FIRST AMERICAN STRATEGY FUNDS INC, 497, 1998-02-11

FIRST AMERICAN STRATEGY FUNDS INC
497, 1998-02-11

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JANUARY 31, 1998

STRATEGY FUNDS

Strategy Income Fund

Strategy Growth and Income Fund

Strategy Growth Fund

Strategy Aggressive Growth Fund

FIRST AMERICAN
STRATEGY FUNDS, INC.

PROSPECTUS

[LOGO] FIRST AMERICAN
THE POWER OF DISCIPLINED INVESTING(SM)

<PAGE>

TABLE OF CONTENTS

Summary 2

Fees and Expenses 5

Financial Highlights 8

The Funds 10

Investment Objectives and Policies 10

The Underlying Funds 14

Management 24

Distributor 27

Investing in the Funds 28

Redeeming Shares 31

Determining the Price of Shares 33

Federal Income Taxes 34

Fund Shares 34

Calculation of Performance Data 35

Special Investment Methods 36

Information Concerning Compensation 45
Paid to U.S. Bank National Association,
First Trust National Association and
Other Affiliates

<PAGE>

FIRST AMERICAN STRATEGY FUNDS, INC.

PROSPECTUS

The shares described in this Prospectus represent interests in First American
Strategy Funds, Inc., which consists of the following mutual funds (the
"Funds"):

* INCOME FUND

* GROWTH AND INCOME FUND

* GROWTH FUND

* AGGRESSIVE GROWTH FUND

As described in this Prospectus, the Funds' investment objectives are intended
to provide differing balances between the objectives of current income and of
growth of capital. Each Fund seeks to achieve its investment objectives by
investing primarily in a variety of other mutual funds which are also advised by
the Funds' investment adviser, U.S. Bank National Association acting through its
First American Asset Management group. In managing the Funds, the investment
adviser will allocate and re-allocate the Funds' assets among such other mutual
funds within predetermined ranges, expressed as percentages of the Funds' net
assets.

SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, INCLUDING U.S. BANK NATIONAL ASSOCIATION AND ANY OF ITS
AFFILIATES, NOR ARE THEY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION,
THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. AN INVESTMENT IN THE FUNDS
INVOLVES INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL, DUE TO
FLUCTUATIONS IN EACH FUND'S NET ASSET VALUE.

This Prospectus concisely sets forth information about the Funds that a
prospective investor should know before investing. It should be read and
retained for future reference.

A Statement of Additional Information dated January 31, 1998, for the Funds has
been filed with the Securities and Exchange Commission ("SEC") and is
incorporated in its entirety by reference in this Prospectus. To obtain copies
of the Statement of Additional Information at no charge, or to obtain other
information or make inquiries about the Funds, call (800) 637-2548 or write SEI
Investments Distribution Co., Oaks, Pennsylvania 19456. The SEC maintains a
World Wide Web site that contains reports and information regarding issuers that
file electronically with the SEC. The address of such site is
"http://www.sec.gov."

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

The date of this Prospectus is January 31, 1998.

<PAGE>

SUMMARY

First American Strategy Funds, Inc. ("FASF") is an open-end investment company
which offers shares in four different mutual funds (the "Funds"). The Funds'
investment objectives are intended to provide differing balances between the
objectives of current income and of growth of capital. These investment
objectives are as follows:

INCOME FUND seeks to provide a high level of current income consistent with
limited risk to capital. The Fund's limited equity component is designed to help
offset inflation and provide a source for potential increases in income over
time.

GROWTH AND INCOME FUND seeks to provide both capital growth and current income
through a balanced approach to equity securities and fixed-income investments.

GROWTH FUND seeks to provide capital growth with a moderate level of current
income. The Fund provides high allocations to various equity categories
including small company and international company equity securities.

AGGRESSIVE GROWTH FUND seeks to provide a high level of capital growth. The Fund
provides high allocations to various equity categories including small company
and international company equity securities and may include high allocations to
technology and health care company equity securities.

Each Fund seeks to achieve its investment objectives by investing primarily in a
variety of other mutual funds (the "Underlying Funds") which are also advised by
the Funds' investment adviser. In managing the Funds, the investment adviser
will allocate and re-allocate the Funds' assets among the Underlying Funds
within predetermined ranges, expressed as percentages of the Funds' net assets.
These ranges, and the investment adviser's allocations within the ranges, are
intended to reflect the Funds' differing balances between the investment
objectives of current income and of growth of capital.

The Underlying Funds include ten equity funds, one fixed income fund, and one
money market fund. The equity funds and the fixed income fund comprise separate
series of First American Investment Funds, Inc. ("FAIF"), and the money market
fund comprises a separate series of First American Funds, Inc. ("FAF"). The
predetermined ranges within which the Funds' assets may be allocated are set
forth below under the caption "Investment Objectives and Policies," and detailed
information concerning the Underlying Funds is set forth below under the caption
"The Underlying Funds." Each of the Funds is a non-diversified investment
company, as defined in the Investment Company Act of 1940 (the "1940 Act").

INVESTMENT ADVISER. U.S. Bank National Association (the "Adviser"), acting
through its First American Asset Management group, serves as investment adviser
to each of the Funds. See "Management."

DISTRIBUTOR; ADMINISTRATOR. SEI Investments Distribution Co. (the "Distributor")
serves as the distributor of the Funds' shares. SEI Investments Management
Corporation (the "Administrator") serves as the administrator of the Funds. See
"Management" and "Distributor."

OFFERING PRICES; EXPENSES. Shares of the Funds are sold at net asset value
without any front-end or deferred sales charges. Shares of each Fund are subject
to a shareholder servicing fee computed at an annual rate of 0.25% of average
daily net assets. See "Investing in the Funds" and "Distributor."

Investors in the Funds will bear their proportionate share of the expenses of
the Funds (including operating costs, administrative fees and, to the extent not
waived, investment advisory fees) and, in addition, will indirectly bear similar
expenses of the Underlying Funds. Some investors (primarily certain
institutional investors which are eligible to purchase the "no load" class of
Underlying Fund shares) might be able to realize lower aggregate charges and
expenses by investing directly in the Underlying Funds, rather than investing
indirectly in the Underlying Funds by purchasing Fund shares. An investor who
chooses

<PAGE>

to invest directly in the Underlying Funds rather than purchasing Fund shares
would, however, forego the asset allocation services provided by the Adviser in
its management of the Funds. See "Fees and Expenses -- Information Concerning
Fees and Expenses."

MINIMUM INITIAL AND SUBSEQUENT INVESTMENTS. The minimum initial investment is
$1,000 ($250 for retirement plans) for each Fund. Subsequent investments must be
$100 or more. Regular investment in the Funds is simplified through the
Systematic Investment Program through which monthly purchases of $100 or more
are possible. See "Investing in the Funds -- Minimum Investment Required" and
"-- Systematic Investment Program."

EXCHANGES. Shares of any Fund may be exchanged for shares of any other Fund at
the shares' respective net asset values with no additional charge. Shares of the
Funds may not be exchanged for shares of the Underlying Funds, other than Class
A Shares of FAF's Prime Obligations Fund. See "Investing in the Funds --
Exchange Privilege."

REDEMPTIONS. Shares of each Fund may be redeemed at any time at their net asset
value next determined after receipt of a redemption request by the Funds'
transfer agent. Each Fund may, upon 60 days written notice, redeem an account if
the account's net asset value falls below $500. See "Investing in the Funds" and
"Redeeming Shares."

RISKS TO CONSIDER. An investment in any of the Funds involves certain risks.
These include the following:

ACTIVE MANAGEMENT. The performance of the Funds will reflect in part the ability
of the Adviser to make asset allocation and other investment decisions which are
suited to achieving the Funds' investment objectives. Due to their active
management, the Funds could underperform other mutual funds with similar
investment objectives.

ADDITIONAL EXPENSES. Investing in the Underlying Funds through the Funds
involves certain additional expenses that would not be present in a direct
investment in the Underlying Funds. See "Fees and Expenses -- Information
Concerning Fees and Expenses."

RISKS ASSOCIATED WITH THE UNDERLYING FUNDS. The risks associated with the
Underlying Funds are discussed in greater detail under "The Underlying Funds."
These risks include, among others:

* The Underlying Funds are actively managed, and therefore may
underperform other mutual funds with similar investment objectives.

* Each of the Underlying Funds is subject to the risk of generally
adverse markets. In general, the market prices of equity securities
frequently are subject to greater volatility than the prices of fixed
income securities. Therefore, it may be expected that the net asset
values of Underlying Funds which are permitted to invest higher
proportions of their assets in equity funds may be more volatile than
Underlying Funds which are limited to lower proportions.

* Certain of the Underlying Funds may (i) invest in small-capitalization
companies; (ii) concentrate their investments in a single or related
economic sectors; (iii) invest in real estate investment trusts; (iv)
invest in securities of foreign issuers; (v) in the case of one
Underlying Fund, invest a significant portion of its assets in less
than investment grade debt securities; and (vi) engage (but not for
speculative purposes) in options and futures transactions.

* The Underlying Fund which invests primarily in debt securities is
subject to interest rate risk, credit risk, call risk, and certain
risks associated with investing in mortgage-backed securities. In
addition, to the limited extent to which several other Underlying Funds
may invest in fixed-rate debt securities, they also are subject to
interest rate risk, credit risk, and call risk.

POSSIBLE CONFLICTS OF INTEREST AND RECEIPT OF SECURITIES. It is possible that
situations could arise in which the interests of the Funds diverge

<PAGE>

from those of the Underlying Funds. Since the Funds and the Underlying Funds
have a common investment adviser and common officers and directors, such
situations could place these persons in a position in which their duties to the
Funds conflict with their duties to the Underlying Funds. In order to resolve
some types of conflicts, an Underlying Fund could determine to meet a redemption
request by a Fund by distributing securities from its portfolio to the Fund
rather than by paying cash. Any securities received by a Fund as a result of
such an in-kind redemption would be held by the Fund until the Adviser
determines that it is appropriate to dispose of such securities. See "Investment
Objectives and Policies -- Possible Conflicts of Interest and Receipt of
Securities."

SHAREHOLDER INQUIRIES. Any questions or communications regarding the Funds or a
shareholder account should be directed to the Distributor by calling (800)
637-2548, or to the financial institution which holds shares on an investor's
behalf.

<PAGE>

FEES AND EXPENSES

The following tables set forth the shareholder transaction expenses and the
direct annual operating expenses that a shareholder bears in connection with an
investment in the Funds' shares. As illustrated in the other tables under this
caption, Fund shareholders also indirectly bear their proportionate share of the
Underlying Funds' expenses.

GROWTH
AND AGGRESSIVE
INCOME INCOME GROWTH GROWTH
FUND FUND FUND FUND
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES

Maximum sales load imposed on purchases None None None None

Maximum sales load imposed on reinvested dividends None None None None

Deferred sales load None None None None

Redemption fees None None None None

Exchange fees None None None None

DIRECT ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE NET ASSETS)

Investment advisory fee (after voluntary
fee waivers and reimbursements)(1) 0.00% 0.00% 0.00% 0.00%

Rule 12b-1 fees None None None None

Other expenses (after voluntary fee waivers and
reimbursements)(1):

Shareholder servicing fee 0.25% 0.25% 0.25% 0.25%

Miscellaneous(1) 0.00% 0.00% 0.00% 0.00%

Total other expenses 0.25% 0.25% 0.25% 0.25%

Total fund operating expenses
(after voluntary fee waivers and reimbursements)(1) 0.25% 0.25% 0.25% 0.25%

</TABLE>

(1) The Adviser intends to waive a portion of its fees and/or reimburse
expenses on a voluntary basis, and the amounts shown reflect this waiver
and reimbursement as of the date of this Prospectus. The Adviser intends to
maintain such waiver and reimbursement in effect for the current fiscal
year but reserves the right to discontinue them at any time in its sole
discretion. Absent any waivers, investment advisory fees as an annualized
percentage of average daily net assets would be 0.25% for each of the
Funds; other expenses calculated on such basis would be 1.75% for Income
Fund; 1.85% for Growth and Income Fund; 2.37% for Growth Fund and 2.60% for
Aggressive Growth Fund; and total fund operating expenses calculated on
such basis would be 2.00% for Income Fund; 2.10% for Growth and Income
Fund; 2.62% for Growth Fund and 2.85% for Aggressive Growth Fund. "Other
expenses" includes an administration fee and is based on estimated amounts
for the current fiscal year.

<PAGE>

FEES AND EXPENSES (continued)

RANGES OF COMBINED DIRECT AND INDIRECT EXPENSE RATIOS
(AS A PERCENTAGE OF AVERAGE NET ASSETS)

As noted above, in addition to the Funds' direct expenses, Fund shareholders
also indirectly bear their proportionate share of the Underlying Funds'
expenses. The following table sets forth the ranges of combined direct and
indirect expense ratios borne by Fund shareholders after voluntary fee waivers
and reimbursements, taking into account Underlying Fund expenses indirectly
borne by Fund shareholders. Ranges are presented because the Underlying Funds'
expense ratios differ from one another, so that the actual combined direct and
indirect expense ratios of the Funds will depend on the allocation of Fund
assets among the Underlying Funds. Information concerning the Underlying Funds'
expense ratios is set forth under "-- Underlying Fund Expense Ratios" below.

RANGES OF COMBINED DIRECT AND INDIRECT INCOME GROWTH AND GROWTH AGGRESSIVE
EXPENSE RATIOS FUND INCOME FUND FUND GROWTH FUND

<S> <C> <C> <C> <C>
0.91% to 0.92% to 0.99% to 1.06% to
0.98% 1.19% 1.29% 1.35%

</TABLE>

EXAMPLE(2)

Using the midpoint of the ranges set forth above, you would pay the following
expenses on a $1,000 investment, assuming (i) a 5% annual return and (ii)
redemption at the end of each time period:

INCOME GROWTH AND GROWTH AGGRESSIVE
FUND INCOME FUND FUND GROWTH FUND

1 year $ 10 $ 11 $ 12 $ 12
3 years $ 30 $ 34 $ 36 $ 38
5 years $ 53 $ 58 $ 63 $ 66
10 years $117 $129 $139 $147

(2) Absent the fee waivers and reimbursements referred to in (1) above, the
dollar amounts for the 1, 3, 5 and 10 year periods would be as follows:
Income Fund, $27, $84, $143 and $303; Growth and Income Fund, $29, $90,
$153 and $323; Growth Fund, $35, $108, $182 and $378; and Aggressive Growth
Fund, $38, $116, $196 and $404.

<PAGE>

UNDERLYING FUND EXPENSE RATIOS

Based on information as of September 30, 1997, the expense ratios of the
Underlying Funds in which the respective Funds may invest are as set forth in
the table below. The information in the table is for Class C Shares of the
Underlying Funds, which is the only class in which the Funds will invest. The
ratios presented reflect existing voluntary fee waiver and reimbursement
arrangements with respect to the Underlying Funds. These arrangements may be
discontinued at any time, in which event the Underlying Funds' expense ratios
would be higher.

EXPENSE
UNDERLYING FUND RATIO(7)

Real Estate Securities Fund(5)(6) 0.80%
Equity Income Fund(4)(5)(6) 0.75%
Stock Fund(3) 0.80%
Diversified Growth Fund(3) 0.80%
Special Equity Fund(3)(4) 0.89%
Emerging Growth Fund(3) 0.90%
Small Cap Value Fund 0.90%
International Fund(3) 1.67%
Health Sciences Fund(3)(4)(5) 0.90%
Technology Fund(3)(4)(5) 0.90%
Fixed Income Fund 0.70%
Prime Obligations Fund 0.45%

(3) Income Fund is not permitted to invest in this Underlying Fund.

(4) Growth and Income Fund is not permitted to invest in this Underlying Fund.

(5) Growth Fund is not permitted to invest in this Underlying Fund.

(6) Aggressive Growth Fund is not permitted to invest in this Underlying Fund.

(7) Absent voluntary fee waiver and reimbursement arrangements, these expense
ratios would be as follows: Real Estate Securities Fund, 1.05%; Equity
Income Fund, 0.92%; Stock Fund, 0.89%; Diversified Growth Fund, 0.89%;
Special Equity Fund, 0.90%; Emerging Growth Fund, 0.91%; Small Cap Value
Fund, 0.90%; International Fund, 1.67%; Health Sciences Fund, 1.04%;
Technology Fund, 0.92%; Fixed Income Fund, 0.88%; and Prime Obligations
Fund, 0.52%.

INFORMATION CONCERNING FEES AND EXPENSES

The purpose of the preceding tables is to assist the investor in
understanding the various costs and expenses that an investor in a Fund may
bear directly or indirectly. THE EXAMPLES CONTAINED IN THE TABLES SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.

<PAGE>

FINANCIAL HIGHLIGHTS

The following financial highlights should be read in conjunction with the Funds'
financial statements, the related notes thereto and the independent auditors'
report of KPMG Peat Marwick LLP appearing in FASF's annual report to
shareholders for the year ended September 30, 1997. Further information about
the Funds' performance is contained in such annual report to shareholders, which
may be obtained without charge by calling (800) 637-2548 or by writing SEI
Investments Distribution Co., Oaks, Pennsylvania 19456.

For the period ended September 30, 1997

For a share outstanding throughout the period.

REALIZED
NET ASSET AND DIVIDENDS
VALUE NET UNREALIZED FROM NET
BEGINNING INVESTMENT GAINS ON INVESTMENT
OF PERIOD INCOME INVESTMENTS INCOME

<S> <C> <C> <C> <C>
INCOME FUND (1) $ 10.00 $ 0.41 $ 0.82 $ (0.41)
GROWTH AND INCOME FUND (1) $ 10.00 $ 0.26 $ 1.76 $ (0.26)
GROWTH FUND (1) $ 10.00 $ 0.18 $ 2.12 $ (0.18)
AGGRESSIVE GROWTH FUND (1) $ 10.00 $ 0.11 $ 2.58 $ (0.11)

</TABLE>

+ Returns are for the periods indicated and have not been annualized.

(1) Commenced operations on October 1, 1996. All ratios for the period have
been annualized.

(2) Expense ratios do not include expenses of the Underlying Funds.

<PAGE>

<TABLE>
<CAPTION>
RATIO OF
RATIO OF NET EXPENSES TO
NET ASSET RATIO OF INVESTMENT AVERAGE
VALUE NET ASSETS EXPENSES TO INCOME TO NET ASSETS
END OF TOTAL END OF AVERAGE AVERAGE (EXCLUDING PORTFOLIO
PERIOD RETURN PERIOD (000) NET ASSETS NET ASSETS WAIVERS) TURNOVER

<S> <C> <C> <C> <C> <C> <C>
$ 10.82 12.51%+ $36,119 0.60%(2) 4.39% 2.00%(2) 29%
$ 11.76 20.47%+ $27,565 0.60%(2) 2.59% 2.10%(2) 37%
$ 12.12 23.23%+ $15,676 0.60%(2) 1.61% 2.62%(2) 6%
$ 12.58 27.06%+ $13,725 0.60%(2) 0.76% 2.85%(2) 7%

</TABLE>

<PAGE>

THE FUNDS

FASF is an open-end management investment company which offers shares in several
different mutual funds, each of which evidences an interest in a separate and
distinct investment portfolio. FASF was incorporated under the laws of the State
of Minnesota in 1996, and its principal offices are located at Oaks,
Pennsylvania 19456. The Board of Directors of FASF may authorize additional
series or classes of common stock in the future. Each of the Funds pays its
expenses, including the fees of its service providers, audit and legal expenses,
expenses of preparing prospectuses, proxy solicitation materials and reports to
shareholders, costs of custodial services and registering shares under federal
and state securities laws, pricing, insurance expenses, brokerage costs,
interest charges, taxes, directors' fees and organization expenses.

INVESTMENT OBJECTIVES AND POLICIES

OBJECTIVES

The investment objectives of the Funds are as follows:

GROWTH AND INCOME FUND seeks to provide both capital growth and current income
through a balanced approach to equity securities and fixed-income investments.

There is no assurance that any of these objectives will be achieved. The
investment objectives of the Funds are not fundamental and therefore may be
changed without a vote of shareholders. Such changes could result in a Fund
having investment objectives different from those which shareholders considered
appropriate at the time of their investment in a Fund. Shareholders will receive
written notification at least 30 days prior to a change in a Fund's investment
objectives.

<PAGE>

INVESTMENT POLICIES

Each Fund seeks to achieve its investment objectives by investing in a variety
of the Underlying Funds. The Underlying Funds include the ten Equity Funds named
in the table below, Fixed Income Fund and Prime Obligations Fund (a money market
fund). In managing the Funds, the Adviser will allocate and re-allocate their
assets among the Underlying Funds within the following ranges, expressed as
percentages of the Funds' net assets:

<TABLE>
<CAPTION>
GROWTH AND AGGRESSIVE
INCOME FUND INCOME FUND GROWTH FUND GROWTH FUND
UNDERLYING FUNDS MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM MINIMUM MAXIMUM
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EQUITY FUNDS AS A WHOLE 20% 40% 40% 70% 55% 85% 65% 95%
Real Estate Securities Fund 0% 10% 0% 10% 0% 0% 0% 0%
Equity Income Fund 20% 40% 0% 0% 0% 0% 0% 0%
Stock Fund 0% 0% 10% 30% 10% 35% 10% 40%
Diversified Growth Fund 0% 0% 10% 30% 10% 35% 10% 40%
Special Equity Fund 0% 0% 0% 15% 5% 25% 10% 40%
Emerging Growth Fund 0% 0% 0% 15% 5% 25% 10% 40%
Small Cap Value Fund 0% 0% 0% 15% 5% 25% 10% 40%
International Fund 0% 0% 0% 15% 5% 25% 10% 30%
Health Sciences Fund 0% 0% 0% 0% 0% 0% 0% 20%
Technology Fund 0% 0% 0% 0% 0% 0% 0% 20%
FIXED INCOME FUND 60% 80% 30% 60% 15% 45% 5% 35%
PRIME OBLIGATIONS FUND 0% 20% 0% 30% 0% 30% 0% 30%
</TABLE>

The ranges set forth above, and the Adviser's allocations within the ranges, are
intended to reflect the Funds' differing balances between the investment
objectives of current income and of growth of capital. The Funds may make
alterations to the ranges and the Underlying Funds set forth above without
shareholder approval, provided that this Prospectus is appropriately amended or
supplemented. Detailed information concerning the Underlying Funds is set forth
below under the caption "The Underlying Funds."

In addition to Prime Obligations Fund, the Funds also may hold cash or invest in
cash items of the kinds described under "Special Investment Methods -- Cash
Items." Under normal circumstances, the aggregate investments of the Funds in
Prime Obligations Fund and such cash and cash items will not exceed the maximum
percentages set forth in the table above for Prime Obligations Fund. However,
for temporary defensive purposes, the Funds may without limitation hold shares
of Prime Obligations Fund and such cash and cash items.

The Funds are permitted to invest in futures contracts and options on futures in
order to remain effectively fully invested in proportions consistent with their
current asset allocation strategy in a cost effective manner; to re-allocate
assets among asset categories while minimizing transaction costs; to maintain
cash reserves while simulating full investment; to facilitate trading; or to
seek higher investment returns when a futures contract is priced more
attractively than the underlying security or index. For information about these
investment methods, restrictions on their use, and certain associated risks, see
"Special Investment Methods -- Futures and Options on Futures."

RISKS TO CONSIDER

An investment in any of the Funds involves certain risks. These include the
following:

ACTIVE MANAGEMENT. All of the Funds are actively managed. The performance of the
Funds therefore will reflect in part the ability of the

<PAGE>

Adviser to make asset allocation and other investment decisions which are suited
to achieving the Funds' investment objectives. Due to their active management,
the Funds could underperform other mutual funds with similar investment
objectives.

RISKS ASSOCIATED WITH THE UNDERLYING FUNDS. The risks associated with the
Underlying Funds are discussed in greater detail under "The Underlying Funds."
These risks include, among others:

* The Underlying Funds are actively managed, and therefore may
underperform other mutual funds with similar investment objectives.

* Each of the Underlying Funds is subject to the risk of generally
adverse markets. In general, the market prices of equity securities
frequently are subject to greater volatility than the prices of fixed
income securities. Therefore, it may be expected that the net asset
values of Funds which are permitted to invest higher proportions of
their assets in the Equity Funds may be more volatile than Funds which
are limited to lower proportions.

* With respect to the Equity Funds, (i) certain of these funds are
subject to risks associated with investing in small-capitalization
companies; (ii) Real Estate Securities Fund, Health Sciences Fund, and
Technology Fund are subject to risks associated with concentrating
their investments in a single or related economic sectors; (iii) Real
Estate Securities Fund is subject to risks associated with direct
investments in real estate investment trusts; (iv) International Fund
is subject to risks associated with investing in foreign securities and
to currency risk; (v) Equity Income Fund may invest a significant
portion of its assets in less than investment grade convertible debt
obligations; (vi) certain of the other Equity Funds may invest
specified portions of their assets in securities of foreign issuers
which are listed on a United States stock exchange or are represented
by American Depository Receipts; and (vii) certain Underlying Funds may
engage (but not for speculative purposes) in options and futures
transactions.

* Fixed Income Fund (i) is subject to interest rate risk (the risk that
increases in market interest rates will cause declines in the value of
the debt securities held by the fund), credit risk (the risk that the
issuers of debt securities held by the fund default in making required
payments), and call or prepayment risk (the risk that a borrower may
exercise the right to prepay a debt obligation before its stated
maturity, requiring the fund to reinvest the prepayment at a lower
interest rate); (ii) may invest in mortgage-backed securities which are
subject to certain additional risks; and (iii) may, in order to attempt
to reduce risk, invest in exchange traded put and call option on
interest rate futures contracts and on interest rate indices. In
addition, to the limited extent to which the Equity Funds may invest in
fixed-rate debt securities, they also are subject to interest rate
risk, credit risk and call risk.

POSSIBLE CONFLICTS OF INTEREST. As discussed below under "-- Possible Conflicts
of Interest and Receipt of Securities," it is possible that situations could
arise in which the interests of the Funds diverge from those of the Underlying
Funds.

PORTFOLIO TURNOVER

Each Fund's portfolio turnover rate is not expected to exceed 25% annually. It
is expected that the Adviser will make asset re-allocation decisions for the
Funds on a monthly basis. However, the Adviser may re-allocate assets more
frequently if it determines that market conditions so warrant. The Funds will
purchase and sell shares of the Underlying Funds and other permitted investments
(i) to maintain or modify the allocation of the Funds' assets in the Underlying
Funds within the percentage ranges set forth above under

<PAGE>

"-- Investment Policies;" (ii) to accommodate purchases and redemptions of the
Funds' shares; and (iii) in response to market or other economic conditions. It
should be noted that the portfolio turnover rates of the Underlying Funds can be
higher than the Funds' portfolio turnover rates. High portfolio turnover rates
(100% or more) in the Underlying Funds generally would result in higher
transaction costs and could result in additional tax consequences to the
Underlying Funds' shareholders, including the Funds.

INVESTMENT RESTRICTIONS

The fundamental and nonfundamental investment restrictions of the Funds are set
forth in full in the Funds' Statement of Additional Information. The fundamental
restrictions include the following:

* None of the Funds will invest more than 25% of its total assets in any
one industry, except for investment companies which are part of the
"same group of investment companies" (as defined in Rule 11a-3 under
the 1940 Act) as the Funds.

* None of the Funds will borrow money, except from banks for temporary or
emergency purposes. The amount of such borrowing may not exceed 10% of
the borrowing Fund's total assets. None of the Funds will borrow money
for leverage purposes. For the purpose of this investment restriction,
the use of options and futures transactions shall not be deemed the
borrowing of money. If a Fund engages in borrowing, its share price may
be subject to greater fluctuation, and the interest expense associated
with the borrowing may reduce the Fund's net income.

* None of the Funds will mortgage, pledge or hypothecate its assets,
except in an amount not to exceed 15% of the value of its total assets
to secure temporary or emergency borrowing.

* None of the Funds will make short sales of securities.

* None of the Funds will purchase any securities on margin except to
obtain such short-term credits as may be necessary to for the clearance
of transactions.

