FBR FAMILY OF FUNDS, 485BPOS, 1999-03-01

FBR FAMILY OF FUNDS
485BPOS, 1999-03-01

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<PAGE>

File Nos. 333-05675
811-07665

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 1, 1999

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Pre-Effective Amendment No.

Post-Effective Amendment No. 6

and

REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940

Amendment No. 8

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

FBR FAMILY OF FUNDS

(Exact Name of Registrant as Specified in Charter)
Potomac Tower
1001 Nineteenth Street North
Arlington, VA 22209
(Address of Principal Executive Office) (Zip Code)

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

Robert S. Smith, Esq. Copy To:
Friedman, Billings, Ramsey & Co., Inc. Jack W. Murphy, Esq.
Potomac Tower Dechert Price & Rhoads
1001 Nineteenth Street North 1775 Eye Street, N.W.
Arlington, VA 22209 Washington, D.C. 20006
(Name and Address of Agent for Service)

It is proposed that this filing will become effective (check appropriate box):

X immediately upon filing pursuant to paragraph (b)
- ----------
on [date] pursuant to paragraph (b)
- ----------
60 days after filing pursuant to paragraph (a)(1)
- ----------
on March 1, 1998 pursuant to paragraph (a)(1)
- ----------
75 days after filing pursuant to paragraph (a)(2)
- ----------
on [date] pursuant to paragraph (a)(2) of Rule 485
- ----------

<PAGE>
FBR FAMILY OF FUNDS

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

FBR FINANCIAL SERVICES FUND
FBR SMALL CAP FINANCIAL FUND
FBR SMALL CAP VALUE FUND
FBR REALTY GROWTH FUND

[LOGO]

PROSPECTUS

MARCH 1, 1999

Investment Adviser
FBR Fund Advisers, Inc.
Potomac Tower
1001 Nineteenth Street North
Arlington, VA 22209
1-888-888-0025

AS WITH ALL MUTUAL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION
HAS NOT JUDGED WHETHER THESE FUNDS ARE GOOD INVESTMENTS
OR WHETHER THE INFORMATION IN THIS PROSPECTUS IS ADEQUATE AND ACCURATE.
ANYONE WHO INDICATES OTHERWISE IS COMMITTING A FEDERAL CRIME.
<PAGE>
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Overview of Funds.............................. 1

Fees and Expenses of the Funds................. 5

Investment Objectives, Principal Investment
Strategies and Related Risks................. 6

Financial Services Fund...................... 6

Small Cap Financial Fund..................... 6

Small Cap Value Fund......................... 6

Realty Growth Fund........................... 7

Strategies of All Funds...................... 7

Risks........................................ 7

Investment Adviser............................. 9

Investing in the Funds......................... 10

Determination of Net Asset Value............. 10

How to Buy Shares............................ 10

How to Redeem Shares......................... 12

Shareholder Services........................... 14

Cross-Reinvestment of Dividends and
Distributions.............................. 14

Tax-Sheltered Retirement Plans............... 14

Exchange Privilege........................... 14

Other Important Investment Information......... 14

Distribution Fees............................ 14

Dividends and Distributions.................. 15

Taxes.......................................... 15

Financial Highlights........................... 16

Additional Information......................... 18
</TABLE>

<PAGE>
OVERVIEW OF FUNDS

THE FOLLOWING DISCUSSION IS AN OVERVIEW OF THE INVESTMENT OBJECTIVES,
PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS OF EACH OF THE FUNDS OFFERED
IN THIS PROSPECTUS. MORE INFORMATION ON THE INVESTMENT OBJECTIVES, PRINCIPAL
INVESTMENT STRATEGIES AND RELATED RISKS OF EACH OF THE FUNDS APPEARS BELOW UNDER
"INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND RELATED RISKS."

FBR FINANCIAL SERVICES FUND (FBRFX)

OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGY. The investment objective of the
FBR Financial Services Fund ("Financial Services Fund") is capital appreciation.
Under normal market conditions, the Financial Services Fund invests at least 65%
of its total assets in equity securities of companies providing financial
services to consumers and industry. Companies in the financial services group of
industries include commercial banks, savings and loan associations, consumer and
industrial financial companies, securities brokerage companies, insurance
companies, real estate, leasing companies and companies that combine some or all
of these businesses, and holding companies for each of the foregoing. The
Financial Services Fund also invests in companies in the information technology
industries that primarily provide products and/or services to companies in the
financial services industries. The companies in which the Financial Services
Fund invests may have market capitalization of less than $500 million at the
time of purchase.

RISKS. The Financial Services Fund is intended for investors who are
seeking above-average gains and are willing to accept the risks of concentrating
their investments in securities within an industry or group of industries.
Because of its narrow industry focus, the performance of the Financial Services
Fund is tied closely to and affected by developments in the financial services
industry, such as the possibility that government regulation will negatively
impact companies involved in the financial services industry. Financial services
companies can be influenced by adverse effects of volatile interest rates, and
other factors, which are described in more detail below. See "Investment
Objectives, Principal Investment Strategies and Related Risks--Risks."

TOTAL RETURNS. The bar chart below shows the annual total returns for the
Financial Services Fund for each calendar year during the life of the Fund
through December 31, 1998. The chart shows how much returns can vary from year
to year. The Financial Services Fund's past performance is no guarantee of
future results.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
FINANCIAL SERVICES FUND

The table below compares the Financial Services Fund's performance over time
with that of the S&P 500 Composite Index, a widely recognized unmanaged index of
stock performance, and the Lipper Financial Services Fund Index, which shows
performance of mutual funds that invest primarily in the financial services
sector. These figures are for periods ended December 31, 1998.

<TABLE>
<CAPTION>
AVERAGE ANNUAL
SINCE INCEPTION
ON JANUARY 3,
1 YEAR 1997
--------- -----------------
<S> <C> <C>
Financial Services Fund.... 3.56% 23.73%
S&P 500 Composite Index*... 28.57% 31.32%
Lipper Financial Services
Fund Index*.............. -9.53% 16.42%
</TABLE>

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

* Investors should note that the Fund is a professionally managed mutual fund
while the indices are unmanaged, do not incur expenses and are not available
for investment.

<TABLE>
<CAPTION>
TOTAL
QUARTER ENDED RETURN
----------------- -----------
<S> <C> <C>
Best Quarter June 30, 1997 17.93%
September 30,
Worst Quarter 1998 -17.17%
</TABLE>

1
<PAGE>

FBR SMALL CAP FINANCIAL FUND (FBRSX)

OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGY. The investment objective of the
FBR Small Cap Financial Fund ("Small Cap Financial Fund") is capital
appreciation. Under normal market conditions, the Small Cap Financial Fund
invests at least 65% of its total assets in small capitalization ("small-cap")
companies "principally engaged" in the business of providing financial services
to consumers and industry. The Small Cap Financial Fund considers companies with
market capitalization of less than $750 million to be small-cap companies.
However, the Small Cap Financial Fund focuses its investments on companies with
market capitalizations below $200 million. The Small Cap Financial Fund may
invest up to 35% of its total assets in equity securities of companies that are
not small-cap companies.

RISKS. The Small Cap Financial Fund is intended for investors who are
seeking above-average gains and are willing to accept the risks of concentrating
their investments in securities within an industry or group of industries.
Because of its narrow industry focus, the performance of the Small Cap Financial
Fund is tied closely to and affected by developments in the financial services
industry, such as the possibility that government regulation will negatively
impact companies involved in the financial services industry. Financial services
companies can be influenced by adverse effects of volatile interest rates, and
other factors, which are described in more detail below. See "Investment
Objectives, Principal Investment Strategies and Related Risks--Risks."

Investing in the Small Cap Financial Fund involves the risks of investing in
small-cap companies, which generally involve greater risk than investing in
larger, more established companies. The market price of securities of small-cap
companies may be more volatile than securities of larger, more established
companies. Additionally, small-cap companies are typically subject to greater
changes in earnings and business prospects than larger, more established
companies. Typically, there is less publicly available information concerning
small-cap companies than for larger, more established companies.

TOTAL RETURNS. The bar chart below shows the annual total returns for the
Small Cap Financial Fund for each calendar year during the life of the Fund
through December 31, 1998. The chart shows how much returns can vary from year
to year. The Small Cap Financial Fund's past performance is no guarantee of
future results.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
SMALL CAP FINANCIAL FUND

The table below compares the Small Cap Financial Fund's performance over
time with that of the Russell 2000 Index, an unmanaged index of small
capitalization companies, and the Lipper Financial Services Fund Index, which
shows performance of mutual funds that invest primarily in the financial
services sector. These figures are for periods ended December 31, 1998.

<TABLE>
<CAPTION>
AVERAGE ANNUAL
SINCE INCEPTION
ON JANUARY 3,
1 YEAR 1997
--------- -----------------
<S> <C> <C>
Small Cap Financial
Fund.................... -13.52% 16.95%
Russell 2000 Index*....... -2.24% 9.88%
Lipper Financial Services
Fund Index*............. -9.53% 16.42%
</TABLE>

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

* Investors should note that the Fund is a professionally managed mutual fund
while the indices are unmanaged, do not incur expenses and are not available
for investment.

<TABLE>
<CAPTION>
TOTAL
QUARTER ENDED RETURN
----------------- -----------
<S> <C> <C>
September 30,
Best Quarter 1997 16.77%
September 30,
Worst Quarter 1998 -17.49%
</TABLE>

2
<PAGE>

FBR SMALL CAP VALUE FUND (FBRVX)

OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGY. The investment objective of the
FBR Small Cap Value Fund ("Small Cap Value Fund") is capital appreciation. Under
normal market conditions, the Small Cap Value Fund invests at least 65% of its
total assets in small-cap companies. Unlike the Small Cap Financial Fund, the
Small Cap Value Fund considers small-cap companies to have market
capitalizations of less than $1 billion, measured at the time of purchase. The
Small Cap Value Fund may invest up to 35% of its total assets in equity
securities of companies with larger market capitalizations. Investments will
consist primarily of common stocks, but may include preferred stocks,
convertible bonds, and warrants.

RISKS. Investing in the Small Cap Value Fund involves the risks of
investing in small-cap companies, which generally involve greater risk than
investing in larger, more established companies. The market price of securities
of small-cap companies may be more volatile than securities of larger, more
established companies. Additionally, small-cap companies are typically subject
to greater changes in earnings and business prospects than larger, more
established companies. Typically, there is less publicly available information
concerning small-cap companies than for larger, more established companies.

The Small Cap Value Fund is a "non-diversified" fund. Compared to other
funds, the Small Cap Value Fund may invest a greater percentage of its assets in
a particular issuer. To the extent that the Small Cap Value Fund is less
diversified, it may be more susceptible to adverse economic, political, or
regulatory developments affecting a single issuer than would be the case if it
were more broadly diversified.

TOTAL RETURNS. The bar chart below shows the annual total returns for the
Small Cap Value Fund for each calendar year during the life of the Fund through
December 31, 1998. The chart shows how much returns can vary from year to year.
The Small Cap Value Fund's past performance is no guarantee of future results.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
SMALL CAP VALUE FUND

The table below compares the Small Cap Value Fund's performance over time
with that of the Russell 2000 Index, an unmanaged index of small capitalization
companies, and the Lipper Small Cap Fund Index, an index of mutual funds that
invest primarily in small capitalization securities. These figures are for
periods ended December 31, 1998.

<TABLE>
<CAPTION>
AVERAGE ANNUAL
SINCE INCEPTION
ON JANUARY 3,
1 YEAR 1997
--------- -----------------
<S> <C> <C>
Small Cap Value Fund....... -3.52% 18.02%
Russell 2000 Index*........ -2.24% 9.88%
Lipper Small Cap Fund
Index*................... 20.47% 18.45%
</TABLE>

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

* Investors should note that the Fund is a professionally managed mutual fund
while the indices are unmanaged, do not incur expenses and are not available
for investment.

<TABLE>
<CAPTION>
TOTAL
QUARTER ENDED RETURN
----------------- -----------
<S> <C> <C>
September 30,
Best Quarter 1997 22.79%
September 30,
Worst Quarter 1998 -18.21%
</TABLE>

3
<PAGE>

FBR REALTY GROWTH FUND (GVRGX)

OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGY. The investment objective of
the FBR Realty Growth Fund ("Realty Growth Fund") is capital appreciation, with
current income as a secondary objective. Under normal market conditions, the
Realty Growth Fund invests at least 65% of its total assets in equity securities
of real estate investment trusts ("REITs") and other real estate industry
companies. The Realty Growth Fund's investments in real estate industry
companies will consist of companies that derive at least 50% of their gross
revenues or net profits from the ownership, development, construction,
financing, management or sale of commercial, industrial or residential real
estate. In addition to REITs, real estate industry companies include brokers or
real estate developers, as well as companies with substantial real estate
holdings (i.e., at least 50% of their total assets), such as paper and lumber
producers and hotel and entertainment companies.

RISKS. Although the Realty Growth Fund does not invest directly in real
estate, it invests primarily in securities of real estate industry companies,
and, therefore, an investment in the Realty Growth Fund is subject to risks
associated with the ownership of real estate. REITs are subject to additional
risks related to the credit quality and value of the underlying property owned.
A shareholder's return will be reduced not only by his or her proportionate
share of the expenses of a Fund, but also, indirectly, by similar expenses of
the REITs in which the Fund invests.

The Realty Growth Fund is a "non-diversified" fund. Compared to other funds,
the Realty Growth Fund may invest a greater percentage of its assets in a
particular issuer. To the extent that the Realty Growth Fund is less
diversified, it may be more susceptible to adverse economic, political, or
regulatory developments affecting a single issuer than would be the case if it
were more broadly diversified.

TOTAL RETURNS. The bar chart below shows the annual total returns for the
Realty Growth Fund for each calendar year during the life of the Fund through
December 31, 1998. The chart shows how much returns can vary from year to year.
The Realty Growth Fund's past performance is no guarantee of future results.

