FBR FAMILY OF FUNDS, 497, 1997-01-06

FBR FAMILY OF FUNDS
497, 1997-01-06

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Rule 497(c)
Registration. No. 333-05675

The FBR Family of Funds

Prospectus For information, call toll free: 888-888-0025
December 30, 1996 e-mail: [email protected]

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
Financial Services Fund, the Small Cap Financial 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
December 30, 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 (THE "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
Fund Expenses.............................................................. 3
Investment Objectives...................................................... 6
Investment Policies and Risk Factors....................................... 6
Additional Information About the Funds..................................... 11
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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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 Financial Services Fund, FBR
Small Cap Financial 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, another 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, other
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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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)
Investment Advisory 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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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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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 group of industries 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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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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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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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] 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 another 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 other 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. 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 Internal Revenue Code of 1986, as amended (the "IRS 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 IRS Code. Each Fund contemplates the
distribution of all of its net investment income and capital gains, if any, in
accordance with the timing requirements imposed by the 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 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 Plan 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.

Under the terms of the Administration Agreement, BSFM is paid a monthly fee at
the annual rate of .075% on the first $250 million of each Fund's average net
assets and .050% of net assets in excess of $250 million, subject to a minimum
annual fee of $75,000, payable monthly by each Fund. 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.

Counsel.

Kramer, Levin, Naftalis & Frankel serves as counsel to the Funds.

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.

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

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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>

Rule 497(c)
Registration. No. 333-05675

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 30, 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.....................................................................A-1
FINANCIAL STATEMENTS.........................................................B-1

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 group of industries 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 providing financial services to consumers
and industry with an emphasis on those 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.

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

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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.

In addition to the margin restrictions discussed above, transactions in futures
contracts may involve the segregation of funds pursuant to requirements imposed
by the Commission. Under those requirements, where a Fund has a long position in
a futures contract, it may be required to establish a segregated account (not
with a futures commission merchant or broker, except as may be permitted under
Commission rules) containing cash or certain liquid assets equal to the purchase
price of the contract (less any margin on deposit). For a short position in
futures or forward contracts held by a Fund, those requirements may mandate the
establishment of a segregated account (not with a futures commission merchant or
broker, except as may be permitted under Commission rules) with cash or certain
liquid assets that, when added to the amounts deposited as margin, equal the
market value of the instruments underlying the futures contracts (but are not
less than the price at which the short positions were established).

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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

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<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 group of industries; 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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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>

-21-

<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:

<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 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.

Frank J. Maresca, 37 Assistant Treasurer Managing Director of Bear Stearns since
245 Park Avenue September 1994; Associate Director of
New York, NY 10167 Bear Stearns from September 1993 to
September 1994; Executive Vice President
of BSFM since March 1992; Vice President
of Bear Stearns from March 1992 to
September 1993; First Vice President of
Mitchell Hutchins Asset Management Inc.
("Mitchell Hutchins") from June 1988 to
March 1992; and Director of Funds
Administration Division of Mitchell
Hutchins from November 1991 to March
1992.

Vincent L. Pereira, 30 Assistant Secretary Associate Director of Bear Stearns since
245 Park Avenue September 1995 and Vice President of BSFM
New York, New York 10167 since May 1993; Vice President of Bear,
Stearns & Co. Inc. to September 1995;
Assistant Vice President of Mitchell
Hutchins from October 1992 to May 1993;
Senior Relationship Manager of Mitchell
Hutchins from June 1988 to October 1992.

</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.

-22-

<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 30, 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 common control
with 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.

-23-

<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

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.

-24-

<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.

-25-

<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.

-26-

<PAGE>

Shareholder and Trustee Liability.

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

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

Miscellaneous.

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

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

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

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

The Prospectus and this Statement of Additional Information are not an offering
of the securities herein described in any state in which such offering may not
lawfully be made. No salesman, dealer, or other person is authorized to give any
information or make any representation other than those contained in the
Prospectus and this Statement of Additional Information.

-27-

<PAGE>

APPENDIX

Description of Security Ratings.

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

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

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

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

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

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

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

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

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

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

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

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

A - 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)

A - 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.

A - 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.

A - 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.

A - 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).

B - 1

<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

B - 2