STATE FARM VARIABLE PRODUCT TRUST, 497, 1998-02-10

STATE FARM VARIABLE PRODUCT TRUST
497, 1998-02-10

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STATE FARM VARIABLE PRODUCT TRUST
One State Farm Plaza
Bloomington, Illinois 61710-0001
(309) 766-2029

PROSPECTUS
December 15, 1997

State Farm Variable Product Trust is an investment company consisting of six
separate investment portfolios or funds (the "Funds"), each of which has
different investment objectives.

The Money Market Fund seeks to maximize current income to the extent consistent
with the preservation of capital and maintenance of liquidity. This Fund will
pursue its objective by investing exclusively in high quality money market
instruments. An investment in the Money Market Fund is neither insured nor
guaranteed by the U.S. Government. This Fund will attempt to maintain a stable
net asset value of $1.00 per share, but there can be no assurance that the Fund
will be able to do so.

The Large Cap Equity Index Fund seeks to match the performance of the Standard &
Poor's Composite Index of 500 Stocks (the "S&P 500"). This Fund will pursue its
objective by investing primarily on a capitalization-weighted basis in the
securities comprising the index.

The Small Cap Equity Index Fund seeks to match the performance of the Russell
2000 Small Stock Index (the "Russell 2000"). This Fund will pursue its objective
by investing primarily in a representative sample of stocks found in the index.

The International Equity Index Fund seeks to match the performance of the Morgan
Stanley Capital International Europe, Australia and Far East Free Index (the
"EAFE Free"). This Fund will pursue its objective by investing primarily in a
representative sample of stocks found in the index.

The Stock and Bond Balanced Fund seeks long-term growth of capital, balanced
with current income. This Fund will pursue its objective by investing primarily
in the Trust's Large Cap Equity Index Fund and Bond Fund.

These Funds are available to the public only through the purchase of certain
variable annuity and variable life insurance contracts issued by State Farm Life
Insurance Company and State Farm Life and Accident Assurance Company.

This prospectus provides vital information about the Trust. For your own benefit
and protection, you should read it thoroughly before investing and keep it on
hand for future reference. A Statement of Additional Information containing
additional information about the Trust has been filed with the Securities and
Exchange Commission, and may be obtained without charge by sending a written
request to the Trust at the above address or calling the telephone number shown.
The Statement of Additional Information is considered part of this prospectus,
and is incorporated herein by reference.

SHARES OF THE TRUST ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY. AN INVESTMENT IN ANY OF THE FUNDS INVOLVES INVESTMENT RISK INCLUDING
POSSIBLE LOSS OF PRINCIPAL.

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

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About the Trust 2

Investment Objectives and Policies 2
The Money Market Fund 3
The Equity Index Funds 3
The Bond Fund 6
The Stock and Bond Balanced Fund 7

Investment Techniques 7
Loans of Portfolio Securities 7
Short-term Money Market Instruments 8
Foreign Investments 8
Foreign Investments Generally 8
Investments in ADRs, EDRs and GDRs 9
Forward Currency Contracts 9
Stock Index Futures Contracts and Options on Such Contracts 10
Restricted Securities And Illiquid Investments 10
Borrowing 10
Investments in Securities of Small Capitalization Issuers 10
Investments in Other Investment Companies 11

Performance Information 11

Determination of Net Asset Value 11

Offering, Purchase and Redemption of Shares 12

Dividends, Distributions and Taxes 12
Dividends and Distributions 12
Taxes 12
General Tax Information 12
Taxation of Foreign Investments 13
Additional Tax Considerations 13

Management of the Trust 13
Board of Trustees 13
Investment Adviser 13
Investment Sub-adviser 14
The Bond Fund and the Stock and Bond Balanced Fund Managers 15
Use of Certain Brokers 15

Additional Information 15
About The Shares 15
Contract Owner Voting Rights 15
Annual and Semi-annual Reports 16
Service Providers 16
Legal Matters 16
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State Farm Variable Product Trust

About the Trust

State Farm Variable Product Trust (the "Trust") is an open-end management
investment company organized as a business trust under the laws of the State of
Delaware on February 21, 1997. The Trust consists of six separate investment
portfolios (the "Funds" or a "Fund"), each of which is, in effect, a separate
mutual fund. The Trust issues a separate series of shares of beneficial interest
for each Fund representing fractional undivided interests in that Fund. By
investing in a Fund, you become entitled to a pro-rata share of all dividends
and distributions arising from the net income and capital gains on the
investments of that Fund. Likewise, you share pro-rata in any losses of that
Fund.