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
REALTY GROWTH FUND

The table below compares the Realty Growth Fund's performance over time with
that of the S&P 500 Composite Index, a widely recognized unmanaged index of
stock performance, and the NAREIT Total Return Index, an unmanaged index of REIT
performance. These figures are for periods ended December 31, 1998.

<TABLE>
<CAPTION>
AVERAGE ANNUAL
SINCE
INCEPTION
ON JULY 3,
1 YEAR 1995
--------- --------------
<S> <C> <C>
Realty Growth Fund.......... -20.46% 11.86%
S&P 500 Composite Index*.... 28.57% 28.39%
NAREIT Total Return
Index*.................... -18.82% 10.93%
</TABLE>

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

* Investors should note that the Fund is a professionally managed mutual fund
while the indices are unmanaged, do not incur expenses and are not available
for investment.

<TABLE>
<CAPTION>
TOTAL
QUARTER ENDED RETURN
----------------- -----------
<S> <C> <C>
September 30,
Best Quarter 1997 13.09%
September 30,
Worst Quarter 1998 -17.71%
</TABLE>

4
<PAGE>
FEES AND EXPENSES OF THE FUNDS

This table describes the fees and expenses that you may pay if you buy and
hold shares of the Funds.

<TABLE>
<S> <C> <S> <C>
SHAREHOLDER FEES (fees paid directly from your investment)
Maximum Sales Charge Imposed on Purchases................................................................ NONE
Maximum Deferred Sales Charge............................................................................ NONE
Maximum Sales Charge Imposed on Reinvested Dividends..................................................... NONE
Redemption Fee on Shares held 90 days or less (as a percentage of the redemption amount)*................ 1.00 %
Exchange Fee............................................................................................. NONE
</TABLE>

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

* In addition, we charge a $15.00 redemption fee for all payments by wire made
through the Funds' transfer agent.

ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets)

<TABLE>
<CAPTION>
FINANCIAL SMALL CAP
SERVICES FINANCIAL SMALL CAP REALTY
FUND FUND VALUE FUND GROWTH FUND
----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Investment Advisory Fees.............................................. 0.90% 0.90% 0.90% 1.00%
Distribution (12b-1) Fees............................................. 0.25% 0.25% 0.25% 0.25%
Other Expenses........................................................ 0.72% 0.62% 1.10% 4.16%
--- --- --- ---
Total Annual Fund Operating Expenses.................................. 1.87% 1.77% 2.25% 5.41%
--- --- --- ---
--- --- --- ---
Fee Waiver and Expense Reimbursement*................................. 0.00% 0.00% 0.30% 3.41%
--- --- --- ---
--- --- --- ---
NET EXPENSES*......................................................... 1.87% 1.77% 1.95% 2.00%
--- --- --- ---
--- --- --- ---
</TABLE>

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

* FBR Fund Advisers, Inc. (the "Adviser") has agreed in writing to waive a
portion of its investment advisory fees and assume certain expenses of each
Fund to the extent annual fund operating expenses exceed 1.95% of each
Fund's average daily net assets for the Financial Services Fund, Small Cap
Financial Fund and Small Cap Value Fund, and to the extent annual fund
operating expenses exceed 2.00% of the average daily net assets of the
Realty Growth Fund. The Adviser has agreed to maintain these expense
limitations with regard to each Fund through October 31, 1999.

EXAMPLE

These Examples are intended to help you compare the cost of investing in the
Funds with the cost of investing in other mutual funds.

These Examples assume that you invest $10,000 in each Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Examples also assumes that your investment has a 5% return each
year and that the Funds' operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
Financial Services Fund..................................................... $ 190 $ 588 $ 1,011 $ 2,193
Small Cap Financial Fund.................................................... 180 557 959 2,086
Small Cap Value Fund........................................................ 198 675 1,178 2,562
Realty Growth Fund.......................................................... 203 1,313 2,414 5,126
</TABLE>

5
<PAGE>
INVESTMENT OBJECTIVES, PRINCIPAL
INVESTMENT STRATEGIES
AND RELATED RISKS

FINANCIAL SERVICES FUND

The investment objective of the Financial Services Fund is capital
appreciation. Under normal market conditions, the Financial Services Fund
invests at least 65% of its total assets in equity securities of companies
providing financial services to consumers and industry. Companies in the
financial services group of industries include commercial banks, savings and
loan associations, consumer and industrial finance companies, securities
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. The Financial Services Fund may also invest in
companies in the information technology industries that primarily provide
products and/or services to companies in the financial services industries. The
strategy of investing in these types of companies may lead to investments in
companies with market capitalization of less than $500 million at the time of
purchase.

The Financial Services Fund will not invest more than 5% of its total assets
in the equity-related securities of any company that derives more than 15% of
its revenues from brokerage or investment management activities.

SMALL CAP FINANCIAL FUND

The investment objective of the Small Cap Financial Fund is capital
appreciation. Under normal market conditions, the Small Cap Financial Fund
invests at least 65% of its total assets in small-cap companies "principally
engaged" in the business of providing financial services to consumers and
industry. The Small Cap Financial Fund considers a small-cap company to be one
that has market capitalization of less than $750 million, measured at the time
of purchase. However, the Small Cap Financial Fund anticipates focusing its
investments on companies with market capitalizations below $200 million.

An issuer is "principally engaged" in the business of providing financial
services if at least 50% of its assets, gross income, or net profits are
committed to, or derived from, financial services activities. The Small Cap
Financial Fund focuses on financial services companies that invest in real
estate, usually through mortgages 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, consumer finance companies,
savings and loan associations, savings banks, building and loan associations,
cooperative banks, commercial banks, other depository institutions, companies in
the information technology industries which are primarily engaged in providing
products and/or services to the types of companies listed above, and REITs. The
Small Cap Financial Fund may also hold securities of U.S. depository
institutions whose customer deposits are insured by the Savings Association
Insurance Fund or the Bank Insurance Fund.

The Small Cap Financial Fund will not invest more than 5% of its total
assets in the equity-related securities of any company that derives more than
15% of its revenues from brokerage or investment management activities.

SMALL CAP VALUE FUND

The investment objective of the Small Cap Value Fund is capital
appreciation. The Small Cap Value Fund invests in small-cap companies whose
securities' market price the Adviser believes is undervalued or not reflective
of the prospect for accelerating earnings and/or cash flow growth. Unlike the
Small Cap Financial Fund, the Small Cap Value Fund considers small-cap companies
to have market capitalizations of less than $1 billion, measured at the time of
purchase.

The Small Cap Value Fund's investments will focus on companies that will
have a demonstrated record of achievement and excellent prospects for earnings
and/or cash flow growth over a 3 to 5 year period. Investments in these
companies will consist primarily of common stocks, but may include preferred
stocks, convertible bonds, and warrants. At

6
<PAGE>

least 65% of the Small Cap Value Fund's assets will be invested in small-cap
companies. However, once the 65% threshold is met, the Small Cap Value Fund may
invest a portion of its assets in equity securities of companies that are not
small-cap companies.

REALTY GROWTH FUND

The investment objective of the Realty Growth Fund is capital appreciation,
with current income as a secondary objective. The investment objective of the
Realty Growth Fund may be changed without shareholder approval. Under normal
market conditions, the Realty Growth Fund invests at least 65% of its total
assets in the equity securities of REITs and other real estate industry
companies that the Adviser believes exhibit above average growth prospects.
These securities may include securities of real estate industry companies or
REITs that are large, well capitalized, and in favor; real estate industry
companies or REITs that are out of favor and/or the Adviser believes are
undervalued; and real estate industry companies or REITs that the Adviser
believes have significant "turnaround" potential. In determining whether a
security meets any of these requirements, the Adviser may take into account
price-to-earnings ratios, cash flows, relationships of asset value to market
prices of the securities, interest or dividend payment histories and other
factors which it believes to be relevant. The Adviser may determine that a
company has "turnaround" potential based on, for example, changes in management
or financial restructurings.

The Realty Growth Fund's investments in real estate industry companies will
consist of companies that derive at least 50% of their gross revenues or net
profits from the ownership, development construction, financing, management or
sale of commercial, industrial or residential real estate. In addition to REITs,
real estate industry companies include brokers or real estate developers, as
well as companies with substantial real estate holdings (i.e., at least 50% of
their total assets), such as paper and lumber producers and hotel and
entertainment companies.

The Realty Growth Fund may invest without limitation in shares of REITs.
REITs are pooled investment vehicles that invest primarily in income-producing
real estate or real estate related loans or interests. REITs are generally
classified as equity REITs, mortgage REITs or a combination of equity and
mortgage REITs. Equity REITs invest the majority of their assets directly in
real property and derive income primarily from the collection of rents. Equity
REITs can also realize capital gains by selling properties that have appreciated
in value. Mortgage REITs invest the majority of their assets in real estate
mortgages and derive income from the collection of interest payments.

STRATEGIES OF ALL FUNDS

INVESTMENT CRITERIA. The Adviser makes investment decisions for the Funds
on the basis of value-oriented security analysis. Once an issuer is identified
as an attractive candidate for a Fund's portfolio, the Adviser assesses the
relative value of the security on the basis of various factors, which may
include price to book ratio, price to earnings ratio, earnings yield and cash
flow, among others.

TEMPORARY DEFENSIVE POSITIONS. The Funds may, from time to time, take
temporary defensive positions in response to adverse market, economic, political
or other conditions. To the extent the assets of a Fund are invested in
temporary defensive positions, the Fund may not achieve its investment
objective. For temporary defensive purposes, each Fund may invest in cash and/or
short-term obligations. These may include high grade liquid debt securities such
as variable amount master demand notes, commercial paper, certificates of
deposit, bankers' acceptances, repurchase agreements and U.S. Government
obligations.

PORTFOLIO TURNOVER. Each Fund may engage in short-term trading. Short-term
trading refers to the practice of selling securities held for a short time,
ranging from several months to less than a day. The object of short-term trading
is to take advantage of what the Adviser believes are changes in a market,
industry or individual company. Short-term trading increases a Fund's
transaction costs, which could affect the Fund's performance, and could result
in higher levels of taxable realized gains to shareholders.

RISKS

Loss of money is a risk of investing in any of the Funds. Because each Fund
invests primarily in

7
<PAGE>
equity securities, 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.

Because of their narrow industry focus, the performance of the Financial
Services Fund and the Small Cap Financial Fund is tied closely to and affected
by the financial services industry. As is the case with other industries,
companies in the financial services industry often face similar obstacles,
issues, or regulatory burdens. Consequently, securities of financial services
companies may react similarly and move in unison to changes in these or other
market conditions.

Investing in the securities of small-cap companies generally involves
greater risk than investing in larger, more established companies. This greater
risk is, in part, attributable to the fact that the securities of small-cap
companies usually have more limited marketability. Because small-cap companies
have fewer shares outstanding than larger companies, it also may be more
difficult to buy or sell significant amounts of such shares without unfavorable
impact on prevailing prices. Additionally, small-cap companies are typically
subject to greater changes in earnings and business prospects than are larger,
more established companies and typically there is less publicly available
information concerning small-cap companies than for larger, more established
companies.

Securities of small-cap companies, especially those whose business involves
emerging products or concepts, may be more volatile due to their limited product
lines, markets or financial resources and may lack management depth. Securities
of small-cap companies also may be more volatile than larger companies or the
market averages in general because of their general susceptibility to economic
downturns, especially in the financial services industry where changes in
interest rates and demand for financial services are so closely tied to the
economy. Although investing in securities of small companies offers potential
above-average returns if the companies are successful, there is a risk that the
companies will not succeed and the prices of the companies' shares could
significantly decline in value.

Another risk for the Financial Services Fund and the Small Cap Financial
Fund is the possibility that government regulation will negatively impact
companies involved in the financial services industry. Commercial banks, savings
and loan institutions and their holding companies are also 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. 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.
A Fund may incur loss on an investment in the equity securities issued by these
institutions.

Banks, savings and loan associations, and finance companies are subject to
extensive governmental regulation that may limit their lending activity. These
companies largely depend on the availability and cost of capital funds for their
profitability, which can change significantly when interest rates change. In
addition, general economic conditions are important to the operations of these
companies.

Investment banking, securities and commodities brokerage and investment
advisory companies are also 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
are also 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.

Although the Realty Growth Fund does not invest directly in real estate, it
invests primarily in securities of real estate companies, and, therefore, an
investment in the Realty Growth Fund is subject to risks associated with the
ownership of real estate. These risks include:

- - declines in real estate values

- - limited credit markets

- - overbuilding

8
<PAGE>
- - costs associated with environmental problems

- - local governmental regulation

- - general and local economic downturns

- - extended vacancies of rental properties

- - casualty or condemnation losses

- - increases in competition, property taxes and
operating expenses

- - uninsured damages from natural disasters

Investing in REITs involves certain risks in addition to the risks of
investing in the real estate industry in general. Equity REITs may be affected
by changes in the value of the underlying property owned by the REITs, while
mortgage REITs may be affected by the quality of any credit extended (which may
also be affected by changes in the value of the underlying property). REITs are
dependent upon management skills, often have limited diversification, and are
subject to the risks of financing projects. REITs are heavily dependent on cash
flow and on the creditworthiness of borrowers. REITs face the risk that they
could fail to qualify for the exemption from tax for distributed income under
the Internal Revenue Code. There is also the risk that they could fail to
maintain their exemptions from the Investment Company Act of 1940, as amended
(the "1940 Act"). Net investment income for REITs includes dividend and interest
income, capital gains and return of capital. Certain REITs have relatively small
market capitalizations, which may result in less market liquidity and greater
price volatility of their securities. When a shareholder invests in real estate
indirectly through a Fund, the shareholder's return will be reduced not only by
his or her proportionate share of the expenses of the Fund, but also,
indirectly, by similar expenses of the REITs in which the Fund invests.

The Small Cap Value Fund and the Realty Growth Fund are classified as
"non-diversified" investment companies under the 1940 Act, which means the Funds
are not limited by the 1940 Act in the proportion of their assets that may be
invested in the securities of a single issuer. A fund that is less diversified
may be more susceptible to adverse economic, political, or regulatory
developments affecting a single issuer than a fund that is more broadly
diversified.