A fundamental policy or restriction, including those stated above, cannot be
changed without an affirmative vote of the holders of a "majority" of the
outstanding shares of the applicable Fund, as defined in the 1940 Act.

POSSIBLE CONFLICTS OF INTEREST AND RECEIPT OF SECURITIES

The officers and directors of FASF also serve as officers and directors of FAIF
and FAF. In addition, the Adviser to the Funds also serves as investment adviser
to the Underlying Funds. It is possible that situations could arise in which the
interests of the Funds diverge from those of the Underlying Funds, so that these
officers and directors and the Adviser could be subject to conflicts of
interest. For example, the Adviser might determine that a particular Fund should
reduce its allocation of assets to a particular Underlying Fund, thus requiring
it to redeem shares of such Underlying Fund, at a time when it is not in the
best interests of such Underlying Fund to sell portfolio securities in order to
meet such a redemption request. Other types of conflicts of interest between the
Funds and the Underlying Funds may arise as well. The Adviser intends to monitor
the operations of the Funds and of the Underlying Funds for potential conflicts
of interest and to take and recommend to the directors such steps as it believes
are necessary in order to avoid or minimize, to the extent possible, adverse
consequences to the Funds or the Underlying Funds from such conflicts of
interest.

In order to resolve some types of conflicts of interest, the Adviser might
determine that an Underlying Fund should meet a redemption request by a Fund by
distributing securities from its portfolio to the Fund rather than by paying
cash to the Fund. For example, where an Underlying Fund would incur sizeable
brokerage commissions in disposing of portfolio securities in order to pay a
Fund's redemption request in cash, the Underlying Fund might instead distribute
portfolio securities to the Fund so that the Fund alone, and not the Underlying
Fund and its other shareholders, would bear the brokerage commissions associated
with disposing of such securities. If a Fund receives

<PAGE>

securities as a result of such in-kind distributions, it may hold such
securities until the Adviser determines that it is appropriate to dispose of
them, and the receipt and holding of such securities will not be deemed to
violate the Fund's investment policies.

EXEMPTIVE ORDER

Each Fund seeks to achieve its investment objectives by investing in the
Underlying Funds within the percentage ranges set forth above under "--
Investment Policies." The Funds operate under an exemptive order from the
Securities and Exchange Commission permitting them to invest up to 100% of their
assets in shares of other mutual funds which are part of the "same group of
investment companies" as the Funds within the meaning of Rule 11a-3 under the
1940 Act, subject to certain conditions.

THE UNDERLYING FUNDS

This section sets forth information concerning the investment objectives,
policies, and restrictions of the Underlying Funds. There is no assurance that
any of the Underlying Funds' investment objectives will be achieved. Each of the
Underlying Funds is a separate series of FAIF except for Prime Obligations Fund,
which is a separate series of FAF. The Adviser also acts as investment adviser
for each of the Underlying Funds. The Adviser has retained a sub-adviser with
respect to International Fund. See "Management."

Additional information concerning the Underlying Funds is contained in their
Prospectuses and Statements of Additional Information, copies of which can be
obtained by writing SEI Investments Distribution Co., Oaks, Pennsylvania 19456,
or by calling (800) 637-2548.

GENERAL

Except with respect to Prime Obligations Fund, the Underlying Funds' investment
objectives are not fundamental and therefore may be changed without a vote of
shareholders. Each of the Underlying Funds except Real Estate Securities Fund,
Health Sciences Fund and Technology Fund is a diversified investment company, as
defined in the 1940 Act. Real Estate Securities Fund, Health Sciences Fund and
Technology Fund are non-diversified companies under the 1940 Act.

If a percentage limitation on investments by an Underlying Fund stated below is
adhered to at the time of an investment, a later increase or decrease in
percentage resulting from changes in asset values will not be deemed to violate
the limitation except in the case of the limitation on illiquid investments.
Similarly, if an Underlying Fund is required or permitted to invest a stated
percentage of its assets in companies with no more or no less than a stated
market capitalization, deviations from the stated percentages which result from
changes in companies' market capitalizations after the Underlying Fund purchases
their shares will not be deemed to violate the limitation. An Underlying Fund
which is limited to investing in securities with specified ratings is not
required to sell a security if its rating is reduced or discontinued after
purchase, but the Underlying Fund may consider doing so. However, except in the
case of Equity Income Fund, in no event will more than 5% of any Underlying
Fund's net assets be invested in non-investment grade securities. Descriptions
of the rating categories of Standard & Poor's Rating Services, a division of The
McGraw-Hill Companies, Inc. ("Standard & Poor's") and Moody's Investors Service,
Inc. ("Moody's") are contained in the Statement of Additional Information.

When the term "equity securities" is used in the following sections, it refers
to common stock and securities which are convertible into or exchangeable for,
or which carry warrants or other rights to acquire, common stock.

In addition to the investment policies described under the specific Equity
Funds' captions below, the Equity Funds also are subject to the investment
policies described below under the caption "-- Policies Common to Underlying
Equity Funds." Certain fundamental investment

<PAGE>

restrictions of the Underlying Funds are described under "Special Investment
Methods -- Investment Restrictions of the Underlying Funds."

REAL ESTATE SECURITIES FUND

OBJECTIVE. Real Estate Securities Fund has an objective of providing above
average current income and long-term capital appreciation by investing primarily
in equity securities of real estate companies.

INVESTMENT POLICIES. Under normal market conditions, Real Estate Securities Fund
invests at least 65% of its total assets in income producing equity securities
of publicly traded companies principally engaged in the real estate industry.
For this purpose, a company is deemed to be "principally engaged" in the real
estate industry if (i) it derives at least 50% of its revenues or profits from
the ownership, construction, management, financing or sale of residential,
commercial or industrial real estate or (ii) has at least 50% of the fair market
value of its assets invested in such real estate. Real Estate Securities Fund
seeks to invest in equity securities that provide a dividend yield that exceeds
the composite dividend yield of the securities included in the S&P 500.

A majority of Real Estate Securities Fund's total assets will be invested in
securities of real estate investment trusts ("REITs"). REITs are publicly traded
corporations or trusts that specialize in acquiring, holding, and managing
residential, commercial or industrial real estate. A REIT is not taxed at the
entity level on income distributed to its shareholders or unitholders if it
distributes to shareholders or unitholders at least 95% of its taxable income
for each taxable year and complies with regulatory requirements relating to its
organization, ownership, assets and income.

REITs generally can be classified as Equity REITs, Mortgage REITs, and Hybrid
REITs. An Equity REIT invests the majority of its assets directly in real
property and derives its income primarily from rents and from capital gains on
real estate appreciation which are realized through property sales. A Mortgage
REIT invests the majority of its assets in real estate mortgage loans and
derives its income primarily from interest payments. A Hybrid REIT combines the
characteristics of an Equity REIT and a Mortgage REIT. Although Real Estate
Securities Fund can invest in all three kinds of REITs, its emphasis is expected
to be on investments in Equity REITs.

Real Estate Securities Fund also may invest up to 35% of its total assets in
fixed income securities of the kinds described under "Special Investment Methods
- -- Fixed Income Securities."

Because Real Estate Securities Fund invests primarily in the real estate
industry, it is particularly subject to risks associated with that industry. The
real estate industry has been subject to substantial fluctuations and declines
on a local, regional and national basis in the past and may continue to be in
the future. Real property values and incomes from real property may decline due
to general and local economic conditions, overbuilding and increased
competition, increases in property taxes and operating expenses, changes in
zoning laws, casualty or condemnation losses, regulatory limitations on rents,
changes in neighborhoods and in demographics, increases in market interest
rates, or other factors. Factors such as these may adversely affect companies
which own and operate real estate directly, companies which lend to such
companies, and companies which service the real estate industry. Although Real
Estate Securities Fund will operate as a non-diversified investment company
under the 1940 Act, it intends to conduct its operations so as to qualify as a
regulated investment company under the Internal Revenue Code of 1986, as
amended.

Because Real Estate Securities Fund may invest a substantial portion of its
assets in REITs, it also is subject to risks associated with direct investments
in REITs. Equity REITs will be affected by changes in the values of and incomes
from the properties they own, while Mortgage REITs may be affected by the credit
quality of the mortgage loans they hold. In addition, REITs are dependent on
specialized management skills and on their ability

<PAGE>

to generate cash flow for operating purposes and to make distributions to
shareholders or unitholders. REITs may have limited diversification and are
subject to risks associated with obtaining financing for real property, as well
as to the risk of self-liquidation. REITs also can be adversely affected by
their failure to qualify for tax-free pass-through treatment of their income
under the Internal Revenue Code of 1986, as amended, or their failure to
maintain an exemption from registration under the 1940 Act. By investing in
REITs indirectly through Real Estate Securities Fund, a shareholder of Real
Estate Securities Fund bears not only a proportionate share of the expenses of
Real Estate Securities Fund, but also may indirectly bear similar expenses of
some of the REITs in which it invests.

EQUITY INCOME FUND

OBJECTIVE. Equity Income Fund has an objective of long-term growth of capital
and income.

INVESTMENT POLICIES. Under normal market conditions, Equity Income Fund invests
at least 65% of its total assets in equity securities of issuers believed by its
adviser to be characterized by sound management, the ability to finance expected
growth and the ability to pay above average dividends.

Equity Income Fund invests in equity securities that have relatively high
dividend yields and which, in the adviser's opinion, will result in a relatively
stable fund dividend with a growth rate sufficient to maintain the purchasing
power of the income stream. Although the adviser anticipates that higher
yielding equity securities will generally represent the core holdings of Equity
Income Fund, Equity Income Fund may invest in lower yielding but higher growth
equity securities to the extent that the adviser believes such investments are
appropriate to achieve portfolio balance. All securities held by Equity Income
Fund will provide current income consistent with its investment objective.

The "equity securities" in which Equity Income Fund may invest include corporate
debt obligations which are convertible into common stock. These convertible debt
obligations may include obligations rated at the time of purchase as low as CCC
by Standard & Poor's or Caa by Moody's, or which have been assigned an
equivalent rating by another nationally recognized statistical rating
organization, or which are of comparable quality in the judgment of the adviser.
Debt obligations rated less than BBB by Standard & Poor's or Baa by Moody's are
considered to be less than "investment grade" and are sometimes referred to as
"junk bonds." Obligations rated CCC by Standard & Poor's or Caa by Moody's are
considered to be of poor standing and are predominantly speculative.
Descriptions of Standard & Poor's and Moody's rating categories are contained in
the Statement of Additional Information. If the rating of an obligation is
reduced below the categories set forth above after purchase or is discontinued,
Equity Income Fund is not required to sell the obligation but may consider doing
so.

Purchases of less than investment grade convertible debt obligations are
intended to advance Equity Income Fund's objective of long-term growth of
capital through the "upside" potential of the obligations' conversion features
and to advance Equity Income Fund's objective of income through receipt of
interest payable on the obligations. Equity Income Fund will not invest more
than 25% of its total assets in convertible debt obligations which are rated
less than investment grade or which are of comparable quality in the judgment of
the adviser. At September 30, 1997, the following percentages of Equity Income
Fund's total assets were invested in convertible and nonconvertible debt
obligations with the indicated Standard & Poor's ratings or their equivalents:
AAA, 0%; AA, 0%; A, 0%; BBB, 1%; BB, 0%; B, 1%; and CCC, 0%.

Debt obligations which are rated less than investment grade generally are
subject to greater market fluctuations and greater risk of loss of income and
principal due to default by the issuer than are higher-rated obligations. The
value of

<PAGE>

these obligations tends to reflect short-term corporate, economic, interest rate
and market developments and investor perceptions of the issuer's credit quality
to a greater extent than investment grade obligations. In addition, since the
market for these obligations is relatively new and does not have as many
participants as the market for higher-rated obligations, it may be more
difficult to dispose of or to determine the value of these obligations. In the
case of a convertible debt obligation, these risks may be present in a greater
degree where the principal amount of the obligation is greater than the current
market value of the common stock into which it is convertible.

Equity Income Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."

STOCK FUND

OBJECTIVES. Stock Fund has a primary objective of capital appreciation. A
secondary objective of Stock Fund is to provide current income.

INVESTMENT POLICIES. Under normal market conditions, Stock Fund invests at least
65% of its total assets in common stocks diversified among a broad range of
industries and among companies that have a market capitalization of at least $1
billion at the time of purchase. In selecting equity securities, its adviser
employs a value-based selection discipline, investing in equity securities it
believes are undervalued relative to other securities in the same industry or
market at the time of purchase. In assessing relative value, the Adviser will
consider factors such as ratios of market price to earnings, market price to
book value, market price to assets, estimated earnings growth rate, cash flow
and liquidation value.

Stock Fund also may invest up to 35% of its total assets in the aggregate in
equity securities of issuers with a market capitalization of less than $1
billion and in fixed income securities of the kinds described under "Special
Investment Methods -- Fixed Income Securities."

DIVERSIFIED GROWTH FUND

OBJECTIVES. Diversified Growth Fund has a primary objective of long-term growth
of capital. A secondary objective of Diversified Growth Fund is to provide
current income.

INVESTMENT POLICIES. Under normal market conditions, Diversified Growth Fund
invests at least 65% of its total assets in equity securities of a diverse group
of companies that, in the Fund's adviser's judgment, exhibit a combination of
above average growth in revenue and earnings, strong management and sound and
improving financial condition.

Diversified Growth Fund also may invest up to 35% of its total assets in fixed
income securities of the kinds described under "Special Investment Methods --
Fixed Income Securities."

SPECIAL EQUITY FUND

OBJECTIVE. Special Equity Fund has an objective of capital appreciation.

INVESTMENT POLICIES. Under normal market conditions, Special Equity Fund invests
at least 65% of its total assets in equity securities of mid-capitalization
companies. For these purposes, mid-capitalization companies are deemed those
with market capitalizations from $1 billion to $5 billion at the time of
purchase. In selecting equity securities, the Adviser employs a value-based
selection discipline, investing in equity securities it believes are undervalued
relative to other securities in the same industry or market at the time of
purchase. In assessing relative value, the Adviser will consider factors such as
ratios of market price to earnings, market price to book value, market price to
assets, estimated earnings growth rate, cash flow and liquidation value.

Special Equity Fund also may invest up to 35% of its total assets in fixed
income securities of the

<PAGE>

kinds described under "Special Investment Methods -- Fixed Income Securities."

EMERGING GROWTH FUND

OBJECTIVE. Emerging Growth Fund has an objective of growth of capital.

INVESTMENT POLICIES. Under normal market conditions, Emerging Growth Fund
invests at least 65% of its total assets in equity securities of
small-capitalization companies that exhibit, in its adviser's opinion,
outstanding potential for superior growth. For these purposes,
small-capitalization companies are deemed those with market capitalizations of
less than $1 billion at the time of purchase. Companies that participate in
sectors that are identified by the adviser as having long-term growth potential
generally are expected to make up a substantial portion of Emerging Growth
Fund's holdings. These companies often have established a market niche or have
developed unique products or technologies that are expected by the adviser to
produce superior growth in revenues and earnings.

Emerging Growth Fund also may invest up to 35% of its total assets in the
aggregate in equity securities of issuers with a market capitalization of $1
billion or more and in fixed income securities of the kinds described under
"Special Investment Methods -- Fixed Income Securities."

SMALL CAP VALUE FUND

OBJECTIVE. Small Cap Value Fund has an objective of capital appreciation.

INVESTMENT POLICIES. Under normal market conditions, Small Cap Value Fund
invests at least 65% of its total assets in equity securities of
small-capitalization companies. For these purposes, small-capitalization
companies are deemed those with market capitalizations of less than $1 billion
at the time of purchase. In selecting equity securities, Small Cap Value Fund's
adviser employs a value-based selection discipline, investing in equity
securities it believes are undervalued relative to other securities in the same
market or industry at the time of purchase. In assessing relative value, Small
Cap Value Fund's adviser will consider such factors as ratios of market price to
earnings, market price to book value, and market price to assets, estimated
earnings growth rate, cash flow and liquidation value.

Small Cap Value also may invest up to 35% of its total assets in the aggregate
in equity securities of issuers with a market capitalization of $1 billion or
more and in fixed income securities of the kinds described under "Special
Investment Methods -- Fixed Income Securities."

INTERNATIONAL FUND

OBJECTIVE. International Fund has an objective of long-term growth of capital.

INVESTMENT POLICIES. Under normal market conditions, International Fund invests
at least 65% of its total assets in an internationally diversified portfolio of
equity securities which trade in markets other than the United States. Generally
these securities are issued by companies (i) domiciled in countries other than
the United States or (ii) that derive at least 50% of either their revenues or
their pre-tax income from activities outside of the United States. The
securities in which International Fund invests include common and preferred
stock, securities (bonds and preferred stock) convertible into common stock,
warrants and securities representing underlying international securities such as
American Depositary Receipts and European Depositary Receipts. International
Fund also may hold securities of other investment companies (which investments
are also subject to the advisory fee) and depositary or custodial receipts
representing beneficial interests in any of the foregoing securities.

International Fund may invest in securities of issuers in, but not limited to,
Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, China, Colombia,
the Czech Republic, Denmark, Finland, France, Germany, Greece, Hong Kong,
Hungary,

<PAGE>

India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Malaysia,
Mexico, the Netherlands, New Zealand, Norway, Pakistan, Peru, the Philippines,
Poland, Portugal, Singapore, South Africa, Spain, Sri Lanka, Sweden,
Switzerland, Taiwan, Thailand, Turkey, the United Kingdom and Venezuela.
Normally, International Fund will invest at least 65% of its total assets in
securities traded in at least three foreign countries, including the countries
listed above. It is possible, although not currently anticipated, that up to 35%
of International Fund's assets could be invested in United States companies.

In investing International Fund's assets, the sub-adviser expects to place
primary emphasis on country selection, followed by selection of industries or
sectors within or across countries and by selection of individual stocks
corresponding to the industries or sectors selected. Investments are expected to
be made primarily in developed markets and larger capitalization companies.
However, International Fund also may invest in emerging markets where smaller
capitalization companies are the norm.

In addition, International Fund may (i) enter into repurchase agreements; (ii)
in order to attempt to reduce risk, purchase put and call options on equity
securities and on stock indices; (iii) write covered call options covering up to
50% of the equity securities owned by International Fund and write call options
on stock indices related to such equity securities; (iv) purchase securities on
a when-issued or delayed delivery basis; (v) engage in the lending of portfolio
securities; (vi) engage in foreign currency transactions; (vii) in order to
attempt to reduce risk, purchase put and call options on foreign currencies;
(viii) write covered call options on foreign currencies owned by International
Fund; and (ix) enter into contracts for the future purchase or delivery of
securities, foreign currencies, and indices, purchase or sell options on any
such futures contracts and engage in related closing transactions. For
information about these investment methods, restrictions on their use, and
certain associated risks, see the related headings under "Special Investment
Methods."

Under normal market conditions, it is expected that International Fund will be
fully invested in equity securities and related hedging instruments (except for
short-term investments of cash for liquidity purposes and pending investment).
However, for temporary defensive purposes, International Fund may without
limitation hold cash or invest in cash items of the kinds described under
"Special Investment Methods -- Cash Items." The Fund also may invest not more
than 35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment.

International Fund is subject to special risks associated with investing in
foreign securities and to declines in net asset value resulting from changes in
exchange rates between the United States dollar and foreign currencies. These
risks are discussed under "Special Investment Methods -- Foreign Securities" and
"-- Foreign Currency Transactions" elsewhere here. Because of the special risks
associated with foreign investing and the sub-adviser's ability to invest
substantial portions of International Fund's assets in a small number of
countries, International Fund may be subject to greater volatility than most
mutual funds which invest principally in domestic securities.

HEALTH SCIENCES FUND

OBJECTIVE. Health Sciences Fund has an objective of long-term growth of capital.

INVESTMENT POLICIES. Under normal market conditions, Health Sciences Fund
invests at least 65% of its total assets in equity securities of companies which
its adviser considers to be principally engaged in the development, production
or distribution of products or services connected with health care or medicine.
Examples of these products and services include pharmaceuticals, health care
services and administration, diagnostics, medical equipment and supplies,
medical technology, and medical research and development. The adviser
anticipates investing in companies that have the potential for above

<PAGE>

average growth in revenue and earnings as a result of new or unique products,
processes or services, increasing demand for a company's products or services,
established market leadership, or exceptional management. A company will be
deemed "principally engaged" in the health sciences industries if at the time of
investment the adviser determines that at least 50% of its assets, revenues or
profits are derived from those industries.

Health Sciences Fund also may invest up to 35% of its total assets in fixed
income securities of the kinds described under "Special Investment Methods --
Fixed Income Securities."

Health Sciences Fund operates as a non-diversified investment company, as
defined in the 1940 Act, but intends to conduct its operations so as to qualify
as a regulated investment company for purposes of the Internal Revenue Code of
1986, as amended. Since a relatively high percentage of the assets of Health
Sciences Fund may be invested in the securities of a limited number of issuers
which will be in the same or related economic sectors, Health Sciences Fund's
portfolio securities may be more susceptible to any single economic,
technological or regulatory occurrence than the portfolio securities of
diversified investment companies. Many products and services in the health
sciences industries may become rapidly obsolete due to technological and
scientific advances. In addition, the health sciences industries generally are
subject to greater governmental regulation than many other industries, so that
changes in governmental policies may have a material effect on the demand for
products and services in these industries. Regulatory approvals generally are
required before new drugs, medical devices or medical procedures can be
introduced and before health care providers can acquire additional facilities or
equipment.

TECHNOLOGY FUND

OBJECTIVE. Technology Fund has an objective of long-term growth of capital.

INVESTMENT POLICIES. Under normal market conditions, Technology Fund invests at
least 65% of its total assets in equity securities of companies which its
adviser believes have, or will develop, products, processes or services that
will provide or will benefit significantly from technological advances and
improvements. The description of the technology sector is interpreted broadly by
the adviser and may include such products or services as inexpensive computing
power, such as personal computers; improved methods of communications, such as
satellite transmission; or labor saving machines or instruments, such as
computer-aided design equipment. The prime emphasis of Technology Fund is to
identify those companies positioned, in the adviser's opinion, to benefit from
technological advances in areas such as semiconductors, minicomputers and
peripheral equipment, scientific instruments, computer software, communications,
and future automation trends in both office and factory settings.

Technology Fund also may invest up to 35% of its total assets in fixed income
securities of the kinds described under "Special Investment Methods -- Fixed
Income Securities."

Technology Fund operates as a non-diversified investment company, as defined in
the 1940 Act, but intends to conduct its operations so as to qualify as a
regulated investment company for purposes of the Internal Revenue Code of 1986,
as amended. Since a relatively high percentage of the assets of Technology Fund
may be invested in the securities of a limited number of issuers which will be
in the same or related economic sectors, Technology Fund's portfolio securities
may be more susceptible to any single economic, technological or regulatory
occurrence than the portfolio securities of diversified investment companies. In
addition, competitive pressures may have a significant effect on the financial
condition of companies in the technology industry. For example, if technology
continues to advance at an accelerated rate, and the number of companies and
product offerings continue to expand, these companies could become increasingly
sensitive to short product cycles and aggressive pricing.

<PAGE>

POLICIES COMMON TO UNDERLYING EQUITY FUNDS

Subject to the limitations stated under their respective captions above, each of
Real Estate Securities Fund, Equity Income Fund, Stock Fund, Diversified Growth
Fund, Special Equity Fund, Emerging Growth Fund, Technology Fund and Health
Sciences Fund may invest up to 25% of its total assets in securities of foreign
issuers which are either listed on a United States stock exchange or represented
by American Depositary Receipts. For information about these kinds of
investments and certain associated risks, see "Special Investment Methods --
Foreign Securities."

Each of Real Estate Securities Fund, Equity Income Fund, Stock Fund, Diversified
Growth Fund, Special Equity Fund, Emerging Growth Fund, Small Cap Value Fund,
Technology Fund and Health Sciences Fund may (i) enter into repurchase
agreements; (ii) in order to attempt to reduce risk, purchase put and call
options on equity securities and on stock indices; (iii) write covered call
options covering up to 25% of the equity securities owned by such Underlying
Fund and write call options on stock indices related to such securities; (iv)
purchase securities on a when-issued or delayed delivery basis; and (v) engage
in the lending of portfolio securities. For information about these investment
methods, restrictions on their use, and certain associated risks, see the
related headings under "Special Investment Methods." International Fund may
engage in these and certain additional activities to the extent described under
its caption above.

Each of Real Estate Securities Fund, Equity Income Fund, Stock Fund, Diversified
Growth Fund, Special Equity Fund, Emerging Growth Fund, Small Cap Value Fund,
Technology Fund and Health Sciences Fund may, for temporary defensive purposes,
without limitation hold cash or invest in cash items of the kinds described
under "Special Investment Methods -- Cash Items." Each such Underlying Fund also
may invest not more than 35% of its total assets in cash and cash items in order
to utilize assets awaiting normal investment.

FIXED INCOME FUND

OBJECTIVE. Fixed Income Fund has an objective of providing a high level of
current income consistent with limited risk to capital.

INVESTMENT POLICIES. Fixed Income Fund invests in investment grade debt
securities, at least 65% of which are United States Government obligations and
corporate debt obligations and mortgage-backed and asset-backed securities rated
at least A by Standard & Poor's or Moody's or which have been assigned an
equivalent rating by another nationally recognized statistical rating
organization. Under normal market conditions, the weighted average maturity of
the securities held by Fixed Income Fund will not exceed 15 years.

Fixed Income Fund's permitted investments include notes, bonds and discount
notes of United States Government agencies or instrumentalities; domestic issues
of corporate debt obligations having floating or fixed rates of interest and
rated at least BBB by Standard & Poor's or Baa by Moody's, or which have been
assigned an equivalent rating by another nationally recognized statistical
rating organization, or which are of comparable quality in the judgment of the
adviser; other fixed income securities, including mortgage-backed securities,
which are rated in one of the four highest categories by a nationally recognized
statistical rating organization or which are of comparable quality in the
judgment of the adviser; and commercial paper which is rated A-1 by Standard &
Poor's or P-1 by Moody's or which has been assigned an equivalent rating by
another nationally recognized statistical rating organization. Unrated
securities deemed to be of comparable quality as set forth above will not exceed
10% in the aggregate of the value of the total assets of Fixed Income Fund. At
least 65% of the total assets of Fixed Income Fund will be invested in fixed
rate obligations.

Subject to the foregoing limitations, Fixed Income Fund may invest in the
following kinds of securities, as described under the related headings

<PAGE>

under "Special Investment Methods:" (i) mortgage-backed securities (provided
that Fixed Income Fund will not invest more than 10% of its total assets in the
aggregate in interest-only, principal-only or inverse floating rate
mortgage-backed securities); (ii) asset-backed securities; and (iii) bank
instruments.

In addition, Fixed Income Fund may (i) invest up to 15% of its total assets in
foreign securities payable in United States dollars; (ii) enter into repurchase
agreements; (iii) in order to attempt to reduce risk, invest in exchange traded
put and call options on interest rate futures contracts and on interest rate
indices; (iv) purchase securities on a when-issued or delayed delivery basis;
and (v) engage in the lending of portfolio securities. For information about
these investment methods, restrictions on their use, and certain associated
risks, see the related headings under "Special Investment Methods."

Although Fixed Income Fund will not make direct purchases of common or preferred
stocks or rights to acquire common or preferred stocks, Fixed Income Fund may
invest in debt securities which are convertible into or exchangeable for, or
which carry warrants or other rights to acquire, such stocks. Equity interests
acquired through conversion, exchange or exercise of rights to acquire stock
will be disposed of by Fixed Income Fund as soon as practicable in an orderly
manner.

For temporary defensive purposes, Fixed Income Fund may without limitation hold
cash or invest in cash items. Fixed Income Fund also may invest not more than
35% of its total assets in cash and cash items in order to utilize assets
awaiting normal investment. Cash items may include short-term obligations such
as rated commercial paper and variable amount master demand notes; time and
savings deposits (including certificates of deposit); bankers' acceptances;
obligations of the United States Government or its agencies or
instrumentalities; and repurchase agreements collateralized by eligible
investments. Fixed Income Fund also may invest in securities of other mutual
funds which invest primarily in debt obligations with remaining maturities of 13
months or less.