Pursuant to investment advisory agreements and subject to the authority of the
Trust's Board of Trustees, State Farm Investment Management Corp. ("SFIM")
serves as the Trust's investment adviser and conducts the business and affairs
of the Trust. SFIM has engaged Barclays Global Fund Advisors ("BGFA") as the
investment sub-adviser to provide day-to-day portfolio management for the Large
Cap, Small Cap, and International Equity Index Funds. (The term "investment
adviser" in this prospectus may mean either SFIM or BGFA, as appropriate.)

The Trust currently offers the shares of each Fund to separate accounts of State
Farm Life Insurance Company as funding vehicles for certain variable annuity and
life insurance contracts (the "Contracts") issued by State Farm Life Insurance
Company through such separate accounts. The Trust also intends to offer shares
of each Fund to separate accounts of State Farm Life and Accident Assurance
Company as funding vehicles for certain variable annuity and life insurance
contracts issued by State Farm Life and Accident Assurance Company through such
separate accounts. (State Farm Life Insurance Company and State Farm Life and
Accident Assurance Company are collectively referred to herein as "State Farm";
the variable annuity and variable life insurance contracts issued by State Farm
are collectively referred to herein as the "Contracts"; and the State Farm
separate accounts are collectively referred to as the "Accounts"). The Trust
does not offer its shares directly to the general public. The Accounts, like the
Trust, are registered as investment companies with the SEC and separate
prospectuses, one of which accompanies this prospectus, describe each Account
and the Contract being offered through that Account. The Trust may, in the
future, offer its shares to other registered and unregistered separate accounts
of State Farm and its affiliates supporting other variable annuity or variable
life insurance contracts and, subject to obtaining required regulatory
approvals, to qualified pension and retirement plans.

Investment Objectives and Policies

Each Fund has one or more investment objectives and related investment policies
and uses various investment techniques to pursue these objectives and policies.
There can be no assurance that any of the Funds will achieve its investment
objective or objectives. You should not consider any one Fund alone to be a
complete investment program. All of the Funds are subject to the risk of
changing economic conditions. The Bond Fund and Stock and Bond Balanced Fund are
also subject to the risk inherent in the ability of the Fund's investment
adviser to make changes in the composition of the Fund in anticipation of
changes in economic, business, and financial conditions. As with any security, a
risk of loss is inherent in an investment in the shares of any of the Funds.

In addition to these general risks, the different types of securities,
investments, and investment techniques used by each Fund all have attendant
risks of varying degrees. With respect to equity securities, there can be no
assurance of capital appreciation and there is a substantial risk of decline.
With respect to debt instruments, there exists the risk that the issuer of the
security may not be able to meet its obligations on interest or principal
payments at the time required by the instrument. In addition, the value of debt
instruments generally rises and falls inversely with prevailing current interest
rates. Moreover, foreign investments and investments in small capitalization
issuers entail special additional risks. For a more detailed explanation of the
risks associated with and a definition of "foreign investments," see "Foreign
Investments" in this prospectus and the statement of additional information
("SAI").

Certain types of investments and investment techniques common to one or more
Funds are described in greater detail, including the risks of each, under
"Investment Techniques" in this prospectus and in the SAI.

The investment objective or objectives of each Fund are fundamental and may not
be changed without the approval of a majority of the outstanding voting shares
of the series related to that Fund. Certain investment restrictions also are
fundamental and cannot be changed without shareholder approval. In contrast,
certain other investment restrictions as well as the investment policies and
techniques of each Fund are not fundamental and may be changed by the Trust's
Board of Trustees without shareholder approval. These investment objectives,
restrictions, policies and techniques are described below and in more detail in
the SAI.