YEAR 2000

Like other mutual funds, business organizations and individuals around the
world, the Funds could be adversely affected if the computer systems used by the
Adviser and other service providers do not properly process and calculate
date-related information and data from and after January 1, 2000. This is
commonly known as the "Year 2000 Problem." The Adviser is taking steps that it
believes are reasonably designed to address the Year 2000 Problem with respect
to computer systems that it uses and to obtain reasonable assurances that
comparable steps are being taken by the Funds' other major service providers. In
addition, companies in which the Funds invest may experience Year 2000 Problem
difficulties which could affect the value of securities issued by them.

INVESTMENT ADVISER

FBR Fund Advisers, Inc., located at Potomac Tower, 1001 Nineteenth Street
North, Arlington, VA 22209, is the investment adviser to the Funds.

ADVISORY SERVICES PROVIDED TO THE FUNDS

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

EXPERIENCE OF THE ADVISER

The Adviser is registered with the Securities and Exchange Commission as an
investment adviser. It is an affiliate of Friedman, Billings, Ramsey & Co.,
Inc., Friedman, Billings, Ramsey Investment Management, Inc. and FBR Offshore
Management, Inc. The Adviser and its affiliates manage approximately $800
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 was organized as a new company
in 1996. As a result, the Adviser has a short

9
<PAGE>
operating history as an investment manager of mutual funds, but its officers and
employees are persons with extensive experience in managing investment
portfolios.

COMPENSATION OF THE ADVISER

For its services, the Adviser is entitled to receive a monthly fee, at an
annual rate of 0.90% of the average daily net assets of the Financial Services
Fund, Small Cap Financial Fund and Small Cap Value Fund, and 1.00% of the
average daily net assets of the Realty Growth Fund. The Adviser may periodically
waive all or a portion of its advisory fee with respect to each Fund. The Funds
will not pay the Adviser at a later time for any fees waived.

PORTFOLIO MANAGERS

The chart below lists the current portfolio manager of each Fund and his
business experience during the last five years. In each case, the current
portfolio manager has served in that capacity since the commencement of the
Fund's operations.

<TABLE>
<CAPTION>
FUND NAME PORTFOLIO MANAGER BUSINESS EXPERIENCE DURING PAST 5 YEARS
- ------------------------ --------------------------- ------------------------------------------------------
<S> <C> <C>
Financial Services Fund David Ellison Mr. Ellison was portfolio manager of the Home Finance
and Small Cap Financial Portfolio of Fidelity Select Portfolios from December
Fund 1985 until January 1997.

Small Cap Value Fund Charles Thomas Akre, Jr. 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 adviser.

Realty Growth Fund Winsor H. Aylesworth Prior to the Fund's conversion to a series of the
Trust in September 1998, Mr. Aylesworth co-managed the
Fund as an officer of GrandView Advisers, Inc. Before
organizing GrandView Advisers, Inc. in 1994, Mr.
Aylesworth was an officer of Bank of Boston
Corporation, where his responsibilities included real
estate and loan portfolio management.
</TABLE>

INVESTING IN THE FUNDS

All purchases and redemptions of a Fund's shares are made at the Fund's net
asset value next determined after receipt of the order. You pay no sales charges
to invest in the Funds.

DETERMINATION OF NET ASSET VALUE

Your price for Fund shares is the Fund's net asset value per share, which is
computed daily as of the close of regular trading on the New York Stock Exchange
(the "NYSE") (normally 4:00 p.m., New York time) on each day that the NYSE is
open (a "Business Day"). Each Fund determines its net asset value by dividing
the value of its net assets (i.e., assets less liabilities) by the total number
of shares outstanding. Each Fund's investments are valued based on market value.
When market quotations are not readily available, the Funds use fair value as
determined under procedures established by the Board of Trustees.

HOW TO BUY SHARES
GENERAL

You may buy shares of the Funds on any Business Day. The minimum initial
investment is $2,000, or $1,000 if the investment is for IRAs, or pension,
profit-sharing or other employee benefit

10
<PAGE>
plans ("Retirement Plans"). Additional investments must be at least $100. The
Funds reserve the right to reject any purchase order or vary the initial and
subsequent investment minimums at any time.

BUYING SHARES THROUGH BROKERS

You may buy shares through a brokerage account maintained with FBR
Investment Services, Inc. (the "Distributor") or with any dealer that has a
sales agreement with the Distributor (an "Authorized Dealer"). If you buy shares
this way, the price will be the Fund's net asset value next determined after a
purchase order is received by the Distributor or an Authorized Dealer. Payment
is generally due on the next business day.

You must provide a certified Taxpayer Identification Number (a "TIN") upon
opening or reopening an account. See "Taxes."

BUYING SHARES THROUGH THE TRANSFER AGENT

To purchase shares through PFPC Inc. (the "Transfer Agent"), you should
complete the application (the "Application") accompanying this Prospectus and
forward it with payment by check or Federal Reserve Draft payable to the order
of "FBR Family of Funds" c/o PFPC Inc., P.O. Box 8994, Wilmington, Delaware
19899-8994. You may make additional purchases of shares by mailing a check or
Federal Reserve Draft payable to the order of "FBR Family of Funds" to the same
address. The name of the Fund must appear on the check or Federal Reserve Draft.
Federal Reserve Drafts are available at national banks or any state bank that is
a member of the Federal Reserve System. If you pay for shares by check, the
shares will be priced at the net asset value next determined after the Transfer
Agent receives the check in proper form. You may not purchase shares by
submitting a check issued by a third party and endorsed over to the Funds.

You may also buy shares by having your bank or broker wire Federal Funds to
the Transfer Agent. The bank or broker may charge you a fee for this service. If
you are sending Federal Funds by wire for an initial investment, please call the
Transfer Agent at 1-800-821-3460 for instructions. You will still need to fully
complete and sign the Application and mail it to us at the address shown above.
The Transfer Agent will not process redemptions until it receives a fully
completed and signed Application.

You should also notify the Transfer Agent before wiring funds for additional
purchases.

BUYING SHARES THROUGH THE DISTRIBUTOR OR OTHER AUTHORIZED DEALERS

You may buy shares through the Distributor or an Authorized Dealer by
sending a check or Federal Reserve Draft or by wiring Federal Funds. Payment by
check or Federal Reserve Draft must be received within three business days of
receipt of the purchase order by the Distributor or Authorized Dealer. The
Distributor or an investor's Authorized Dealer is responsible for forwarding
payment promptly to the Funds.

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

Shareholders whose shares are held through a brokerage account who desire to
transfer such shares to another brokerage account should contact their current
broker to effect the transfer.

Some broker-dealers (other than the Distributor), financial institutions,
securities dealers, financial planners and other industry professionals
(collectively, "Investment Professionals") may charge their clients direct fees
or impose conditions on investments in addition to or different from those
described in this Prospectus. You should contact your Investment Professional
concerning these fees and conditions (if any). Investment Professionals are
solely responsible for promptly transmitting purchase and redemption orders to
the Funds.

IN-KIND PURCHASES

You may buy shares of the Funds "in-kind" through a transfer of securities
as payment for the shares, if approved in advance by the Adviser. Securities
used to purchase Fund shares must be appropriate investments for that Fund must
be consistent with the Fund's investment objective and policies, and must have
readily available market quotations. The securities will be valued in

11
<PAGE>
accordance with the Funds' policy for calculating net asset value, determined as
of the close of business the day on which the securities are received by the
Fund in salable form. Whether a Fund will accept particular securities as
payment will be decided in the sole discretion of the Adviser. If you are
considering buying shares in this manner, please call 1-888-888-0025.

SYSTEMATIC INVESTMENT PLAN

The Systematic Investment Plan allows you to buy shares of a Fund at regular
intervals. If your bank or other financial institution allows automatic
withdrawals, you may buy shares by having a designated account debited in the
specified amount once a month, on or about the twentieth day of the month. Only
an account maintained at a domestic financial institution which is an Automated
Clearing House member may be used for participation in the Systematic Investment
Plan. If you want to participate in the Systematic Investment Plan, please 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, you should consider your financial ability to continue to
purchase through periods of low price levels. The Funds may modify or terminate
the Systematic Investment Plan at any time or charge a service fee. No fee is
currently charged or contemplated.

HOW TO REDEEM SHARES
GENERAL

You may redeem (sell) your shares on any Business Day. When a Fund receives
a request in proper form, it will redeem the shares at the next determined net
asset value. The Funds generally do not impose any charges when you redeem your
shares. However, if you redeem shares within 90 days of buying them, the Funds
will charge a redemption fee of 1% of the amount redeemed.

Each Fund ordinarily will make payment for all shares redeemed within three
days after it receives a redemption request in proper form. However, if you
purchased Fund shares by check and then submit a redemption request by mail, the
redemption proceeds will not be paid until your check has cleared, which may
take up to 15 days.

Your account may be redeemed after 60 days written notice to you if your
account's net asset value has fallen below $1,000 due to redemptions. If you
receive notice that your account will be redeemed, you may avoid the redemption
by investing additional amounts in your account to bring the balance over
$1,000.

REDEEMING THROUGH THE DISTRIBUTOR OR AUTHORIZED DEALERS

If you hold Fund shares through a brokerage account, you must submit
redemption requests to your account executive or Authorized Dealer, either in
person or by telephone, mail or wire. As the Funds' agent, the Distributor or
another Authorized Dealer may honor a redemption request by repurchasing Fund
shares from you at the shares' net asset value next computed after the
Distributor or Authorized Dealer receives your request. Under normal
circumstances, redemption proceeds will be paid by check or credited to your
brokerage account within three days. The Distributor and Authorized Dealers are
responsible for promptly sending redemption requests to the Transfer Agent.

REDEEMING THROUGH THE TRANSFER AGENT

REDEMPTION IN WRITING. If you do not hold shares through a brokerage
account and you wish to redeem shares, you may redeem your shares through the
Transfer Agent by sending a written request in proper form directly to: FBR
Family of Funds, c/o PFPC Inc., P.O. Box 8994, Wilmington, Delaware 19899-8994.
You may also place redemption requests through an Investment Professional, who
might charge a fee for this service.

All persons in whose names the shares are registered must sign any request
for redemption. Signatures on the request must appear as they do on the account
registration. We require a signature guarantee if the proceeds of the redemption
would exceed $50,000, if the proceeds are not to be paid to the record owner at
the address of record, or if the shareholder is a corporation, partnership,
trust or fiduciary. We accept signature guarantees from domestic banks, brokers,
dealers, credit unions, national securities exchanges, registered securities
associations, clearing agencies and savings

12
<PAGE>

associations participating in a MEDALLION program. The three recognized
medallion programs are Securities Transfer Agent Medallion Program (STAMP),
Stock Exchanges Medallion Program (SEMP), and New York Stock Exchange, Inc.
Medallion Signature Program (MSP). SIGNATURE GUARANTEES RECEIVED FROM
INSTITUTIONS NOT PARTICIPATING WILL NOT BE ACCEPTED. If you redeem shares within
30 days of a change in your address of record, a signature guarantee will be
required. You may call the Transfer Agent at 1-800-821-3460 to determine whether
a particular institution is eligible to guarantee your signature.

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. For example, additional documentary evidence
of authority is required for a redemption by a corporation, partnership, trust,
fiduciary, executor or administrator.

REDEMPTION BY TELEPHONE/PAYMENT BY WIRE TRANSFER. You may redeem shares by
telephone if you elected this option on your initial Application, or if you have
filed a Telephone Authorization with the Transfer Agent. You may obtain a
Telephone Authorization from the Transfer Agent by calling 1-800-821-3460.

If you redeem shares by telephone, we will mail a check for the redemption
proceeds to your registered address unless you have designated in your
Application or Telephone Authorization that redemption proceeds are to be sent
by wire transfer to a specific checking or savings account. In that case, if we
receive a telephone redemption request before the close of regular trading on
the NYSE (normally 4:00 p.m., New York time), we will wire the redemption
proceeds to your bank account on the next day that a wire transfer can be
effected. We charge a transaction fee of $15.00 for payments by wire. The
Distributor and the Transfer Agent reserve the right to refuse a telephone
redemption if they consider it appropriate.

During times of drastic economic or market conditions, you may find it
difficult contacting the Distributor or Authorized Dealers by telephone to
request a redemption of Fund shares. In those cases, you should consider using
the other redemption procedures described above. However, if you use these other
redemption procedures, your redemption request may be processed at a later time
than it would have been if you had redeemed your shares by telephone. During the
delay, a Fund's net asset value may fluctuate.

The Funds will take measures to make sure that telephone instructions are
genuine. These measures may include asking for name, account number, social
security or other taxpayer ID number and other relevant information, and
following up with a written confirmation to the address of record. If the Funds
do not use such procedures, they may be liable for any losses due to
unauthorized or fraudulent telephone instructions. If appropriate measures are
taken, neither the Fund nor the Transfer Agent will be responsible for any
losses that may occur to any account due to an unauthorized telephone call.

REDEMPTION IN-KIND

The Funds reserve the right to make a "redemption in kind" payment in
portfolio securities rather than cash if the amount you are redeeming is large
enough to affect Fund operations (for example, if it represents more than 1% of
a Fund's assets).

AUTOMATIC WITHDRAWAL

The Funds have an automatic withdrawal program, which allows you to withdraw
a specified dollar amount (minimum of $100) on either a monthly or quarterly
basis if you have a $10,000 minimum account balance. We will redeem shares in
your account for this purpose. As with other redemptions, we will charge a 1%
fee for shares held less than 90 days. You may obtain an application for
automatic withdrawal from the Distributor or the Transfer Agent. You may cancel
the automatic withdrawal at any time. The Funds or the Transfer Agent may modify
or terminate this option at any time.

