF FUNDS

By: _____________________________
Title:

<PAGE>

________, 1996

THE FBR FAMILY OF FUNDS

Re: TRANSFER AGENCY SERVICES FEE WAIVER

Dear Sir/Madam:

Very truly yours,

PFPC INC.

By: ________________________

Title:
Acknowledged:

THE FBR FAMILY OF FUNDS

By: __________________________
Title:

Kramer, Levin, Naftalis & Frankel
919 THIRD AVENUE
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. Naftalis Counsel
Thomas E. Constance Michael J. Nassau --------
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

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

December 17, 1996

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

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

Dear Ladies/Gentlemen:

We have acted as counsel for The FBR Family of Funds, a Delaware
business trust (the "Fund"), in connection with the proposed public offering of
shares of beneficial interest, no par value (the "Shares") of its FBR Small Cap
Financial Fund series, FBR Financial Services Fund series, FBR Small Cap
Growth/Value Fund series and FBR Information Technologies Fund series pursuant
to a registration statement on Form N-1A (File No. 333-05675) (the "Registration
Statement"), filed with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, and the Investment Company Act of 1940, as
amended.

We have reviewed the Fund's Certificate of Trust, its Delaware Trust
Instrumeny and its ByLaws, resolutions of the Board of Trustees of the Fund, and
the Registration Statement (including exhibits thereto). We have also made such
inquires and have examined originals, certified copies or copies otherwise
identified to our satisfaction of such documents, records and other instruments
as we have deemed necessary or appropriate for the purposes of this opinion. For
purposes of such examination, we have assumed

<PAGE>

the genuineness of all signatures on original documents and the conformity to
the original documents of all copies submitted.

We are members of the Bar of the State of New York and do not hold
ourselves out as experts as to the law of any other state or jurisdiction. We
have received and relied upon an opinion from Morris, Nichols, Arsht & Tunnell,
Special Delaware Counsel, a copy of which is attached herewith, concerning the
organization of the Fund and the authorization and issuance of the Shares.

Based upon and subject to the foregoing, we are of the opinion, and so
advise you as follows:

i. The Fund is duly organized and validly existing as a business
trust in good standing under the laws of the State of Delaware.

ii. The shares of FBR Small Cap Financial Fund series Shares, FBR
Financial Services Fund series Shares, FBR Small Cap Growth/Value
Fund series Shares and FBR Information Technologies Fund series
Shares of the Fund to be offered for sale pursuant to the
Prospectus are duly authorized and, when sold, issued and paid
for as contemplated by the will be fully paid and nonassessable.

We consent to the filing of this opinion as an exhibit to the
Registration Statement.

Very truly yours,

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

[MORRIS, NICHOLS, ARSHT & TUNNELL LETTERHEAD]

December 16, 1996

The FBR Family of Funds
Potomac Tower
1001 19th Street North
Arlington, VA 22209

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

Ladies and Gentlemen:

We have acted as special Delaware counsel to The FBR Family of Funds, a
Delaware business trust (the "Trust"), in connection with certain matters
relating to the organization of the Trust and the issuance of Shares of
beneficial interest in the Trust. Capitalized terms used herein and not
otherwise herein defined are used as defined in the Trust Instrument of the
Trust dated April 30, 1996 (the "Governing Instrument").

In rendering this opinion, we have examined copies of the following
documents, each in the form provided to us: the Certificate of Trust of the
Trust as filed in the Office of the Secretary of State of the State of Delaware
(the "Recording Office") on May 1, 1996 (the "Certificate"); the Governing
Instrument; the Bylaws of the Trust; certain resolutions of the Trustees of the
Trust; the Trust's Notification Of Registration Filed Pursuant to Section 8(a)
of the Investment Company Act of 1940 on Form N-8A as filed with the Securities
and Exchange Commission on June 11, 1996; the Trust's Registration Statement on
Form N-1A as filed with the Securities and Exchange Commission on June 11, 1996
as amended by Pre-Effective Amendments No. 1 and 2 thereto (as so amended, the
"Registration Statement"); and a certification of good standing of the Trust
obtained as of a recent date from the Recording Office. In such examinations, we
have assumed the genuineness of all signatures, the conformity to original
documents of all documents submitted to us as copies or drafts of documents to
be executed, and the legal capacity of