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THE MONEY MARKET FUND

1. U.S. Government securities (as defined in the SAI) and related custody
receipts;

2. obligations issued or guaranteed by U.S. banks (including certificates of
deposit, bank notes, loan participation interests, commercial paper,
unsecured promissory notes, time deposits, and bankers' acceptances) that
have more than $1 billion in total assets at the time of purchase as well
as debt obligations of U.S. subsidiaries of such banks and certificates
of deposit and promissory notes issued by Canadian affiliates of such
banks, provided that such obligations are guaranteed as to principal and
interest by such banks;

3. commercial paper (unsecured promissory notes including variable amount
master demand notes) issued or guaranteed by U.S. corporations or other
entities that are, at the time of purchase, rated in the two highest
rating categories for short-term debt obligations of at least one
nationally recognized statistical rating organization ("NRSRO");

4. asset-backed securities (including interests in pools of assets such as
motor vehicle installment purchase obligations and credit card
receivables);

5. other short-term obligations issued or guaranteed by U.S. corporations,
state and municipal governments or other entities;

6. unrated notes, paper, obligations or other instruments that SFIM
determines to be of comparable high quality; and

7. repurchase agreements with banks and government securities dealers that
are recognized as primary dealers by the Federal Reserve System, provided
that:

(a) at the time that the repurchase agreement is entered into, and
throughout the duration of the agreement, the collateral has a market
value at least equal to the value of the repurchase agreement; and

(b) the collateral consists of U.S. Government securities or instruments
that are rated in the highest rating category by the requisite NRSROs
(as defined below).

The Money Market Fund may acquire any of the above securities on a forward
commitment or when-issued basis, and may lend portfolio securities and invest in
other investment companies. See "Investment Techniques" in this prospectus for
more detailed information.

The Money Market Fund will only invest in instruments denominated in U.S.
dollars that SFIM, under the supervision of the Trust's Board of Trustees,
determines present minimal credit risk and meet, at the time of acquisition,
certain minimum credit rating requirements described in the SAI.

The Money Market Fund will invest at least 95% of its total assets in securities
that are rated in the highest category by the requisite NRSROs or unrated
securities of comparable investment quality. Of securities not rated in the
highest category (or not of comparable quality), the Fund will not invest more
than the greater of 1% of its total assets or $1 million in the securities of
any single issuer. The Fund is diversified. Except as explained in the SAI, the
Fund will not invest more than 5% of its net assets in securities of any single
issuer (except U.S. Government securities or repurchase agreements
collateralized by such securities).

All portfolio instruments owned by the Money Market Fund will mature within 13
months or less of the time that they are acquired. The average maturity of the
portfolio securities owned by the Fund based on their dollar value will not
exceed 90 days at the time of each investment. If the disposition of a portfolio
security results in a dollar-weighted average portfolio maturity in excess of 90
days, the Money Market Fund will invest its available cash in such manner as to
reduce its dollar-weighted average portfolio maturity to 90 days or less as soon
as is reasonably practicable.

See Appendix A to the SAI for additional information on the types of money
market instruments in which the Money Market Fund may invest.

NRSROs include S&P, Moody's, Fitch Investors Service, Inc., Duff & Phelps, Inc.,
IBCA Limited and its affiliate IBCA Inc., and Thompson BankWatch. See Appendix B
to the SAI for a description of each NRSRO's rating categories.

THE EQUITY INDEX FUNDS

The Large Cap, Small Cap, and International Equity Index Funds are equity index
Funds that invest mostly in stocks, although each may also invest in stock index
futures contracts and options on such futures contracts. By investing in a broad
range of stocks within a specific index (a "benchmark index"), each of these
Funds avoids the risks of individual stock selection and instead, seeks to match
the performance of its benchmark index, whether that index goes up or down.
These Funds do not have, and will not adopt, a defensive investment

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strategy in times of generally declining stock prices, and you bear the risk of
such a market decline with an investment in any of these Funds.