13
<PAGE>
SHAREHOLDER SERVICES

CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS

You may elect to reinvest dividends and capital gain distributions paid by a
Fund in shares of any of the other FBR Funds or the FBR Money Market Portfolio
of The RBB Fund, Inc. This option is available if the value of your account(s)
in the Fund that is paying the dividend is at least $5,000. Shares of a Fund
acquired in this manner are subject to the minimum initial investment for that
Fund. If the first purchase by cross-reinvestment is not large enough to meet
the minimum for the Fund you are acquiring, you may commit to continue
cross-reinvestment until the value of your account with that Fund reaches the
minimum level. See the account Application.

TAX-SHELTERED RETIREMENT PLANS

The Funds offer their shares to retirement plans, including IRA plans for
individuals and their non-employed spouses, IRA plans for employees in
connection with employer sponsored SEP, SAR-SEP and SIMPLE IRA plans, 403(b)
plans and defined contribution plans such as 401(k) Salary Reduction Plans. You
may obtain detailed information concerning these plans from the Transfer Agent,
including information on fees and taxes. You should read this information
carefully, and it may be advisable for you to consult an attorney or tax
adviser.

EXCHANGE PRIVILEGE

You may exchange your shares of a Fund at net asset value for shares of any
of the other FBR Funds or the FBR Money Market Portfolio of The RBB Fund, Inc.
You should obtain and read the prospectus of the Fund you want to acquire in an
exchange. The exchange privilege may be modified or withdrawn at any time upon
60 days notice to shareholders and is subject to certain limitations.

If you wish to make an exchange, you may do so by sending a written request
to the Transfer Agent. You will automatically be provided with telephone
exchange privileges when you open your account, unless you indicate on the
account Application that you do not wish to use this privilege. You may add a
telephone exchange feature to an existing account that previously did not
provide for this option. A Telephone Exchange Authorization Form for this
purpose is available from the Transfer Agent. Once this election has been made,
you may simply contact the Transfer Agent at 1-800-821-3460 to request the
exchange.

If you do not currently own shares of the Fund whose shares you wish to
acquire, we will establish a new account with the same registration, dividend
and capital gain options as your current account. If you want different options
for the new account, you must specify this in writing, with all signatures
guaranteed as described above. See "Redemption In Writing" above.

For federal income tax purposes, an exchange is treated as a redemption of
the shares surrendered in the exchange, on which you may be subject to tax,
followed by a purchase of shares received in the exchange. You should consult
your own tax adviser concerning the tax consequences of an exchange.

If an exchange is to a new Fund, the dollar value of shares acquired must
meet the Funds' minimum investment for a new account; if the exchange is to an
existing account, the dollar value must equal or exceed the Funds' minimum for
subsequent investments. Any amount that remains in a Fund account after an
exchange must not drop below the minimum account value required by the Funds.

OTHER IMPORTANT INVESTMENT INFORMATION

DISTRIBUTION FEES

Each Fund has adopted a distribution plan (a "12b-1 Plan") which allows the
Fund to pay distribution fees for the sale and distribution of its shares. Under
these plans, each Fund pays a distribution fee at an annual rate of up to 0.25%
of the Fund's average daily net assets. Because these fees are paid out of the
Fund's assets on an ongoing basis, over time these fees will increase the cost
of your investment and may cost you more than paying other types of sales
charges.

14
<PAGE>
DIVIDENDS AND DISTRIBUTIONS

The Realty Growth Fund pays dividends from its net investment income
quarterly and distributes net realized capital gains, if any, once a year. Each
of the other Funds ordinarily pays dividends from its net investment income and
distributes net realized capital gains, if any, once a year. The Funds may make
additional distributions if necessary to comply with the distribution
requirements of the Internal Revenue Code of 1986, as amended (the "Code").

You may choose to have dividends and distributions of a Fund paid to you in
(i) cash, (ii) additional shares of the Fund or (iii) shares of any other FBR
Fund, or the FBR Money Market Portfolio of The RBB Fund, Inc. (See "Shareholder
Services--Cross-Reinvestment of Dividends and Distributions.") You should make
this election on your account Application but you may change your election by
giving written notice to the Transfer Agent at any time prior to the record date
for a particular dividend or distribution. If you do not choose otherwise, all
dividends and distributions will be reinvested in the Fund.

TAXES

FEDERAL TAXES

Each Fund plans to distribute all of its net investment income and net
realized capital gains, if any, in accordance with the timing requirements of
the Code, so that the Funds will not be subject to U.S. federal income taxes or
the 4% U.S. federal excise tax on undistributed income.

Distributions by a Fund of its net investment income and the excess, if any,
of its net realized short-term capital gain over its net realized long-term
capital loss are taxable to you as ordinary income. These distributions are
treated as ordinary income for federal income tax purposes, but only a portion
of the amount may qualify for the 70% dividends-received deduction for corporate
shareholders. Distributions by a Fund of the excess, if any, of its net realized
long-term capital gain over its net realized short-term capital loss are
designated as capital gain distributions and are taxable to shareholders as
long-term capital gain, regardless of the length of time you have held your
shares. Those distributions are not eligible for the dividends-received
deduction. If you sell shares in a Fund at a loss before holding such shares for
more than six months, the loss will be treated as a long-term capital loss to
the extent that you have received a capital gain distribution on those shares.
Distributions will be treated in the same manner for U.S. federal income tax
purposes whether you receive them 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 the
preceding year. Each Fund sends tax statements to its shareholders (with copies
to the Internal Revenue Service (the "IRS")) by January 31 showing the amounts
and tax status of distributions made (or deemed made) during the preceding
calendar year.

OTHER TAX INFORMATION

The information above is only a summary of some of the U.S. federal income
tax consequences generally affecting each Fund and its U.S. shareholders, and we
have made no attempt to discuss individual tax consequences. Before investing,
you should also review the more detailed discussion of U.S. federal income tax
considerations in the Statement of Additional Information. In addition to the
U.S. federal income tax, you may be subject to state or local taxes on your
investment in a Fund, depending on the laws of your state or local jurisdiction.
IF YOU ARE CONSIDERING AN INVESTMENT IN ONE OF THE FUNDS, YOU SHOULD CONSULT
YOUR TAX ADVISER TO DETERMINE WHETHER THE FUND IS SUITABLE TO YOUR PARTICULAR
TAX SITUATION.

When you sign your account Application, you are asked to provide your
correct social security or taxpayer identification number and other required
certifications. If you do not comply with IRS regulations, the IRS requires each
Fund to withhold 31% of amounts distributed to you by the Fund as dividends or
in redemption of your shares. Because your tax treatment as a shareholder
depends on your purchase price and your individual tax position, you should keep
your regular account statements for use in determining your tax.

15
<PAGE>
FINANCIAL HIGHLIGHTS

The financial highlights table is intended to help you understand each
Fund's financial performance. Certain information reflects financial results for
a single Fund share. The total returns in the table represent the rate that an
investor would have earned or lost on an investment in the Fund (assuming
reinvestment of all dividends and distributions, if any). This information has
been audited by Arthur Andersen LLP, whose report, along with the Fund's audited
financial statements, are included in the current annual report, which is
available upon request.

FINANCIAL SERVICES FUND, SMALL CAP FINANCIAL FUND AND SMALL CAP VALUE FUND
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
FBR SMALL CAP
FBR FINANCIAL SERVICES FUND FBR SMALL CAP FINANCIAL FUND VALUE FUND
------------------------------------ ------------------------------------ -----------------
FOR THE PERIOD FOR THE PERIOD
FOR THE FISCAL JANUARY 3, 1997* FOR THE FISCAL JANUARY 3, 1997* FOR THE FISCAL
YEAR ENDED THROUGH OCTOBER YEAR ENDED THROUGH OCTOBER YEAR ENDED
OCTOBER 31, 1998 31, 1997 OCTOBER 31, 1998 31, 1997 OCTOBER 31, 1998
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE**
Net asset value,
beginning of
period............. $ 16.03 $ 12.00 $ 17.53 $ 12.00 $ 16.70
------- ------- ------- ------- -------
Net investment
income/
(loss)(1).......... 0.10 0.04 0.08 0.02 (0.08)
Net realized and
unrealized
gain/(loss) on
investments and
options
transactions, if
any(2)............. 1.04 3.99 (1.81) 5.51 (1.46)
------- ------- ------- ------- -------
Net
increase/(decrease)
in net assets
resulting from
operations......... 1.14 4.03 (1.73) 5.53 (1.54)
------- ------- ------- ------- -------

DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment
income............. (0.04) -- (0.03) -- --
Net realized capital
gains.............. (0.19) -- (0.15) -- (0.49)
------- ------- ------- ------- -------
Total dividends and
distributions to
shareholders....... (0.23) -- (0.18) -- (0.49)
------- ------- ------- ------- -------
Net asset value, end
of period.......... $ 16.94 $ 16.03 $ 15.62 $ 17.53 $ 14.67
------- ------- ------- ------- -------
------- ------- ------- ------- -------
Total investment
return(3).......... 7.12% 33.58% (9.99)% 46.08% (9.57)%
------- ------- ------- ------- -------
------- ------- ------- ------- -------

RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
period (000's
omitted)........... $ 50,342 $ 23,985 $ 53,439 $ 43,362 $ 15,250
Ratio of expenses to
average net
assets(1).......... 1.65% 1.65%(4) 1.63% 1.65%(4) 1.65%
Ratio of net
investment
income/(loss) to
average net
assets(1).......... 0.61% 0.57%(4) 0.35% 0.57%(4) (0.81)%
Increase/(decrease)
reflected in above
expense ratios and
net investment
income/ (loss) due
to waivers and
related
reimbursements..... 0.22% 1.42%(4) 0.14% 1.43%(4) 0.60%
Portfolio turnover
rate............... 105.58% 49.68% 94.23% 35.41% 78.26%

FOR THE PERIOD
JANUARY 3, 1997*
THROUGH OCTOBER
31, 1997
-----------------
<S> <C>
PER SHARE OPERATING
PERFORMANCE**
Net asset value,
beginning of
period............. $ 12.00
-------
Net investment
income/
(loss)(1).......... (0.05)
Net realized and
unrealized
gain/(loss) on
investments and
options
transactions, if
any(2)............. 4.75
-------
Net
increase/(decrease)
in net assets
resulting from
operations......... 4.70
-------
DIVIDENDS AND
DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment
income............. --
Net realized capital
gains.............. --
-------
Total dividends and
distributions to
shareholders....... --
-------
Net asset value, end
of period.......... $ 16.70
-------
-------
Total investment
return(3).......... 39.17%
-------
-------
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
period (000's
omitted)........... $ 8,269
Ratio of expenses to
average net
assets(1).......... 1.65%(4)
Ratio of net
investment
income/(loss) to
average net
assets(1).......... (0.79)%(4)
Increase/(decrease)
reflected in above
expense ratios and
net investment
income/ (loss) due
to waivers and
related
reimbursements..... 3.84%(4)
Portfolio turnover
rate............... 42.59%
</TABLE>

- ----------------------------------
* Commencement of investment operations.

** Calculated based on shares outstanding on the first and last day of the
respective periods, except for dividends and distributions, if any, which
are based on actual shares outstanding on the respective dates of
distributions.

(1) Reflects waivers and related reimbursements.

(2) The amounts shown for a share outstanding throughout the respective periods
are not in accordance with the changes in the aggregate gains and losses on
investments during the respective periods because of the timing of sales and
repurchases of Fund shares in relation to fluctuating net asset value during
the respective periods.

(3) Total investment return does not consider the effects of sales charges or
contingent deferred sales charges. Total investment return is calculated
assuming a purchase of shares on the first day and a sale of shares on the
last day of each period reported and will include reinvestments of dividends
and distributions, if any. Total investment return is not annualized.

(4) Annualized.

16
<PAGE>

REALTY GROWTH FUND
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)

Contained below is per share operating performance data for each share
outstanding, total investment return, ratios to average net assets and other
supplemental data for the period July 3, 1995 (commencement of investment
operations) through March 31, 1996, for the fiscal years ended March 31, 1997
and March 31, 1998, and for the fiscal period ended October 31, 1998. This
information has been derived from the financial statements for those periods.
The information regarding the period ended October 31, 1998 has been audited by
Arthur Andersen LLP, whose report thereon is included in the Fund's current
annual report to shareholders. The information regarding the fiscal year ended
March 31, 1998 has been audited by Deloitte & Touche, LLP, whose report thereon
is included in the March 31, 1998 annual report to shareholders of the GrandView
Funds. The information for prior periods was audited by other auditors. The
financial data included in this table should be read in conjunction with the
financial statements and related notes incorporated by reference in the
Statement of Additional Information. The Fund was reorganized as a series of the
Trust on September 18, 1998. Prior to that date, the Fund was a series of the
GrandView Investment Trust.

<TABLE>
<CAPTION>
FOR THE PERIOD FOR THE PERIOD
APRIL 1, 1998 FOR THE FISCAL FOR THE FISCAL JULY 3, 1995*
THROUGH OCTOBER YEAR ENDED YEAR ENDED THROUGH MARCH
31, 1998 MARCH 31, 1998 MARCH 31, 1997 31, 1996
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE**
Net asset value, beginning of period............ $ 14.51 $ 12.69 $ 10.09 $ 10.00
Net investment income(1)........................ 0.22 0.11 0.33 0.20
Net realized and unrealized gain/(loss) on
investments(2)................................ (3.57) 3.00 4.14 0.36
Net increase/(decrease) in net assets resulting
from operations............................... (3.35) 3.11 4.47 0.56
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income........................... (0.13) (0.11) (0.33) (0.20)
Net realized capital gains...................... (1.35) (1.18) (1.53) (0.22)
------- ------- ------- -------
Tax return of capital........................... -- -- (0.01) (0.05)
------- ------- ------- -------
Total dividends and distributions to
shareholders.................................. (1.48) (1.29) (1.87) (0.47)
Net asset value, end of period.................. $ 9.68 $ 14.51 $ 12.69 $ 10.09
------- ------- ------- -------
------- ------- ------- -------
Total investment return(3)...................... (21.14)% 24.80% 45.12% 5.70%
------- ------- ------- -------
------- ------- ------- -------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted)....... $ 2,287 $ 2,376 $ 1,158 $ 182
Ratio of expenses to average net assets
Before expense reimbursements and waived
fees........................................ 5.41%(4) 5.68% 9.59% 31.34%(4)
After expense reimbursements and waived fees.. 2.00%(4) 2.00% 1.89% 2.00%(4)
Ratio of net investment income to average net
assets
Before expense reimbursements and waived
fees........................................ (0.43)%(4) (3.09)% (4.58)% (25.55)%(4)
After expense reimbursements and waived fees.. 2.98%(4) 0.59% 3.12% 3.62%(4)
Increase/(decrease) reflected in above expense
ratios and net investment income due to
waivers and related reimbursements............ 3.41%(4) 3.68% 7.70% 29.34%(4)
Portfolio turnover rate......................... 136.24% 170.19% 197.90% 44.44%
</TABLE>

- --------------------------
* Commencement of investment operations.