PRIME OBLIGATIONS FUND

OBJECTIVE. Prime Obligations Fund seeks to achieve maximum current income to the
extent consistent with the preservation of capital and the maintenance of
liquidity.

INVESTMENT POLICIES. Prime Obligations Fund seeks to maintain a constant dollar
price of $1.00 per share and holds itself out as a "money market fund." As such,
Prime Obligations Fund is subject to the provisions of Rule 2a-7 under the 1940
Act, which require, among other things, that the fund invest exclusively in
securities that mature within 397 days from the date of purchase as determined
pursuant to Rule 2a-7, that it maintain an average weighted maturity of not more
than 90 days, and that it invest only in United States dollar-denominated
investments that meet specified credit quality standards. There is no assurance
that Prime Obligations Fund will be able to maintain a constant dollar price of
$1.00 per share.

In seeking to achieve its objective, Prime Obligations Fund invests in money
market instruments, including marketable securities issued or guaranteed by the
United States Government or its agencies or instrumentalities; United States
dollar-denominated obligations (including bankers' acceptances, time deposits,
and certificates of deposit, including variable rate certificates of deposit) of
banks (including commercial banks, savings banks, and savings and loan
associations) organized under the laws of the United States or any state,
foreign banks, United States branches of foreign banks, and foreign branches of
United States banks, if such banks have total assets of not less than $500
million; and certain corporate and other obligations, including high grade
commercial paper, non-convertible corporate debt securities, and loan
participation interests with no more than 397 days remaining to maturity as
determined pursuant to Rule 2a-7. For more information on these types of
securities, see "Special Investment

<PAGE>

Methods" below. Under Rule 2a-7, securities which are subject to certain types
of demand or put features may be deemed to mature at the next demand or put date
although they have a longer stated maturity.

Prime Obligations Fund may also (i) engage in repurchase agreements with respect
to any of its portfolio securities, (ii) purchase credit enhancement agreements
to enhance the creditworthiness of its portfolio securities, (iii) lend
securities from its portfolio, or (iv) purchase the securities described above
on a when-issued or delayed delivery basis. See "Special Investment Methods"
below.

Prime Obligations Fund may invest (i) up to 25% of its total assets in
dollar-denominated obligations of United States branches of foreign banks which
are subject to the same regulation as United States banks, and (ii) up to 25% of
its total assets collectively in dollar-denominated obligations of foreign
branches of domestic banks, foreign banks, and foreign corporations. Prime
Obligations Fund may invest in United States dollar-denominated obligations of
foreign corporations if the obligations satisfy the same quality standards set
forth above for domestic corporations. See "Special Investment Methods" for a
discussion of the risks relating to investments in such securities.

RISKS TO CONSIDER WITH RESPECT TO THE UNDERLYING FUNDS

An investment in the Underlying Funds involves certain risks in addition to
those noted above with respect to particular funds. These include the following:

EQUITY SECURITIES GENERALLY. Market prices of equity securities generally, and
of particular companies' equity securities, frequently are subject to greater
volatility than prices of fixed income securities. Market prices of equity
securities as a group have dropped dramatically in a short period of time on
several occasions in the past, and they may do so again in the future. Each of
the Equity Funds is subject to the risk of generally adverse equity markets.

SMALL-CAPITALIZATION COMPANIES. Emerging Growth Fund and Small Cap Value Fund
emphasize investments in companies with small market capitalizations, and the
remaining Equity Funds are permitted to invest in equity securities of such
companies. The equity securities of such companies frequently have experienced
greater price volatility in the past than those of larger-capitalization
companies, and they may be expected to do so in the future. To the extent that
the Equity Funds invest in small companies, they are subject to this risk of
greater volatility.

INTEREST RATE, CREDIT, AND CALL RISK. Fixed Income Fund is subject to interest
rate, credit, and call risk, as are the Equity Funds to the extent that they are
permitted to invest limited portions of their assets in fixed-rate securities:

INTEREST RATE RISK is the risk that the value of a fixed-rate debt
security will decline due to changes in market interest rates. In
general, when interest rates rise, the value of a fixed-rate debt
security declines. Conversely, when interest rates decline, the value
of a fixed-rate debt security generally increases. In general, the
value of fixed-rate debt securities with longer maturities is more
sensitive to changes in market interest rates than the value of such
securities with shorter maturities. Thus, the net asset value of a fund
which invests in securities with longer weighted average maturities,
such as Fixed Income Fund, should be expected to have greater
volatility in periods of changing market interest rates than that of a
fund which invests in securities with shorter weighted average
maturities.

CREDIT RISK is the risk that the issuer of a debt security will fail to
make payments on the security when due. Fixed Income Fund can invest in
debt securities rated as low as BBB by Standard & Poor's or Baa by
Moody's, or which have been assigned an equivalent rating by another
nationally recognized statistical rating organization, or which are of
comparable quality

<PAGE>

in the judgment of the fund's adviser. Although these rating categories
are investment grade, obligations with these ratings are viewed as
having speculative characteristics and carry a somewhat higher risk of
default than obligations rated in the higher investment grade
categories.

CALL RISK is the risk that a corporate bond will be called for
redemption at the option of its issuer at a price specified in the
indenture or other investment pursuant to which it was issued. In
general, it is advantageous for an issuer to call its bonds if they can
be refinanced through the issuance of new bonds which bear a lower
interest rate than that of the called bonds. If a bond is called during
a period of declining interest rates, its holder probably will have to
reinvest the proceeds received by it at a lower interest rate than that
borne by the called bond, thus resulting in a decrease in income.

ACTIVE MANAGEMENT. All of the Underlying Funds are actively managed by their
adviser or, in the case of International Fund, its sub-adviser. Their
performance therefore will reflect in part the ability of the adviser or
sub-adviser to select securities which are suited to achieving their investment
objectives. Due to their active management, the Underlying Funds could
underperform other mutual funds with similar investment objectives or the market
generally.

FOREIGN SECURITIES. International Fund is subject to special risks associated
with investing in foreign securities and to declines in net asset value
resulting from changes in exchange rates between the United States dollar and
foreign securities. These risks are discussed under "Special Investment Methods
- -- Foreign Securities" elsewhere herein. Because of the special risks associated
with foreign investing, the Fund may be subject to greater volatility than most
mutual funds which invest principally in domestic securities.

OTHER. Investors also should review "Special Investment Methods" for information
concerning risks associated with certain investment techniques which may be
utilized by Underlying Funds.

MANAGEMENT

The Board of Directors of FASF has the primary responsibility for overseeing the
overall management and electing the officers of FASF. Subject to the overall
direction and supervision of the Board of Directors, the Adviser acts as
investment adviser for and manages the investment portfolios of FASF.

INVESTMENT ADVISER TO THE FUNDS

U.S. Bank National Association, 601 Second Avenue South, Minneapolis, Minnesota
55402, acts as the Funds' investment adviser through its First American Asset
Management group. The Adviser has acted as an investment adviser to FASF since
its inception in 1996. The Adviser also has acted as investment adviser to FAIF
since 1987 and to FAF since 1982. As of September 30, 1997, the Adviser was
managing accounts with an aggregate value of approximately $55 billion,
including mutual fund assets of approximately $20 billion. U.S. Bancorp, 601
Second Avenue South, Minneapolis, Minnesota 55480, is the holding company for
the Adviser.

Each of the Funds has agreed to pay the Adviser monthly fees calculated on an
annual basis equal to 0.25% of its average daily net assets. The Adviser may, at
its option, waive any or all of its fees, or reimburse expenses, with respect to
any Fund from time to time. Any such waiver or reimbursement is voluntary and
may be discontinued at any time. The Adviser also may absorb or reimburse
expenses of the Funds from time to time, in its discretion, while retaining the
ability to be reimbursed by the Funds for such amounts prior to the end of the
fiscal year. This practice would have the effect of lowering a Fund's overall
expense ratio and of increasing yield to investors, or the converse, at the time
such amounts are absorbed or reimbursed, as the case may be.

The Glass-Steagall Act generally prohibits banks from engaging in the business
of underwriting, selling or distributing securities and from being

<PAGE>

affiliated with companies principally engaged in those activities. In addition,
administrative and judicial interpretations of the Glass-Steagall Act prohibit
bank holding companies and their bank and nonbank subsidiaries from organizing,
sponsoring or controlling registered open-end investment companies that are
continuously engaged in distributing their shares. Bank holding companies and
their bank and nonbank subsidiaries may serve, however, as investment advisers
to registered investment companies, subject to a number of terms and conditions.

Although the scope of the prohibitions and limitations imposed by the
Glass-Steagall Act has not been fully defined by the courts or the appropriate
regulatory agencies, the Funds believe that the Adviser is not prohibited from
performing the investment advisory services described above, and that
broker-dealers affiliated with the Adviser are not prohibited from entering into
a sales agreement with the Distributor as described herein. In the event of
changes in federal or state statutes or regulations or judicial and
administrative interpretations or decisions pertaining to permissible activities
of bank holding companies and their bank and nonbank subsidiaries, the Adviser
and affiliated broker-dealers might be prohibited from continuing these
arrangements. In that event, it is expected that the Board of Directors would
make other arrangements and that shareholders would not suffer adverse financial
consequences.

PORTFOLIO MANAGEMENT OF THE FUNDS

Asset allocation decisions for the Funds are made by a committee comprised of
Mr. Bren, Mr. Cline, Mr. Doak, Mr. Dubiak, Mr. Jones, Mr. Murphy, Mr. Rovner,
Mr. Stanley, and Mr. Ulrey, whose backgrounds are set forth below.

GERALD C. BREN joined the Adviser in 1972 as an investment analyst. Mr.
Bren received his master's degree in business administration from the
University of Chicago. He is a Chartered Financial Analyst. He also
participates in the management of certain of the Equity Funds.

DAVID CLINE is a member of the Adviser's asset allocation committee and
is responsible for quantitative analysis. He joined the Adviser in 1994
and has nine years of investment industry experience. Prior to joining
the Adviser, he was a portfolio manager at Marquette Bank, N.A. Mr.
Cline received his bachelor's degree from Indiana University and his
master's degree in business administration from the University of
Minnesota.

JAMES DOAK joined the Adviser in 1982 after serving for two years as
Vice President of INA Capital Advisors and ten years as Vice President
of Loomis-Sayles & Co. He has managed assets for individual and
institutional clients, specializing in equity investment. Mr. Doak
received his bachelor's degree from Brown University and his master's
degree in business administration from the Wharton School of Business.
He is a Chartered Financial Analyst. He also participates in the
management of certain of the Equity Funds.

ALBIN S. DUBIAK began his investment career as a security trader with
The First National Bank of Chicago in 1963 before joining the Adviser
as an investment analyst in 1969. Mr. Dubiak received his bachelor's
degree from Indiana University and his master's degree in business
administration from the University of Arizona. He also participates in
the management of certain of the Equity Funds.

MARTIN L. JONES heads the Fixed Income Group of the Adviser and has
over 20 years of investment experience. Formerly with Harris Trust &
Savings Bank, Dillon, Read & Co., and Loeb Rhoades & Co., Mr. Jones
received his bachelor's degree from Texas Tech University, his master's
degree from University of Texas, and his master's degree in business
administration from the University of Chicago. He also is portfolio
manager of Fixed Income Fund.

JOHN M. MURPHY, JR. is Chief Investment Officer of the Adviser's First
American Asset Management group, having joined the Adviser in 1984. He
has more than 30 years in the

<PAGE>

investment management field and served with Investment Advisers, Inc.
and Blyth, Eastman, Dillon & Co. before joining the Adviser. He
received his bachelor's degree from Regis College. He also participates
in the management of certain of the Equity Funds.

JAMES S. ROVNER joined the Adviser in 1986 and has managed assets for
institutional and individual clients for over 15 years, specializing in
equity and balanced investment strategies. Mr. Rovner received his
bachelor's degree and his master's degree in business administration
from the University of Wisconsin. He is a Chartered Financial Analyst.
He also participates in the management of certain of the Equity Funds.

RICHARD W. STANLEY joined the Adviser in 1986 and has 39 years of
investment industry experience. Prior to joining the Adviser, Mr.
Stanley was with Heritage Investment Advisors and Smith Barney, Inc.
Mr. Stanley received his bachelor's degree from Dartmouth College and
his master's degree in business administration from Cornell University.
He is a Chartered Financial Analyst. He also participates in the
management of certain tax-exempt funds offered by FAIF.

JOSEPH M. ULREY III is a member of the Adviser's asset allocation
committee. He joined the Adviser in 1991 and has 16 years of investment
industry experience. Prior to joining the Adviser, Mr. Ulrey spent 10
years overseeing various functions in the Treasury and Finance
Divisions of U.S. Bancorp. Mr. Ulrey received his bachelor's degree in
mathematics/economics from Macalester College and his master's degree
in business administration from the University of Chicago. He also
participates in the management of Prime Obligations Fund.

INVESTMENT ADVISER AND SUB-ADVISER TO THE UNDERLYING FUNDS

U.S. Bank National Association, the adviser to the Funds, also acts as
investment adviser to each of the Underlying Funds through its First American
Asset Management group. Each of the Equity Funds other than International Fund
has agreed to pay the Adviser monthly fees calculated on an annual basis equal
to 0.70% of its daily average assets. International Fund pays the Adviser a
monthly fee calculated on the same basis equal to 1.25% of its average daily net
assets, out of which the Adviser pays that fund's sub-adviser's fees. Fixed
Income Fund and Prime Obligations Fund pay the Adviser monthly fees calculated
on the same basis equal to 0.70% and 0.40%, respectively, of their average daily
net assets. The Adviser may, at its option, waive any or all of such fees, or
reimburse expenses, with respect to any Underlying Fund from time to time and
may discontinue any such waiver or reimbursement at any time.

Marvin & Palmer Associates, Inc., 1201 North Market Street, Suite 2300,
Wilmington, Delaware 19801, is sub-adviser to International Fund under an
agreement with the Adviser. The sub-adviser is responsible for the investment
and reinvestment of International Fund's assets and the placement of brokerage
transactions in connection therewith. For its services, the sub-adviser is paid
a monthly fee by the Adviser calculated on an annual basis equal to 0.75% of the
first $100 million of International Fund's average daily net assets, 0.50% of
International Fund's average daily net assets in excess of $100 million up to
$300 million, 0.45% of International Fund's average daily net assets in excess
of $300 million up to $500 million, and 0.40% of International Fund's average
daily net assets in excess of $500 million.

The sub-adviser, a privately held company, was founded in 1986 by David F.
Marvin and Stanley Palmer. The stock of the sub-adviser is owned by Mr. Marvin,
Mr. Palmer and several other holders. The sub-adviser is engaged in the
management of global, non-United States and emerging markets equity portfolios
for institutional accounts. At September 30, 1997, the sub-adviser managed a
total of $4.7 billion in investments for 50 institutional investors.

<PAGE>

CUSTODIAN

The Custodian of the Funds' assets is First Trust National Association (the
"Custodian"), First Trust Center, 180 East Fifth Street, St. Paul, Minnesota
55101. The Custodian is a subsidiary of U.S. Bancorp.

As compensation for its services to the Funds, the Custodian is paid monthly
fees equal to 0.03% of the average daily net assets of each Fund. In addition,
the Custodian is reimbursed for its out-of-pocket expenses incurred while
providing its services to the Funds. The Custodian also acts as custodian of the
Underlying Funds' assets and receives compensation for such services.

ADMINISTRATOR

The administrator for the Funds is SEI Investments Management Corporation, Oaks,
Pennsylvania 19456. The Administrator, a wholly-owned subsidiary of SEI
Investments Company, provides the Funds with certain administrative services
necessary to operate the Funds. These services include shareholder servicing and
certain accounting and other services. The Administrator provides these services
for a fee calculated at an annual rate of 0.12% of each Fund's average daily net
assets, provided that to the extent that the aggregate net assets of all First
American Funds exceed $8 billion, the percentage stated above is reduced to
0.105%. From time to time, the Administrator may voluntarily waive its fees or
reimburse expenses with respect to any of the Funds. Any such waivers or
reimbursements may be made at the Administrator's discretion and may be
terminated at any time. The Administrator also acts as administrator for the
Underlying Funds and receives compensation for such services. U.S. Bank National
Association assists the Administrator and provides sub-administration services
for the Funds. For these services, the Administrator compensates the
sub-administrator at an annual rate of up to 0.05% of each Fund's average daily
assets.

TRANSFER AGENT

DST Systems, Inc. (the "Transfer Agent") serves as the transfer agent and
dividend disbursing agent for the Funds. The address of the Transfer Agent is
1004 Baltimore Street, Kansas City, Missouri 64105. The Transfer Agent is not
affiliated with the Distributor, the Administrator or the Adviser. The Transfer
Agent also serves as transfer agent and dividend disbursing agent for the
Underlying Funds and receives compensation for such services.

DISTRIBUTOR

SEI Investments Distribution Co. is the principal distributor for shares of the
Funds. The Distributor is a Pennsylvania corporation and is the principal
distributor for a number of investment companies. The Distributor, which is not
affiliated with the Adviser, is a wholly-owned subsidiary of SEI Investments
Company and is located at Oaks, Pennsylvania 19456.

Shares of the Funds are distributed through the Distributor and securities
firms, financial institutions (including, without limitation, banks) and other
industry professionals which enter into sales agreements with the Distributor.

FASF has adopted and entered into a shareholder service plan and agreement (the
"Service Agreement") pursuant to which the Distributor agrees to provide, or to
enter into written agreements with service providers to provide, one or more
specified shareholder services to beneficial owners of shares of the Funds. In
consideration of the services and facilities to be provided by the Distributor
or any service provider, each Fund will pay to the Distributor a shareholder
servicing fee at an annual rate of 0.25% of the average net asset value of all
shares of each Fund, which fee will be computed daily and paid monthly. The
shareholder servicing fee is intended to compensate the Distributor for the
provision of shareholder services and may be used by the Distributor to provide
compensation to institutions through which shareholders hold their shares for
ongoing

<PAGE>

service and/or maintenance of shareholder accounts. Such shareholder services
may include maintaining accounts relating to beneficial owners that invest in
shares; providing information periodically to beneficial owners showing their
positions in shares; arranging for bank wires; responding to inquiries from
beneficial owners relating to the services performed by the Distributor or any
service provider; responding to inquiries from beneficial owners concerning
their investments in shares; forwarding shareholder communications from the
Funds (such as proxies, shareholder reports, annual and semi-annual financial
statements and dividend, distribution and tax notices) to beneficial owners;
processing purchase, exchange and redemption requests from beneficial owners and
placing such orders with the Funds or its service providers; assisting
beneficial owners in changing dividend options, account designations, and
addresses; providing subaccounting with respect to shares beneficially owned;
processing dividend payments from the Funds on behalf of beneficial owners; and
providing such other similar services as the Funds may reasonably request to the
extent that the Distributor and/or the service provider is permitted to do so
under applicable laws or regulations. To the extent that shares are held through
affiliates of the Adviser, such as U.S. Bancorp Investments, Inc. ("USBI"), a
broker-dealer, or First Trust National Association, those entities may receive
shareholder servicing fees from the Distributor. The shareholder servicing fee
is intended to be a "service fee" as defined in Section 2830 of the NASD Conduct
Rules.

The Adviser, the Administrator, the Distributor, and any institution which has
entered into a sales agreement with the Distributor may in their discretion use
their own assets to pay for certain additional costs of distributing Fund shares
or servicing shareholder accounts. Any such arrangement may be commenced or
discontinued by any of these persons at any time, and any sales promotion
arrangement offered by the Adviser, the Administrator or the Distributor will be
offered on a uniform basis to all entities distributing Fund shares or servicing
Fund shareholders unless otherwise disclosed herein. USBI has entered into a
sales agreement with the Distributor. The Adviser may pay USBI an amount equal
to up to 3% of the net asset value of Fund shares sold through it.

Institutions through which Fund shareholders hold shares may impose additional
charges on such shareholders in connection with services provided by them,
provided that such charges are disclosed to such shareholders.

The Distributor also acts as the principal distributor for the Underlying Funds
and receives compensation (but not for distribution of the class of shares in
which the Funds invest) for such services.

INVESTING IN THE FUNDS

SHARE PURCHASES

Shares of the Funds are sold at their net asset value, next determined after an
order is received, without any sales charge, on days on which both the New York
Stock Exchange and federally-chartered banks are open for business. Shares may
be purchased as described below. The Funds reserve the right to reject any
purchase request.

Net asset value is determined as of the earlier of the close of the New York
Stock Exchange or 3:00 p.m. Central time Monday through Friday except on (i)
days on which there are not sufficient changes in the value of a Fund's
portfolio securities that its net asset value might be materially affected; (ii)
days during which no shares are tendered for redemption and no orders to
purchase shares are received; and (iii) days in which the New York Stock
Exchange or federally-chartered banks are closed including, but not limited to,
the following federal holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day,
and Christmas Day. In addition, net asset value will not be calculated on Good
Friday.

<PAGE>

THROUGH A FINANCIAL INSTITUTION. Shares may be purchased through a financial
institution which has a sales agreement with the Distributor. An investor may
call his or her financial institution to place an order. Purchase orders must be
received by the financial institution by the time specified by the institution
to be assured same day processing, and purchase orders must be transmitted to
and received by the Funds by 3:00 p.m. Central time in order for shares to be
purchased at that day's price. It is the financial institution's responsibility
to transmit orders promptly.

Certain financial institutions assist their clients in the purchase or
redemption of shares and charge a fee for this service.

BY MAIL. An investor may place an order to purchase shares of the Funds directly
through the Transfer Agent. Orders by mail will be executed upon receipt of
payment by the Transfer Agent. If an investor's check does not clear, the
purchase will be cancelled and the investor could be liable for any losses or
fees incurred. Third-party checks, credit cards, credit card checks and cash
will not be accepted. When purchases are made by check, the proceeds of
redemptions of the shares purchased are not available until the Transfer Agent
is reasonably certain that the purchase payment has cleared, which could take up
to ten calendar days from the purchase date.

In order to purchase shares by mail, an investor must:

* complete and sign the new account form;

* enclose a check made payable to (Fund name); and

* mail both to DST Systems, Inc., P.O. Box 419382, Kansas City, Missouri
64141-6382.

After an account is established, an investor can purchase shares by mail by
enclosing a check and mailing it to DST Systems, Inc. at the above address.

BY WIRE. To purchase shares of a Fund by wire, call (800) 637-2548 before 3:00
p.m. Central time. All information needed will be taken over the telephone, and
the order will be considered placed when the Custodian receives payment by wire.
If the Custodian does not receive the wire by 3:00 p.m. Central time, the order
will be executed the next business day. Federal funds should be wired as
follows: U.S. Bank National Association, Minneapolis, Minnesota, ABA Number
091000022; For Credit to: DST Systems, Inc.: Account Number 160234580266; For
Further Credit To: (Investor Name and Fund Name). Shares cannot be purchased by
Federal Reserve wire on days on which the New York Stock Exchange or
federally-chartered banks are closed.

MINIMUM INVESTMENT REQUIRED

The minimum initial investment for each Fund is $1,000 unless the investment is
in a retirement plan, in which case the minimum investment is $250. The minimum
subsequent investment is $100. The Funds reserve the right to waive the minimum
investment requirement for employees of the Adviser and its affiliates.

SYSTEMATIC EXCHANGE PROGRAM

Shares of a Fund may also be purchased through automatic monthly deductions from
a shareholder's account in the Class A Shares of Prime Obligations Fund of FAF.
Under a systematic exchange program, a shareholder enters an agreement to
purchase shares of one or more Funds over a specified period of time, and
initially purchases Prime Obligations Fund shares in an amount equal to the
total amount of the investment. On a monthly basis a specified dollar amount of
shares of Prime Obligations Fund is exchanged for shares of the Funds specified.
The systematic exchange program of investing a fixed dollar amount at regular
intervals over time has the effect of reducing the average cost per share of the
Funds. This effect also can be achieved through the systematic investment
program described below. A shareholder may apply for participation in this
program through his or her financial institution or by calling (800) 637-2548.

<PAGE>

SYSTEMATIC INVESTMENT PROGRAM

Once a Fund account has been opened, shareholders may add to their investment on
a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Fund shares at the net asset value next determined after an order is
received, plus any applicable sales charge. A shareholder may apply for
participation in this program through his or her financial institution or by
calling (800) 637-2548.

CERTIFICATES AND CONFIRMATIONS

The Transfer Agent maintains a share account for each shareholder. Share
certificates will not be issued by the Funds.

Confirmations of each purchase and redemption are sent to each shareholder. In
addition, monthly confirmations are sent to report all transactions and
dividends paid during that month for the Funds.

DIVIDENDS AND DISTRIBUTIONS

Dividends are declared and paid monthly with respect to the Funds. Distributions
of any net realized long-term capital gains will be made at least once every 12
months. Dividends and distributions are automatically reinvested in additional
shares of the Fund paying the dividend on payment dates at the ex-dividend date
net asset value without a sales charge, unless shareholders request cash
payments on the new account form or by writing to the Fund.

All shareholders on the record date are entitled to the dividend. If shares are
purchased before a record date for a dividend or a distribution of capital
gains, a shareholder will pay the full price for the shares and will receive
some portion of the purchase price back as a taxable dividend or distribution
(to the extent, if any, that the dividend or distribution is otherwise taxable
to holders of Fund shares). If shares are redeemed or exchanged before the
record date for a dividend or distribution or are purchased after the record
date, those shares are not entitled to the dividend or distribution.

EXCHANGE PRIVILEGE

Shares of a Fund, whether acquired by direct purchase, reinvestment of dividends
on such shares, or otherwise, may be exchanged for shares of the other Funds
without the payment of any sales charge (i.e., at net asset value). Exchanges of
shares among the Funds must meet any applicable minimum investment of the Fund
for which shares are being exchanged.

Shares of the Funds may not be exchanged for shares of the Underlying Funds,
other than Class A Shares of FAF's Prime Obligations Fund.

The ability to exchange shares of the Funds does not constitute an offering or
recommendation of shares of one Fund by another Fund. This privilege is
available to shareholders resident in any state in which the Fund shares being
acquired may be sold. Exchanges may be accomplished by a written request, or by
telephone if a preauthorized exchange authorization is on file with the Transfer
Agent, shareholder servicing agent, or financial institution.

Written exchange requests must be signed exactly as shown on the authorization
form, and the signatures may be required to be guaranteed as for a redemption of
shares by an entity described below under "Redeeming Shares." Neither the Funds,
the Distributor, the Transfer Agent, any shareholder servicing agent, nor any
financial institution will be responsible for further verification of the
authenticity of the exchange instructions.

Telephone exchange instructions made by an investor may be carried out only if a
telephone authorization form completed by the investor is on file with the
Transfer Agent, shareholder servicing agent or financial institution. Shares may
be exchanged between two Funds by telephone

<PAGE>

only if both Funds have identical shareholder registrations.

Telephone exchange instructions may be recorded and will be binding upon the
shareholder. Telephone instructions must be received by the Transfer Agent
before 3:00 p.m. Central time, or by a shareholder's shareholder servicing agent
or financial institution by the time specified by it, in order for shares to be
exchanged the same day. Neither the Transfer Agent nor any Fund will be
responsible for the authenticity of exchange instructions received by telephone
if it reasonably believes those instructions to be genuine. The Funds and the
Transfer Agent will each employ reasonable procedures to confirm that telephone
instructions are genuine, and they may be liable for losses resulting from
unauthorized or fraudulent telephone instructions if they do not employ these
procedures.

Shareholders of the Funds may have difficulty in making exchanges by telephone
through brokers and other financial institutions during times of drastic
economic or market changes. If a shareholder cannot contact his or her broker or
financial institution by telephone, it is recommended that an exchange request
be made in writing and sent by overnight mail to DST Systems, Inc., 1004
Baltimore, Kansas City, Missouri 64105.

The terms of any exchange privilege may be modified or terminated by the Funds
at any time. There are currently no additional fees or charges for the exchange
service. The Funds do not contemplate establishing such fees or charges, but
they reserve the right to do so. Shareholders will be notified of any
modification or termination of the exchange privilege and of the imposition of
any additional fees or charges.