What is an index? An index is a grouping of securities, such as stocks, bonds or
commodities, used to measure and report changes in a particular market. An index
may be comprised of many securities and designed to be representative of the
overall market, or made up of a smaller number of securities and designed to
reflect a particular industry or market sector. The composition and weighting of
securities in an index can, and often does, change.

Which indices do these Funds follow? While there are more than a hundred
different indices, each of the equity index Funds try to match the performance
of a very prominent stock index. Each equity index Fund has the fundamental
investment objective of seeking to match the investment return of its benchmark
index.

The Large Cap Equity Index Fund's benchmark index is the S&P 500.(1) This Fund
will pursue its objective of seeking to match the return of that index by
investing primarily on a capitalization-weighted basis in the securities
comprising the index, I.E., by purchasing each of the stocks comprising the S&P
500 in the same weighted proportions that such stocks have in the index. The S&P
500 tracks the common stock performance of large U.S. companies in the
manufacturing, utilities, transportation, and financial industries. It also
tracks the performance of common stocks issued by foreign and smaller U.S.
companies in similar industries. In total, the S&P 500 is comprised of 500
common stocks.

Like the S&P 500, the Large Cap Equity Index Fund will hold both dividend paying
and non-dividend paying common stocks.

The Small Cap Equity Index Fund's benchmark index is the Russell 2000.(2) This
Fund will pursue its objective of seeking to match the return of that index by
investing primarily in a diversified portfolio of common stocks that will
reflect, as a group, the total investment return of that index. The Russell 2000
tracks the common stock performance of the 2,000 smallest U.S. companies in the
Russell 3000 Index, which represents approximately 10% of the total
capitalization of the Russell 3000 Index. The Frank Russell Company created the
Russell 2000 in the 1980s to give investors an idea of how the stocks of smaller
companies generally perform. As of the latest reconstitution of the Russell
2000, the average market capitalization was approximately $421 million, the
median market capitalization was approximately $352 million, and the largest
company in the index had an approximate market capitalization of $1.0 billion.
The stocks comprising the Russell 2000 are updated annually because many of the
companies in the index either outgrow the index or fall in value.

The International Equity Index Fund's benchmark index is the EAFE Free.(3) This
Fund will pursue its objective of seeking to match the return of that index by
investing primarily in a diversified portfolio of common stocks that will
reflect, as a group, the total investment return of that index. The EAFE Free is
a diversified index developed by Morgan Stanley Capital International in 1970.
As of December 31, 1995, the EAFE Free included the common stocks (or equity
securities having investment characteristics of common stocks) of over 1,100
companies. The EAFE Free currently measures the performance of stock markets of
Europe (Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, the
Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom),
Australia, New Zealand, and the Far East (Hong Kong, Japan, Malaysia, and
Singapore). Unlike MSCI's standard indices, the Free indices take into account
local market restrictions on share ownership by foreigners. EAFE Free is meant
to reflect actual opportunities for foreign investors in a local market.

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(1) The Standard & Poor's Composite Index of 500 Stocks ("S&P 500"). "Standard &
Poor's," "S&P," and "S&P 500" are trademarks of Standard & Poor's ("S&P").
S&P's only relationship to the Trust is the licensing of certain trademarks
and trade names of S&P and of the S&P 500 which is determined, composed and
calculated by S&P without regard to the Trust. S&P has no obligation to take
your needs or the needs of the Trust into consideration in determining,
composing or calculating the S&P 500. S&P is not responsible for and has not
participated in the determination of the prices or composition of the Large
Cap Equity Index Fund or the timing of the issuance or sale of the shares of
that Fund. The Large Cap Equity Index Fund is not sponsored, endorsed, sold
or promoted by S&P, and S&P makes no representation regarding the
advisability of investment in this Fund.

(2) The Russell 2000 Small Stock Index and the Russell 3000 Index are
trademarks/service marks of the Frank Russell Trust Company. The Small Cap
Equity Index Fund is not promoted, sponsored or endorsed by, nor in any way
affiliated with the Frank Russell Company. The Frank Russell Company is not
responsible for and has not reviewed the Fund or any associated literature or
publications and makes no representation or warranty, express or implied, as
to their accuracy, or completeness, or otherwise.