(1) Reflects waivers and related reimbursements.

(4) Annualized.

17
<PAGE>
ADDITIONAL INFORMATION

FBR FAMILY OF FUNDS

Additional information about the Funds is available free of charge, upon
request, in the following forms:

- - Statement of Additional Information--additional information about the Funds'
operations. The information presented in the Statement of Additional
Information is incorporated by reference into this prospectus.

- - Annual Report--additional information about the Funds' investments and a
discussion of market conditions and investment strategies that significantly
affected the Funds' performance during their last fiscal year.

- - Semi-Annual Report--additional information about the Funds' investments.

To request a free copy of any of the materials described above, or to make
other inquiries, contact us:

<TABLE>
<S> <C>
By telephone: 1-888-888-0025

By mail: FBR Family of Funds
Potomac Tower
1001 Nineteenth Street
North
Arlington, Virginia 22209

By e-mail: [email protected]

On the Internet: http://www.fbrfunds.com
</TABLE>

Information about the Funds (including the Funds' Statement of Additional
Information) can also be reviewed and copied at the Securities Exchange
Commission's ("Commission") Public Reference Room in Washington, D.C.
Information on the operation of the public reference room may be obtained by
calling the Commission at 1-800-SEC-0330. Reports and other information about
the Fund are available on the Commission's Internet site at http://www.sec.gov
and copies of this information may be obtained, upon payment of a duplicating
fee, by writing the Public Reference Section of the Commission, Washington, D.C.
20549-6009.

18
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION

FBR FAMILY OF FUNDS
FBR FINANCIAL SERVICES FUND
FBR SMALL CAP FINANCIAL FUND
FBR SMALL CAP VALUE FUND
FBR REALTY GROWTH FUND

MARCH 1, 1999

FBR Family of Funds

Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
Toll-Free Telephone: 1-888-888-0025

This Statement of Additional Information ("SAI") 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, as supplemented from time to time (the
"Prospectus"). This SAI is incorporated by reference in its entirety into the
Prospectus. The financial statements and notes contained in the annual report
and semi-annual report are incorporated by reference into this SAI. Copies of
the SAI, Prospectus, annual and semi-annual reports may be obtained at no charge
by writing or calling the address or phone number shown above.

TABLE OF CONTENTS
PAGE
Investment Objectives and Policies 2
Investment Limitations and Restrictions 17
Valuation of Portfolio Securities 22
Performance 22
Additional Purchase and Redemption Information 24
Dividends and Distributions 25
Taxes 25
Trustees and Officers 27
Advisory and Other Contracts 29
Additional Information 35
Financial Statements 37
Appendix A A-1

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

The FBR Family of Funds (the "Trust") is an open-end management investment
company. The Trust currently consists of five 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"), which are diversified series of the
Trust, and FBR Small Cap Value Fund (the "Small Cap Value Fund"), FBR Realty
Growth Fund ("Realty Growth Fund") and the FBR Information Technologies Fund
(the "Information Technologies Fund"), which are non-diversified series of the
Trust (individually, a "Fund" and, collectively, the "Funds"). This Statement of
Additional Information relates to each Fund, except the 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 Prospectus.

INVESTMENT OBJECTIVES AND POLICIES

ADDITIONAL INFORMATION REGARDING FUND INVESTMENTS

The following descriptions supplement the descriptions of 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.

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 short-term instruments may include
high grade liquid debt securities such as variable amount master demand notes,
commercial paper, certificates of deposit, bankers' acceptances, repurchase
agreements which mature in less than seven days and obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities. Bankers'
acceptances are instruments of the U.S. banks which are drafts or bills of
exchange "accepted" by a bank or trust company as an obligation to pay on
maturity. Money market instruments 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 Funds 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 Funds 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

2
<PAGE>

chooses to do so, this action could have an adverse effect on the Fund's ability
to achieve its investment objectives.

ASSET-BACKED SECURITIES. 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.

MORTGAGE-BACKED SECURITIES. The Funds may invest in securities that directly or
indirectly represent participations in, or are collateralized by the payable and
payable from, mortgage loans secured by real property. ("Mortgage-Backed
Securities").

Mortgage-Backed Securities represent pools of mortgage loans assembled for sale
to investors by various governmental agencies such as the Government National
Mortgage Association ("Ginnie Mae") and government-related organizations such as
the Federal National Mortgage Association ("Fannie Mae") and the Federal Home
Loan Mortgage Corporation ("Freddie Mac"), as well as by nongovernmental issuers
such as commercial banks, savings and loan institutions, mortgage bankers, and
private mortgage insurance companies. Although certain Mortgage-Backed
Securities are guaranteed by a third party or otherwise similarly secured, the
market value of the security, which may fluctuate, is not so secured. If the
Adviser purchases a Mortgage-Backed Security at a premium, that portion may be
lost if there is a decline in the market value of the security whether resulting
from changes in interest rates or prepayments in the underlying mortgage
collateral. As with other interest-bearing securities, the prices of such
securities are inversely affected by changes in interest rates. However, though
the value of a Mortgage-Backed Security may decline when interest rates rise,
the converse is not necessarily true since in periods of declining interest
rates the mortgages underlying the securities are prone to prepayment. For this
and other reasons, a Mortgage-Backed Security's stated maturity may be shortened
by unscheduled prepayments on the underlying mortgages and, therefore, it is not
possible to predict accurately the securities' return to a Fund. In addition,
regular payments received in respect of Mortgage-Backed Securities include both
interest and principal. No assurance can be given as to the return a Fund will
receive when these amounts are reinvested.

There are a number of important differences among the agencies and
instrumentalities of the U.S. Government that issue Mortgage-Backed Securities
and among the securities that they issue. Mortgage-Backed Securities issued by
Ginnie Mae include Ginnie Mae Mortgage Pass-Through Certificates which are
guaranteed as to the timely payment of principal and interest by Ginnie Mae.
This guarantee is backed by the full faith and credit of the United States.
Ginnie Mae is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. Ginnie Mae certificates also are supported by
the authority of Ginnie Mae to borrow funds from the U.S. Treasury to make
payments under its guarantee. Mortgage-Backed Securities issued by Fannie Mae
include Fannie Mae Guaranteed Mortgage Pass-Through Certificates (also known as
"Fannie Maes") which are guaranteed as to timely payment of the principal and
interest by Fannie Mae. Fannie Maes are solely the obligations of Fannie Mae
and are not backed by or entitled to the full faith and credit of the United
States. Fannie Mae is a government-sponsored organization owned entirely by
private stockholders. Mortgage-Backed Securities issued by Freddie Mac include
Freddie Mac Mortgage Participation Certificates (also knows as "Freddie Mac
PC's"). Freddie Mac is a corporate instrumentality of the United States,
created pursuant to an Act of Congress, which is owned entirely by Federal Home
Loan Banks. Freddie Macs are not guaranteed by the United States or by any
Federal Home Loan Banks and do not constitute a debt

3
<PAGE>

or obligation of the United States or any Federal Home Loan Bank. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by Freddie
Mac. Freddie Mac guarantees either ultimate collection or timely payment of all
principal payments on the underlying mortgage loans. When Freddie Mac does not
guarantee timely payment of principal, Freddie Mac may remit the amount due on
account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.

The Funds may also invest in Mortgage-Backed Securities which are collateralized
mortgage obligations structured on pools of mortgage pass-through certificates
or mortgage loans ("CFOs" and "REMICs") and derivative multiple-class
mortgage-backed securities ("Stripped Mortgage-Backed Securities" or "SMBSs").

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

VARIABLE OR FLOATING RATE SECURITIES. 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.

4
<PAGE>

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 a 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.
Each 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 a Fund enters into a swap agreement
on other than a net basis, it will segregate assets with a value equal to the
full amount of the Fund's accrued obligations under the agreement.

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

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

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 U.S. Treasury notes and U.S. 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").

5
<PAGE>

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 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,
whose fluctuation increases the longer the period of maturity. Although zero
coupon bonds do not pay interest to holders prior to maturity, U.S. federal
income tax law requires a Fund to recognize as interest income a portion of the
bond's discount each year and this income must then be distributed to
shareholders along with other income earned by the Fund. To the extent that any
shareholders in a Fund elect to receive their dividends in cash rather than
reinvest such dividends in additional shares, cash to make these distributions
will have to be provided from the assets of the Fund or other sources such as
proceeds of sales of Fund shares and/or sales of portfolio securities. In such
cases, the Fund will not be able to purchase additional income producing
securities with cash used to make such distributions and its current income may
ultimately be reduced as a result.

REAL ESTATE-RELATED INVESTMENTS. 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, 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.

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.

REVERSE REPURCHASE AGREEMENTS. Each 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, a 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

6
<PAGE>

in a segregated custodial account assets consistent with the Fund's investment
restrictions having a value equal to the repurchase price (including accrued
interest), and will subsequently monitor the account to ensure that such
equivalent value is maintained. Such assets will include U.S. Government
securities or other liquid, high-grade debt securities. Reverse repurchase
agreements involve the risk that the market value of the securities sold by a
Fund may decline below the price at which the Fund is obligated to repurchase
the securities. Reverse repurchase agreements are considered to be borrowing by
a Fund under the 1940 Act.

LOWER-RATED DEBT SECURITIES. The Funds may purchase lower-rated debt
securities, commonly referred to as "junk bonds" (those rated below the fourth
highest grade by a nationally recognized statistical ratings organization
("NRSRO") and non-rated 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 that 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 debt 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 AND RESTRICTED SECURITIES. Each Fund may invest up to 15%
of its net assets in illiquid investments, including restricted securities which
do not meet the criteria for liquidity established by the Trust's Board of
Trustees. 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 of Trustees monitors investments in
illiquid

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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.

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 the
Rule. 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 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.

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

FOREIGN INVESTMENT. The Funds may invest in securities issued by foreign
branches of U.S. banks, foreign banks, or other foreign issuers, including
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
Global Depositary Receipts ("GDRs") and securities purchased on foreign
securities exchanges and over-the-counter.

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Depositary receipts are not usually denominated in the same currency as the
securities into which they may be converted. Generally, ADRs, in registered
form, are designed for use in U.S. securities markets and EDRs and GDRs, in
bearer form, are designed for use in European and global securities markets.
ADRs are receipts typically issued by a U.S. bank or trust company evidencing
ownership of the underlying securities. EDRs and GDRs are European and global
receipts, respectively, evidencing a similar arrangement.

Other 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.
Such investments 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 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. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal
rights in foreign countries.

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

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

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

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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 currencies 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 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 investments 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.

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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 U.S. 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.

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

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

Futures traders are required to make a good faith margin deposit in cash or U.S.
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.

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<PAGE>

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, a 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 one third of the Fund's total assets. Futures
transactions will be limited to the extent necessary to maintain the Fund's
qualification as a regulated investment company.

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

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

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<PAGE>

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 involves 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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

LEAPS. The Small Cap Value Fund may purchase certain long-term exchange-traded
equity options called Long-Term Equity Anticipation Securities ("LEAPs"). LEAPs
provide a holder the opportunity to participate in the underlying securities'
appreciation in excess of a fixed dollar amount. The Small Cap 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, except the Realty Growth Fund, may seek to hedge
investments or realize additional gains through the use of 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.

16
<PAGE>

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

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

INVESTMENT LIMITATIONS AND RESTRICTIONS

The following investment restrictions are fundamental with respect to each Fund
other than the Realty Growth 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."

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.

17
<PAGE>

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 Small Cap Value Fund) of its
total assets, purchase the securities of any issuer (other than securities
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities) if, as a result, (a) more than 5% of the Fund's total
assets would be invested in the securities of that issuer, or (b) the Fund
would hold more than 10% of the outstanding voting securities of that
issuer.

8. (a) With respect to 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 the Small Cap 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 investment restrictions are fundamental with respect to the Realty
Growth Fund and may be changed only by a vote of a majority of that Fund's
outstanding shares as defined in "Additional Information - Miscellaneous."

THE REALTY GROWTH FUND MAY NOT:

1. Borrow money, except that as a temporary measure for extraordinary or
emergency purposes it may borrow from banks and enter into reverse
repurchase agreements in an amount not to exceed 33 1/3% of the current
value of its respective net assets, including the amount borrowed (and the
Fund may purchase any securities at any time at which borrowings exceed 5%
of the total assets of the Fund, taken at market value). It is intended
that a Fund would borrow money only from banks and

18
<PAGE>
only to accommodate requests for the repurchase of shares of the Fund while
effecting an orderly liquidation of portfolio securities.

2. Make short sales of securities or purchase securities on margin, except
that the Trust may purchase and sell various types of futures contracts and
may obtain short-term credits as necessary for the clearance of security
transactions.

3. Underwrite securities issued by other persons, except to the extent that
the Fund may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities.

4. Make loans to other persons except (a) through the lending of its portfolio
securities, but not in excess of 33 1/3% of the Fund's net assets,
(b) through the use of fixed time deposits or repurchase agreements or the
purchase of short-term obligations or (c) by purchasing all or a portion of
an issue of debt securities; for purposes of this paragraph 4 the purchase
of short-term commercial paper or a portion of an issue of debt securities
which are part of an issue to the public shall not be considered the making
of a loan.

5. Purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity contracts
in the ordinary course of business, except that the Fund may purchase and
sell mortgage-related securities and may hold and sell real estate acquired
as a result of the ownership of securities by the Fund.

6. Issue any senior security (as that term is defined in the 1940 Act) if such
issuance is specifically prohibited by the 1940 Act or the rules and
regulations promulgated thereunder, except as appropriate to evidence a
debt incurred without violating Investment Restriction (1) above.

7. Invest 25% or more of its assets in securities of issuers in any one
industry (other than securities or obligations issued or guaranteed by the
U.S. Government or any agency or instrumentality thereof), except that it
will invest at least 25% of its assets in securities of issuers in the real
estate industry.

NON-FUNDAMENTAL RESTRICTIONS.

The following restrictions with respect to the Funds other than the Realty
Growth Fund 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

19
<PAGE>
("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.

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.

The following restrictions with respect to the Realty Growth Fund are not
fundamental and may be changed without shareholder approval. The Realty Growth
Fund does not as a matter of operating policy:

1. Borrow money for any purpose in excess of 10% of the net assets of the Fund
(taken at cost) (the Fund will not purchase any securities at any time at
which borrowings exceed 5% of the total assets of the Fund (taken at market
value));

2. Sell any security which the Fund does not own unless by virtue of the
ownership of other securities there is at the time of sale a right to
obtain securities, without payment of further consideration, equivalent in
kind and amount to the securities sold and provided that if such right is
conditional the sale is made upon the same conditions;

3. Invest for the purpose of exercising control or management;

4. Purchase securities issued by any registered investment company, except by
purchase in the open market where no commission or profit to a sponsor or
dealer results from such purchase other than the customary broker's
commission, or except when such purchase, though not made in the open
market, is part of a plan of merger or consolidation; provided, however,
that the Fund will not purchase the securities of any registered investment
company if such purchase at the time thereof would cause more than 10% of
the total assets of the Fund (taken in each case at the greater of cost or
market value) to be invested in the securities of such issuers or would
cause more than 3% of the outstanding voting securities of any such issuer
to be held for the Fund;

5. Invest more than 15% of the net assets of the Fund in securities that are
not readily marketable or which are subject to legal or contractual
restrictions on resale including debt securities for which there is no
established market and fixed time deposits and repurchase agreements
maturing in more than seven days;

6. Purchase or retain any securities issued by an issuer any of whose
officers, directors, trustees or security holders is an officer or Trustee
of the Trust, or is an officer or director of the Adviser, if after the
purchase of the securities of such issuer by the Fund, one or more of such
persons owns beneficially more than 1/2 of 1% of the shares or securities,
or both, all taken at market value, of such issuer, and such persons owning
more than 1/2 of 1% of such shares or securities together own beneficially
more than 5% of such shares or securities, or both, all taken at market
value;

7. Make short sales of securities, except that the Fund may purchase and sell
various types of futures contracts and may obtain short-term credits as
necessary for the clearance of security transactions;

20
<PAGE>

8. Invest more than 5% of the Fund's net assets in warrants (valued at the
lower of cost or market), but not more than 2% of the Fund's net assets may
be invested in warrants not listed on the New York Stock Exchange or the
American Stock Exchange;

9. With respect to 50% of the Fund's total assets, invest more than 5% of its
total assets in securities of any one issuer, and as to the remaining 50%
of the Fund's total assets, invest more than 25% in the securities of any
one issuer;

10. Purchase securities of any issuer if, as to 75% of the assets of the Fund
at the time of purchase, more than 10% of the voting securities of any
issuer would be held by the Fund, or;

11. Invest more than 15% of the Fund's total assets in the securities of
issuers which together with any predecessors (including public and private
predecessor operating companies) have a record of less than three years of
continuous operation or securities of issuers which are restricted as to
disposition, despite any determinations made by the Board of Trustees that
such securities are liquid.

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 shareholder vote.

VALUATION OF PORTFOLIO SECURITIES

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

In computing a Fund's net asset value, all liabilities incurred or accrued are
deducted from net assets. The resulting net assets are divided by the number of
shares outstanding at the time of the valuation and the result (adjusted to the
nearest cent) is the net asset value per share.

21
<PAGE>

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, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.

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 is calculated using the following formula set forth in
rules adopted by the Commission that apply to all funds that quote yields:

6
STANDARDIZED YIELD = 2 [(a-b + 1) - 1]
---
cd

The symbols above represent the following factors:

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

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

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

22
<PAGE>

d = the maximum offering price per share 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.

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 net 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)

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 $10,000 ("P" in the formula below) held for a number of years
("n") to achieve an Ending Redeemable Value ("ERV"), according to the following
formula:

n
(ERV) -1 = AVERAGE ANNUAL TOTAL RETURN
-----
(P)

The cumulative "total return" calculation measures the change in value of a
hypothetical investment of $10,000 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 and takes into consideration the
reinvestment of dividends and capital gain distributions.

23
<PAGE>

The average annual total returns of shares of the Funds were as follows:

FUND TOTAL RETURN
---- ------------
(for periods ending October 31, 1998)
1 YEAR SINCE INCEPTION*
------ ---------------
<S> <C> <C>
Financial Services Fund 7.12% 21.63%

Small Cap Financial Fund (9.99)% 16.14%

Small Cap Value Fund (9.57)% 13.39%

Realty Growth Fund (17.42)% 12.21%
</TABLE>
- ---------------------
* The Financial Services Fund, the Small Cap Financial Fund and the Small Cap
Value Fund commenced operations on January 3, 1997. The Realty Growth Fund
commenced operations on July 3, 1995 (commencement of operations for the
Grandview-SM- Realty Growth Fund).

Prior to its reorganization as a series of the Trust on September 18, 1998, the
Realty Growth Fund was a series of the GrandView Investment Trust ("GrandView").
Shares offered prior to the reorganization were sold with a maximum 4.5%
front-end sales charge. Prior to the reorganization, the Fund was managed by
portfolio management personnel of GrandView Advisers, Inc. who continue to
manage the Fund as employees of FBR Fund Advisers, Inc., subject to the same
investment objectives, policies and restrictions that applied to the Fund prior
to its reorganization.

During the period shown, Class A shares of the Funds (the class that corresponds
to the currently outstanding shares) were offered subject to a minimum initial
sales charge of 5.5%. The sales charge was terminated on December 10, 1998, and
it is not reflected in the total return figures shown above.

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

Shares may be purchased or redeemed through FBR Investment Services, Inc. ("FBR
Services" or the "Distributor") account executives, other authorized dealers or
directly through PFPC Inc. ("PFPC" or the "Transfer Agent"). The minimum
initial investment for each Fund is $2,000. Subsequent investments must be $100
or more. The minimum initial investment for Individual Retirement Accounts
("IRAs"), or pension, profit-sharing or other employee benefit plans is $1,000
and minimum subsequent investments are $100.

Shares may be purchased at a price equal to their next determined net asset
value ("NAV").

REDEMPTION. The value of shares on redemption or repurchase may be more or less
than the investor's cost, depending upon the market value of the portfolio
securities at the time of redemption or repurchase.

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

24
<PAGE>

obligated to redeem shares for any one shareholder in cash only up to the lesser
of $250,000 or 1% of a Fund's NAV during any 90-day period.

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

DIVIDENDS AND DISTRIBUTIONS

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

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

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

TAXES

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

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

25
<PAGE>

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

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

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

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

TRUSTEES AND OFFICERS

BOARD OF TRUSTEES

Overall responsibility for management of the Trust rests with the Trustees, who
are elected by the shareholders of the Trust. The Trust is managed by the
Trustees in accordance with the laws of the State of Delaware. There are
currently five Trustees, three of whom are not "interested persons" of the Trust
within the meaning of that term under the 1940 Act ("Independent Trustees").
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:

26
<PAGE>

Position(s) Held Principal Occupation
Name, Address and Age With the Trust During Past 5 Years
--------------------- -------------- -------------------
C. Eric Brugel, 35* Trustee, Managing Director, Friedman,
Potomac Tower Chairman of the Billings, Ramsey & Co., Inc.
1001 Nineteenth Street Board, President
North and Secretary
Arlington, VA 22209

Michael A. Willner, 42 Trustee President, Catalyst Advisers,
11521 Potomac Road Inc. from September 1996 to
Lorton, VA 22079 Present; President, Federal
Filings, Inc. from July 1986 to
July 1995.

F. David Fowler, 65 Trustee Dean, The George Washington
9450 Newbridge Drive University School of Business
Potomac, MD 20854 and Public Management; Partner,
KPMG Peat Marwick from October
1969 to June 1992.

George W. Grosz, 61 Trustee Consultant, President and CEO,
533 S. Waterloo Road Meridian Asset Management Co.
Devon, PA 19333 from May 1994 to April 1996;
Executive Vice President and
Director, Riggs National Bank
from January 1987 to April
1994.

- ---------------------
* Mr. Brugel is deemed to be an "interested person" 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. Grosz,
Willner and Fowler. 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 an annual retainer of $5,000 and a fee of
$1,000 for each regular meeting and $500 for each committee meeting attended,
plus expenses, and $250 for each telephonic meeting. Officers of the Funds and
Directors who are interested persons of the Funds do not receive any
compensation from the Funds or any other funds managed by the Investment
Manager. The following table sets forth information regarding compensation of
independent Trustees by the Trust for the fiscal year ended October 31, 1998.

COMPENSATION TABLE
(for the fiscal year ended October 31, 1998)

27
<PAGE>

PENSION OR TOTAL
RETIREMENT ESTIMATED COMPENSATION
BENEFITS ANNUAL FROM
AGGREGATE ACCRUED BENEFITS REGISTRANT
COMPENSATION AS PART OF UPON AND FUND
FROM FUND RETIREMENT COMPLEX PAID
NAME OF TRUSTEE REGISTRANT EXPENSES TO TRUSTEE
--------------- ---------- -------- ----------- ------------
<S> <C> <C> <C> <C>
F. David Fowler $11,250 $0 $0 $11,250

George W. Grosz $7,750 $0 $0 $7,750

Michael A. Willner $11,250 $0 $0 $11,250

Patrick J. Keeley* $2,125 $0 $0 $2,125
</TABLE>

- -------------------
* Mr. Keeley resigned from the Board of Trustees effective December 16, 1997.

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

POSITION(s)
HELD
WITH THE PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE TRUST DURING PAST 5 YEARS
--------------------- ----- --------------------
C. Eric Brugel, 35 Trustee, Managing Director of Friedman,
Potomac Tower Chairman of Billings, Ramsey & Co., Inc.
1001 Nineteenth the Board,
Street North President and
Arlington, Virginia Secretary
22209

Winsor H. Vice Portfolio Manager for the Adviser since
Aylesworth, 51 President and September 1998; President of GrandView
50 Rowes Wharf, Treasurer Advisers, Inc. from 1994 to September
Suite 400 1998.
Boston, MA 02110

John Voorhees, 40 Vice Vice President of Friedman, Billings,
Potomac Tower President Ramsey & Co., Inc.
1001 Nineteenth
Street North
Arlington, Virginia
22209

Frank J. Maresca, 40 Assistant President and Chief Executive Officer
245 Park Avenue Treasurer of BSFM since December 4, 1997;
New York, NY 10167 Managing Director of Bear, Stearns &
Co. Inc. since September 1994;
Associate Director of Bear, Stearns &
Co. Inc. from September 1993 to
September 1994; Executive Vice
President of BSFM from March 1992 to
December 1997; Vice President of Bear,
Stearns & Co. Inc. from March 1992 to
September 1993.

28
<PAGE>

POSITION(s)
HELD
WITH THE PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE TRUST DURING PAST 5 YEARS
--------------------- ----- --------------------

Vincent L. Pereira, 33 Assistant Executive Vice President of BSFM since
245 Park Avenue Secretary December 4, 1997; Associate Director of
New York, New York 10167 Bear, Stearns & Co. Inc. since
September 1995 and Vice President of
BSFM from May 1993 to December 1997;
Vice President 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

As of February 12, 1999, the Trustees and officers of the Trust owned less than
1% of all of the Trusts' shares, except Winsor H. Aylesworth, Vice President and
Treasurer of the Trust, who owns 14,097 shares, or 6.59%, of the Realty Growth
Fund and serves as Trustee of a Trust which holds 2,307 shares, or 1.08% of
the Realty Growth Fund.

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 $700 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

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 for the Funds was last approved
by the Trustees on December 8, 1998.

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

29
<PAGE>

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.

INVESTMENT ADVISORY FEES

For the fiscal year ended October 31, 1998, the investment advisory fees
paid by each Fund, other than the Realty Growth Fund, were as follows:

GROSS ADVISORY ADVISORY FEE NET ADVISORY FEES
FEES WAIVERS
-------------- ------------ -----------------
<S> <C> <C> <C>
Financial Services
Fund $447,904 $(108,464) $339,440

Small Cap Financial
Fund $730,310 $(113,536) $616,774

Small Cap Value Fund
$142,388 $ (92,160) $ 50,228
</TABLE>

For the period January 3, 1997 (commencement of investment operations)
through October 31, 1997, the investment advisory fees paid by each Fund, other
than the Realty Growth Fund, were as follows:

GROSS ADVISORY ADVISORY FEE NET ADVISORY FEES
FEES WAIVERS
-------------- ------------ -----------------
<S> <C> <C> <C>
Financial Services
Fund $91,960 $(85,021) $6,669

Small Cap Financial
Fund $87,174 $(79,894) $7,280

Small Cap Value Fund
$25,311 $(25,311) -------
</TABLE>

Prior to its reorganization as a series of the Trust on September 18, 1998, the
Realty Growth Fund was a series of GrandView Investment Trust, which had a
fiscal year-end of March 31. For the period from April 1, 1998 to October 31,
1998, the Fund accrued advisory fees of $14,751, all of which was waived by the
respective investment advisers. For the fiscal years ended March 31, 1998 and
March 31, 1997, and the period from July 3, 1995 to March 31, 1996, GrandView
Advisers, Inc. waived its entire advisory fee for the GrandView Realty Growth
Fund in the amounts of $16,482, $5,537 and $675, respectively.