REDEEMING SHARES

Each Fund redeems shares at their net asset value next determined after the
Transfer Agent receives the redemption request, without deduction of any
redemption fee or deferred sales charge. Redemptions will be made on days on
which the Fund computes its net asset value. Redemption requests can be made as
described below and must be received in proper form.

BY TELEPHONE

A shareholder may redeem shares of a Fund, if he or she elects the privilege on
the initial shareholder application, by calling his or her financial institution
to request the redemption. Shares will be redeemed at the net asset value next
determined after the Fund receives the redemption request from the financial
institution. Redemption requests must be received by the financial institution
by the time specified by the institution in order for shares to be redeemed at
that day's net asset value, and redemption requests must be transmitted to and
received by the Funds by 3:00 p.m. Central time in order for shares to be
redeemed at that day's net asset value. Pursuant to instructions received from
the financial institution, redemptions will be made by check or by wire
transfer. It is the financial institution's responsibility to transmit
redemption requests promptly.

Shareholders who did not purchase their shares of a Fund through a financial
institution may redeem their shares by telephoning (800) 637-2548. At the
shareholder's request, redemption proceeds will be paid by check mailed to the
shareholder's address of record or wire transferred to the shareholder's account
at a domestic commercial bank that is a member of the Federal Reserve System,
normally within one business day, but in no event more than seven days after the
request. Wire instructions must be previously established on the account or
provided in writing. The minimum amount for a wire transfer is $1,000. If at any
time the Funds determine it necessary to terminate or modify this method of
redemption, shareholders will be promptly notified.

In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming shares by telephone. If this should occur, another
method of redemption should be considered. Neither the Transfer Agent nor any

<PAGE>

Fund will be responsible for any loss, liability, cost or expense for acting
upon wire instructions or upon telephone instructions that it reasonably
believes to be genuine. The Transfer Agent and the Funds will each employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine. These procedures may include the taping of telephone conversations. To
ensure authenticity of redemption or exchange instructions received by
telephone, the Transfer Agent examines each shareholder request by verifying the
account number and/or tax identification number at the time such request is
made. The Transfer Agent subsequently sends confirmations of both exchange sales
and exchange purchases to the shareholder for verification. If reasonable
procedures are not employed, the Transfer Agent and the Funds may be liable for
any losses due to unauthorized or fraudulent telephone transactions.

BY MAIL

Any shareholder may redeem Fund shares by sending a written request to the
Transfer Agent, shareholder servicing agent, or financial institution. The
written request should include the shareholder's name, the Fund name, the
account number, and the share or dollar amount requested to be redeemed, and
should be signed exactly as the shares are registered. Shareholders should call
the Fund, shareholder servicing agent or financial institution for assistance in
redeeming by mail. A check for redemption proceeds normally is mailed within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.

Shareholders requesting a redemption of $5,000 or more, a redemption of any
amount to be sent to an address other than that on record with the Fund, or a
redemption payable other than to the shareholder of record, must have signatures
on written redemption requests guaranteed by:

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

* a member firm of the New York, American, Boston, Midwest, or Pacific
Stock Exchanges or of the National Association of Securities Dealers;

* a savings bank or savings and loan association the deposits of which
are insured by the Savings Association Insurance Fund, which is
administered by the FDIC; or

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

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

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

BY SYSTEMATIC WITHDRAWAL PROGRAM

Shareholders whose account value is at least $5,000 may elect to participate in
the Systematic Withdrawal Program. Under this program, Fund shares are redeemed
to provide for periodic withdrawal payments in an amount directed by the
shareholder. A shareholder may apply to participate in this program through his
or her financial institution.

REDEMPTION BEFORE PURCHASE INSTRUMENTS CLEAR

When shares are purchased by check or with funds transmitted through the
Automated Clearing House, the proceeds of redemptions of those shares are not
available until the Transfer Agent is reasonably certain that the purchase
payment has cleared, which could take up to ten calendar days from the purchase
date.

<PAGE>

ACCOUNTS WITH LOW BALANCES

Due to the high cost of maintaining accounts with low balances, a Fund may
redeem shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below the required minimum value of
$500. Shares will not be redeemed in this manner, however, if the balance falls
below $500 because of changes in a Fund's net asset value. Before shares are
redeemed to close an account, the shareholder will be notified in writing and
allowed 60 days to purchase additional shares to meet the minimum account
requirement.

DETERMINING THE PRICE
OF SHARES

Shares of the Funds are sold at net asset value, without any sales charge.
Shares are redeemed at net asset value, without deduction of any redemption fee
or deferred sales charge.

The net asset value per share is determined as of the earlier of the close of
the New York Stock Exchange or 3:00 p.m. Central time on each day the New York
Stock Exchange and federally-chartered banks are open for business, provided
that net asset value need not be determined on days when no Fund shares are
tendered for redemption and no order for that Fund's shares is received and on
days on which changes in the value of portfolio securities will not materially
affect the current net asset value of the Fund's shares. The price per share for
purchases or redemptions is such value next computed after the Transfer Agent
receives the purchase order or redemption request.

It is the responsibility of investors' financial institutions promptly to
forward purchase and redemption orders to the Transfer Agent. In the case of
redemptions and repurchases of shares owned by corporations, trusts or estates,
the Transfer Agent or Fund may require additional documents to evidence
appropriate authority in order to effect the redemption, and the applicable
price will be that next determined following the receipt of the required
documentation.

DETERMINING NET ASSET VALUE

The net asset value per share for each of the Funds is determined by dividing
the value of the securities owned by the Fund plus any cash and other assets
(including interest accrued and dividends declared but not collected), less all
liabilities, by the number of Fund shares outstanding. The assets of each Fund
are expected to consist primarily of shares of the Underlying Funds, which are
valued at their respective net asset values. For the purpose of determining the
aggregate net assets of the Funds, cash and receivables will be valued at their
face amounts. Interest will be recorded as accrued and dividends will be
recorded on the ex-dividend date.

Security valuations of investments in the Underlying Funds are furnished by an
independent pricing service that has been approved by the Board of Directors.
Securities listed on a securities exchange or an automated quotation system for
which quotations are readily available, including securities traded over the
counter, are valued at the last quoted sale price on the principal exchange on
which they are traded on the valuation date, or, if there is no such reported
sale on the valuation date, at the most recently quoted bid price. Debt
obligations with remaining maturities in excess of sixty days are valued at the
most recently quoted bid price. For such debt obligations the pricing service
may employ methods that utilize actual market transactions, broker-dealer
valuations, or other electronic data processing techniques. These techniques
generally consider such factors as security prices, yields, maturities, call
features, ratings and developments relating to specific securities in arriving
at security valuations. Debt obligations with remaining maturities of sixty days
or less may be valued at their amortized cost which approximates market value.
If a security price cannot be obtained from an independent pricing service a bid
price may be obtained from an independent broker who makes a market in the
security. Foreign securities owned by the Underlying Funds are valued at the
closing prices on the principal

<PAGE>

exchange on which they trade. If the value for a security cannot be obtained
from the sources described above, the security's value may be determined
pursuant to the fair value procedures established by the applicable Board of
Directors.

Financial futures held by the Underlying Funds are valued at the settlement
price established each day by the board of exchange on which they are traded.
The daily settlement prices for financial futures are provided by an independent
source. Portfolio securities underlying actively traded options are valued at
their market price as determined above. The current market value of any exchange
traded options held or written by an Underlying Fund, is valued at the closing
bid price for a long position or the closing ask price for a short position.

Foreign currency forward contracts held by the Underlying Funds are valued at
the current day's interpolated foreign exchange rate, as calculated using the
current day's exchange rate, and the thirty, sixty, ninety and one-hundred
eighty day forward rates provided by the Reuters system.

FEDERAL INCOME TAXES

Each Fund intends to qualify as a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended (the "Code"), during its
current taxable year in order to be relieved of payment of federal income taxes
on amounts of taxable income it distributes to shareholders.

Dividends paid from each Fund's net investment income and net short-term capital
gains will be taxable to shareholders as ordinary income, whether or not the
shareholder elects to have such dividends automatically reinvested in additional
shares. Dividends paid by the Funds attributable to investments by the
Underlying Funds in the securities of foreign issuers, debt securities, or REITs
will not be eligible for the 70% deduction for dividends received by
corporations.

Dividends paid from the net capital gains of each Fund and designated as capital
gain dividends will be taxable to shareholders as long-term capital gains,
regardless of the length of time for which they have held their shares in the
Fund. In the case of shareholders who are individuals, estates, or trusts, each
Fund will designate the portion of each capital gain dividend that must be
treated as mid-term capital gain and the portion that must be treated as
long-term capital gain.

Gain or loss realized upon the sale of shares in the Funds will be treated as
capital gain or loss, provided that the shares represented a capital asset in
the hands of the shareholder. For corporate shareholders, such gain or loss will
be long-term gain or loss if the shares were held for more than one year. For
shareholders who are individuals, estates, or trusts the gain or loss will be
considered long-term if the shareholder has held the shares for more than 18
months and mid-term if the shareholder has held the shares for more than one
year but not more than 18 months.

Investment income received by the Funds from sources within foreign countries
may be subject to foreign income taxes withheld at the source. The Funds will
not be able to treat shareholders as having paid their proportionate share of
such taxes for foreign tax credit purposes.

Each Fund is required by federal law to withhold 31% of reportable payments
(including dividends, capital gain distributions, and redemptions) paid to
certain accounts whose owners have not complied with IRS regulations. In order
to avoid this withholding requirement, each shareholder will be asked to certify
on the shareholder's account application that the social security or taxpayer
identification number provided is correct and that the shareholder is not
subject to backup withholding for previous underreporting to the IRS.

This is a general summary of the federal tax laws applicable to the Funds and
their shareholders as of the date of this Prospectus. See the Statement of
Additional Information for further details. Before investing in the Funds, an
investor should consult his or her tax adviser about the consequences of state
and local tax laws.

<PAGE>

FUND SHARES

Each share of a Fund is fully paid, nonassessable, and transferable. Shares may
be issued as either full or fractional shares. Fractional shares have pro rata
the same rights and privileges as full shares. Shares of the Funds have no
preemptive or conversion rights.

Each share of a Fund has one vote. On some issues, such as the election of
directors, all shares of all FASF Funds vote together as one series. The shares
do not have cumulative voting rights. Consequently, the holders of more than 50%
of the shares voting for the election of directors are able to elect all of the
directors if they choose to do so. On issues affecting only a particular Fund,
the shares of that Fund will vote as a separate series. Examples of such issues
would be proposals to alter a fundamental investment restriction pertaining to a
Fund or to approve, disapprove or alter a distribution plan.

The Bylaws of FASF provide that annual shareholders meetings are not required
and that meetings of shareholders need only be held with such frequency as
required under Minnesota law and the 1940 Act.

CALCULATION OF
PERFORMANCE DATA

From time to time, any of the Funds may advertise information regarding its
performance. Each Fund may publish its "yield," its "cumulative total return,"
its "average annual total return" and its "distribution rate." Distribution
rates may only be used in connection with sales literature and shareholder
communications preceded or accompanied by a Prospectus. Each of these
performance figures is based upon historical results and is not intended to
indicate future performance, and, except for "distribution rate," is
standardized in accordance with Securities and Exchange Commission regulations.

"Yield" for the Funds is computed by dividing the net investment income per
share (as defined in applicable Securities and Exchange Commission regulations)
earned during a 30-day period (which period will be stated in the advertisement)
by the maximum offering price per share on the last day of the period. Yield is
an annualized figure, in that it assumes that the same level of net investment
income is generated over a one year period. The yield formula annualizes net
investment income by providing for semi-annual compounding.

"Total return" is based on the overall dollar or percentage change in value of a
hypothetical investment in a Fund assuming reinvestment of dividend
distributions and deduction of all expenses. "Cumulative total return" reflects
a Fund's performance over a stated period of time. "Average annual total return"
reflects the hypothetical annually compounded rate that would have produced the
same cumulative total return if performance had been constant over the entire
period. Because average annual returns tend to smooth out variations in a Fund's
performance, they are not the same as actual year-by-year results.

A Fund's "distribution rate" is determined by dividing the income dividends per
share for a stated period by the maximum offering price per share on the last
day of the period. All distribution rates published for the Funds are measures
of the level of income dividends distributed during a specified period. Thus,
these rates differ from yield (which measures income actually earned by a Fund)
and total return (which measures actual income, plus realized and unrealized
gains or losses of a Fund's investments). Consequently, distribution rates alone
should not be considered complete measures of performance.

In reports or other communications to shareholders and in advertising material,
the performance of each Fund may be compared to recognized unmanaged indices or
averages of the performance of similar securities and to composites of such
indices and averages. Also, the performance of each Fund may be compared to that
of other funds of similar size and objectives as listed in the rankings prepared
by Lipper Analytical Services, Inc. or similar independent mutual fund rating

<PAGE>

services, and each Fund may include in such reports, communications and
advertising material evaluations published by nationally recognized independent
ranking services and publications. For further information regarding the Funds'
performance, see "Fund Performance" in the Statement of Additional Information.

SPECIAL INVESTMENT METHODS

This section provides additional information concerning the securities in which
the Funds and the Underlying Funds may invest and related topics. Further
information concerning these matters is contained in the Statement of Additional
Information.

CASH ITEMS

The "cash items" in which the Funds and the Equity Funds may invest, as
described under "Investment Objectives and Policies" and "The Underlying Funds,"
include short-term obligations such as rated commercial paper and variable
amount master demand notes; United States dollar-denominated time and savings
(including certificates of deposit); bankers' acceptances; obligations of the
United States Government or its agencies or instrumentalities; repurchase
agreements collateralized by eligible investments of an Underlying Fund;
securities of other mutual funds which invest primarily in debt obligations with
remaining maturities of 13 months or less (which investments also are subject to
the advisory fee); and other similar high-quality short-term United States
dollar-denominated obligations.

REPURCHASE AGREEMENTS

Each of the Underlying Funds may enter into repurchase agreements. A repurchase
agreement involves the purchase by an Underlying Fund of securities with the
agreement that after a stated period of time, the original seller will buy back
the same securities ("collateral") at a predetermined price or yield. Repurchase
agreements involve certain risks not associated with direct investments in
securities. If the original seller defaults on its obligation to repurchase as a
result of its bankruptcy or otherwise, the purchasing Underlying Fund will seek
to sell the collateral, which could involve costs or delays. Although collateral
(which may consist of any fixed income security which is an eligible investment
for the Underlying Fund entering into the repurchase agreement) will at all
times be maintained in an amount equal to the repurchase price under the
agreement (including accrued interest), an Underlying Fund would suffer a loss
if the proceeds from the sale of the collateral were less than the agreed-upon
repurchase price. The adviser of an Underlying Fund or, in the case of
International Fund, its sub-adviser will monitor the creditworthiness of the
firms with which the Underlying Funds enter into repurchase agreements.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

Each of the Underlying Funds may purchase securities on a when-issued or delayed
delivery basis. When such a transaction is negotiated, the purchase price is
fixed at the time the purchase commitment is entered, but delivery of and
payment for the securities take place at a later date. An Underlying Fund will
not accrue income with respect to securities purchased on a when-issued or
delayed delivery basis prior to their stated delivery date. Pending delivery of
the securities, each Underlying Fund will maintain in a segregated account cash
or liquid high-grade securities in an amount sufficient to meet its purchase
commitments.

The purchase of securities on a when-issued or delayed delivery basis exposes an
Underlying Fund to risk because the securities may decrease in value prior to
delivery. In addition, an Underlying Fund's purchase of securities on a
when-issued or delayed delivery basis while remaining substantially fully
invested could increase the amount of the Underlying Fund's total assets that
are subject to

<PAGE>

market risk, resulting in increased sensitivity of net asset value to changes in
market prices. However, the Underlying Funds will engage in when-issued and
delayed delivery transactions only for the purpose of acquiring portfolio
securities consistent with their investment objectives, and not for the purpose
of investment leverage. A seller's failure to deliver securities to an
Underlying Fund could prevent the Underlying Fund from realizing a price or
yield considered to be advantageous. Prime Obligations Fund will not purchase
securities on a when-issued or delayed delivery basis if, as a result thereof,
more than 15% of its net assets would be so invested.

LENDING OF PORTFOLIO SECURITIES

In order to generate additional income, each of the Underlying Funds may lend
portfolio securities representing up to one-third of the value of its total
assets to broker-dealers, banks or other institutional borrowers of securities.
As with other extensions of credit, there may be risks of delay in recovery of
the securities or even loss of rights in the collateral should the borrower of
the securities fail financially. However, the Underlying Funds will only enter
into loan arrangements with broker-dealers, banks or other institutions which
its adviser or, in the case of International Fund, its sub-adviser has
determined are creditworthy under guidelines established by the Board of
Directors. In these loan arrangements, the Underlying Funds will receive
collateral in the form of cash, United States Government securities or other
high-grade debt obligations equal to at least 100% of the value of the
securities loaned. Collateral is marked to market daily. The Underlying Funds
will pay a portion of the income earned on the lending transaction to the
placing broker and may pay administrative and custodial fees in connection with
these loans which, in the case of First Trust National Association, are 40% of
the Funds' income from such securities lending transactions.

OPTIONS TRANSACTIONS

PURCHASES OF PUT AND CALL OPTIONS. The Underlying Funds, other than Prime
Obligations Fund, may purchase put and call options. These transactions will be
undertaken only for the purpose of reducing risk to the Underlying Funds; that
is, for "hedging" purposes. Depending on the Underlying Fund, these transactions
may include the purchase of put and call options on equity securities, on stock
indices, on interest rate indices, or (only in the case of International Fund)
on foreign currencies. Options on futures contracts are discussed below under
"Futures and Options on Futures."

A put option on a security gives the purchaser of the option the right (but not
the obligation) to sell, and the writer of the option the obligation to buy, the
underlying security at a stated price (the "exercise price") at any time before
the option expires. A call option on a security gives the purchaser the right
(but not the obligation) to buy, and the writer the obligation to sell, the
underlying security at the exercise price at any time before the option expires.
The purchase price for a put or call option is the "premium" paid by the
purchaser for the right to sell or buy.

Options on indices are similar to options on securities except that, rather than
the right to take or make delivery of a specific security at a stated price, an
option on an index gives the holder the right to receive, upon exercise of the
option, a defined amount of cash if the closing value of the index upon which
the option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option.

None of the Underlying Funds other than International Fund will invest more than
5% of the value of its total assets in purchased options, provided that options
which are "in the money" at the time of purchase may be excluded from this 5%
limitation. A call option is "in the money" if the exercise price is lower than
the current market price of the underlying security or index, and a put option
is "in the money" if the exercise price is higher than the current market price.
An Underlying Fund's loss exposure in purchasing an option is limited to the sum
of the premium paid and the commission or other transaction expenses associated
with acquiring the option.

<PAGE>

The use of purchased put and call options involves certain risks. These include
the risk of an imperfect correlation between market prices of securities held by
an Underlying Fund and the prices of options, and the risk of limited liquidity
in the event that an Underlying Fund seeks to close out an options position
before expiration by entering into an offsetting transaction.

WRITING OF CALL OPTIONS. The Underlying Funds may write (sell) covered call
options to the extent specified with respect to particular Underlying Funds
under "The Underlying Funds." These transactions would be undertaken principally
to produce additional income. Depending on the Underlying Fund, these
transactions may include the writing of covered call options on equity
securities or (only in the case of International Fund) on foreign currencies
which an Underlying Fund owns or has the right to acquire or on interest rate
indices.

When an Underlying Fund sells a covered call option, it is paid a premium by the
purchaser. If the market price of the security covered by the option does not
increase above the exercise price before the option expires, the option
generally will expire without being exercised, and the Underlying Fund will
retain both the premium paid for the option and the security. If the market
price of the security covered by the option does increase above the exercise
price before the option expires, however, the option is likely to be exercised
by the purchaser. In that case the Underlying Fund will be required to sell the
security at the exercise price, and it will not realize the benefit of increases
in the market price of the security above the exercise price of the option.

The Equity Funds also may write call options on indices the movements of which
generally correlate with those of the respective Equity Funds' portfolio
holdings. These transactions, which would be undertaken principally to produce
additional income, entail the risk of an imperfect correlation between movements
of the index covered by the option and movements in the price of the applicable
Equity Fund's portfolio securities.

FUTURES AND OPTIONS ON FUTURES

The Funds, as well as Fixed Income Fund and International Fund, may engage in
futures transactions and purchase options on futures as described with respect
to the Funds under "Investment Objectives and Policies -- Investment Policies"
and with respect to such Underlying Funds under "The Underlying Funds." In
addition, International Fund may enter into contracts for the future delivery of
securities or foreign currencies and futures contracts based on a specific
security, class of securities, or foreign currency.

A futures contract on a security obligates one party to purchase, and the other
to sell, a specified security at a specified price on a date certain in the
future. A futures contract on an index obligates the seller to deliver, and
entitles the purchaser to receive, an amount of cash equal to a specific dollar
amount times the difference between the value of the index at the expiration
date of the contract and the index value specified in the contract. The
acquisition of put and call options on futures contracts will, respectively,
give a fund the right (but not the obligation), for a specified exercise price,
to sell or to purchase the underlying futures contract at any time during the
option period.

The Funds may use futures contracts and options on futures for the purposes
specified under "Investment Objectives and Policies -- Investment Policies." An
Underlying Fund may use futures contracts and options on futures in an effort to
hedge against market risks and, in the case of International Fund, as part of
its management of foreign currency transactions.

Aggregate initial margin deposits for futures contracts, and premiums paid for
related options, may not exceed 5% of a Fund's or Underlying Fund's total
assets, and the value of securities that are the subject of such futures and
options (both for receipt and delivery) may not exceed 1/3 of the market value
of International Fund's total assets. Futures transactions will be limited to
the extent necessary to maintain each Fund's and Underlying Fund's qualification
as a regulated investment

<PAGE>

company under the Internal Revenue Code of 1986, as amended.

Where a Fund or an Underlying Fund is permitted to purchase options on futures,
its potential loss is limited to the amount of the premiums paid for the
options. As stated above, this amount may not exceed 5% of a Fund's or
Underlying Fund's total assets. Where a Fund or an Underlying Fund is permitted
to enter into futures contracts obligating it to purchase securities, currency
or an index in the future at a specified price, such Fund or Underlying Fund
could lose 100% of its net assets in connection therewith if it engaged
extensively in such transactions and if the market value or index value of the
subject securities, currency or index at the delivery or settlement date fell to
zero for all contracts into which a Fund or Underlying Fund was permitted to
enter. Where an Underlying Fund is permitted to enter into futures contracts
obligating it to sell securities or currencies (as is the case with respect only
to International Fund), its potential losses are unlimited if it does not own
the securities or currencies covered by the contracts and it is unable to close
out the contracts prior to the settlement date.

Futures transactions involve brokerage costs and require a Fund or Underlying
Fund to segregate assets to cover contracts that would require it to purchase
securities or currencies. A Fund or Underlying Fund may lose the expected
benefit of futures transactions if interest rates, exchange rates or securities
prices move in an unanticipated manner. Such unanticipated changes may also
result in poorer overall performance than if the Fund or Underlying Fund had not
entered into any futures transactions. In addition, the value of a Fund's or
Underlying Fund's futures positions may not prove to be perfectly or even highly
correlated with the value of its portfolio securities or foreign currencies,
limiting the Fund's or Underlying Fund's ability to hedge effectively against
interest rate, exchange rate and/or market risk and giving rise to additional
risks. There is no assurance of liquidity in the secondary market for purposes
of closing out futures positions.

FIXED INCOME SECURITIES

The fixed income securities in which the Equity Funds may invest include
securities issued or guaranteed by the United States Government or its agencies
or instrumentalities, nonconvertible preferred stocks, nonconvertible corporate
debt securities, and short-term obligations of the kinds described above under
"-- Cash Items." Investments in nonconvertible preferred stocks and
nonconvertible corporate debt securities will be limited to securities which are
rated at the time of purchase not less than BBB by Standard & Poor's or Baa by
Moody's (or equivalent short-term ratings), or which have been assigned an
equivalent rating by another nationally recognized statistical rating
organization, or which are of comparable quality in the judgment of the adviser.
Obligations rated BBB, Baa or their equivalent, although investment grade, have
speculative characteristics and carry a somewhat higher risk of default than
obligations rated in the higher investment grade categories.

In addition, Equity Income Fund may invest up to 25% of its total assets, and
each of the other Equity Funds may invest up to 5% of its net assets, in less
than investment grade convertible debt obligations. For a description of such
obligations and the risks associated therewith, see "The Underlying Funds --
Equity Income Fund."

FOREIGN SECURITIES

GENERAL. Under normal market conditions International Fund invests at least 65%
of its total assets in equity securities which trade in markets other than the
United States. In addition, the other Equity Funds may invest lesser proportions
of their assets in securities of foreign issuers which are either listed on a
United States securities exchange or represented by American Depositary
Receipts.

Fixed Income Fund may invest up to 15% of its total assets in foreign securities
payable in United States dollars. These securities may include

<PAGE>

securities issued or guaranteed by (i) the government of Canada, any Canadian
province, or any instrumentality or political subdivision thereof; (ii) any
other foreign government, agency or instrumentality; (iii) foreign subsidiaries
of United States corporations; and (iv) foreign banks having total capital and
surplus at the time of investment of at least $1 billion. Such foreign bank or
corporate securities must be rated by at least one major United States rating
agency as having a quality not less than that which would be required for
comparable domestic securities. In addition, Fixed Income Fund also may invest
in Eurodollar Certificates of Deposit, Eurodollar Time Deposits and Yankee
Certificates of Deposit as described under "-- Bank Instruments" below.

Prime Obligations Fund may invest in United States dollar-denominated
obligations of foreign banks, United States branches of foreign banks, and
foreign branches of United States banks, subject to the limitations described
under "The Underlying Funds -- Prime Obligations Fund" above.

Investment in foreign securities is subject to special investment risks that
differ in some respects from those related to investments in securities of
United States domestic issuers. These risks include political, social or
economic instability in the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of the imposition of exchange
controls, expropriation, limits on removal of currency or other assets,
nationalization of assets, foreign withholding and income taxation, and foreign
trading practices (including higher trading commissions, custodial charges and
delayed settlements). Foreign securities also may be subject to greater
fluctuations in price than securities issued by United States corporations. The
principal markets on which these securities trade may have less volume and
liquidity, and may be more volatile, than securities markets in the United
States.

In addition, there may be less publicly available information about a foreign
company than about a United States domiciled company. Foreign companies
generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to United States domestic
companies. There is also generally less government regulation of securities
exchanges, brokers and listed companies abroad than in the United States.
Confiscatory taxation or diplomatic developments could also affect investment in
those countries. In addition, foreign branches of United States banks, foreign
banks and foreign issuers may be subject to less stringent reserve requirements
and to different accounting, auditing, reporting, and recordkeeping standards
than those applicable to domestic branches of United States banks and United
States domestic issuers.

AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS. For many foreign
securities, United States dollar-denominated American Depositary Receipts, which
are traded in the United States on exchanges or over-the-counter, are issued by
domestic banks. American Depositary Receipts represent the right to receive
securities of foreign issuers deposited in a domestic bank or a correspondent
bank. American Depositary Receipts do not eliminate all the risk inherent in
investing in the securities of foreign issuers. However, by investing in
American Depositary Receipts rather than directly in foreign issuers' stock, an
Equity Fund can avoid currency risks during the settlement period for either
purchases or sales. In general, there is a large, liquid market in the United
States for many American Depositary Receipts. The information available for
American Depositary Receipts is subject to the accounting, auditing and
financial reporting standards of the domestic market or exchange on which they
are traded, which standards are more uniform and more exacting than those to
which many foreign issuers may be subject. International Fund also may invest in
European Depositary Receipts, which are receipts evidencing an arrangement with
a European bank similar to that for American Depositary Receipts and which are
designed for use in the European securities markets. European Depositary
Receipts are not necessarily denominated in the currency of the underlying
security.