(3) The Morgan Stanley Capital International Europe, Australia and Far East Free
Index ("EAFE Free"). EAFE Free is the property of Morgan Stanley & Co.
Incorporated ("Morgan Stanley"). Morgan Stanley Capital International
("MSCI") is a service mark of Morgan Stanley and has been licensed for use by
the Trust. The International Equity Index Fund is not sponsored, endorsed,
sold or promoted by Morgan Stanley. Morgan Stanley makes no representation or
warranty, express or implied, to the owners of shares of the International
Equity Index Fund or any member of the public regarding the advisability of
investing in securities generally or in the shares of the International
Equity Index Fund particularly or the ability of EAFE Free to track general
stock market performance. EAFE Free is determined, composed and calculated
without regard to the International Equity Index Fund or the Trust, and
Morgan Stanley does not have any obligation to take the needs of the issuer
of the International Equity Index Fund or the Trust into consideration in
determining, composing, calculating, or disseminating, the EAFE Free index.

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Since EAFE Free is an index of international stocks, BGFA may invest up to 100%
of the International Equity Index Fund's total assets in foreign stocks (listed
and over-the-counter) that comprise the EAFE Free.

How are the index Funds managed? BGFA does not manage the equity index Funds
according to traditional methods of "active" investment management, which
involve the buying and selling of securities based upon economic, financial and
market analysis and investment judgment. Instead, BGFA utilizes a "passive" or
indexing investment approach for each equity index Fund, attempting to
approximate the investment performance of the appropriate benchmark index
through quantitative analytical procedures. Stocks are selected for inclusion in
an equity index Fund's portfolio in order to have aggregate investment
characteristics (based on market capitalization and industry weightings),
fundamental characteristics (such as return variability, earnings valuation and
yield) and liquidity measures similar to those of the benchmark index taken in
its entirety.

Each equity index Fund will attempt to remain as fully invested as practicable
in a pool of equity securities the performance of which is expected to
approximate the performance of its benchmark index taken in its entirety. An
equity index Fund will normally invest at least 90% of its total assets in
stocks that are represented in its benchmark index and will at all times invest
a substantial portion of its total assets in such stocks.

Do the index Funds hold every stock in their indices? The Large Cap Equity Index
Fund will generally hold every stock in the S&P 500. However, each of the Small
Cap and International Equity Index Funds generally will not hold all of the
issues that comprise its benchmark index, due in part to the costs involved and,
in certain instances, the potential illiquidity of certain securities. Instead,
the Small Cap Equity Index Fund will attempt to hold a representative sample of
the securities in its benchmark index, which will be selected by BGFA utilizing
quantitative analytical models in a technique known as "portfolio sampling."
Under this technique, each stock is considered for inclusion in the Fund based
on its contribution to certain capitalization, industry and fundamental
investment characteristics. The International Equity Index Fund will hold
securities which will be selected by BGFA utilizing a quantitative model known
as minimum variance optimization. Under this technique, stocks are selected for
inclusion if the fundamental investment characteristics of the security reduce
the portfolio's predicted tracking error against the benchmark index. BGFA will
seek to construct the portfolio of each of the Small Cap and International
Equity Index Funds so that, in the aggregate, its capitalization, industry and
fundamental investment characteristics perform like those of its benchmark
index. Over time, the portfolio composition of these two Funds may be altered
(or "rebalanced") to reflect changes in the characteristics of its benchmark
index or with a view to bringing the performance and characteristics of the
equity index Fund more in line with that of its benchmark index. Such
rebalancings will require the equity index Fund to incur transaction costs and
other expenses. Each of the Small Cap and International Equity Index Funds
reserves the right to invest in all of the securities in the benchmark index.