<PAGE>

The FBR Family of Funds
December 17, 1996
Page 2

natural persons to complete the execution of documents. We have further assumed
for the purpose of this opinion: (i) the due authorization, execution and
delivery by, or on behalf of, each of the parties thereto of the
above-referenced instruments, certificates and other documents, and of all
documents contemplated by the Governing Instrument and applicable resolutions of
the Trustees to be executed by investors desiring to become Shareholders; (ii)
the payment of consideration for Shares, and the application of such
consideration, as provided in the Governing Instrument, and compliance with the
other terms, conditions and restrictions set forth in the Governing Instrument,
the Registration Statement, the Trust's Prospectus and Statement of Additional
Information forming a part of the Registration Statement, as amended from time
to time, and all applicable resolutions of the Trustees in connection with the
issuance of Shares (including, without limitation, the taking of all appropriate
action by the Trustees to designate Series of Shares and the rights and
preferences attributable thereto as contemplated by the Governing Instrument);
(iii) that appropriate notation of the names and addresses of, the number of
Shares held by, and the consideration paid by, Shareholders will be maintained
in the appropriate registers and other books and records of the Trust in
connection with the issuance or transfer of Shares; (iv) that no event has
occurred subsequent to the filing of the Certificate that would cause a
dissolution or termination of the Trust under Section 11.04 or Section 11.05 of
the Governing Instrument; (v) that the activities of the Trust have been and
will be conducted in accordance with the terms of the Governing Instrument and
the Delaware Act; and (vi) that each of the documents examined by us is in full
force and effect and has not been modified, supplemented or otherwise amended
except as herein referenced. No opinion is expressed herein with respect to the
requirements of, or compliance with, federal or state securities or blue sky
laws. Further, we have not participated in the preparation of, and express no
opinion on, the sufficiency or accuracy of the Registration Statement or any
other registration or offering documentation relating to the Trust or the
Shares. As to any facts material to our opinion, other than those assumed, we
have relied without independent investigation on the above-referenced documents
and on the accuracy, as of the date hereof, of the matters therein contained.

Based on and subject to the foregoing, and limited in all respects to
matters of Delaware law, it is our opinion that:

1. The Trust is a duly created and validly existing business trust in
good standing under the laws of the State of Delaware.

<PAGE>

The FBR Family of Funds
December 17, 1996
Page 3

2. The Shares, when issued to Shareholders, will constitute legally
issued, fully paid and non-assessable Shares of beneficial interest in the
Trust.

3. Under the Delaware Act and the terms of the Governing Instrument,
each Shareholder of the Trust, in such capacity, will be entitled to the same
limitation of personal liability as that extended to stockholders of private
corporations for profit organized under the general corporation law of the State
of Delaware; provided, however, that we express no opinion with respect to the
liability of any Shareholder who is, was or may become a named Trustee of the
Trust.

We hereby consent to the filing of a copy of this opinion with the
Securities and Exchange Commission as an exhibit to the Registration Statement.
In giving this consent, we do not thereby admit that we come within the category
of persons whose consent is required under Section 7 of the Securities Act of
1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder. Except as provided in this paragraph, the opinion set
forth above is expressed solely for the benefit of the addressee hereof in
connection with the matters contemplated hereby and may not be relied upon by,
or filed with, any other person or entity or for any other purpose without our
prior written consent.

Sincerely,

/s/MORRIS, NICHOLS, ARSHT & TUNNELL
-----------------------------------

Kramer, Levin, Naftalis & Frankel
919 THIRD AVENUE
NEW YORK, N.Y. 10022 - 3852
(212) 715 - 9100

FAX
(212) 715-8000
---
WRITER'S DIRECT NUMBER
(212)715-9100
-------------

New York, New York

December 18, 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
amendment to the Registration Statement on Form N-1A.