<PAGE>

Certain American Depositary Receipts and European Depositary Receipts, typically
those denominated as unsponsored, require the holders thereof to bear most of
the costs of the facilities while issuers of sponsored facilities normally pay
more of the costs thereof. The depository of an unsponsored facility frequently
is under no obligation to distribute shareholder communications received from
the issuer of the deposited securities or to pass through the voting rights to
facility holders in respect to the deposited securities, whereas the depository
of a sponsored facility typically distributes shareholder communications and
passes through voting rights.

FOREIGN CURRENCY TRANSACTIONS

International Fund invests in securities which are purchased and sold in foreign
currencies. The value of its assets as measured in United States dollars
therefore may be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations. International Fund
also will incur costs in converting United States dollars to local currencies,
and vice versa.

International Fund will conduct its foreign currency exchange transactions
either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through forward contracts to purchase or sell
foreign currencies. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date certain at a
specified price. These forward currency contracts are traded directly between
currency traders (usually large commercial banks) and their customers.

International Fund may enter into forward currency contracts in order to hedge
against adverse movements in exchange rates between currencies. It may engage in
"transaction hedging" to protect against a change in the foreign currency
exchange rate between the date International Fund contracts to purchase or sell
a security and the settlement date, or to "lock in" the United States dollar
equivalent of a dividend or interest payment made in a foreign currency. It also
may engage in "portfolio hedging" to protect against a decline in the value of
its portfolio securities as measured in United States dollars which could result
from changes in exchange rates between the United States dollar and the foreign
currencies in which the portfolio securities are purchased and sold.
International Fund also may hedge its foreign currency exchange rate risk by
engaging in currency financial futures and options transactions.

Although a foreign currency hedge may be effective in protecting International
Fund from losses resulting from unfavorable changes in exchanges rates between
the United States dollar and foreign currencies, it also would limit the gains
which might be realized by International Fund from favorable changes in exchange
rates. The sub-adviser's decision whether to enter into currency hedging
transactions will depend in part on its view regarding the direction and amount
in which exchange rates are likely to move. The forecasting of movements in
exchange rates is extremely difficult, so that it is highly uncertain whether a
hedging strategy, if undertaken, would be successful. To the extent that the
sub-adviser's view regarding future exchange rates proves to have been
incorrect, International Fund may realize losses on its foreign currency
transactions.

International Fund does not intend to enter into forward currency contracts or
maintain a net exposure in such contracts where it would be obligated to deliver
an amount of foreign currency in excess of the value of its portfolio securities
or other assets denominated in that currency.

MORTGAGE-BACKED SECURITIES

Fixed Income Fund may invest in mortgage-backed securities which are Agency
Pass-Through Certificates or collateralized mortgage obligations ("CMOs"), as
described below.

Agency Pass-Through Certificates are mortgage pass-through certificates
representing undivided interests in pools of residential mortgage loans.
Distribution of principal and interest on the mortgage loans underlying an
Agency

<PAGE>

Pass-Through Certificate is an obligation of or guaranteed by Government
National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC").
The obligation of GNMA with respect to such certificates is backed by the full
faith and credit of the United States, while the obligations of FNMA and FHLMC
with respect to such certificates rely solely on the assets and credit of those
entities. The mortgage loans underlying GNMA certificates are partially or fully
guaranteed by the Federal Housing Administration or the Veterans Administration,
while the mortgage loans underlying FNMA certificates and FHLMC certificates are
conventional mortgage loans which are, in some cases, insured by private
mortgage insurance companies. Agency Pass-Through Certificates may be issued in
a single class with respect to a given pool of mortgage loans or in multiple
classes.

CMOs are debt obligations typically issued by a private special-purpose entity
and collateralized by residential or commercial mortgage loans or Agency
Pass-Through Certificates. Fixed Income Fund will invest only in CMOs which are
rated in one of the four highest rating categories by a nationally recognized
statistical rating organization or which are of comparable quality in the
judgment of the adviser. Because CMOs are debt obligations of private entities,
payments on CMOs generally are not obligations of or guaranteed by any
governmental entity, and their ratings and creditworthiness typically depend,
among other factors, on the legal insulation of the issuer and transaction from
the consequences of a sponsoring entity's bankruptcy. CMOs generally are issued
in multiple classes, with holders of each class entitled to receive specified
portions of the principal payments and prepayments and/or of the interest
payments on the underlying mortgage loans. These entitlements can be specified
in a wide variety of ways, so that the payment characteristics of various
classes may differ greatly from one another. Examples of the more common classes
are provided in the Statement of Additional Information. The CMOs in which the
Fixed Income Fund may invest include classes which are subordinated in right of
payment to other classes, as long as they have the required rating referred to
above.

It generally is more difficult to predict the effect of changes in market
interest rates on the return on mortgaged-backed securities than to predict the
effect of such changes on the return of a conventional fixed-rate debt
instrument, and the magnitude of such effects may be greater in some cases. The
return on interest-only and principal-only mortgage-backed securities is
particularly sensitive to changes in interest rates and prepayment speeds. When
interest rates decline and prepayment speeds increase, the holder of an
interest-only mortgage-backed security may not even recover its initial
investment. Similarly, the return on an inverse floating rate CMO is likely to
decline more sharply in periods of increasing interest rates than that of a
fixed-rate security. For these reasons, interest-only, principal-only and
inverse floating rate mortgage-backed securities generally have greater risk
than more conventional classes of mortgage-backed securities. Fixed Income Fund
will not invest more than 10% of its total assets in interest-only,
principal-only or inverse floating rate mortgage backed securities.

ASSET-BACKED SECURITIES

Fixed Income Fund may invest in asset-backed securities. Asset-backed securities
generally constitute interests in, or obligations secured by, a pool of
receivables other than mortgage loans, such as automobile loans and leases,
credit card receivables, home equity loans and trade receivables. Asset-backed
securities generally are issued by a private special-purpose entity. Their
ratings and creditworthiness typically depend on the legal insulation of the
issuer and transaction from the consequences of a sponsoring entity's
bankruptcy, as well as on the credit quality of the underlying receivables and
the amount and credit quality of any third-party credit enhancement supporting
the underlying receivables or the asset-backed securities. Asset-backed
securities and their underlying receivables generally are not issued or
guaranteed by any governmental entity.

<PAGE>

BANK INSTRUMENTS

The bank instruments in which Fixed Income Fund may invest include time and
savings deposits, deposit notes and bankers acceptances (including certificates
of deposit) in commercial or savings banks. They also include Eurodollar
Certificates of Deposit issued by foreign branches of United States or foreign
banks; Eurodollar Time Deposits, which are United States dollar-denominated
deposits in foreign branches of United States or foreign banks; and Yankee
Certificates of Deposit, which are United States dollar-denominated certificates
of deposit issued by United States branches of foreign banks and held in the
United States. For a description of certain risks of investing in foreign
issuers' securities, see "-- Foreign Securities" above. In each instance, Fixed
Income Fund may only invest in bank instruments issued by an institution which
has capital, surplus and undivided profits of more than $100 million or the
deposits of which are insured by the Bank Insurance Fund or the Savings
Association Insurance Fund.

LOAN PARTICIPATIONS; SECTION 4(2) AND RULE 144A SECURITIES

The loan participation interests in which Prime Obligations Fund may invest
represent pro rata undivided interests in an underlying bank loan. Participation
interests, like the underlying loans, may have fixed, floating, or variable
rates of interest. The bank selling a participation interest generally acts as a
mere conduit between its borrower and the purchasers of interests in the loan.
The purchaser of an interest generally does not have recourse against the bank
in the event of a default on the underlying loan. Therefore, the credit risk
associated with such instruments is governed by the creditworthiness of the
underlying borrowers and not by the banks selling the interests. Loan
participation interests that can be sold within a seven-day period are deemed by
the adviser to be liquid investments. If a loan participation interest is
restricted from being sold within a seven-day period, then it, as a fundamental
policy, will be limited, together with other illiquid investments, to not more
than 10% of Prime Obligations Fund's total assets. Commercial paper issued in
reliance on the exemption from registration afforded by Section 4(2) of the
Securities Act of 1933 and corporate obligations qualifying for resale to
certain "qualified institutional buyers" pursuant to Rule 144A under the
Securities Act of 1933 meet the criteria for liquidity established by the Board
of Directors and are quite liquid. Consequently, Prime Obligations Fund does not
intend to subject such securities to the limitation applicable to restricted
securities.

CREDIT ENHANCEMENT AGREEMENTS

Prime Obligations Fund may arrange for guarantees, letters of credit, or other
forms of credit enhancement agreements (collectively, "Guarantees") for the
purpose of further securing the payment of principal and/or interest on Prime
Obligation Fund's investment securities. Although each investment security, at
the time it is purchased, must meet Prime Obligations Fund's creditworthiness
criteria, Guarantees sometimes are purchased from banks and other institutions
(collectively, "Guarantors") when the adviser, through yield and credit
analysis, deems that credit enhancement of certain of Prime Obligations Fund's
securities is advisable. As a non-fundamental policy, Prime Obligations Fund
will limit the value of all investment securities issued or guaranteed by each
Guarantor to not more than 10% of the value of Prime Obligations Fund's total
assets.

MONEY MARKET FUNDS

When an Underlying Fund is permitted to invest a portion of its assets in
securities of other mutual funds which invest primarily in debt obligations with
remaining maturities of 13 months or less (i.e., in money market funds), the
other funds in which it is permitted to invest include money market funds
advised by the Underlying Fund's

<PAGE>

adviser. Investments by the Underlying Funds in money market funds advised by
such adviser are subject to certain restrictions contained in an exemptive order
issued by the Securities and Exchange Commission with respect thereto. Where
Prime Obligations Fund invests in other money market funds, the permitted
investments of such other money market funds must constitute permitted
investments of Prime Obligations Fund.

INVESTMENT RESTRICTIONS OF THE UNDERLYING FUNDS

The fundamental and nonfundamental investment restrictions of the Underlying
Funds are set forth in full in their Statements of Additional Information. The
fundamental restrictions include the following:

* None of the Equity Funds or Fixed Income Fund will borrow money, except
from banks for temporary or emergency purposes. The amount of such
borrowing may not exceed 10% of the borrowing Underlying Fund's total
assets. None of such Underlying Funds will borrow money for leverage
purposes. For the purpose of this investment restriction, the use of
options and futures transactions and the purchase of securities on a
when-issued or delayed delivery basis shall not be deemed the borrowing
of money. If an Underlying Fund engages in borrowing, its share price
may be subject to greater fluctuation, and the interest expense
associated with the borrowing may reduce the Underlying Fund's net
income.

* None of the Underlying Funds will make short sales of securities.

* None of the Underlying Funds will purchase any securities on margin
except, in the case of the Equity Funds and Fixed Income Fund, to
obtain such short-term credits as may be necessary for the clearance of
transactions and except, in the case of Emerging Growth Fund,
Technology Fund, and International Fund as may be necessary to make
margin payments in connection with foreign currency futures and other
derivative transactions.

* Prime Obligations Fund will not purchase a security if, as a result:
(i) more than 10% of its net assets would be in illiquid assets
including time deposits and repurchase agreements maturing in more than
seven days; or (ii) 25% or more of its total assets would be in any
single industry, except that there is no limitation on the purchase of
obligations of domestic commercial banks (excluding, for this purpose,
foreign branches of domestic commercial banks). Limitation (ii) does
not apply to obligations issued or guaranteed by the United States or
its agencies or instrumentalities.

* Prime Obligations Fund will not borrow money except from banks for
temporary or emergency purposes for the purpose of meeting redemption
requests which might otherwise require the untimely disposition of
securities. Borrowing in the aggregate may not exceed 10% of the value
of Prime Obligations Fund's total assets (including the amount
borrowed) valued at the lesser of cost or market less liabilities (not
including the amount borrowed) at the time the borrowing is made. The
borrowings will be repaid before any additional investments are made.
However, even with such authority to borrow money, there is no
assurance that Prime Obligations Fund will not have to dispose of
securities on an untimely basis to meet redemption requests.

<PAGE>

INFORMATION CONCERNING COMPENSATION PAID TO FIRST TRUST NATIONAL
ASSOCIATION AND OTHER AFFILIATES

U.S. Bank National Association, First Trust National Association and other
affiliates of U.S. Bancorp may act as fiduciary with respect to plans subject to
the Employee Retirement Income Security Act of 1974 ("ERISA") and other trust
and agency accounts that invest in the Funds. These U.S. Bancorp affiliates may
receive compensation from the Funds for the services they provide to the Funds,
as described more fully in the following sections of this Prospectus:

Investment advisory services -- see "Management-Investment Adviser to
the Funds"

Custodian services -- see "Management-Custodian"

Sub-administration services -- see "Management-Administrator"

Shareholder servicing -- see "Distributor"

Securities lending -- see "Special Investment Methods-Lending of
Portfolio Securities"

<PAGE>

FIRST AMERICAN STRATEGY FUNDS, INC.
Oaks, Pennsylvania 19456

Investment Adviser
U.S. BANK NATIONAL ASSOCIATION
601 Second Avenue South
Minneapolis, Minnesota 55402

Custodian
FIRST TRUST NATIONAL ASSOCIATION
180 East Fifth Street
St. Paul, Minnesota 55101

Distributor
SEI INVESTMENTS DISTRIBUTION CO.
Oaks, Pennsylvania 19456

Administrator
SEI INVESTMENTS MANAGEMENT CORPORATION
Oaks, Pennsylvania 19456

Transfer Agent
DST SYSTEMS, INC.
1004 Baltimore
Kansas City, Missouri 64105

Independent Auditors
KPMG PEAT MARWICK LLP
90 South Seventh Street
Minneapolis, Minnesota 55402

Counsel
DORSEY & WHITNEY LLP
220 South Sixth Street
Minneapolis, Minnesota 55402

FASF-3000(1/98)

<PAGE>

FIRST AMERICAN STRATEGY FUNDS, INC.

STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 31, 1998

INCOME FUND GROWTH FUND

GROWTH AND INCOME FUND AGGRESSIVE GROWTH FUND

This Statement of Additional Information relates to the funds named
above (the "Funds"), each of which is a series of First American Strategy Funds,
Inc. ("FASF"). This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the Funds' current Prospectus dated January
31, 1998. This Statement of Additional Information is incorporated into the
Funds' Prospectus by reference. To obtain copies of the Prospectus, write or
call the Funds' distributor SEI Investments Distribution Co., Oaks, Pennsylvania
19456, telephone: (800) 637-2548. Please retain this Statement of Additional
Information for future reference.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE PAGE
---- ----
<S> <C> <C> <C>
General Information........................... 2 Custodian; Transfer Agent; Counsel;
Accountants............................. 20
Investment Restrictions of the Funds.......... 3
Investment Advisory Services for the
Additional Information Concerning Underlying Funds.............................. 21
Investments by the Funds and the Investment Advisory Agreements of
Underlying Funds.............................. 5 the Underlying Funds.................... 21
Short-Term Investments..................... 5 Sub-Advisory Agreement for International
Repurchase Agreements...................... 5 Fund.................................... 22
When-Issued and Delayed Delivery Portfolio Managers for the Underlying
Transactions............................ 6 Funds................................... 22
Lending of Portfolio Securities............ 6
Options Transactions....................... 6 Portfolio Transactions and Allocation
Futures and Options on Futures............. 7 of Brokerage................................. 25
Foreign Securities......................... 8
Foreign Currency Transactions.............. 8 Capital Stock................................. 27
Mortgage-Backed Securities................. 9
Debt Obligations Rated Less Than Net Asset Value and Public Offering
Investment Grade........................ 10 Price........................................ 29

Investment Restrictions of the Underlying Fund Performance.............................. 29
Funds......................................... 12 SEC Standardized Performance Figures....... 29
Restrictions Applicable to the Equity Non-Standard Distribution Rates............ 31
Funds and Fixed Income Fund............. 12 Certain Performance Comparisons............ 31
Restrictions Applicable to Prime Obligations
Fund.................................... 14 Taxation...................................... 32

Directors and Executive Officers.............. 16 Ratings....................................... 33
Directors.................................. 16 Ratings of Corporate Debt Obligations
Executive Officers......................... 16 and Municipal Bonds..................... 34
Compensation............................... 17 Ratings of Preferred Stock................. 35
Ratings of Commercial Paper................ 36
Investment Advisory and Other Services Best's Rating System for
for the Funds................................. 18 Insurance Companies..................... 36
Investment Advisory Agreement.............. 18
Administration Agreement................... 19 Financial Statements.......................... 37
Distributor and Shareholder Service
Plan and Agreement...................... 20

</TABLE>

<PAGE>

GENERAL INFORMATION

First American Strategy Funds, Inc. ("FASF") was incorporated in the
State of Minnesota on June 19, 1996. FASF is organized as a series fund and
currently issues its shares in four series. Each series of shares represents a
separate investment portfolio with its own investment objectives and policies
(in essence, a separate mutual fund). The series of FASF to which this Statement
of Additional Information relates are named on the cover hereof. These series
are referred to in this Statement of Additional Information as the "Funds."

As described in the Funds' Prospectus, each Fund seeks to achieve its
investment objectives by investing primarily in a variety of other mutual funds
which are also advised by the Funds' investment adviser. These other mutual
funds include Real Estate Securities Fund, Equity Income Fund, Stock Fund,
Diversified Growth Fund, Special Equity Fund, Emerging Growth Fund, Small Cap
Value Fund, Technology Fund, International Fund, Health Sciences Fund and Fixed
Income Fund, each of which is a series of First American Investment Funds, Inc.
("FAIF"), and Prime Obligations Fund, which is a series of First American Funds,
Inc. ("FAF"). These other funds are referred to herein and in the Prospectus
collectively as the "Underlying Funds." The first ten funds named above are
referred to herein and in the Prospectus collectively as the "Equity Funds."

The Bylaws of FASF provide that annual shareholders meetings are not
required and that meetings of shareholders need only be held with such frequency
as required under Minnesota law and the Investment Company Act of 1940 (the
"1940 Act"). Minnesota law provides that if a regular meeting of shareholders
has not been held during the immediately preceding 15 months, a shareholder or
shareholders holding 3% or more of the voting power of all shares entitled to
vote may demand a regular meeting of shareholders. Minnesota law further
provides that a special meeting of shareholders may be called by a shareholder
or shareholders holding 10% or more of the voting power of all shares entitled
to vote, except that a special meeting for the purpose of considering any action
to facilitate or effect a business combination, including any action to change
or otherwise affect the composition of the board of directors for that purpose,
must be called by 25% or more of the voting power of all shares entitled to
vote. The 1940 Act requires a shareholder vote for all amendments to fundamental
investment policies and restrictions, for approval of all investment advisory
agreements, and for the adoption of, and material increases in amounts payable
under, Rule 12b-1 distribution plans.

<PAGE>

INVESTMENT RESTRICTIONS OF THE FUNDS

In addition to the investment objectives and policies set forth in the
Prospectus and under the caption "Additional Information Concerning Investments
by the Funds and the Underlying Funds" below, each of the Funds is subject to
the investment restrictions set forth below. The investment restrictions set
forth in paragraphs 1 through 10 below are fundamental and cannot be changed
with respect to a Fund without approval by the holders of a majority of the
outstanding shares of that Fund as defined in the 1940 Act, i.e., by the lesser
of the vote of (a) 67% of the shares of the Fund present at a meeting where more
than 50% of the outstanding shares are present in person or by proxy, or (b)
more than 50% of the outstanding shares of the Fund.

None of the investment restrictions set forth below shall be deemed to
restrict any Fund from holding securities of investment companies which engage
in the activities described in such investment restrictions. None of the
investment restrictions set forth below shall be deemed to restrict any Fund
from receiving, holding, and disposing of any securities received as a result of
an in-kind redemption by an investment company whose shares are held by such
Fund.

None of the Funds will:

1. Invest more than 25% of its total assets in any one industry, except
for investment companies which are part of the "same group of
investment companies" (as defined in Rule 11a-3 under the 1940 Act) as
the Funds.

2. Issue any senior securities (as defined in the 1940 Act), other than
as set forth in restriction number 3 below and except to the extent
that using options may be deemed to constitute issuing a senior
security.

3. Borrow money, except from banks for temporary or emergency purposes.
The amount of such borrowing may not exceed 10% of the borrowing
Fund's total assets. None of the Funds will borrow money for leverage
purposes. For the purpose of this investment restriction, the use of
options and futures transactions shall not be deemed the borrowing of
money. (As a non- fundamental policy, no Fund will make additional
investments while its borrowings exceed 5% of total assets.)

4. Mortgages, pledge or hypothecate its assets, except in an amount not
exceeding 15% of the value of its total assets to secure temporary or
emergency borrowing.

5. Make short sales of securities.

6. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions.

7. Purchase or sell physical commodities (including, by way of example
and not by way of limitation, grains, oilseeds, livestock, meat, food,
fiber, metals, petroleum, petroleum-based products or natural gas) or
futures or options contracts with respect to physical commodities.
This restriction shall not restrict any Fund from purchasing or
selling any financial contracts or instruments which may be deemed
commodities (including, by way of example and not by way of
limitation, options, futures and options on futures with respect, in
each case, to interest rates, currencies, stock indices, bond indices
or interest rate indices) or any security which is collateralized or
otherwise backed by physical commodities.

8. Purchase or sell real estate or real estate mortgage loans, except
that the Funds may invest in securities secured by real estate or
interests therein or issued by companies that invest in or hold real
estate or interests therein, and in mortgage-backed securities.

9. Act as an underwriter of securities of other issuers, except to the
extent a Fund may be deemed to be an underwriter, under Federal
securities laws, in connection with the disposition of portfolio
securities.

<PAGE>

10. Lend any of its assets, except portfolio securities representing up
to one-third of the value of its total assets.

The following restrictions are non-fundamental and may be changed by
FASF's Board of Directors without shareholder vote. None of the Funds will:

11. Invest more than 15% of its net assets in all forms of illiquid
investments.

12. Invest in any securities, if as a result more than 5% of the value of
its total assets is invested in the securities of any issuers, other
than registered investment companies and series thereof, which, with
their predecessors, have a record of less than three years continuous
operation. (Securities of any of such issuers will not be deemed to
fall within this limitation if they are guaranteed by an entity which
has been in continuous operation for more than three years.)

13. Invest for the purpose of exercising control or management.

14. Purchase or sell real estate limited partnership interests, or oil,
gas or other mineral leases, rights or royalty contracts, except that
the Funds may purchase or sell securities of companies which invest in
or hold the foregoing.

15. Purchase securities of any other registered investment company (as
defined in the 1940 Act), except, subject to 1940 Act limitations, (a)
each of the Funds may, as part of its investment in cash items, invest
in securities of other mutual funds which invest primarily in debt
obligations with remaining maturities of 13 months or less, (b) all
Funds may purchase securities as part of a merger, consolidation,
reorganization or acquisition of assets, and (c) all Funds may invest
in securities of other registered investment companies to the extent
permitted by applicable Securities and Exchange Commission exemptive
relief, no-action letters, or rules or pursuant to the 1940 Act.

<PAGE>

ADDITIONAL INFORMATION CONCERNING INVESTMENTS
BY THE FUNDS AND THE UNDERLYING FUNDS

The investment objectives, policies and restrictions of the Funds and
the Underlying Funds are set forth in such Funds' Prospectus. Additional
information concerning the investments which may be made by the Funds and the
Underlying Funds is set forth under this caption. Additional information
concerning the Funds' investment restrictions is set forth above under the
caption "Investment Restrictions of the Funds," and additional information
concerning the Underlying Funds' investment restriction is set forth below under
the caption "Investment Restrictions of the Underlying Funds."

SHORT-TERM INVESTMENTS

The Funds and the Underlying Funds can invest in a variety of
short-term instruments which are specified in the Prospectus. Short-term
investments may be entered into on a joint basis by the Funds, the Underlying
Funds, and other funds advised by the Adviser, and repurchase agreements may be
entered into on a joint basis by the Underlying Funds and other funds advised by
the Adviser, in each case to the extent permitted by Securities and Exchanges
Commission exemptive order. A brief description of certain kinds of short-term
instruments follows:

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. Subject to the
limitations described in the Prospectus, the Funds and the Underlying Funds may
purchase commercial paper consisting of issues rated at the time of purchase
within the two highest rating categories by Standard & Poor's Rating Services, a
division of The McGraw-Hill Companies, Inc. ( Standard & Poor's") or Moody's
Investors Service, Inc. ("Moody's"), or which have been assigned an equivalent
rating by another nationally recognized statistical rating organization. The
Funds and the Underlying Funds also may invest in commercial paper that is not
rated but that is determined by the Adviser to be of comparable quality to
instruments that are so rated. For a description of the rating categories of
Standard & Poor's and Moody's, see "Ratings" herein.

BANKERS ACCEPTANCES. Bankers acceptances are credit instruments
evidencing the obligation of a bank to pay a draft drawn on it by a customer.
These instruments reflect the obligation both of the bank and of the drawer to
pay the full amount of the instrument upon maturity.

VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand
notes are unsecured demand notes that permit the indebtedness thereunder to vary
and provide for periodic adjustments in the interest rate according to the terms
of the instrument. Because master demand notes are direct lending arrangements
between a Fund or an Underlying Fund and the issuer, they are not normally
traded. Although there is no secondary market in the notes, a Fund or an
Underlying Fund may demand payment of principal and accrued interest at any
time. While the notes are not typically rated by credit rating agencies, issuers
of variable amount master demand notes (which are normally manufacturing,
retail, financial, and other business concerns) must satisfy the same criteria
as set forth above for commercial paper. The Adviser or, in the case of
International Fund, its sub-adviser will consider the earning power, cash flow,
and other liquidity ratios of the issuers of such notes and will continuously
monitor their financial status and ability to meet payment on demand.

REPURCHASE AGREEMENTS

The Underlying Funds may invest in repurchase agreements to the extent
specified in the Prospectus. The Underlying Funds' custodian will hold the
securities underlying any repurchase agreement, or the securities will be part
of the Federal Reserve/Treasury Book Entry System. The market value of the
collateral underlying the repurchase agreement will be determined on each
business day. If at any time the market value of the collateral falls below the
repurchase price under the repurchase agreement (including any accrued
interest), the appropriate Underlying Fund will promptly receive additional
collateral (so the total collateral is an amount at least equal to the
repurchase price plus accrued interest).

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WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS

When an Underlying Fund agrees to purchase securities on a when-issued
or delayed delivery basis, its custodian will maintain in a segregated account
cash or liquid securities in an amount sufficient to meet its purchase
commitments. It may be expected that an Underlying Fund's net assets will
fluctuate to a greater degree when it sets aside securities to cover such
purchase commitments than when it sets aside cash. In addition, because an
Underlying Fund will set aside cash or liquid securities to satisfy its purchase
commitments in the manner described above, its liquidity and the ability of its
adviser to manage it might be affected in the event its commitments to purchase
when-issued or delayed delivery securities ever exceeded 25% of the value of its
assets. Under normal market conditions, however, an Underlying Fund's
commitments to purchase when-issued or delayed delivery securities will not
exceed 25% of the value of its assets.

LENDING OF PORTFOLIO SECURITIES

When an Underlying Fund lends portfolio securities, it must receive
100% collateral as described in the Prospectus. This collateral must be valued
daily by the Underlying Fund's adviser or sub-adviser and, if the market value
of the loaned securities increases, the borrower must furnish additional
collateral to the lending Underlying Fund. During the time portfolio securities
are on loan, the borrower pays the lending Underlying Fund any dividends or
interest paid on the securities. Loans are subject to termination by the lending
Underlying Fund or the borrower at any time. While an Underlying Fund does not
have the right to vote securities on loan, it would terminate the loan and
regain the right to vote if that were considered important with respect to the
investment.

As set forth in the Prospectus, First Trust National Association, the
Funds' and the Underlying Funds' custodian and an affiliate of the Adviser, may
act as securities lending agent for the Underlying Funds and receive separate
compensation for such services.