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What other investments do the index Funds make? An equity index Fund may invest
any assets not invested in stocks that are represented in its benchmark index
(its "remaining assets") in the same type of short-term high quality debt
securities in which the Money Market Fund invests (described above), stock index
futures contracts, options on such futures contracts, and/ or cash. Such
investments may be made to invest uncommitted cash balances and to assist in
meeting shareholder redemptions. The International Equity Index Fund may also
enter into foreign currency forward and foreign currency futures contracts to
facilitate settlements in local markets, in connection with stock index futures
positions, and to protect against currency exposure in connection with its
distributions to shareholders, but may not enter into such contracts for
speculative purposes or as a way of protecting against anticipated adverse
changes in exchange rates between foreign currencies and the U.S. dollar. A
foreign currency forward contract is 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. An equity index Fund will not invest its remaining assets as
part of a temporary defensive strategy to protect against potential stock market
declines.

When and why are these futures contracts and options on futures contracts
used? An equity index Fund may purchase stock index futures contracts on its
benchmark index or a comparable stock index to simulate investment in its
benchmark index. This may be done to rapidly gain exposure to the securities
comprising its benchmark index in anticipation of purchasing such securities
over time, to reduce transaction costs, or to gain exposure to such securities
at a lower cost than by making direct investments in the cash market. If an
equity index Fund cannot sell a futures contract that it holds, it may write
call and buy put options on the contract to effectively close out or offset the
contract. The equity index Funds will not use futures contracts or options on
futures contracts to leverage net assets. See "Financial Futures Contracts and
Options on Such Contracts" in this prospectus for more detailed information.

How closely can an index Fund match the performance of its benchmark index? All
three equity index Funds attempt to match the performance of their benchmark
indices, although the Trust cannot guarantee that any of the Funds will be able
to do so. Due to the use of the portfolio sampling and optimization techniques
described above, the Small Cap and International Equity Index Funds are not
expected to track their benchmark indicies with the same degree of accuracy as
would an investment vehicle that invested in every component security of its
benchmark index. BGFA expects that, over time, the "expected tracking error" of
an equity index Fund relative to the performance of its benchmark index will be
less than 5%. BGFA will monitor the tracking error of each equity index Fund on
an ongoing basis and will seek to minimize tracking error to the extent
possible. There can be no assurance that any equity index Fund will achieve any
particular level of tracking error relative to the performance of the relevant
benchmark index. For an explanation of "expected tracking error" and more
information on this subject, see the SAI.

What are some of the other risks associated with the index Funds? The Small Cap
Equity Index Fund invests in many small U.S. companies, which entail special
risks. For a discussion of the risks of investing in small capitalization
issuers, see "Investments in Securities of Small Capitalization Issuers," in
this prospectus. In addition, the Large Cap Equity Index and International
Equity Index Funds may make foreign investments, which may present the potential
for certain benefits not generally present in domestic equity investments, but
are also subject to special risks. See "Foreign Investments" for a definition
of, and more details on the benefits and risks of, foreign investments.

THE BOND FUND

The Bond Fund seeks to realize over a period of years the highest yield
consistent with prudent investment management through current income and capital
gains. This Fund will pursue its objective by investing primarily in debt
securities rated A or better by Standard & Poor's or A or better by Moody's and
in U.S. Government securities. Under normal circumstances, at least 65% of the
Fund's total assets will be invested in debt securities that are rated A or
better or that are unrated but of equivalent quality.

The Bond Fund generally seeks to maintain a dollar weighted average portfolio
duration of less than six years. Duration represents the weighted average
maturity of expected cash flows on a debt obligation, discounted to present
value. The longer the duration of a debt obligation, the more sensitive its
value is to changes in interest rates. Maturity measures only the time final
payment is due on a bond or other debt security; it takes no account of the
pattern of a security's cash flows over time. In computing the duration of its
portfolio, the Bond Fund will have to estimate the duration of debt obligations
that are subject to prepayment or redemption by the issuer.