Very truly yours,

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

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our report
dated December 17, 1996 included in this Registration Statement (File No.
333-05675) relating to our audit of the FBR Financial Services Fund, the FBR
Small Cap Financial Fund, and the FBR Small Cap Growth/Value Fund financial
statements, as of December 16, 1996, each of which is a series of The FBR Family
of Funds.

/s/Arthur Andersen & Co. LLP
----------------------------

Washington, D. C.
December 17, 1996

[FRIEDMAN, BILLINGS, RAMSEY & CO., INC. LETTERHEAD]

December 16, 1996

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

Ladies/Gentlemen:

Friedman, Billings, Ramsey & Co., Inc. ("FBRI") hereby offers to
purchase 2777.75 shares each of FBR Small Cap Financial Fund, FBR Financial
Services Fund and 2777.833 shares of FBR Growth/Value Fund (the "Seed Capital
Shares"). This letter will confirm that FBRI is purchasing the Seed Capital
Shares for its own account for investment purposes only and not with a view to
reselling or otherwise distributing such shares.

FBRI agrees and hereby undertakes that, in the event any of the Seed
Capital Shares are redeemed during the period of amortization of the Fund's
organizational expenses, the redemption proceeds will be reduced by any
unamortized organizational expenses in the same proportion as the number of Seed
Capital Shares being redeemed bears to the number of Seed Capital Shares
outstanding at the time of redemption.

Sincerely,

/s/ Emanuel Friedman
--------------------
Chairman

FORM OF
Rule 12b-1 Distribution Plan
<PAGE>

PLAN FOR PAYMENT OF CERTAIN EXPENSES
FOR DISTRIBUTION OR SHAREHOLDER SERVICING
ASSISTANCE

A Plan (the "Plan") pertaining to each of the series of The FBR Family
of Funds listed on Exhibit A (each a "Fund"), a Delaware business trust (the
"Trust") and an open-end, diversified management investment company registered
under the Investment Company Act of 1940, as amended (the "Act"), adopted
pursuant to Section 12(b) of the Act and Rule 12b-1 promulgated thereunder
("Rule 12b-1").

1. Principal Underwriter. Friedman, Billings, Ramsey & Co., Inc. ("the
Distributor"), acts as the principal underwriter of the Fund's shares pursuant
to a Distribution Agreement with the Trust. FBR Fund Advisers, Inc. (the
"Investment Adviser"), acts as the Fund's investment adviser pursuant to an
Investment Advisory Agreement with the Trust.

2. Distribution Payments. (a) The Fund either directly or through the
Investment Adviser, may make payments periodically (i) to the Distributor or to
any broker-dealer (a "Broker") who is registered under the Securities Exchange
Act of 1934 and a member in good standing of the National Association of
Securities Dealers, Inc. and who has entered into a selected dealer agreement
with the Distributor, (ii) to other persons or organizations ("Servicing
Agents") who have entered into shareholder processing and service agreements
with the Trust on behalf of the Fund, the Investment Adviser or the Distributor,
regarding shares of the Fund owned by shareholders for which such broker is the
dealer or holder of record or such servicing agent has a servicing relationship,
or (iii) for expenses

<PAGE>

associated with distribution of Fund shares, including the compensation of the
sales personnel of the Distributor.

(b) The schedule of such fees and the basis upon which such fees will
be paid shall be determined from time to time by the Distributor and the
Investment Adviser, subject to approval by the Board of Trustees of the Trust.

(c) Payments may also be made for any advertising and promotional
expenses relating to selling efforts, including but not limited to the
incremental costs of printing prospectuses, statements of additional
information, annual reports and other periodic reports for distribution to
persons who are not shareholders of the Fund; costs of preparing and
distributing any other supplemental sales literature; costs of radio,
television, newspaper and other advertising; telecommunications expenses,
including the cost of telephones, telephone lines and other communications
equipment, incurred by or for the Distributor in carrying out its obligations
under the Distribution Agreement.