OPTIONS TRANSACTIONS

OPTIONS ON SECURITIES. To the extent specified in the Prospectus,
Underlying Funds may purchase put and call options on securities and may write
covered call options on securities which they own or have the right to acquire.
An Underlying Fund may purchase put options to hedge against a decline in the
value of its portfolio. By using put options in this way, an Underlying Fund
would reduce any profit it might otherwise have realized in the underlying
security by the amount of the premium paid for the put option and by transaction
costs. In similar fashion, an Underlying Fund may purchase call options to hedge
against an increase in the price of securities that the Underlying Fund
anticipates purchasing in the future. The premium paid for the call option plus
any transaction costs will reduce the benefit, if any, realized by the
Underlying Fund upon exercise of the option, and, unless the price of the
underlying security rises sufficiently, the option may expire unexercised.

The writer (seller) of a call option has no control over when the
underlying securities must be sold; the writer may be assigned an exercise
notice at any time prior to the termination of the option. If a call option is
exercised, the writer experiences a profit or loss from the sale of the
underlying security. The writer of a call option that wishes to terminate its
obligation may effect a "closing purchase transaction." This is accomplished by
buying an option on the same security as the option previously written. If an
Underlying Fund was unable to effect a closing purchase transaction in a
secondary market, it would not be able to sell the underlying security until the
option expires or it delivers the underlying security upon exercise.

OPTIONS ON STOCK INDICES. Options on stock indices are similar to
options on individual stocks except that, rather than the right to take or make
delivery of stock at a specified price, an option on a stock index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing value of the stock index upon which the option is based is greater
than, in the case of a call, or lesser than, in the case of a put, the exercise
price of the option. This amount of cash is equal to the difference between the
closing price of the index and the exercise price of the option expressed in

<PAGE>

dollars times a specified multiple (the "multiplier"). The writer of the option
is obligated, in return for the premium received, to make delivery of this
amount. Unlike stock options, all settlements for stock index options are in
cash, and gain or loss depends on price movements in the stock market generally
(or in a particular industry or segment of the market) rather than price
movements in individual stocks. The multiplier for an index option performs a
function similar to the unit of trading for a stock option. It determines the
total dollar value per contract of each point in the difference between the
underlying stock index. A multiplier of 100 means that a one-point difference
will yield $100. Options on different stock indices may have different
multipliers.

OPTIONS ON INTEREST RATE INDICES. An option on an interest rate index
gives the holder the right to receive, upon exercise of the option, an amount of
cash if the closing value of the interest rate index upon which the option is
based is greater than, in the case of a call, or lesser than, in the case of a
put, the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the index and the exercise price of the
option expressed in dollars times a specified multiple (the "multiplier"). The
writer of the option is obligated, for the premium received, to make delivery of
this amount. Unlike interest rate futures options contracts, settlements for
interest rate index options are always in cash. Gain or loss depends on price
movements in the interest rate movements with respect to specific financial
instruments. As with stock index options, the multiplier for interest rate index
options determines the total dollar value per contract of each point in the
difference between the exercise price of an option and the current value of the
underlying interest rate index. Options on different interest rate indices may
have different multipliers.

FUTURES AND OPTIONS ON FUTURES

As discussed in the Prospectus, the Funds and certain of the Underlying
Funds may enter into futures contracts and may purchase options on futures
contracts of various types. In the case of the Funds, these investment
techniques may be used in order to remain effectively fully invested in
proportions consistent with their current asset allocation strategy in a cost
effective manner; to re-allocate assets among asset categories while minimizing
transaction costs; to maintain cash reserves while simulating full investment;
to facilitate trading; or to seek higher investment returns when a futures
contract is priced more attractively than the underlying security or index. In
the case of the Underlying Funds, these investment techniques are designed
primarily to hedge against anticipated future changes in market conditions or
foreign exchange rates which otherwise might adversely affect the value of
securities which an Underlying Fund holds or intends to purchase. The types of
futures and options on futures which the Funds and particular Underlying Funds
may utilize are described in the Prospectus.

At the same time a futures contract is purchased or sold, a Fund or
Underlying Fund generally must allocate cash or securities as a deposit payment
("initial deposit"). It is expected that the initial deposit would be
approximately 1-1/2% to 5% of a contract's face value. Daily thereafter, the
futures contract is valued and the payment of "variation margin" may be
required, since each day the Fund or Underlying Fund would provide or receive
cash that reflects any decline or increase in the contract's value. Futures
transactions also involve brokerage costs and require a Fund or Underlying Fund
to segregate liquid assets, such as cash, United States Government securities or
other liquid high grade debt obligations, to cover its performance under such
contracts.

A Fund or Underlying Fund may lose the expected benefit of futures
transactions if interest rates, securities prices or foreign exchange rates move
in an unanticipated manner. Such unanticipated changes may also result in poorer
overall performance than if the Fund or Underlying Fund had not entered into any
futures transactions. In addition, the value of an Underlying Fund's futures
positions may not prove to be perfectly or even highly correlated with the value
of its portfolio securities and foreign currencies, limiting the Fund's or
Underlying Fund's ability to hedge effectively against interest rate, foreign
exchange rate and/or market risk and giving rise to additional risks. Because of
the low margin requirements in the futures markets, they may be subject to
market forces, including speculative activity, which do not affect the cash
markets. There also is no assurance of liquidity in the secondary market for
purposes of closing out futures positions.

<PAGE>

FOREIGN SECURITIES

As described in the Prospectus, under normal market conditions
International Fund invests principally in foreign securities. In addition, the
other Equity Funds (excluding Real Estate Securities Fund) may invest lesser
proportions of their assets in securities of foreign issuers which are either
listed on a United States securities exchange or represented by American
Depositary Receipts, and Fixed Income Fund and Prime Obligations Fund may invest
in securities of foreign issuers in the manner and to the extent described in
the Prospectus.

Fixed commissions on foreign securities exchanges are generally higher
than negotiated commissions on United States exchanges. Foreign markets also
have different clearance and settlement procedures, and in some markets there
have been times when settlements have been unable to keep pace with the volume
of securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of International Fund is uninvested. In addition, settlement problems
could cause International Fund to miss attractive investment opportunities or to
incur losses due to an inability to sell or deliver securities in a timely
fashion. In the event of a default by an issuer of foreign securities, it may be
more difficult for a Fund to obtain or to enforce a judgment against the issuer.

FOREIGN CURRENCY TRANSACTIONS

As described in the Prospectus, International Fund may engage in a
variety of foreign currency transactions in connection with its investment
activities. These include forward foreign currency exchange contracts, foreign
currency futures, and foreign currency options.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
These contracts are traded directly between currency traders (usually large
commercial banks) and their customers. International Fund will not enter into
such forward contracts or maintain a net exposure in such contracts where
International Fund would be obligated to deliver an amount of foreign currency
in excess of the value of its securities or other assets denominated in that
currency. International Fund will comply with applicable Securities and Exchange
Commission announcements requiring it to segregate assets to cover its
commitments with respect to such contracts. At the present time, these
announcements generally require a fund with a long position in a forward foreign
currency contract to establish with its custodian a segregated account
containing cash or liquid high grade debt securities equal to the purchase price
of the contract, and require a fund with a short position in a forward foreign
currency contract to establish with its custodian a segregated account
containing cash or liquid high grade debt securities that, when added to any
margin deposit, equal the market value of the currency underlying the forward
contract. These requirements will not apply where a forward contract is used in
connection with the settlement of investment purchases or sales or where the
position has been "covered" by entering into an offsetting position.
International Fund generally will not enter into a forward contract with a term
longer than one year.

FOREIGN CURRENCY FUTURES TRANSACTIONS. Unlike forward foreign currency
exchange contracts, foreign currency futures contracts and options on foreign
currency futures contracts are standardized as to amount and delivery period and
may be traded on boards of trade and commodities exchanges or directly with a
dealer which makes a market in such contracts and options. It is anticipated
that such contracts may provide greater liquidity and lower cost than forward
foreign currency exchange contracts. As part of its financial futures
transactions, International Fund may use foreign currency futures contracts and
options on such futures contracts. Through the purchase or sale of such
contracts, International Fund may be able to achieve many of the same objectives
as through forward foreign currency exchange contracts more effectively and
possibly at a lower cost.

FOREIGN CURRENCY OPTIONS. A foreign currency option provides the option
buyer with the right to buy or sell a stated amount of foreign currency at the
exercise price at a specified date or during the

<PAGE>

option period. A call option gives its owner the right, but not the obligation,
to buy the currency, while a put option gives its owner the right, but not the
obligation, to sell the currency. The option seller (writer) is obligated to
fulfill the terms of the option sold if it is exercised. However, either seller
or buyer may close its position during the option period in the secondary market
for such options at any time prior to expiration.

A foreign currency call option rises in value if the underlying
currency appreciates. Conversely, a foreign currency put option rises in value
if the underlying currency depreciates. While purchasing a foreign currency
option may protect International Fund against an adverse movement in the value
of a foreign currency, it would not limit the gain which might result from a
favorable movement in the value of the currency. For example, if International
Fund were holding securities denominated in an appreciating foreign currency and
had purchased a foreign currency put to hedge against a decline in the value of
the currency, it would not have to exercise its put. In such an event, however,
the amount of International Fund's gain would be offset in part by the premium
paid for the option. Similarly, if International Fund entered into a contract to
purchase a security denominated in a foreign currency and purchased a foreign
currency call to hedge against a rise in the value of the currency between the
date of purchase and the settlement date, International Fund would not need to
exercise its call if the currency instead depreciated in value. In such a case,
International Fund could acquire the amount of foreign currency needed for
settlement in the spot market at a lower price than the exercise price of the
option.

MORTGAGE-BACKED SECURITIES

As described in the Prospectus, Fixed Income Fund may invest in
mortgage-backed securities. Fixed Income Fund will invest only in
mortgage-backed securities which are Agency Pass-Through Certificates or
collateralized mortgage obligations ("CMOs"), as defined and described in the
Prospectus.

Agency Pass-Through Certificates are issued or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National Mortgage
Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC").
GNMA is a wholly-owned corporate instrumentality of the United States within the
Department of Housing and Urban Development. The guarantee of GNMA with respect
to GNMA certificates is backed by the full faith and credit of the United
States, and GNMA is authorized to borrow from the United States Treasury in an
amount which is at any time sufficient to enable GNMA, with no limitation as to
amount, to perform its guarantee.

FNMA is a federally chartered and privately owned corporation organized
and existing under federal law. Although the Secretary of the Treasury of the
United States has discretionary authority to lend funds to FNMA, neither the
United States nor any agency thereof is obligated to finance FNMA's operations
or to assist FNMA in any other manner.

FHLMC is a federally chartered corporation organized and existing under
federal law, the common stock of which is owned by the Federal Home Loan Banks.
Neither the United States nor any agency thereof is obligated to finance FNMA's
operations or to assist FNMA in any other manner.

The residential mortgage loans evidenced by Agency Pass-Through
Certificates and upon which CMOs are based generally are secured by first
mortgages on one- to four-family residential dwellings. Such mortgage loans
generally have final maturities ranging from 15 to 30 years and provide for
monthly payments in amounts sufficient to amortize their original principal
amounts by the maturity dates. Thus, each monthly payment on such mortgage loans
generally includes both an interest component and a principal component, so that
the holder of the mortgage loans receives both interest and a partial return of
principal in each monthly payment. In general, such mortgage loans can be
prepaid by the borrowers at any time without any prepayment penalty. In
addition, many such mortgage loans contain a "due-on-sale" clause requiring the
loans to be repaid in full upon the sale of the property securing the loans.
Because residential mortgage loans generally provide for monthly amortization
and may be prepaid in full at any time, the weighted average maturity of a pool
of residential mortgage loans is likely to be substantially shorter than its
stated final maturity date. The

<PAGE>

rate at which a pool of residential mortgage loans is prepaid may be influenced
by many factors and is not predictable with precision.

As stated in the Prospectus, CMOs generally are issued in multiple
classes, with holders of each class entitled to receive specified portions of
the principal payments and prepayments and/or of the interest payments on the
underlying mortgage loans. These entitlements can be specified in a wide variety
of ways, so that the payment characteristics of various classes may differ
greatly from one another. For example:

* In a sequential-pay CMO structure, one class is entitled to receive
all principal payments and prepayments on the underlying mortgage
loans (and interest on unpaid principal) until the principal of the
class is repaid in full, while the remaining classes receive only
interest; when the first class is repaid in full, a second class
becomes entitled to receive all principal payments and prepayments on
the underlying mortgage loans until the class is repaid in full, and
so forth.

* A planned amortization class ("PAC") of CMOs is entitled to receive
principal on a stated schedule to the extent that it is available from
the underlying mortgage loans, thus providing a greater (but not
absolute) degree of certainty as to the schedule upon which principal
will be repaid.

* An accrual class of CMOs provides for interest to accrue and be added
to principal (but not be paid currently) until specified payments have
been made on prior classes, at which time the principal of the accrual
class (including the accrued interest which was added to principal)
and interest thereon begins to be paid from payments on the underlying
mortgage loans.

* As discussed above with respect to Agency Pass-Through Certificates,
an interest-only class of CMOs entitles the holder to receive all of
the interest and none of the principal on the underlying mortgage
loans, while a principal-only class of CMOs entitles the holder to
receive all of the principal payments and prepayments and none of the
interest on the underlying mortgage loans.

* A floating rate class of CMOs entitles the holder to receive interest
at a rate which changes in the same direction and magnitude as changes
in a specified index rate. An inverse floating rate class of CMOs
entitles the holder to receive interest at a rate which changes in the
opposite direction from, and in the same magnitude as or in a multiple
of, changes in a specified index rate. Floating rate and inverse
floating rate classes also may be subject to "caps" and "floors" on
adjustments to the interest rates which they bear.

* A subordinated class of CMOs is subordinated in right of payment to
one or more other classes. Such a subordinated class provides some or
all of the credit support for the classes that are senior to it by
absorbing losses on the underlying mortgage loans before the senior
classes absorb any losses. A subordinated class which is subordinated
to one or more classes but senior to one or more other classes is
sometimes referred to as a "mezzanine" class. A subordinated class
generally carries a lower rating than the classes that are senior to
it, but may still carry an investment grade rating.

DEBT OBLIGATIONS RATED LESS THAN INVESTMENT GRADE

As described in the Prospectus, the "equity securities" in which
certain Underlying Funds may invest include corporate debt obligations which are
convertible into common stock. These convertible debt obligations may include
obligations rated as low as CCC by Standard & Poor's or Caa by Moody's or which
have been assigned an equivalent rating by another nationally recognized
statistical rating organization. Debt obligations rated BB, B or CCC by Standard
& Poor's or Ba, B or Caa by Moody's are considered to be less than "investment
grade" and are sometimes referred to as "junk bonds." The limitations on
investments by the Underlying Funds in less than investment grade convertible
debt obligations are set forth in the Prospectus.

<PAGE>

Purchases of less than investment grade corporate debt obligations
generally involve greater risks than purchases of higher rated obligations. Less
than investment grade debt obligations are especially subject to adverse changes
in general economic conditions and to changes in the financial condition of
their issuers. During periods of economic downturn or rising interest rates,
issuers of such obligations may experience financial stress that could adversely
affect their ability to make payment of principal and interest and increase the
possibility of default.

Yields on less than investment grade debt obligations will fluctuate
over time. The prices of such obligations have been found to be less sensitive
to interest rate changes than higher rated obligations, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or period of rising interest rates, highly leveraged issuers
may experience financial stress which could adversely affect their ability to
service principal and interest payment obligations, to meet projected business
goals, and to obtain additional financing. In addition, periods of economic
uncertainty and changes can be expected to result in increased volatility of
market prices of less than investment grade debt obligations.

In addition, the secondary trading market for less than investment
grade debt obligations may be less developed than the market for investment
grade obligations. This may make it more difficult for an Underlying Fund to
value and dispose of such obligations. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of less than investment grade obligations, especially in a
thin secondary trading market.

Certain risks also are associated with the use of credit ratings as a
method for evaluating less than investment grade debt obligations. For example,
credit ratings evaluate the safety of principal and interest payments, not the
market value risk of such obligations. In addition, credit rating agencies may
not timely change credit ratings to reflect current events. Thus, the success of
a Fund's use of less than investment grade convertible debt obligations may be
more dependent on its adviser' own credit analysis than is the case with
investment grade obligations.

<PAGE>

INVESTMENT RESTRICTIONS OF THE UNDERLYING FUNDS

RESTRICTIONS APPLICABLE TO THE EQUITY FUNDS AND FIXED INCOME FUND

In addition to the investment objectives and policies set forth in the
Prospectus and under the caption "Additional Information Concerning Investments
by the Funds and the Underlying Funds" above, the Equity Funds and Fixed Income
Fund are subject to the investment restrictions set forth below. The investment
restrictions set forth in paragraphs 1 through 9 below are fundamental and
cannot be changed with respect to any of these Underlying Funds without approval
by the holders of a majority of the outstanding shares of the applicable
Underlying Fund as defined in the 1940 Act. See "Investment Restrictions of the
Funds" above.

None of the Equity Funds or Fixed Income Fund will:

1. Except for Technology Fund and Health Sciences Fund, invest in any
securities if, as a result, 25% or more of the value of its total
assets would be invested in the securities of issuers conducting their
principal business activities in any one industry, except that Real
Estate Securities Fund will invest without restriction in issuers
principally engaged in the real estate industry. This restriction does
not apply to securities of the United States Government or its
agencies and instrumentalities or repurchase agreements relating
thereto.

2. Issue any senior securities (as defined in the 1940 Act), other than
as set forth in restriction number 3 below and except to the extent
that using options or purchasing securities on a when- issued basis
may be deemed to constitute issuing a senior security.

3. Borrow money, except from banks for temporary or emergency purposes.
The amount of such borrowing may not exceed 10% of the borrowing
Fund's total assets. None of these Underlying Funds will borrow money
for leverage purposes. For the purpose of this investment restriction,
the use of options and futures transactions and the purchase of
securities on a when-issued or delayed delivery basis shall not be
deemed the borrowing of money. (As a non-fundamental policy, no such
Underlying Fund will make additional investments while its borrowings
exceed 5% of total assets.)

4. Make short sales of securities.

5. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions and
except, in the case of Emerging Growth Fund, International Fund and
Technology Fund, as may be necessary to make margin payments in
connection with foreign currency futures and other derivative
transactions.

6. Purchase or sell physical commodities (including, by way of example
and not by way of limitation, grains, oilseeds, livestock, meat, food,
fiber, metals, petroleum, petroleum-based products or natural gas) or
futures or options contracts with respect to physical commodities.
This restriction shall not restrict any of these Underlying Funds from
purchasing or selling any financial contracts or instruments which may
be deemed commodities (including, by way of example and not by way of
limitation, options, futures and options on futures with respect, in
each case, to interest rates, currencies, stock indices, bond indices
or interest rate indices) or any security which is collateralized or
otherwise backed by physical commodities.

7. Purchase or sell real estate or real estate mortgage loans, except
that these Underlying Funds may invest in securities secured by real
estate or interests therein or issued by companies that invest in or
hold real estate or interests therein, and except that Fixed Income
Fund, Real Estate Securities Fund, Emerging Growth Fund, International
Fund, Health Sciences Fund and Technology Fund may invest in
mortgage-backed securities.

<PAGE>

8. Act as an underwriter of securities of other issuers, except to the
extent such an Underlying Fund may be deemed to be an underwriter,
under Federal securities laws, in connection with the disposition of
portfolio securities.

9. Lend any of its assets, except portfolio securities representing up to
one-third of the value of their total assets.

The following restrictions are non-fundamental and may be changed by
FAIF's Board of Directors without shareholder vote. None of the Equity Funds or
Fixed Income Fund will:

10. Invest more than 15% of its net assets in all forms of illiquid
investments.

11. Invest in any securities, if as a result more than 5% of the value of
its total assets is invested in the securities of any issuers (other
than, in the case of Real Estate Securities Fund, publicly traded real
estate investment trusts) which, with their predecessors, have a
record of less than three years continuous operation. (Securities of
any of such issuers will not be deemed to fall within this limitation
if they are guaranteed by an entity which has been in continuous
operation for more than three years.)

12. Invest for the purpose of exercising control or management.

13. Purchase or sell real estate limited partnership interests (other
than, in the case of Real Estate Securities Fund, publicly traded real
estate limited partnership interests), or oil, gas or other mineral
leases, rights or royalty contracts, except that these Underlying
Funds may purchase or sell securities of companies which invest in or
hold the foregoing.

14. Purchase securities of any other registered investment company (as
defined in the 1940 Act), except, subject to 1940 Act limitations, (a)
International Fund may purchase shares of open-end investment
companies which invest in permitted investments for such Underlying
Fund; (b) each of Real Estate Securities Fund, Equity Income Fund,
Stock Fund, Diversified Growth Fund, Special Equity Fund, Emerging
Growth Fund, Small Cap Value Fund, International Fund, Health Sciences
Fund, Technology Fund, and Fixed Income Fund may, as part of its
investment in cash items, invest in securities of other mutual funds
which invest primarily in debt obligations with remaining maturities
of 13 months or less; and (c) all such Underlying Funds may purchase
securities as part of a merger, consolidation, reorganization or
acquisition of assets.

15. Invest in foreign securities, except that (a) Fixed Income Fund may
invest up to 15% of its total assets in foreign securities payable in
United States Dollars; (b) each of Real Estate Securities Fund, Equity
Income Fund, Stock Fund, Diversified Growth Fund, Special Equity Fund,
Emerging Growth Fund, Health Sciences Fund and Technology Fund may
invest may invest up to 25% of its total assets in securities of
foreign issuers which are either listed on a United States stock
exchange or represented by American Depositary Receipts; and (c)
International Fund may invest in foreign securities without
limitation.

16. Except for International Fund, invest in warrants; provided, that the
other of such Underlying Funds may invest in warrants in an amount not
exceeding 5% of such Underlying Fund's net assets. No more than 2% of
this 5% may be warrants which are not listed on the New York Stock
Exchange.

For determining compliance with its investment restriction relating to
industry concentration, each such Underlying Fund classifies asset-backed
securities in its portfolio in separate industries based upon a combination of
the industry of the issuer or sponsor and the type of collateral. The industry
of the issuer or sponsor and the type of collateral will be determined by the
Underlying Fund's adviser. For example, an asset-backed security known as "Money
Store 94D A2" would be classified as follows: the issuer or sponsor of the
security is The Money Store, a personal finance company, and the

<PAGE>

collateral underlying the security is automobile receivables. Therefore, the
industry classification would be Personal Finance Companies -- Automobile.
Similarly, an asset-backed security known as "Midlantic Automobile Grantor Trust
1992-1 B" would be classified as follows: the issuer or sponsor of the security
is Midlantic National Bank, a banking organization, and the collateral
underlying the securit is automobile receivables. Therefore, the industry
classification would be Banks -- Automobile. Thus, an issuer or sponsor may be
included in more than one "industry" classification, as may a particular type of
collateral.

RESTRICTIONS APPLICABLE TO PRIME OBLIGATIONS FUND

In addition to the investment objectives and policies set forth in the
Prospectus and under the caption "Additional Information Concerning Investments
by the Funds and the Underlying Funds" above, Prime Obligations Fund is subject
to the investment restrictions set forth below. The investment restrictions set
forth in paragraphs 1 through 12 below are fundamental and cannot be changed
without approval by the holders of a majority of the outstanding shares of Prime
Obligations Fund as defined in the 1940 Act. See "Investment Restrictions of the
Funds" above.

Prime Obligations Fund may not:

1. Purchase common stocks, preferred stocks, warrants, other equity
securities, corporate bonds or debentures, state bonds, municipal
bonds, or industrial revenue bonds (except through the purchase of
obligations referred to under "Investment Objectives and Policies" in
Prime Obligations Fund's Prospectus).

2. Borrow money except from banks for temporary or emergency purposes for
the purpose of meeting redemption requests which might otherwise
require the untimely disposition of securities. Borrowing in the
aggregate may not exceed 10% of the value of Prime Obligations Fund's
total assets (including the amount borrowed) valued at the lesser of
cost or market less liabilities (not including the amount borrowed) at
the time the borrowing is made. The borrowings will be repaid before
any additional investments are made. However, even with such authority
to borrow money, there is no assurance that Prime Obligations Fund
will not have to dispose of securities on an untimely basis to meet
redemption requests.

3. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
in an amount up to 15% of the value of its total assets but only to
secure borrowings for temporary or emergency purposes.

4. Sell securities short or purchase securities on margin.

5. Write or purchase put or call options, except that Prime Obligations
Fund may write or purchase put or call options in connection with the
purchase of variable rate certificates of deposit described below.

6. Underwrite the securities of other issuers except to the extent Prime
Obligations Fund may be deemed to be an underwriter, under federal
securities laws, in connection with the disposition of portfolio
securities, or purchase securities with contractual or other
restrictions on resale.

7. Invest more than 10% of its net assets in illiquid assets, including,
without limitation, time deposits and repurchase agreements maturing
in more than seven days.

8. Purchase or sell real estate, real estate investment trust securities,
commodities or commodity contracts, or oil and gas interests.

9. Lend money to others except through the purchase of debt obligations
of the type which Prime Obligations Fund is permitted to purchase (see
"Investment Objectives and Policies" in Prime Obligations Fund's
Prospectus).

10. Invest 25% or more of its assets in the securities of issuers in any
single industry; provided that there shall be no limitation on the
purchase of obligations issued or guaranteed by the United States, its
agencies or instrumentalities, or obligations of domestic commercial
banks, excluding

<PAGE>

for this purpose, foreign branches of domestic commercial banks. As to
utility companies, gas, electric, water, and telephone companies are
considered as separate industries. As to finance companies, the
following two categories are each considered a separate industry: (A)
business credit institutions, such as Honeywell Finance Corporation
and General Electric Credit Corp., and (B) personal credit
institutions, such as Sears Roebuck Acceptance Corp. and Household
Finance Corporation.

11. Invest in companies for the purpose of exercising control.

12. Purchase or retain the securities of any issuer if any of the officers
or directors of Prime Obligations Fund or its investment adviser owns
beneficially more than 1/2 of 1% of the securities of such issuer and
together own more than 5% of the securities of such issuer.

In connection with Prime Obligations Fund's purchase of variable rate
certificates of deposit ("CDs"), it may enter into agreements with banks or
dealers allowing Prime Obligations Fund to resell the certificates to the bank
or dealer, at Prime Obligations Fund's option. Time deposits which may be
purchased by Prime Obligations Fund are deposits held in foreign branches of
United States banks which have a specified term or maturity. Prime Obligations
Fund purchases CDs from only those domestic savings and loan institutions which
are regulated by the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation ("FDIC"), and whose deposits are insured by either the
Savings Association Insurance Fund or the Bank Insurance Fund, each of which is
administered by the FDIC. However, because Prime Obligations Fund purchases
large denomination CDs, it does not expect to benefit materially from such
insurance. The policies described in this paragraph are nonfundamental and may
be changed by FAF's Board of Directors.

<PAGE>

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of FASF are listed below, together
with their business addresses and their principal occupations during the past
five years. Directors who are "interested persons" (as that term is defined in
the 1940 Act) of FASF are identified with an asterisk.

DIRECTORS

Robert J. Dayton, 5140 Norwest Center, Minneapolis, Minnesota 55402:
Director of FASF since June 1996, of FAIF since September 1994 and of FAF since
December 1994; Chairman (1989-1993) and Chief Executive Officer (1993-present),
Okabena Company (private family investment office). Age: 54.

Roger A. Gibson, 1020 15th Street, Suite 41A, Denver, Colorado 80202:
Director of FAIF, FAF and FASF since October 1997; Vice President, North America
- - Mountain Region for United Airlines since June 1995; prior to his current
position, served most recently as Vice President, Customer Service for United
Airlines in the West Region in San Francisco, California and the Mountain Region
in Denver, Colorado; employed at United Airlines since 1967. Age: 51.

Andrew M. Hunter III, 537 Harrington Road, Wayzata, Minnesota 55391:
Director of FAIF, FAF and FASF since January 1997; Chairman of Hunter, Keith
Industries, a diversified manufacturing and services management company, since
1975. Age: 49.

Leonard W. Kedrowski, 16 Dellwood Avenue, Dellwood, Minnesota 55110:
Director of FASF since June 1996, of FAIF and FAF since November 1993; President
and owner of Executive and Management Consulting, Inc., a management consulting
firm; Vice President, Chief Financial Officer, Treasurer, Secretary and Director
of Anderson Corporation, a large privately-held manufacturer of wood windows,
from 1983 to October 1992. Age: 55.