From time to time, up to 20% of the Bond Fund's total assets may be invested in
debt securities which are rated lower than A by Standard & Poor's or Moody's or
comparable unrated debt securities or in convertible debt securities,
convertible preferred stocks and nonconvertible preferred stocks rated within
the three highest grades of Standard & Poor's or Moody's

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applicable to such securities. To the extent that the Bond Fund invests in such
securities, the Bond Fund's investment portfolio will be subject to relatively
greater risk of loss of income and principal. Securities rated BBB or lower by
Standard & Poor's or Baa or lower by Moody's are considered by those rating
agencies to have varying degrees of speculative characteristics. Consequently,
although they can be expected to provide higher yields, such securities may be
subject to greater market value fluctuations and greater risk of loss of income
and principal than lower-yielding, higher-rated fixed-income securities.

The Bond Fund will not directly purchase common stocks. However, it may retain
common stocks acquired either by conversion of debt securities or by the
exercise of warrants attached to debt securities.

When appropriate, in SFIM's opinion, based upon prevailing market or economic
conditions, the Bond Fund for temporary defensive purposes may invest up to 100%
of its total assets in other types of securities, including securities in which
the Money Market Fund may invest, or it may retain funds in cash. See the
description of the Money Market Fund above and Appendix A to the SAI.

Although, in SFIM's opinion, the risk of loss of principal should be lessened by
the quality of the investments in which the Bond Fund will primarily invest, the
Bond Fund may be subject to substantial price changes resulting from market
yield fluctuations with respect to holdings of longer maturities that typically
provide the best yields.

THE STOCK AND BOND BALANCED FUND

The Stock and Bond Balanced Fund seeks long-term growth of capital, balanced
with current income. This Fund will pursue its objective by investing primarily
in shares of the Trust's Large Cap Equity Index Fund and Bond Fund
(collectively, the "underlying Funds").

Under normal circumstances, the Stock and Bond Balanced Fund will attempt to
maintain approximately 60% of its net assets in shares of the Large Cap Equity
Index Fund and approximately 40% of its net assets in shares of the Bond Fund.
The Stock and Bond Balanced Fund will never invest more than 75% of its net
assets in either underlying Fund. Though the Stock and Bond Balanced Fund is not
an asset allocation or market timing fund, it will, over time, adjust the amount
of its net assets invested in each underlying Fund within the limits prescribed
above as economic, market and financial conditions warrant.

The Stock and Bond Balanced Fund may hold a portion of its assets in U.S.
Government securities, short-term paper, or may invest in the Money Market Fund
to provide flexibility in meeting redemptions, expenses, and the timing of new
investments, and serves as a short-term defense during periods of unusual
volatility. For temporary defensive purposes, the Stock and Bond Balanced Fund
may invest without limitation in such securities.

Special Risk Considerations. To the extent that the Stock and Bond Balanced Fund
invests in shares of other Funds, the risks associated with those other Funds
are also associated with an investment in the Stock and Bond Balanced Fund.
Also, since the Stock and Bond Balanced Fund's investments are concentrated in
the underlying Funds, the Stock and Bond Balanced Fund's performance is directly
related to the performance of the underlying Funds. The investment objectives,
restrictions, investment techniques and risks associated with each of the
underlying Funds are described elsewhere in this prospectus and in the SAI.

Diversification. The Stock and Bond Balanced Fund is a "nondiversified"
investment company for purposes of the Investment Company Act of 1940 because it
invests in the securities of a limited number of mutual funds. However, the
underlying Funds themselves are diversified investment companies, and the Stock
and Bond Balanced Fund intends to qualify as a diversified investment company
for the purposes of Subchapter M of the Internal Revenue Code.

Investment Techniques

In pursuing their investment objectives, the Funds may engage in the following
investment techniques.

LOANS OF PORTFOLIO SECURITIES

Each Fund may from time to time lend securities it holds to brokers, dealers,
and financial institutions, up to a maximum of 33% of the total value of that
Fund's assets. Such loans will be secured by collateral in the form of cash or
U.S. Treasury securities, which will be maintained in an amount at least equal
to the current market value of the loaned securities. Each Fund will continue to
receive interest and dividends on the loaned securities during the term of its
loans, and, in addition, will receive either a fee from the borrower or interest
earned from the investment of cash collateral in short-term securities. Each
Fund also will receive any gain or loss in the market value of its loaned
securities and of securities in which cash collateral is invested during the
term of the loan. The primary risk involved in lending securities is that the
borrower will fail financially and return the loaned securities at a time when
the collateral is insufficient to replace the full amount of the loan. In order
to minimize this risk, each Fund will make loans of securities only to firms
determined by its investment adviser (under the supervision of the Board of
Trustees) to be creditworthy.