(d) The aggregate amount of all payments by the Fund in any fiscal
year, to the Distributor, Brokers, Servicing Agents and for advertising and
promotional expenses pursuant to paragraphs (a), (b), (c) of this Section 2
shall not exceed 0.50% of the average daily net asset value attributable to
shares of the Fund on an annual basis for such fiscal year, or such lesser
amounts as determined appropriate. The Plan will only make payments for expenses
actually incurred on a first-in, first-out basis. The amount of expenses
incurred in any year may not exceed the rate of reimbursement set forth in the
Plan. The unreimbursed amounts may be recovered through future payments under
the Plan. Carry-over

-2-

<PAGE>

amounts are not limited in the number of years they may be carried forward. If
the Plan is terminated in accordance with its terms, the obligations of the Fund
to make payments pursuant to the Plan will cease and the Fund will not be
required to make any payments past the date the Plan terminates.

3. Reports. Quarterly, in each year that this Plan remains in effect,
the Trust's Principal Financial Officer shall prepare and furnish to the Board
of Trustees of the Trust a written report, complying with the requirements of
Rule 12b-l, setting forth the amounts expended by the Fund under the Plan and
purposes for which such expenditures were made.

4. Approval of Plan. This Plan shall become effective upon approval of
the Plan, the form of Selected Dealer Agreement and the form of Shareholder
Servicing Agreement, by the majority votes of both (a) the Board of Trustees and
the Qualified Trustees (as defined in Section 6), cast in person at a meeting
called for the purpose of voting on the Plan and (b) the outstanding voting
securities of the Fund, as defined in Section 2(a)(42) of the Act.

5. Term. This Plan shall remain in effect for one year from its
adoption date and may be continued thereafter if this Plan and all related
agreements are approved at least annually by a majority vote of the Trustees,
including a majority of the Qualified Trustees, cast in person at a meeting
called for the purpose of voting on such Plan and

-3-
<PAGE>

agreements. This Plan may not be amended in order to increase materially the
amount to be spent for distribution assistance without shareholder approval in
accordance with Section 4 hereof. All material amendments to this Plan must be
approved by a vote of the Board of Trustees, and of the Qualified Trustees (as
hereinafter defined), cast in person at a meeting called for the purpose of
voting thereon.

6. Termination. This Plan may be terminated at any time by a majority
vote of the Trustees who are not interested persons (as defined in section
2(a)(19) of the Act) of the Fund and have no direct or indirect financial
interest in the operation of the Plan or in any agreements related to the Plan
(the "Qualified Trustees") or by vote of a majority of the outstanding voting
securities of the Fund, as defined in section 2(a)(42) of the Act.

7. Nomination of "Disinterested" Trustees. While this Plan shall be in
effect, the selection and nomination of the "disinterested" Trustees of the
Trust shall be committed to the discretion of the Qualified Trustees then in
office.

8. Miscellaneous. (a) Any termination or noncontinuance of (i) a
Selected Dealer Agreement between the Distributor and a particular Broker or
(ii) a Shareholder Servicing Agreement between the Investment Adviser or the
Trust on behalf of the Fund and a particular person or organization; shall have
no effect on any similar agreements between Brokers or other persons and the
Fund, the Investment Adviser or the Distributor pursuant to this Plan.

-4-

<PAGE>

(b) Neither the Distributor, the Investment Adviser nor the Fund shall
be under any obligation because of this Plan to execute any Selected Dealer
Agreement with any Broker or any Shareholder Servicing Agreement with any person
or organization.

(c) All agreements with any person or organization relating to the
implementation of this Plan shall be in writing and any agreement related to
this Plan shall be subject to termination, without penalty, pursuant to the
provisions of Section 6 hereof.

-5-

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Meyer Eisenberg, or Joanne Doldo, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all his
capacities as a trustee of The FBR Family of Funds, a Delaware business trust,
to sign on his or its behalf any and all Registration Statements (including any
pre-effective and post-effective amendments to Registration Statements) under
the Securities Act of 1933, the Investment Company Act of 1940 and any
amendments and supplements thereto, and other documents in connection
thereunder, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully as to all intents and purposes as
he might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, and each of them, may lawfully do or cause to be
done by virtue hereof.