* Robert L. Spies, 4715 Twin Lakes Avenue, Brooklyn Center, Minnesota
55429: Director of FAIF, FAF and FASF since January 31, 1997; employed by First
Bank System, Inc. and subsidiaries from 1957 to January 31, 1997, most recently
as Vice President, First Bank National Association. Age: 62.

Joseph D. Strauss, 8617 Edenbrook Crossing, # 443, Brooklyn Park,
Minnesota 55443: Director of FASF since June 1996, of FAF since 1984 and of FAIF
since April 1991; Chairman of FAF's and FAIF's Boards from 1993 to September
1997 and of FASF's Board from June 1996 to September 1997; President of FAF and
FAIF from June 1989 to November 1989; Owner and President, Strauss Management
Company, since 1993; Owner and President, Community Resource Partnerships, Inc.,
a community business retention survey company, since 1992; attorney-at-law. Age:
56.

Virginia L. Stringer, 712 Linwood Avenue, St. Paul, Minnesota 55105:
Director of FASF since June 1996, of FAIF since August 1987 and of FAF since
April 1991; Chair of FAIF's, FAF's and FASF's Boards since September 1997; Owner
and President, Strategic Management Resources, Inc. since 1993; formerly
President and Director of The Inventure Group, a management consulting and
training company, President of Scott's, Inc., a transportation company, and Vice
President of Human Resources of The Pillsbury Company. Age: 52.

EXECUTIVE OFFICERS

David Lee, SEI Investments Company, Oaks, Pennsylvania 19456: President
of FASF since June 1996 and of FAIF and FAF since April 1994; Senior Vice
President and Assistant Secretary of FAF and FAIF beginning June 1, 1993; Senior
Vice President of SEI Investments Distribution Co. (the "Distributor") since
1991; President, GW Sierra Trust Funds prior to 1991. Age: 44.

<PAGE>

Carmen V. Romeo, SEI Investments Company, Oaks, Pennsylvania 19456:
Treasurer and Assistant Secretary of FASF since June 1996 and of FAIF and FAF
beginning November 1992; Director, Executive Vice President, Chief Financial
Officer and Treasurer of SEI Investments Company ("SEI"), SEI Investments
Management Corporation (the "Administrator") and the Distributor since 1981.
Age: 52.

Kevin P. Robins, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FASF since June 1996 and of FAIF and
FAF since April 1994; Senior Vice President, Assistant Secretary and General
Counsel of the Administrator and the Distributor. Age: 36.

Kathryn Stanton, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FASF since June 1996 and of FAIF and
FAF since April 1994; Vice President and Assistant Secretary of the
Administrator and the Distributor since April 1994; Associate, Morgan, Lewis &
Bockius, from 1989 to 1994. Age: 37.

Sandra K. Orlow, SEI Investments Company, Oaks, Pennsylvania 19456:
Vice President and Assistant Secretary of FASF since June 1996 and of FAIF and
FAF since 1992; Vice President and Assistant Secretary of the Administrator and
the Distributor since 1983. Age: 40.

Todd Cipperman, SEI Investments Company, Oaks, Pennsylvania 19456: Vice
President and Assistant Secretary of FAIF, FAF and FASF since December 1996;
Vice President and Assistant Secretary of SEI, the Administrator and the
Distributor since 1995. Associate, Dewey Ballantine from 1994 to 1995;
Associate, Winston & Strawn from 1991 to 1994. Age: 31.

Joseph M. O'Donnell, Vice President and Assistant Secretary of FAIF,
FAF and FASF beginning in February 1998; Vice President and Assistant Secretary
of the Administrator and Distributor since January 1998; Vice President and
General Counsel, FPS Services, Inc. from 1993 to 1997; Staff Counsel and
Secretary, Provident Mutual Family of Funds from 1990 to 1993. Age: 42.

Michael Beattie, SEI Investments Company, Oaks, Pennsylvania 19456:
Controller of FAIF, FAF and FASF since December 1997; Associate Director, Funds
Accounting, SEI Investments Company since July 1997; prior to his current
position, served most recently as Fund Accounting Manager of SEI (1993-1997);
Registered Representative, First Investors Corporation, from 1988 to 1990. Age:
32.

Michael J. Radmer, 220 South Sixth Street, Minneapolis, Minnesota
55402: Secretary of FASF since June 1996 and of FAIF since April 1991 and of FAF
since 1981; Partner, Dorsey & Whitney LLP, a Minneapolis-based law firm and
general counsel of FASF, FAIF and FAF. Age: 52.

COMPENSATION

The First American Family of Funds, which includes FASF, FAIF and FAF,
currently pays only to directors of the funds who are not paid employees or
affiliates of the funds a fee of $15,000 per year ($22,500 in the case of the
Chair) plus $2,500 ($3,750 in the case of the Chair) per meeting of the Board
attended and $800 per committee meeting attended ($1,600 in the case of a
committee chair) and reimburses travel expenses of directors and officers to
attend Board meetings. In the event of telephonic Board or committee meetings,
each director receives a fee of $500 per Board or committee meeting ($750 in the
case of the Chair or a committee chair). In addition, directors may receive a
per diem fee of $1,000 per day plus travel expenses when directors travel out of
town on Fund business. However, directors do not receive the $1,000 per diem
amount plus the foregoing Board or committee fee for an out of town committee or
Board meeting but instead receive the greater of the total per diem fee or
meeting fee. Legal fees and expenses are also paid to Dorsey & Whitney LLP, the
law firm of which Michael J. Radmer, secretary of FASF, FAIF and FAF, is a
partner. The following table sets forth information concerning aggregate
compensation paid to each director of FASF (i) by FASF (column 2), and (ii) by
FASF, FAIF and FAF collectively (column 5) during the fiscal year ended
September 30, 1997. No executive officer or affiliated person of FASF had
aggregate compensation from FASF in excess of $60,000 during such fiscal year:

<PAGE>

<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Total Compensation
Aggregate Pension or Retirement Estimated From Registrant and
Name of Compensation Benefits Accrued as Annual Benefits Fund Complex
Person, Position(1) From Registrant Part of Fund Expenses Upon Retirement Paid to Directors
- ------------------------------ --------------- --------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Robert J. Dayton, Director $66 -0- -0- $33,500

Roger A. Gibson, Director * -0- -0- -0- -0-

Andrew M. Hunter III, Director $59 -0- -0- $23,250

Leonard W. Kedrowski, Director $62 -0- -0- $32,700

Robert L. Spies, Director $59 -0- -0- $24,050

Joseph D. Strauss, Director $73 -0- -0- $39,925

Virginia L. Stringer, Director $90 -0- -0- $39,925

</TABLE>

* Not a director during the fiscal year ended September 30, 1997.

(1) Gae B. Veit resigned as a director of FAIF, FASF and FAF on September 12,
1997.

INVESTMENT ADVISORY AND OTHER SERVICES FOR THE FUNDS

INVESTMENT ADVISORY AGREEMENT

U.S. Bank National Association (the "Adviser"), 601 Second Avenue
South, Minneapolis, Minnesota 55402, serves as the investment adviser and
manager of the Funds through its First American Asset Management group. The
Adviser is a national banking association that has professionally managed
accounts for individuals, insurance companies, foundations, commingled accounts,
trust funds, and others for over 75 years. The Adviser is a subsidiary of U.S.
Bancorp ("USB"), 601 Second Avenue South, Minneapolis, Minnesota 55402, which is
a regional multi-state bank holding company headquartered in Minneapolis,
Minnesota that primarily serves the Midwestern, Rocky Mountain and Northwestern
states. USB operates five banks and eleven trust companies with offices in 17
contiguous states from Illinois to Washington. USB also has various other
subsidiaries engaged in financial services. At December 31, 1997, on a pro
forma combined basis, USB and its consolidated subsidiaries had consolidated
assets of approximately $71 billion, consolidated deposits of $48 billion and
shareholders' equity of $6 billion.

Pursuant to an Investment Advisory Agreement dated as of October 1,
1996 (the "Advisory Agreement"), the Funds engage the Adviser to act as
investment adviser for and to manage the investment of the assets of the Funds.
Each Fund pays the Adviser monthly fees calculated on an annual basis equal to
0.25% of its average daily net assets.

The Advisory Agreement requires the Adviser to provide FASF with all
necessary office space, personnel and facilities necessary and incident to the
Adviser's performance of its services thereunder. The Adviser is responsible for
the payment of all compensation to personnel of FASF and the officers and
directors of FASF, if any, who are affiliated with the Adviser or any of its
affiliates. The Advisory Agreement provides that each Fund will be reimbursed by
the Adviser, in an amount not in excess of the advisory fees payable by such
Fund, for excess fund expenses as may be required by the laws of certain states
in which the Fund's shares may be offered for sale. As of the date of this
Statement of Additional Information, the most restrictive state limitation in
effect requires that "aggregate annual expenses" (which include the investment
advisory fee and other operating expenses but exclude interest, taxes, brokerage
commissions, Rule 12b-1 fees and certain other expenses) shall not

<PAGE>

exceed 2-1/2% of the first $30 million of average net assets, 2% of the next $70
million of average net assets and 1-1/2% of the remaining average net assets of
a Fund for any fiscal year.

In addition to the investment advisory fee, each Fund pays all its
expenses that are not expressly assumed by the Adviser or any other organization
with which the Fund may enter into an agreement for the performance of services.
Each Fund is liable for such nonrecurring expenses as may arise, including
litigation to which the Fund may be a party, and it may have an obligation to
indemnify its directors and officers with respect to such litigation.

The following table sets forth total advisory fees before waivers and
after waivers for each of the Funds for the fiscal year eneded September 30,
1997:

Year Ended
September 30, 1997
----------------------------------
Advisory Fee Advisory Fee
Before Waivers After Waivers
-------------- -------------

Income Fund $33,069 $ 0

Growth and Income Fund 27,869 $ 0

Growth Fund 13,262 $ 0

Aggressive Growth Fund 11,316 $ 0

ADMINISTRATION AGREEMENT

SEI Investments Management Corporation (the "Administrator") serves as
administrator for the Funds pursuant to an Administration Agreement between it
and the Funds. The Administrator is a wholly-owned subsidiary of SEI Investments
Company, which also owns the Funds' distributor. See "-- Distributor and
Shareholder Service Plan and Agreement" below. Under the Administration
Agreement, the Administrator provides administrative personnel and services to
the Funds for a fee as described in the Fund Prospectus. These services include,
among others, regulatory reporting, fund and portfolio accounting, shareholder
reporting services, and compliance monitoring services. The Administrator also
serves as administrator for the Underlying Funds and receives compensation for
such services. The Underlying Funds have approved the appointment of USB as a
sub-administrator (the "Sub-Administrator") effective January 1, 1998. It is
contemplated that the Sub-Administrator will assist the Administrator in the
performance of administrative services for the Underlying Funds.

The following table sets forth total administrative fees, paid by each
of the Funds for the fiscal year ended September 30, 1997:

Year Ended
September 30, 1997
------------------

Income Fund $44,990

Growth and Income Fund 43,464

Growth Fund 40,308

Aggressive Growth Fund 39,740

DISTRIBUTOR AND SHAREHOLDER SERVICE PLAN AND AGREEMENT

SEI Investments Distribution Co. (the "Distributor") serves as the
distributor for the shares of each Fund. The Distributor is a wholly-owned
subsidiary of SEI Investments Company, which also owns the Funds' Administrator.
See "-- Administration Agreement" above.

The Distributor serves as distributor for the shares of the Funds
pursuant to a Distribution Agreement dated as of October 1, 1996 (the
"Distribution Agreement") between itself and the Funds. Under the Distribution
Agreement, the Distributor has agreed to perform all distribution services and
functions of the Funds. The Distributor may enter into sub-distribution
agreements with securities firms, financial institutions (including, without
limitation, banks) and other industry professionals. The Distributor receives no
separate compensation for distribution of the Funds' Shares.

The Funds also have entered into a Shareholder Service Plan and
Agreement with the Distributor pursuant to which the Distributor agrees to
provide, or to enter into written agreements with service providers to provide,
one or more specified shareholder services to beneficial owners of shares of the
Funds. The Distributor has agreed that the services provided pursuant to the
Shareholder Service Plan and Agreement will in no event be primarily intended to
result in the sale of Fund shares. Pursuant to the Shareholder Service Plan and
Agreement, the Funds have agreed to pay the Distributor a fee at an annual rate
of 0.25% of the average net asset value of the shares of the Funds, computed
daily and paid monthly. The Distributor is to pay any shareholder service
providers with which it enters into written agreements out of this amount.

The following table sets forth shareholder servicing fees, paid by each
of the Funds for the fiscal year ended September 30, 1997:

Year Ended
September 30, 1997

Income Fund $33,069

Growth and Income Fund $27,869

Growth Fund $13,262

Agressive Growth Fund $11,316

The Distributor also serves as distributor for the shares of the
Underlying Funds and receives compensation (but not with respect to the class of
shares purchased by the Funds) for such services.

CUSTODIAN; TRANSFER AGENT; COUNSEL; ACCOUNTANTS

The custodian of the Funds' assets is First Trust National Association
(the "Custodian"), First Trust Center, 180 East Fifth Street, St. Paul,
Minnesota 55101. The Custodian is a subsidiary of USB.

<PAGE>

The Custodian takes no part in determining the investment policies of
the Funds or in deciding which securities are purchased or sold by the Funds.
All of the instruments representing the investments of the Funds and all cash is
held by the Custodian. The Custodian delivers securities against payment upon
sale and pays for securities against delivery upon purchase. The Custodian also
remits Fund assets in payment of Fund expenses, pursuant to instructions of
FASF's officers or resolutions of the Board of Directors.

As compensation for its services to the Funds, the Custodian is paid a
monthly fee calculated on an annual basis equal to 0.03% of each Fund's average
daily net assets. In addition, the Custodian is reimbursed for its out-of-pocket
expenses incurred while providing its services to the Funds. The Custodian
continues to serve so long as its appointment is approved at least annually by
the Board of Directors including a majority of the directors who are not
interested persons (as defined under the 1940 Act) of FASF. The Custodian also
serves as custodian of the Underlying Funds' assets and receives compensation
for such services. In addition, the Custodian may serve as securities lending
agent for the Underlying Funds in connection with securities lending
transactions undertaken by the Underlying Funds, and it may receive compensation
for its provision of services as such securities lending agent.

DST Systems, Inc., 1004 Baltimore, Kansas City, Missouri 64105, is
transfer agent and dividend disbursing agent for the shares of the Funds. DST
Systems, Inc. also serves as transfer agent and dividend disbursing agent for
the Underlying Funds.

Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, is independent General Counsel for the Funds. Dorsey & Whitney LLP also
serves as independent General Counsel for the Underlying Funds.

KPMG Peat Marwick LLP, 90 South Seventh Street, Minneapolis, Minnesota
55402, acts as the Funds' independent auditors, providing audit services
including audits of the annual financial statements and assistance and
consultation in connection with SEC filings. KPMG Peat Marwick LLP also acts as
the Underlying Funds' independent auditors.

INVESTMENT ADVISORY SERVICES FOR THE UNDERLYING FUNDS

INVESTMENT ADVISORY AGREEMENTS OF THE UNDERLYING FUNDS

U.S. Bank National Association (the "Adviser"), the Adviser of the
Funds, also serves as investment adviser and manager of each of the Underlying
Funds through its First American Asset Management group. For information
concerning the Adviser, see "Investment Advisory and Other Services for the
Funds--Investment Advisory Agreement" above.

Pursuant to an Investment Advisory Agreement dated April 2, 1991 (the
"FAIF Advisory Agreement"), the Equity Funds and Fixed Income Fund engage the
Adviser to act as investment adviser for and to manage the investment of the
assets of each such Underlying Fund. Each such Underlying Fund other than
International Fund pays the Adviser monthly fees calculated on an annual basis
equal to 0.70% of its average daily net assets. International Fund pays the
Adviser monthly fees calculated on an annual basis equal to 1.25% of its average
daily net assets.

Pursuant to an Investment Advisory Agreement effective as of January
20, 1995 (the "FAF Advisory Agreement"), Prime Obligations Fund engages the
Adviser to act as investment adviser for and to manage the investment of the
assets of Prime Obligations Fund. Prime Obligations Fund pays the Adviser
monthly fees calculated on an annual basis equal to 0.40% of its average daily
net assets.

The FAIF Advisory Agreement and the FAF Advisory Agreement require the
Adviser to provide FAIF and FAF with all necessary office space, personnel and
facilities necessary and incident to the Adviser's performance of its services
thereunder. The Adviser is responsible for the payment of all compensation to
personnel of FAIF and FAF and the officers and directors of FAIF and FAF, if
any, who are affiliated with the Adviser or any of its affiliates. The FAIF
Advisory Agreement and the

<PAGE>

FAF Advisory Agreement provide that each Underlying Fund will be reimbursed by
the Adviser, in an amount not in excess of the advisory fees payable by such
Underlying Fund, for excess fund expenses as may be required by the laws of
certain states in which the Underlying Fund's shares may be offered for sale. As
of the date of this Statement of Additional Information, the most restrictive
state limitation in effect requires that "aggregate annual expenses" (which
include the investment advisory fee and other operating expenses but exclude
interest, taxes, brokerage commissions, Rule 12b-1 fees and certain other
expenses) shall not exceed 2-1/2% of the first $30 million of average net
assets, 2% of the next $70 million of average net assets and 1-1/2% of the
remaining average net assets of an Underlying Fund for any fiscal year.

In addition to the investment advisory fee, each Underlying Fund pays
all its expenses that are not expressly assumed by the Adviser or any other
organization with which the Underlying Fund may enter into an agreement for the
performance of services. Each Underlying Fund is liable for such nonrecurring
expenses as may arise, including litigation to which the Underlying Fund may be
a party, and it may have an obligation to indemnify its directors and officers
with respect to such litigation.

Information concerning advisory fees paid by the Underlying Funds
during their three most recent fiscal years is set forth in their Statements of
Additional Information, which may be obtained by writing or calling SEI
Investments Distribution Co., Oaks, Pennsylvania 19456, telephone: (800) 637-
2548.

SUB-ADVISORY AGREEMENT FOR INTERNATIONAL FUND

Marvin & Palmer Associates, Inc., 1201 North Market Street, Suite 2300,
Wilmington, Delaware 19801, is sub-adviser for International Fund under an
agreement with the Adviser (the "Sub-Advisory Agreement"). The sub-adviser, a
privately-held company, was founded in 1986 by David F. Marvin and Stanley
Palmer. The sub-adviser is engaged in the management of global, non-United
States and emerging markets equity portfolios for institutional accounts. At
September 30, 1997, the sub-adviser managed a total of $4.7 billion in
investments for 50 institutional investors. Pursuant to the Sub-Advisory
Agreement, the sub-adviser is responsible for the investment and reinvestment of
International Fund's assets and the placement of brokerage transactions in
connection therewith. Under the Sub-Advisory Agreement, the sub-adviser is
required, among other things, to report to the Adviser or the FAIF Board
regularly at such times and in such detail as the Adviser or the Board may from
time to time request in order to permit the Adviser and the Board to determine
the adherence of International Fund to its investment objectives, policies and
restrictions. The Sub-Advisory Agreement also requires the sub-adviser to
provide all office space, personnel and facilities necessary and incident to the
sub-adviser's performance of its services under the Sub-Advisory Agreement.

For its services under the Sub-Advisory Agreement, the sub-adviser is
paid a monthly fee by the Adviser calculated on an annual basis equal to 0.75%
of the first $100 million of International Fund's average daily net assets;
0.50% of International Fund's average daily assets in excess of $100 million up
to $300 million ; 0.45% of International Fund's average daily net assets in
excess of $300 million up to $500 million; and 0.40% of International Fund's
average daily assets in excess of $500 million.

PORTFOLIO MANAGERS FOR THE UNDERLYING FUNDS

Stock Fund is managed by a committee comprised of Mr. Doak, Mr. Murphy,
Mr. Rovner, Mr. Dubiak, Mr. Whitcomb, Mr. Shields, and Mr. Twele. Equity Income
Fund and Diversified Growth Fund are managed by a committee comprised of Mr.
Bren, Mr. Doak, Mr. Dubiak, Ms. Johnson, Mr. Murphy, Mr. Whitcomb, and Mr. Glenn
Johnson. Emerging Growth Fund, Small Cap Value Fund and Health Sciences Fund are
managed by a committee comprised of Mr. Dubiak, Mr. Bren, Mr. Rose, Mr. Buss,
Mr. Hipple and Mr. Magdlen. The remaining Underlying Funds are managed or
co-managed as indicated below.

<PAGE>

James Doak and John M. Murphy, Jr. are members of the committees which
manage three of the Underlying Funds, as set forth above. Their biographies are
set forth in the Funds' Prospectus under the caption "Management-- Portfolio
Management of the Funds."

James S. Rovner is a member of the committee which manages one of the
Underlying Funds, as set forth above, and he is portfolio manager for Special
Equity Fund. His biography is set forth in the Funds' Prospectus under the
caption "Management-- Portfolio Management of the Funds."

Gerald C. Bren is a member of the committee which manages two of the
Underlying Funds, as set forth above, and he is portfolio co-manager for
Emerging Growth Fund and Health Sciences Fund. His biography is set forth in the
Funds' Prospectus under the caption "Management-- Portfolio Management of the
Funds."

Albin S. Dubiak is a member of the committees which manage three of the
Underlying Funds, as set forth above, and he is portfolio co-manager for
Emerging Growth Fund, Small Cap Value Fund, and Health Sciences Fund. His
biography is set forth in the Funds' Prospectus under the caption "Management--
Portfolio Management of the Funds."

Cori B. Johnson is a member of the committee which manages two of the
Underlying Funds, as set forth above, and she is portfolio manager for Real
Estate Securities Fund. She joined the Adviser in 1991 as a securities analyst.
Ms. Johnson received her bachelor's degree from Concordia College and her
master's degree in business administration from the University of Minnesota. She
is a Chartered Financial Analyst.

Roland P. Whitcomb, Jr. is a member of the committees which manage
three of the Underlying Funds, as set forth above, and he is portfolio
co-manager for Small Cap Value Fund and Technology Fund. Mr. Whitcomb joined the
Adviser in 1986 after serving as an account executive with Smith Barney & Co.
since 1979. Mr. Whitcomb received his bachelor's degree from the University of
Chicago and is a Chartered Financial Analyst.

Kevin Shields is a member of the committee which manages one of the
Underlying Funds, as set forth above. Mr. Shields joined the Adviser in 1993 and
has five years of investment industry experience. Mr. Shields has analytic
responsibilities for the banking, financial services and insurance industries.
Mr. Shields received his bachelor's degree from Marquette University and his
master's degree from the Applied Security and Analysis Program at the University
of Wisconsin.

John A. Twele is a member of the committee which manages one of the
Underlying Funds, as set forth above. Prior to joining the Adviser in 1996, he
was employed in various positions at American Express Financial Advisors,
Investment Advisers, Inc., Kemper Financial, and Mercantile Trust. Mr. Twele
received his bachelor's degree from Indiana University.

Douglas K. Rose is a member of the committee which manages three of the
Underlying Funds. Mr. Rose joined the Adviser in 1996 and has ten years of
investment industry experience. Mr. Rose has analytic responsibilities for the
business services, environmental services, leisure and restaurant/lodging
industries. Mr. Rose holds a bachelor's degree from the University of Nebraska,
and master's degree in business administration from the University of Minnesota.
He is a member of the Twin Cities Society of Security Analysts and is a
Chartered Financial Analyst.

Robert L. Buss is a member of the committee which manages three of the
Underlying Funds. Mr. Buss joined the Adviser in 1989 and has nine years of
investment industry experience. In 1996, Mr. Buss began analytical work in the
equity research area covering electric equipment, machinery and diversified
manufacturing. Mr. Buss holds a bachelor's degree in Economics from the
University of Minnesota.

<PAGE>

Anthony W. Hipple is a member of the committee which manages three of
the Underlying Funds. Mr. Hipple is primarily responsible for portfolio
analytics and screening. Mr. Hipple joined the Adviser in 1996 and has four
years of investment industry experience. Mr. Hipple holds a bachelor's degree
from the University of Northern Iowa and a master's degree in business
administration from the University of Iowa.

Frank G. Magdlen is a member of the committee which manages three of
the Underlying Funds. He joined the Adviser in 1979 and has 24 years of
investment industry experience. Prior to joining the Adviser, he was with First
Interstate and Farmers Group. Mr. Magdlen received his bachelor's degree from
the University of Portland and his master's degree in business administration
from the University of Southern California. He is a Chartered Financial Analyst
and past president of the Portland Society of Financial Analysts.

Glenn E. Johnson is a member of the committee which manages two of the
Underlying Funds. He joined the Adviser in 1989 and has 13 years of investment
industry experience. Prior to joining the Adviser, he was an analyst with Piper
Jaffray. Mr. Johnson received his bachelor's degree and his master's degree in
business administration from the University of Minnesota. He is a Chartered
Financial Analyst.

David Johnson is a co-manager of Real Estate Securities Fund. He joined
the Adviser in 1997 and has four years of investment industry experience. He has
analytic responsibilities for REITs, business services, printing and publishing,
and advertising. Prior to joining the Adviser, he was with the State of
Wisconsin Investment Board. Mr. Johnson received his bachelor's degree from St.
Lawrence University and his master's degree in business administration from the
University of Connecticut.

Martin L. Jones is portfolio co-manager for Fixed Income Fund. His
biography is set forth in the Funds' Prospectus under the caption "Management--
Portfolio Management of the Funds."

Lucille C. Rehkamp is co-manager for Fixed Income Fund. Her biography
is set forth in the Fund's Prospectus under the caption "Management-- Portfolio
Management of the Funds.

Mark M. Green is co-manager for Fixed Income Fund. His biography is set
forth in the Fund's Prospectus under the caption "Management-- Portfolio
Management of the Funds.

Joseph M. Ulrey III is portfolio co-manager for Prime Obligations Fund.
His biography is set forth in the Funds' Prospectus under the caption
"Management-- Portfolio Management of the Funds."

Jim Palmer is portfolio co-manager for Prime Obligations Fund. Mr.
Palmer joined the Adviser in 1992 and has over seven years of investment
industry experience. Prior to joining the Adviser, Mr. Palmer was a securities
lending trader and senior master trust accountant with First Trust National
Association. Mr. Palmer received his bachelor's degree from the University of
Wisconsin-- LaCrosse and his master's degree in business administration from the
University of Minnesota.

A committee comprised of the following seven individuals shares the
management of International Fund on behalf of its sub-adviser:

David F. Marvin is Chairman of the sub-adviser and founded the firm
together with Mr. Palmer in 1986. Before founding the sub-adviser, Mr. Marvin
was Vice President in charge of DuPont Corporation's $10 billion
internally-managed pension fund. Prior to that Mr. Marvin was Associate
Portfolio Manager, and then Head Portfolio Manager, for Investors Diversified
Services' IDS Stock Fund. Mr. Marvin started in the investment business in 1965
as a securities analyst for Chicago Title & Trust. Mr. Marvin received his
bachelor's degree from the University of Illinois and his master's degree in
business administration from Northwestern University. He is a Chartered
Financial Analyst and a member of the Financial Analysts Federation.

<PAGE>

Stanley Palmer is President of the sub-adviser and co-founder of the
firm. Mr. Palmer was Equity Portfolio Manager for DuPont Corporation from 1978
through 1986, an analyst and portfolio manager at Investors Diversified Services
from 1971 through 1978, and an analyst at Harris Trust & Savings Bank from 1964
through 1971. Mr. Palmer received his bachelor's degree from Gustavus Adolphus
College and his master's degree in business administration from the University
of Iowa. He is a Chartered Financial Analyst and a member of the Financial
Analysts Federation.