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

30
<PAGE>

Adviser generally seeks competitive spreads or commissions, a Fund may not
necessarily pay the lowest spread or commission available on each transaction,
for reasons discussed below.

Allocation of transactions to dealers is determined by the Adviser in its best
judgment and in a manner deemed fair and reasonable to shareholders. The
primary consideration is prompt execution of orders in an effective manner at
the most favorable price. Subject to this consideration, dealers who provide
supplemental investment research to the Adviser may receive orders for
transactions by the Trust. Information so received is in addition to and not in
lieu of services required to be performed by the Adviser and does not reduce the
investment advisory fees payable to the Adviser by a Fund. Such information may
be useful to the Adviser in serving both the Trust and other clients and,
conversely, such supplemental research information obtained by the placement of
orders on behalf of other clients may be useful to the Adviser in carrying out
its obligations to the Trust. The Trustees have authorized the allocation of
brokerage to Friedman, Billings, Ramsey & Co., Inc. ("FBR"), an affiliated
broker-dealer, to effect portfolio transactions on an agency basis. The
Trustees have adopted procedures incorporating the standards of Rule 17e-1 under
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.

For the fiscal year ended October 31, 1998, the Funds paid brokerage commission
as follows:

TOTAL BROKERAGE COMMISSION
FUND PAID COMMISSION PAID TO FBR
---- -------------------------- -----------------------
<S> <C> <C>
Financial Services $ 102,385 $ 18,160
Fund
Small Cap Financial $ 132,824 $ 19,315
Fund
Small Cap Value Fund $ 44,460 $ 4,675
Realty Growth Fund $ 26,554* $ 982*
</TABLE>

- ----------------
* Prior to its reorganization as a series of the Trust on September 18, 1998,
the Realty Growth Fund was a series of the GrandView Investment Trust,
which had a fiscal year end of March 31. This amount reflects

31
<PAGE>

the brokerage commissions paid for the Realty Growth Fund from April 1, 1998,
through October 31, 1998.

For the period January 3, 1997 (commencement of investment operations) through
October 31, 1997, the Funds paid total brokerage commissions as follows:
Financial Services Fund $32,583, Small Cap Financial Fund $20,143, and Small Cap
Value Fund $10,555. No transactions were allocated to FBR during this period.

For the fiscal years ended March 31, 1998 and March 31, 1997, and the period
from July 3, 1995 (commencement of operations) to March 31, 1996, the GrandView
Realty Growth Fund paid total brokerage commissions of $28,575, $12,994 and
$3,149, respectively. No transactions were allocated to FBR during these
periods.

DISTRIBUTOR

FBR Investment Services, Inc., located at Potomac Tower, 1001 Nineteenth Street
North, Arlington, Virginia 22209, is an affiliate of the Adviser and serves as a
non-exclusive 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 Plans described below.

ADMINISTRATOR

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

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

For the fiscal year ended October 31, 1998 and the period from January 3, 1997
(commencement of operations) to October 31, 1997, the Funds paid BSFM
administration fees as follows: Financial Services Fund -- $37,325 and $7,641,
respectively; Small Cap Financial Fund -- $60,859 and $7,625, respectively; and
Small Cap Value Fund -- $11,866 and $2,109, respectively. Prior to its
reorganization as a series of the Trust on September 18, 1998, the Realty Growth
Fund was a series of the GrandView Investment Trust, which had a fiscal year-end
of March 31. For the period from April 1, 1998 to October 31, 1998, the fiscal
years ended March 31, 1998 and March 31, 1997 and the period from July 3, 1995
(commencement of operations) to March 31, 1996, the Realty Growth Fund paid
administration fees to the respective administrators of $3,779, $5,053, $1,661
and $186, respectively.

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. For the fiscal year ended October 31, 1998
and the period from January 3, 1997 (commencement of operations) to October 31,
1997, the Funds paid PFPC administration and accounting services fees as
follows: Financial Services Fund -- $47,048 and $14,962, respectively; Small Cap
Financial Fund -- $68,887 and $15,122, respectively; and Small Cap Value Fund --
$15,745 and $7,907, respectively. During the fiscal period ended October 31,
1998, the Realty Growth Fund paid PFPC administration and accounting services
fees of $602. Administration fees paid by the Fund prior to its reorganization
as a series of the Trust are set forth in the previous paragraph.

32
<PAGE>

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.

DISTRIBUTION PLANS

The Trust's Board of Trustees has adopted a plan on behalf of each Fund pursuant
to Rule 12b-1 under the 1940 Act (the "Plans"). Pursuant to the Plans each Fund
pays the Distributor a fee for distributing Fund shares at the annual rate of
0.25% of the average daily net assets of the Fund shares for which it is the
distributor of record. Under the Plans, 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 Plans 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 Plans.

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 Funds; (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.

In approving the Plans 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
who have no direct or indirect financial interest in the operation of the Plans
or in any agreements related to the Plans) considered various factors and
determined that there is a reasonable likelihood that the Plans will benefit the
shareholders. The Plans will continue in effect as to a Fund 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 Plans 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 Plans and
the purposes for which such expenditures were made. The Plans may not be
amended to increase materially the amount to be spent for distribution without
shareholder approval and all material amendments to the Plans 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 Plans are in effect,
the selection and nomination of the independent Trustees shall be made by those
Independent Trustees then in office.

Until December 10, 1998, FBR also served as a co-distributor of the Funds'
shares. In addition from April 1, 1998 through December 20, 1998, each of the
Funds had three classes of shares: Class A, which

33
<PAGE>

correspond to the currently outstanding shares, and Class B and Class C shares,
each of which had Rule 12b-1 plans providing for distribution and service fees
at an aggregate annual rate of 1.0% of the average daily net assets of the
class. For the fiscal year ended October 31, 1998, the Funds paid the following
distribution and service fees (amounts paid under the Class A, Class B and Class
C Rule 12b-1 plans are aggregated): Financial Services Fund--$125,128; Small
Cap Financial Fund--$208,187; and Small Cap Value Fund--$40,789. For the period
from April 1, 1998 to October 31, 1998, the Realty Growth Fund paid distribution
fees of $4,134.

For the fiscal year ended October 31, 1998, the following amounts were spent for
distribution-related activities on behalf of the Funds other than compensation
to the Distributor (described above):

PRINTING
AND
MAILING APPROXIMATE
PROSPECTUSES COMPENSATION TOTAL
SALES TO OTHER TO SALES AMOUNT
MATERIAL THAN PERSONNEL SPENT WITH
AND CURRENT AND RESPECT
ADVERTISING SHAREHOLDERS BROKER-DEALERS OTHER TO EACH FUND
----------- ------------ -------------- ----- ------------
<S> <C> <C> <C> <C> <C>
Financial Services
Fund $112,772 $51,089 $158,948 $283,378 $606,190

Small Cap Financial
Fund $123,775 $56,073 $174,455 $311,025 $665,330

Small Cap Value
Fund $33,006 $14,952 $46,521 $82,940 $177,421

Realty Growth Fund*
$5,501 $2,492 $7,753 $13,823 $29,570
</TABLE>

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

* This amount reflects the 12b-1 fees paid by the Realty Growth Fund from
September 18, 1998, through October 31, 1998.

INDEPENDENT PUBLIC ACCOUNTANTS

The financial statements incorporated by reference into this Statement of
Additional Information and the Financial Highlights included in the
prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said report.

LEGAL COUNSEL

Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006 is the
legal 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.

34
<PAGE>

ADDITIONAL INFORMATION

DESCRIPTION OF SHARES

The Trust is a Delaware business trust formed on May 1, 1996. 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
is authorized to issue five series of shares, which represent interests in the
FBR Small Cap Financial Fund, the FBR Financial Services Fund, the FBR
Information Technologies Fund, the FBR Realty Growth Fund and the FBR Small Cap
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). 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 NAV 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

35
<PAGE>

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.

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.

CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES

As of November 30, 1998, the following persons held beneficially or of record 5%
or more of the outstanding shares of the Funds.

NUMBER PERCENTAGE
NAME AND ADDRESS OF SHARES OF OWNERSHIP
---------------- --------- ------------
<S> <C> <C>
Charles Schwab & Co., Inc. 591,181 19.07%
Special Custody Account For
Benefit of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104

Charles Schwab & Co., Inc.

Special Custody Account For 580,994 21.79%
Benefit of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104

Charter Michigan Bancorp, Inc. 175,359 6.58%
13606 Michigan Ave., 2nd Floor
Dearborn, MI 48126

36
<PAGE>

NUMBER PERCENTAGE
NAME AND ADDRESS OF SHARES OF OWNERSHIP
---------------- --------- ------------
Charles Schwab & Co., Inc. 293,123 29.56%
Special Custody Account For
Benefit of Customers
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104

Maryanne S. Aylesworth 11,359 5.31%
IRA
77 Seaside Road
Scituate, MA 02066

Winsor H. Aylesworth 14,097 6.59%
IRA
77 Seaside Road
Scituate, MA 02066

Schwab Omnibus 25,746 12.04%
Attn: Mutual Funds
101 Montgomery St.
San Francisco, CA 94104
</TABLE>

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 NAV 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.

37
<PAGE>

FINANCIAL STATEMENTS

The audited financial statements contained in the annual report to shareholders
for the Funds dated October 31, 1998 is incorporated herein by reference.
Copies of the Funds' most recent annual or semi-annual report may be obtained
without charge upon request by writing to FBR Family of Funds, Potomac Tower,
1001 Nineteenth Street North, Arlington, Virginia 22209 or by calling toll free
1-888-888-0025.

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.

38
<PAGE>

APPENDIX A

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 Ratings Services ("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, I.E.,
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.

<PAGE>

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

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

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

BB. Debt rated BB 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.

A-2
<PAGE>

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).

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. 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
<PAGE>

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.

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.

A-4
<PAGE>

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.

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

A-5
<PAGE>

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-6

.0.
<PAGE>

PART C TO FBR FAMILY OF FUNDS N-1A

OTHER INFORMATION

ITEM 23. EXHIBITS

(a)(1) Certificate of Trust.(1)
(a)(2) Delaware Trust Instrument dated April 30, 1996.(1)
(b) Bylaws.(1)
(c) None.
(d)(1) Form of Investment Advisory Agreement between the Registrant and FBR
Fund Advisers, Inc.(2)
(d)(2) Form of Notice to Investment Advisory Agreement with respect to the
FBR Realty Growth Fund(4)
(e)(1) Form of Distribution Agreement between the Registrant and FBR
Investment Services, Inc.(2)
(e)(2) Form of Notice to Distribution Agreements with respect to the FBR
Realty Growth Fund.(4)
(e)(3) Form of Selected Dealer Agreement.(2)
(f) None.
(g)(1) Form of Custodian Agreement between the Registrant and Custodial Trust
Company.(2)
(g)(2) Form of Notice to Custodian Agreement with respect to the FBR Realty
Growth Fund.(4)
(g)(3) Form of Sub-Custodian Agreement between Custodial Trust Company and
Citibank N.A.(2)
(h)(1) Form of Administration Agreement between the Registrant and Bear
Stearns Funds Management Inc.(2)
(h)(2) Form of Notice to Administration Agreement with respect to the FBR
Realty Growth Fund.(4)
(h)(3) Form of Administration and Accounting Services Agreement between the
Registrant and PFPC Inc.(2)
(h)(4) Form of Notice to Administration and Accounting Services Agreement
with respect to the FBR Realty Growth Fund.(4)
(h)(5) Form of Transfer Agency Services Agreement between the Registrant and
PFPC Inc.(2)
(h)(6) Form of Notice to Transfer Agent Service Agreement with respect to the
FBR Realty Growth Fund.(4)
(i) Opinion and Consent of Dechert Price & Rhoads.(4)
(j)(1) Consent of Arthur Andersen LLP.(5)
(j)(2) Consent of Deloitte & Touche LLP.(5)
(k) None.
(l) Investment Letters.(2)
(m) Rule 12b-1 Distribution Plan.

C-1
<PAGE>

(n) Financial Data Schedules.
(o) None.
(p)(i) Powers of Attorney.(3)
(p)(ii) Power of Attorney for Winsor H. Aylesworth.

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

1. Incorporated by reference to the Registrant's Initial Registration
Statement on Form N-1A as filed on June 11, 1996.
2. Incorporated by reference to Pre-Effective Amendment No. 2 to the
Registration Statement as filed on December 20, 1996.
3. Incorporated by reference to Post-Effective Amendment No. 1 to the
Registration Statement as filed on June 27, 1997.
4. Incorporated by reference to Post-Effective Amendment No. 4 to the
Registration Statement as filed on June 30, 1998.
5. Incorporated by reference to Post-Effective Amendment No. 5 to the
Registration Statement as filed on December 31, 1998.

ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

None.

ITEM 25. INDEMNIFICATION

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

"SECTION 10.02 INDEMNIFICATION.

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

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

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

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

(i) who shall have been adjudicated by a court or body before which
the proceeding was brought (A) to be liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross

C-2
<PAGE>

negligence or reckless disregard of the duties involved in the conduct of his
office or (B) not to have acted in good faith in the reasonable belief that his
action was in the best interest of the Trust; or

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

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

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

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

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

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

C-3
<PAGE>

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

Eric F. Billings Director, Vice Director and Vice Chairman -
Chairman, Chief Friedman, Billings, Ramsey Group,
Operating Officer Inc. and its predecessors and
and Assistant affiliates
Secretary

W. Russell Ramsey Secretary and Director, President and Secretary -
Treasurer Friedman, Billings, Ramsey Group,
Inc. and its predecessors and
affiliates

Emanuel J. Chairman and Chief Chairman and Chief Executive
Friedman Executive Officer Officer, Friedman, Billings, Ramsey
Group, Inc. and its predecessors and
affiliates

C. Eric Brugel Managing Director Vice President - Friedman, Billings,
Ramsey & Co., Inc.

ITEM 27. PRINCIPAL UNDERWRITERS

(a) Not applicable.

(b) FBR Investment Services, Inc. ("FBR Services") also serves as
non-exclusive Distributor to the Funds. The following information is provided
with respect to each director, officer or partner of FBR Services:

Name and principal Positions and offices Positions and
business address(1) with FBR Services offices
------------------- ----------------- with Registrant
---------------
C. Eric Brugel Chief Operating Officer Trustee and
President

Eric Y. Generous Director and Chief Executive Officer None

ITEM 28. LOCATION OF ACCOUNTS AND RECORDS

C-4
<PAGE>

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

ITEM 29. MANAGEMENT SERVICES

Not applicable.

ITEM 30. UNDERTAKINGS

None.

C-5
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that this
Post-Effective Amendment No. 6 to the Registration Statement meets the
requirements for effectiveness pursuant to Rule 485(b) under the Securities Act
of 1933, and has duly caused this Post-Effective Amendment No. 6 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Arlington, and the State of Virginia on this 1st
day of March 1, 1999.

FBR FAMILY OF FUNDS

By:
--------------------
C. Eric Brugel*

As required by the Securities Act of 1933, this Post-Effective
Amendment No. 6 to the Registrant's Registration Statement has been signed by
the following persons in the capacities indicated on the 1st day of March, 1999.

C. Eric Brugel* Trustee and President
(Chief Executive Officer)

Winsor H. Aylesworth* Chief Financial Officer and Treasurer

F. David Fowler* Trustee

Michael A. Willner* Trustee

George W. Grosz Trustee

*By /s/ William J. Kotapish
------------------------------
William J. Kotapish
Attorney-in-fact

<PAGE>

EXHIBIT LIST

EXHIBIT NUMBER NAME OF EXHIBIT

(m) Rule 12b-1 Distribution Plan

(n) Financial Data Schedules

(p)(ii) Power of Attorney For Winsor H. Aylesworth

.0.

<PAGE>

THE FBR FAMILY OF FUNDS
DISTRIBUTION PLAN

This Distribution Plan (the "Plan") is adopted on December 31, 1996,
amended on March 31, 1998 and amended and restated on December 8, 1998 in
accordance with Rule 12b-1 (the "Rule") under the Investment Company Act of
1940, as amended (the "1940 Act"), by The FBR Family of Funds, a business trust
organized under the laws of the State of Delaware (the "Company"), on behalf of
its Funds (individually, a "Fund," and collectively, the "Funds") as set forth
in Schedule I, as amended from time to time, subject to the following terms and
conditions:

SECTION 1. ANNUAL FEES.

DISTRIBUTION FEE. Each Fund will pay to the distributors of its shares,
FBR Investment Services, Inc. (the "Distributor"), a distribution fee under the
Plan at the annual rate of 0.25% of the average daily net assets of the Fund's
shares (the "Distribution Fee").

ADJUSTMENT TO FEES. Any Fund may pay a Distribution Fee to the Distributor
at a lesser rate than the fees specified in Section 1 hereof as agreed upon by
the Board of Trustees and the Distributor and approved in the manner specified
in Section 4 of this Plan.

PAYMENT OF FEES. The Distribution Fees will be calculated daily and paid
monthly by each Fund at the annual rates indicated above.

SECTION 2. EXPENSES COVERED BY THE PLAN.

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) 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 amount of the Distribution Fees payable by any Fund under Section 1
hereof is not related directly to expenses incurred by the Distributor and this
Section 2 does not obligate a Fund to reimburse the Distributor for such
expenses. The Distribution Fees set forth in Section 1 will be paid by a Fund
to the Distributor unless and until the Plan is terminated or not renewed with
respect to a Fund. Any distribution or service expenses incurred by the
Distributor on behalf of a Fund in excess of payments of the Distribution Fees
specified in Section 1 hereof
<PAGE>

which the Distributor has accrued through the termination date are the sole
responsibility and liability of the Distributor and not an obligation of a Fund.

SECTION 3. INDIRECT EXPENSES.

While each Fund is authorized to make payments under this Plan to the
Distributor for expenses described above, it is expressly recognized that each
Fund presently pays, and will continue to pay, an investment advisory fee to its
Investment Adviser and an administration fee to the Administrator. To the
extent that any payments made by any Fund to the Investment Adviser or
Administrator, including payment of fees under the Investment Advisory Agreement
or the Administration Agreement, respectively, should be deemed to be indirect
financing of any activity primarily intended to result in the sale of shares of
the Portfolio within the context of Rule 12b-1 under the 1940 Act, then such
payments shall be deemed to be authorized by this Plan.

SECTION 4. APPROVAL OF TRUSTEES.

Neither the Plan nor any related agreements will take effect until approved
by a majority of both (a) the full Board of Trustees of the Trust and (b) those
Trustees who are not interested persons of the Trust and who have no direct or
indirect financial interest in the operation of the Plan or in any agreements
related to it (the "Qualified Trustees"), cast in person at a meeting called for
the purpose of voting on the Plan.

SECTION 5. CONTINUANCE OF THE PLAN.

The Plan will continue in effect until December 31, 1999, and thereafter
for successive twelve-month periods: provided, however, that such continuance
is specifically approved at least annually by the Trustees of the Trust and by a
majority of the Qualified Trustees.

SECTION 6. TERMINATION.

The Plan may be terminated at any time with respect to a Fund (i) by the
Trust without payment of any penalty, by the vote of a majority of the
outstanding voting securities of any Fund or (ii) by a vote of the Qualified
Trustees. The Plan may remain in effect with respect to a Fund even if the Plan
has been terminated in accordance with this Section 5 with respect to any other
Fund.

SECTION 7. AMENDMENTS.

The Plan may not be amended with respect to any Fund so as to increase
materially the amounts of the fees described in Section 1 above, unless the
amendment is approved by a vote of the holders of at least a majority of the
outstanding voting securities of that Fund. No material amendment to the Plan
may be made unless approved by the Trust's Board of Trustees in the manner
described in Section 4 above.

-2-
<PAGE>

SECTION 8. SELECTION OF CERTAIN TRUSTEES.

While the Plan is in effect, the selection and nomination of the Trust's
Trustees who are not interested persons of the Trust will be committed to the
discretion of the Trustees then in office who are not interested persons of the
Trust.

SECTION 9. WRITTEN REPORTS.

In each year during which the Plan remains in effect, a person authorized
to direct the disposition of monies paid or payable by a Fund pursuant to the
Plan or any related agreement will prepare and furnish to the Trust's Board of
Trustees, and the Board will review, at least quarterly, written reports
complying with the requirements of the Rule which set out the amounts expended
under the Plan and the purposes for which those expenditures were made.

SECTION 10. PRESERVATION OF MATERIALS.

The Trust will preserve copies of the Plan, any agreement relating to the
Plan and any report made pursuant to Section 8 above, for a period of not less
than six years (the first two years in an easily accessible place) from the date
of the Plan, agreement or report.

SECTION 11. MEANINGS OR CERTAIN TERMS.

As used in the Plan, the terms "interested person" and "majority of the
outstanding voting securities" will be deemed to have the same meaning that
those terms have under the 1940 Act by the Securities and Exchange Commission.

-3-
<PAGE>

SCHEDULE I

This Plan shall be adopted with respect to the following Funds of The FBR Family
of Funds:

FBR Financial Services Fund

FBR Realty Growth Fund
FBR Small Cap Financial Fund
FBR Small Cap Growth/Value Fund
FBR Information Technologies Fund

-4-

<PAGE>
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<NAME> FBR FAMILY OF FUNDS
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<NUMBER> 011
<NAME> FBR FINANCIAL SERVICES FUND - CLASS A

<S> <C>
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<PERIOD-END> OCT-31-1998
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<OTHER-ITEMS-ASSETS> 2176847
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<TOTAL-LIABILITIES> 3534346
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<SHARES-COMMON-STOCK> 2971401
<SHARES-COMMON-PRIOR> 1495976
<ACCUMULATED-NII-CURRENT> 291763
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3246402
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2179743)
<NET-ASSETS> 50720170
<DIVIDEND-INCOME> 752503
<INTEREST-INCOME> 373903
<OTHER-INCOME> 0
<EXPENSES-NET> (821852)
<NET-INVESTMENT-INCOME> 304554
<REALIZED-GAINS-CURRENT> 3267813
<APPREC-INCREASE-CURRENT> (5133972)
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<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (70555)
<DISTRIBUTIONS-OF-GAINS> (311918)
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<NUMBER-OF-SHARES-SOLD> 2718479
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<NET-CHANGE-IN-ASSETS> 26734742
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<GROSS-EXPENSE> 930316
<AVERAGE-NET-ASSETS> 49672402
<PER-SHARE-NAV-BEGIN> 16.03
<PER-SHARE-NII> .10
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<RETURNS-OF-CAPITAL> 0
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<EXPENSE-RATIO> 1.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0001015712
<NAME> FBR FAMILY OF FUNDS
<SERIES>
<NUMBER> 021
<NAME> FBR SMALL CAP FINANCIAL FUND - CLASS A

<S> <C>
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<FISCAL-YEAR-END> OCT-31-1998
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<OTHER-ITEMS-ASSETS> 1022054
<TOTAL-ASSETS> 57096521
<PAYABLE-FOR-SECURITIES> 324810
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1296396
<TOTAL-LIABILITIES> 1621206
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 58934775
<SHARES-COMMON-STOCK> 3421970
<SHARES-COMMON-PRIOR> 2473976
<ACCUMULATED-NII-CURRENT> 230598
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6207930
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (9897988)
<NET-ASSETS> 55475315
<DIVIDEND-INCOME> 1177494
<INTEREST-INCOME> 423623
<OTHER-INCOME> 0
<EXPENSES-NET> (1325518)
<NET-INVESTMENT-INCOME> 275599
<REALIZED-GAINS-CURRENT> 6209896
<APPREC-INCREASE-CURRENT> (14197474)
<NET-CHANGE-FROM-OPS> (7711979)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (100673)
<DISTRIBUTIONS-OF-GAINS> (470536)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5542368
<NUMBER-OF-SHARES-REDEEMED> (4625031)
<SHARES-REINVESTED> 30657
<NET-CHANGE-IN-ASSETS> 12113477
<ACCUMULATED-NII-PRIOR> 55672
<ACCUMULATED-GAINS-PRIOR> 468570
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 730310
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1439054
<AVERAGE-NET-ASSETS> 80436321
<PER-SHARE-NAV-BEGIN> 17.53
<PER-SHARE-NII> .08
<PER-SHARE-GAIN-APPREC> (1.81)
<PER-SHARE-DIVIDEND> (.03)
<PER-SHARE-DISTRIBUTIONS> (.15)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.62
<EXPENSE-RATIO> 1.63
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0001015712
<NAME> FBR FAMILY OF FUNDS
<SERIES>
<NUMBER> 031
<NAME> FBR SMALL CAP VALUE FUND - CLASS A

<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 17814955
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<RECEIVABLES> 198256
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<OTHER-ITEMS-ASSETS> 2578882
<TOTAL-ASSETS> 18322576
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
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<PAID-IN-CAPITAL-COMMON> 17523940
<SHARES-COMMON-STOCK> 1039763
<SHARES-COMMON-PRIOR> 495069
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<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 433344
<OVERDISTRIBUTION-GAINS> 0
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<NET-ASSETS> 15645522
<DIVIDEND-INCOME> 74516
<INTEREST-INCOME> 57207
<OTHER-INCOME> 0
<EXPENSES-NET> (262260)
<NET-INVESTMENT-INCOME> (130537)
<REALIZED-GAINS-CURRENT> 564052
<APPREC-INCREASE-CURRENT> (3393765)
<NET-CHANGE-FROM-OPS> (2960250)
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<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (249613)
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<NUMBER-OF-SHARES-SOLD> 1025042
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<SHARES-REINVESTED> 15001
<NET-CHANGE-IN-ASSETS> 7377004
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</TABLE>

<PAGE>
<ARTICLE> 6
<CIK> 0001015712
<NAME> FBR FAMILY OF FUNDS
<SERIES>
<NUMBER> 041
<NAME> FBR REALTY GROWTH FUND - CLASS A

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<TOTAL-ASSETS> 2418044
<PAYABLE-FOR-SECURITIES> 7540
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 123851
<TOTAL-LIABILITIES> 131391
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2995576
<SHARES-COMMON-STOCK> 236339
<SHARES-COMMON-PRIOR> 163820
<ACCUMULATED-NII-CURRENT> 20080
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (295927)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (433076)
<NET-ASSETS> 2286653
<DIVIDEND-INCOME> 71624
<INTEREST-INCOME> 1242
<OTHER-INCOME> 0
<EXPENSES-NET> (29463)
<NET-INVESTMENT-INCOME> 43403
<REALIZED-GAINS-CURRENT> (233287)
<APPREC-INCREASE-CURRENT> (549393)
<NET-CHANGE-FROM-OPS> (739277)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (23323)
<DISTRIBUTIONS-OF-GAINS> (232383)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 143851
<NUMBER-OF-SHARES-REDEEMED> (93361)
<SHARES-REINVESTED> 22029
<NET-CHANGE-IN-ASSETS> (89568)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 169743
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
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<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 78850
<AVERAGE-NET-ASSETS> 2484718
<PER-SHARE-NAV-BEGIN> 14.51
<PER-SHARE-NII> .22
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<PER-SHARE-DISTRIBUTIONS> (1.35)
<RETURNS-OF-CAPITAL> 0
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<EXPENSE-RATIO> 2.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>

<PAGE>

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and
appoints C. Eric Brugel, Jack W. Murphy and William J. Kotapish, and each of
them, his true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution for him in his name, place, and stead, to sign
any and all registration statements applicable to The FBR Family of Funds and
any amendments or supplements thereto, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

February 25, 1999 /s/ Winsor H. Aylesworth
------------------------------
Winsor H. Aylesworth