William E. Dodge has been Senior Managing Director and Portfolio
Manager of the sub-adviser since 1996. Mr. Dodge was Chief Investment Strategist
and Chairman of the Investment Policy Committee of Dean Witter in New York from
1991 to 1996, and he served as a Senior Portfolio Manager, Director of
Quantitative Equity Strategies, and United States equity analyst at the DuPont
Corporation pension fund from 1983 to 1991. From 1976 to 1983 Mr. Dodge served
in various United States portfolio management and analytical positions including
senior investment manager of a bank trust department from 1981 to 1983. Mr.
Dodge received his bachelor's degree and his master's degree in business
administration from the University of Massachusetts at Amherst. He is a
Chartered Financial Analyst and a member of the Financial Analysts Federation.

Terry B. Mason is a Senior Vice President and Portfolio Manager of the
sub-adviser. Before joining the sub-adviser, Mr. Mason was employed for 14 years
by DuPont Corporation, the last five as international equity analyst and
international trader. Mr. Mason received his bachelor's degree from Glassboro
State College and his master's degree in business administration from Widener
University.

Jay F. Middleton is a Vice President and Portfolio Manager for the
sub-adviser and joined the firm in 1989. Mr. Middleton received his bachelor's
degree from Wesleyan University.

Todd D. Marvin is a Vice President and Portfolio Manager for the
sub-adviser and joined the firm in 1991. Before joining the sub-adviser, Mr.
Marvin was employed by Oppenheimer & Company as an analyst in investment
banking. Mr. Marvin received his bachelor's degree from Wesleyan University.

David L. Schaen is a Vice President and Portfolio Manager for the
sub-adviser. Before becoming a Portfolio Manager, Mr. Schaen was Head Trader for
the sub-adviser from 1991 to 1994 and an International Analyst for the
sub-adviser from 1994 to 1995. Prior to 1991 he was Head Trader and Investment
Officer at the Bank of Delaware. Mr. Schaen received his bachelor's degree from
the University of Delaware and his master's degree in business administration
from Widener University.

PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE

It is anticipated that the majority of the Funds' portfolio
transactions will consist of purchases and sales of shares of the Underlying
Funds. These purchases and sales will be made directly with the Underlying
Funds. The class of shares of the Underlying Funds in which the Funds will
invest is not subject to any front-end or deferred sales charges, any Rule 12b-1
distribution fees or any shareholder servicing fees.

To the extent that the Funds may purchase or sell securities other than
shares of the Underlying Funds, decisions with respect to placement of the
Funds' portfolio transactions are made by the Adviser. The Funds' policy is to
seek to place portfolio transactions with brokers or dealers who will execute
transactions as efficiently as possible and at the most favorable price. The
Adviser may, however, select a broker or dealer to effect a particular
transaction without communicating with all brokers or dealers who might be able
to effect such transaction because of the volatility of the market and the
desire of the Adviser to accept a particular price for a security because the
price offered by the broker or dealer meets guidelines for profit, yield or
both. Some portfolio transactions may involve payment of a brokerage commission
by the appropriate Fund. In some cases, transactions may be with dealers or
issuers who act as principal for their own accounts and not as brokers.
Transactions effected on a principal basis are made without the payment of
brokerage commissions but at net prices, which usually include a spread or
markup. In effecting transactions in over-the-counter securities, the Funds

<PAGE>

expect to deal with market makers unless it appears that better price and
execution are available elsewhere.

While the Adviser does not deem it practicable and in the Funds' best
interest to solicit competitive bids for commission rates on each transaction,
consideration will regularly be given by the Adviser to posted commission rates
as well as to other information concerning the level of commissions charged on
comparable transactions by other qualified brokers.

Subject to the policy of seeking favorable price and execution for the
transaction size and risk involved, in selecting brokers and dealers other than
the Distributor and determining commissions paid to them, the Adviser may
consider ability to provide supplemental performance, statistical and other
research information as well as computer hardware and software for research
purpose for consideration, analysis and evaluation by the staff of the Adviser.
In accordance with this policy, the Funds do not execute brokerage transactions
solely on the basis of the lowest commission rate available for a particular
transaction. Subject to the requirements of favorable price and efficient
execution, placement of orders by securities firms for the purchase of shares of
the Funds may be taken into account as a factor in the allocation of portfolio
transactions.

Research services that may be received by the Adviser would include
advice, both directly and in writing, as to the value of securities, the
advisability of investing in, purchasing, or selling securities, and the
availability of securities or purchasers or sellers of securities, as well as
analyses and reports concerning issuers, industries, securities, economic
factors and trends, portfolio strategy, and the performance of accounts. The
research services may allow the Adviser to supplement its own investment
research activities and enable the Adviser to obtain the views and information
of individuals and research staffs of many different securities firms prior to
making investment decisions for the Funds. To the extent portfolio transactions
are effected with brokers and dealers who furnish research services, the Adviser
would receive a benefit, which is not capable of evaluation in dollar amounts,
without providing any direct monetary benefit to the Funds from these
transactions. Research services furnished by brokers and dealers used by the
Funds for portfolio transactions may be utilized by the Adviser in connection
with investment services for other accounts and, likewise, research services
provided by brokers and dealers used for transactions of other accounts may be
utilized by the Adviser in performing services for the Funds. The Adviser
determines the reasonableness of the commissions paid in relation to their view
of the value of the brokerage and research services provided, considered in
terms of the particular transactions and their overall responsibilities with
respect to all accounts as to which they exercise investment discretion.

The Adviser has not entered into any formal or informal agreements with
any broker or dealer, and do not maintain any "formula" that must be followed in
connection with the placement of Fund portfolio transactions in exchange for
research services provided to the Adviser, except as noted below. The Adviser
may, from time to time, maintain an informal list of brokers and dealers that
will be used as a general guide in the placement of Fund business in order to
encourage certain brokers and dealer to provide the Adviser with research
services, which the Adviser anticipates will be useful to it. Any list, if
maintained, would be merely a general guide, which would be used only after the
primary criteria for the selection of brokers and dealers (discussed above) had
been met, and, accordingly, substantial deviations from the list could occur.
The Adviser would authorize the Funds to pay an amount of commission for
effecting a securities transaction in excess of the amount of commission another
broker or dealer would have charged only if the Adviser determined in good faith
that the amount of such commission was reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the overall responsibilities of
the Adviser with respect to the Funds.

The Funds do not effect any brokerage transactions in their portfolio
securities with any broker or dealer affiliated directly or indirectly with the
Adviser or the Distributor unless such transactions, including the frequency
thereof, the receipt of commissions payable in connection therewith, and the
selection of the affiliated broker or dealer effecting such transactions are not
unfair or unreasonable to the shareholders of the Funds, as determined by the
Board of Directors. Any transactions with an

<PAGE>

affiliated broker or dealer must be on terms that are both at least as favorable
to the Funds as the Funds can obtain elsewhere and at least as favorable as such
affiliated broker or dealer normally gives to others.

When two or more clients of the Adviser are simultaneously engaged in
the purchase or sale of the same security, the prices and amounts are allocated
in accordance with a formula considered by the Adviser to be equitable to each
client. In some cases, this system could have a detrimental effect on the price
or volume of the security as far as each client is concerned. In other cases,
however, the ability of the clients to participate in volume transactions may
produce better executions for each client.

The policies of the Underlying Funds with respect to portfolio
transactions and the allocation of brokerage, and the brokerage commissions paid
by them during their three most recent fiscal years, are set forth in their
Statements of Additional Information, which may be obtained by writing or
calling SEI Investments Distribution Co., Oaks, Pennsylvania 19456, telephone:
(800) 637-2548.

CAPITAL STOCK

As of December 1, 1997, the directors of FASF owned shares of FAIF,
FASF and FAF with an aggregate net asset value of $3,596,000. As of January 14,
1998, the directors and officers of FASF as a group owned less than one percent
of each Fund's outstanding shares. As of that date, the Funds were aware that
the following persons owned of record five percent or more of the outstanding
shares of each class of stock of the Funds.

PERCENTAGE OF
SHARES OWNED
------------

INCOME FUND

NFSC FEBO # BJF-001643....................................... 7.99%
Fleet Wholesale Supply Co.
Etal Retirement Plans
c/o Tom Green
P. O. Box 5055
Brainerd, MN 56401-5055

First Trust National Association............................. 7.38%
As Fiduciary For First Retirement
Attn: Reconciliation SPFT0401
180 East 5th Street
St. Paul, MN 55101-1631

VAR & Co..................................................... 7.38%
P. O. Box 64482
St. Paul, MN 55164-0482

Unit & Co.................................................... 7.32%
Attn: Trust Mutual Funds
P. O. Box 3168
Portland, OR 97208-3168

GROWTH AND INCOME FUND

Unit & Co.................................................... 25.72%
Attn: Trust Mutual Funds
P. O. Box 3168
Portland, OR 97208-3168

<PAGE>

VAR & Co..................................................... 20.27%
P. O. Box 64482
St. Paul, MN 55164-0482

Telco........................................................ 15.14%
Attn: Trust Mutual Funds
P. O. Box 3168
Portland, OR 97208-3168

Wachovia Bank NA............................................. 13.86%
Trust US Bancorp Deferred Comp. Trust
DTD 8/1/97
P. O. Box 3073
Winston Salem, NC 27150

GROWTH FUND

Unit & Co.................................................... 19.50%
Attn: Trust Mutual Funds
P. O. Box 3168
Portland, OR 97208-3168

VAR & Co..................................................... 8.94%
P. O. Box 64482
St. Paul, MN 55164-0482

AGGRESSIVE GROWTH FUND

Unit & Co.................................................... 39.22%
Attn: Trust Mutual Funds
P. O. Box 3168
Portland, OR 97208-3168

VAR & Co..................................................... 12.33%
P. O. Box 64482
St. Paul, MN 55164-0482

First Trust National Association............................. 6.84%
As Fiduciary For First Retirement
Attn: Reconciliation SPFT0401
180 East 5th Street
St. Paul, MN 55101-1631

<PAGE>

NET ASSET VALUE AND PUBLIC OFFERING PRICE

The method for determining the public offering price of the shares of
the Funds is summarized in the Prospectus under the caption "Investing in the
Funds." The net asset value of each Fund's shares is determined on each day
during which the New York Stock Exchange (the "NYSE") and federally-chartered
banks are open for business. The NYSE is not open for business on the following
holidays (or on the nearest Monday or Friday if the holiday falls on a weekend):
New Year's Day, Martin Luther King, Jr. Day, Washington's Birthday (observed),
Good Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving
Day and Christmas Day. Each year the NYSE may designate different dates for the
observance of these holidays as well as designate other holidays for closing in
the future.

On September 30, 1997, the net asset values per share for each class of
shares of the Funds were calculated as follows:

Net
Asset Value
Net Assets Shares Per Share
(In Dollars) / Outstanding = (In Dollars)
------------ ----------- ------------

Income Fund $36,118,011 $3,337,762 $10,82

Growth and Income Fund 27,565,392 2,343,810 11.76

Growth Fund 15,675,513 1,293,419 12.12

Aggressive Growth Fund 13,724,705 1,090,679 12.58

FUND PERFORMANCE

SEC STANDARDIZED PERFORMANCE FIGURES

YIELD FOR THE FUNDS. Yield for the Funds is a measure of the net
investment income per share (as defined) earned over a 30-day period expressed
as a percentage of the maximum offering price of a Fund's shares at the end of
the period.

Based upon the 30-day period ended September 30, 1997, the yields for
the shares of the Funds were as follows:

Income Fund 4.18%

Growth and Income Fund 2.21

Growth Fund 1.34

Aggressive Growth Fund 0.65

Such yield figures are determined by dividing the net investment income
per share earned during the specified 30-day period by the maximum offering
price per share on the last day of the period, according to the following
formula:

Yield = 2 [((a - b) / cd) + 1)6(to the sixth power) - 1]

Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of
reimbursements)
c = average daily number of shares outstanding during
the period that were entitled to receive dividends
d = maximum offering price per share on the last day of
the period

TOTAL RETURN. Total return measures both the net investment income
generated by, and the effect of any realized or unrealized appreciation or
depreciation of, the underlying investments in a Fund's portfolio. The Funds'
average annual and cumulative total return figures are computed in accordance
with the standardized methods prescribed by the Securities and Exchange
Commission.

AVERAGE ANNUAL TOTAL RETURN. Average annual total return figures are
computed by determining the average annual compounded rates of return over the
periods indicated in the advertisement, sales literature or shareholders'
report, that would equate the initial amount invested to the ending redeemable
value, according to the following formula:

P(1 + T)n(supscpt) = ERV

Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the period
of a hypothetical $1,000 payment made at the
beginning of such period

This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectus, and (ii) deducts all recurring fees, such as advisory fees, charged
as expenses to all shareholder accounts.

CUMULATIVE TOTAL RETURN. Cumulative total return is computed by finding
the cumulative compounded rate of return over the period indicated in the
advertisement that would equate the initial amount invested to the ending
redeemable value, according to the following formula:

<PAGE>

CTR = ((ERV - P) / P ) 10

Where: CTR = cumulative total return
ERV = ending redeemable value at the end of, the period
of a hypothetical $1,000 payment made at the
beginning of such period; and
P = initial payment of $1,000

This calculation (i) assumes all dividends and distributions are reinvested at
net asset value on the appropriate reinvestment dates as described in the
Prospectuses, and (ii) deducts all recurring fees, such as advisory fees,
charged as expenses to all shareholder accounts.

Based on the foregoing, the average annual and cumulative total returns
for the shares of the Funds were as follows:

Average Annual

Cumulative Since One Five
Since Inception*+ Inception+ Year Years
---------------- --------- ---- -----

Income Fund 12.51% 12.51% ** **

Growth and Income Fund 20.47 20.47 ** **

Growth Fund 23.23 23.23 ** **

Aggressive Growth Fund 27.06 27.06 ** **

* Inception date of October 1, 1996.
** Not in operation for the entire period.

NON-STANDARD DISTRIBUTION RATES

HISTORICAL DISTRIBUTION RATES. The Funds' historical annualized
distribution rates are computed by dividing the income dividends of a Fund for a
stated period by the maximum offering price on the last day of such period. For
the one year period ended September 30, 1997, the historical distribution rates
of the shares of the Funds were as follows:

Income Fund 3.75%

Growth and Income Fund 2.21

Growth Fund 1.47

Aggressive Growth Fund 0.85

ANNUALIZED CURRENT DISTRIBUTION RATES. The Funds' annualized current
distribution rates are computed by dividing a Fund's income dividends for a
specified month by the number of days in that month and multiplying by 365, and
dividing the resulting figure by the maximum offering price on the last day of
the specified period. The annualized current distribution rates for the one
month period ended September 30, 1997 for the funds were as follows:

Income Fund 4.57%

Growth and Income Fund 2.43

Growth Fund 1.23

Aggressive Growth Fund 0.46

CERTAIN PERFORMANCE COMPARISONS

The Funds may compare their performance to that of certain published or
otherwise widely disseminated indices or averages compiled by third parties.
These indices and averages are as follows, among others:

STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500 COMMON STOCKS ("S&P
500") is a composite index of common stocks in industrial, transportation, and
financial and public utility companies. The S&P 500 index assumes reinvestment
of all dividends paid by stocks listed in its index. Taxes due on any of these
distributions are not included, nor are brokerage or other fees calculated in
Standard & Poor's figures.

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

RUSSELL MID-CAP INDEX is an index that measures the performance of the
800 smallest companies in the Russell 1000 Index, which measures the performance
of the 1,000 largest companies in the Russell 1000 Index. The Russell 1000 Index
represents approximately 90% of the total market capitalization of the Russell
3000 Index.

LIPPER BALANCED FUNDS AVERAGE is an average of funds whose primary
objective is to conserve principal by maintaining at all times a balanced
portfolio of both stocks and bonds.

LIPPER FLEXIBLE PORTFOLIO FUNDS AVERAGE is an average of funds which
allocate investments across various asset classes, including domestic common
stocks, bonds and money market instruments, with a focus on total return.

LIPPER INTERNATIONAL FUNDS AVERAGE is an average of funds which invest
primarily in equity securities whose primary trading markets are outside the
United States.

LIPPER GENERAL EQUITY FUNDS AVERAGE is an average of the Lipper Capital
Appreciation Average, Lipper Growth Average, Lipper Mid-Cap Average, Lipper
Small Company Growth Average,

<PAGE>

Lipper Growth & Income Average, Lipper Standard & Poor's 500 Index Objective
Average and Lipper Standard & Poor's Equity Income Average.

LIPPER GENERAL BOND FUNDS AVERAGE is an average of funds which invest
primarily in corporate and government debt issues without quality or maturity
restrictions.

LIPPER INCOME FUNDS AVERAGE is an average of funds which normally seek
a high level of current income through investing in income producing stocks,
bonds and money market instruments.

LIPPER GROWTH & INCOME FUNDS AVERAGE is an average of funds which
combine a growth of earnings orientation and an income requirement for level
and/or rising dividends.

LIPPER MONEY MARKET INSTRUMENT FUNDS AVERAGE is an average of money
market funds which invest in high financial instruments rated in the top two
grades.

MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA AND FAR EAST
("EAFE") INDEX is an aggregate of 15 individual country indices that
collectively represent many of the major markets of the world, excluding the
United States and Canada.

LEHMAN GOVERNMENT/CORPORATE (TOTAL) INDEX is a market weighted index
comprised of all public obligations of the U.S. Treasury, excluding flower bonds
and foreign-targeted issues; all publicly issued debt of U.S. Government
agencies and quasi-federal corporations, and corporate debt guaranteed by the
U.S. Government; and all publicly issued, fixed rate, nonconvertible investment
grade dollar- denominated SEC-registered corporate debt.

SALOMON BROTHERS 3-MONTH U.S. TREASURY BILL INDEX represents monthly
return equivalents of yield averages which are not marked to market.

WILSHIRE 5000 EQUITY INDEX measures the performance of all United
States headquartered equity securities with readily available price data and is
adjusted using over 7,000 capitalization weighted security returns.

In addition, the Funds may compare their performance to composites
constructed from the foregoing indices and averages.

TAXATION

The tax status of the Funds and the distributions that the Funds will
make to shareholders are summarized in the Prospectus in the section entitled
"Federal Income Taxes." Each Fund intends to fulfill the requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), as a
regulated investment company. If so qualified, each Fund will not be liable for
federal income taxes to the extent it distributes its taxable income to its
shareholders.

To qualify under Subchapter M for tax treatment as a regulated
investment company, each Fund must, among other things: (1) derive at least 90%
of its gross income from dividends, interest, and certain other types of
payments related to its investment in stock or securities; (2) distribute to its
shareholders at least 90% of its investment company taxable income (as that term
is defined in the Code determined without regard to the deduction for dividends
paid) and 90% of its net tax-exempt income; and (3) diversify its holdings so
that, at the end of each fiscal quarter of the Fund, (a) at least 50% of the
market value of the Fund's assets is represented by cash, cash items, U.S.
Government securities and securities of other regulated investment companies,
and other securities, with these other securities limited, with respect to any
one issuer, to an amount no greater than 5% of the Fund's total assets and no
greater than 10% of the outstanding voting securities of such issuer, and (b)
not more than 25% of the market value of the Fund's total assets is invested in
the securities of any one issuer (other than U.S. Government securities or
securities of other regulated investment companies).

<PAGE>

Each Fund is subject to a nondeductible excise tax equal to 4% of the
excess, if any, of the amount required to be distributed for each calendar year
over the amount actually distributed. For this purpose, any amount on which the
Fund is subject to corporate-level income tax is considered to have been
distributed. In order to avoid the imposition of this excise tax, each Fund must
declare and pay dividends representing 98% of its net investment income for that
calendar year and 98% of its capital gains (both long-term and short-term) for
the twelve-month period ending October 31 of the calendar year.

Any loss on the sale or exchange of shares of a Fund generally will be
disallowed to the extent that a shareholder acquires or contracts to acquire
shares of the same Fund within 30 days before or after such sale or exchange.
Furthermore, if Fund shares with respect to which a long-term capital gain
distribution has been made are held for less than six months, any loss on the
sale or exchange of such shares will be treated as a long-term capital loss to
the extent of such long-term capital gain distribution.

For federal tax purposes, if a shareholder exchanges shares of a Fund
for shares of any other Fund pursuant to the exchange privilege (see "Investing
in the Funds -- Exchange Privilege" in the Prospectus), such exchange will be
considered a taxable sale of the shares being exchanged.

Dividends generally are taxable to shareholders at the time they are
paid. However, dividends declared in October, November and December, made
payable to shareholders of record in such a month and actually paid in January
of the following year are treated as paid and are thereby taxable to
shareholders as of December 31.

Pursuant to the Code, distributions of net investment income by a Fund
to a shareholder who, as to the United States, is a nonresident alien
individual, nonresident alien fiduciary of a trust or estate, foreign
corporation, or foreign partnership (a "foreign shareholder") will be subject to
U.S. withholding tax (at a rate of 30% or lower treaty rate). Withholding will
not apply if a dividend paid by a Fund to a foreign shareholder is "effectively
connected" with a U.S. trade or business of such shareholder, in which case the
reporting and withholding requirements applicable to U.S. citizens or domestic
corporations will apply. Distributions of net long-term capital gains are not
subject to tax withholding but, in the case of a foreign shareholder who is a
nonresident alien individual, such distributions ordinarily will be subject to
U.S. income tax at a rate of 30% if the individual is physically present in the
U.S. for more than 182 days during the taxable year. Each Fund will report
annually to its shareholders the amount of any withholding.

The foregoing relates only to federal income taxation and is a general
summary of the federal tax law in effect as of the date of this Statement of
Additional Information.

RATINGS

A rating of a rating service represents that service's opinion as to
the credit quality of the rated security. However, such ratings are general and
cannot be considered absolute standards of quality or guarantees as to the
creditworthiness of an issuer. A rating is not a recommendation to purchase,
sell or hold a security, because it does not take into account market value or
suitability for a particular investor. Markets values of debt securities may
change as a result of a variety of factors unrelated to credit quality,
including changes in market interest rates.

When a security has been rated by more than one service, the ratings
may not coincide, and each rating should be evaluated independently. Ratings are
based on current information furnished by the issuer or obtained by the rating
services from other sources which they consider reliable. Ratings may be
changed, suspended or withdrawn as a result of changes in or unavailability of
such information, or for other reasons. In general, the Underlying Funds are not
required to dispose of a security if its rating declines after it is purchased,
although they may consider doing so.

<PAGE>

RATINGS OF CORPORATE DEBT OBLIGATIONS AND MUNICIPAL BONDS

STANDARD & POOR'S

AAA: Securities rated AAA have the highest rating assigned by Standard
& Poor's to a debt obligation. Capacity to pay interest and repay
principal is extremely strong.

AA: Securities rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only to a
small degree.

A: Securities rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.

BBB: Securities rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Although such securities normally
exhibit adequate protection standards, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity
to pay interest and repay principal for securities in this category
than for those in higher rated categories.

Debt rated BB, B, CCC, CC, and C by Standard & Poor's is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.

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

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

CCC: Securities rated CCC have a currently identifiable vulnerability
to default, and are dependent upon favorable business, financial, and
economic conditions to meet timely payment of interest and repayment of
principal. In the event of adverse business, financial, or economic
conditions, they are not likely to have the capacity to pay interest
and repay principal. The CCC rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied B or
B- rating.

The ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.

MOODY'S

Aaa: Securities 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 edge." Interest payments are protected
by a large or 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.

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Aa: Securities 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 securities. They are rated lower than the
best securities because margins of protection may not be as large as in
Aaa securities, or fluctuation of protective elements may be of greater
magnitude, or there may be other elements present which make the
long-term risks appear somewhat greater than in Aaa securities.

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

Baa: Securities which are rated Baa are considered as medium grade
obligations, being 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
securities lack outstanding investment characteristics, and in fact
have some speculative characteristics.

Ba: An issue which is rated Ba is judged to have speculative elements;
its future cannot be considered as well assured. Often the protection
of interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes issues in this class.

B: An issue which is rated B generally lacks characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.

Caa: An issue which is rated Caa is of poor standing. Such an issue may
be in default or there may be present elements of danger with respect
to principal or interest.

Those securities in the Aa, A and Baa groups which Moody's believes possess the
strongest investment attributes are designated by the symbols Aa-1, A-1 and
Baa-1. Other Aa, A and Baa securities comprise the balance of their respective
groups. These rankings (1) designate the securities which offer the maximum in
security within their quality groups, (2) designate securities which can be
bought for possible upgrading in quality, and (3) additionally afford the
investor an opportunity to gauge more precisely the relative attractiveness of
offerings in the marketplace.

RATINGS OF PREFERRED STOCK

STANDARD & POOR'S. Standard & Poor's ratings for preferred stock have
the following definitions:

AAA: An issue rated "AAA" has the highest rating that may be assigned
by Standard & Poor's to a preferred stock issue and indicates an
extremely strong capacity to pay the preferred stock obligations.

AA: A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated "AAA."

A: An issue rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible
to the adverse effects of changes in circumstances and economic
conditions.

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BBB: An issue rated "BBB" is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the
category.

MOODY'S. Moody's ratings for preferred stock include the following:

aaa: An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.

aa: An issue which is rated "aa" is considered a high grade preferred
stock. This rating indicates that there is reasonable assurance that
earnings and asset protection will remain relatively well maintained in
the foreseeable future.

a: An issue which is rated "a" is considered to be an upper medium
grade preferred stock. While risks are judged to be somewhat greater
than in the "aaa" and "aa" classifications, earnings and asset
protection are, nevertheless, expected to be maintained at adequate
levels.

baa: An issue which is rated "baa" is considered to be medium grade,
neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any
great length of time.

RATINGS OF COMMERCIAL PAPER

STANDARD & POOR'S. Commercial paper ratings are graded into four
categories, ranging from "A" for the highest quality obligations to "D" for the
lowest. Issues assigned the A rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined with
the designation 1, 2 and 3 to indicate the relative degree of safety. The "A-1"
designation indicates that the degree of safety regarding timely payment is very
strong. Those issues determined to possess overwhelming safety characteristics
will be denoted with a plus (+) symbol designation. None of the Funds or the
Underlying Funds will purchase commercial paper rated A-3 or lower.

MOODY'S. Moody's commercial paper ratings are opinions as to the
ability of the issuers to timely repay promissory obligations not having an
original maturity in excess of nine months. Moody's makes no representation that
such obligations are exempt from registration under the Securities Act of 1933,
as amended, and it does not represent that any specific instrument is a valid
obligation of a rated issuer or issued in conformity with any applicable law.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment capacity of rated issuers:

PRIME-1: Superior capacity for repayment.

PRIME-2: Strong capacity for repayment .

PRIME-3: Acceptable capacity for repayment .

None of the Funds or the Underlying Funds will purchase Prime-3 commercial
paper.

BEST'S RATING SYSTEM FOR INSURANCE COMPANIES

The objective of Best's Rating System is to evaluate the various
factors affecting the overall performance of an insurance company in order to
provide an opinion as to the company's relative financial strength and ability
to meet its contractual obligations. The procedure includes both a quantitative
and qualitative review of the company.

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The quantitative evaluation is based on an analysis of the company's
financial condition and operating performance utilizing a series of financial
tests. These tests measure a company's performance in the three critical areas
of Profitability, Leverage and Liquidity in comparison to the norms established
by the A.M. Best Company. These norms are based on an evaluation of the actual
performance of the insurance industry.

Best's review also includes a qualitative evaluation of the adequacy
and soundness of a company's reinsurance, the adequacy of its reserves and the
experience of its management. In addition, various other factors of importance
are considered such as the composition of the company's book of business and the
quality and diversification of its assets.

Upon completion of analysis, Best's Ratings are assigned to those
companies that meet the qualifications for rating. The Best's Rating
classifications are A+ (Superior); A & A- (Excellent); B+ (Very Good); B & B-
(Good); C+ (Fairly Good); and C & C- (Fair). Those not qualifying for a current
Best's Rating are classified in the "Not Assigned" category that has ten
classifications which identify why a company is not eligible for a Best's
Rating. Care should be exercised in the use of Best's Ratings without further
reference to additional Best's publications.

FINANCIAL STATEMENTS

The financial statements of FASF included in its annual report to
shareholders dated September 30, 1997 are incorporated herein by reference. Such
annual report to shareholders accompanies this Statement of Additional
Information.