7 -------
<PAGE>
SHORT-TERM MONEY MARKET INSTRUMENTS

All of the Funds may, to varying degrees, invest in short-term money market
instruments, including repurchase agreements, and when-issued and
delayed-delivery securities. A repurchase agreement is a transaction in which a
Fund buys a security at one price and simultaneously agrees to sell that same
security back to the original owner at a higher price. Each Fund's investment
adviser (under the supervision of the Board of Trustees) reviews the
creditworthiness of the other party to the agreement and must find it
satisfactory before engaging in a repurchase agreement. In the event of the
bankruptcy of the other party, the Fund could experience delays in recovering
its money, may realize only a partial recovery or even no recovery, and may also
incur disposition costs. When-issued and delayed delivery securities are
discussed in "Investment Techniques" in the SAI.

FOREIGN INVESTMENTS

Investing in the securities of companies organized outside the United States or
of companies whose securities are principally traded outside the United States
("foreign issuers") or investments in securities denominated or quoted in
foreign currency ("non-dollar securities") involves certain special
considerations, including those set forth below, which are not typically
associated with investing in securities of domestic issuers or U.S. dollar
denominated securities.

Each of the Large Cap Equity Index and International Equity Index Funds may
invest in non-dollar securities and the securities of foreign issuers
(collectively, "foreign investments"). These Funds will generally not
concentrate their investments in any particular foreign country, except to the
extent that the Fund's benchmark index concentrates in such foreign country. The
Large Cap Equity Index Fund may invest up to 20% of its total assets in foreign
securities. The International Equity Index Fund may invest all of its assets in
non-dollar securities and the securities of foreign issuers.

FOREIGN INVESTMENTS GENERALLY

Foreign investments may offer potential benefits not available from investments
solely in securities of domestic issuers. Such benefits may include the
opportunity to invest in foreign issuers that appear to offer better opportunity
for long-term capital appreciation or current earnings than investments in
domestic issuers, the opportunity to invest in foreign countries with economic
policies or business cycles different from those of the United States and the
opportunity to reduce fluctuations in portfolio value by taking advantage of
foreign securities markets that do not necessarily move in a manner parallel to
U.S. markets.

Making foreign investments involves significant risks that are not typically
associated with investing in securities of domestic issuers. Such investments
may be affected by changes in currency rates, changes in foreign or U.S. laws or
restrictions applicable to such investments and in exchange control regulations.
For example, a decline in the currency exchange rate may reduce the value of
certain portfolio investments. Many foreign stock markets may have substantially
less volume than, for example, the New York Stock Exchange and securities of
some foreign issuers may be less liquid than securities of comparable domestic
issuers. Commissions and dealer mark-ups on transactions in foreign securities
may be higher than for similar transactions in the U.S. In addition, clearance
and settlement procedures may be different in foreign countries and, in certain
markets, on certain occasions, such procedures have been unable to keep pace
with the volume of securities transactions, thus making it difficult to conduct
such transactions. For example, delays in settlement could result in temporary
periods when a portion of the assets of a Fund are uninvested and no return is
earned thereon. The inability of a Fund to make intended investments due to
settlement problems could cause it to miss attractive investment opportunities.
Inability to dispose of portfolio securities or other investments due to
settlement problems could result either in losses to a Fund due to subsequent
declines in value of the portfolio investment or, if the Fund has entered into a
contract to sell the investment, could result in possible liability for the
Fund.

Foreign issuers are not generally subject to uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
companies. There may be less publicly available information about a foreign
issuer than about a domestic one. In addition, there is generally less
government regulation of stock exchanges, brokers, and listed and unlisted
issuers in foreign countries than in the United States. Furthermore, with
respect to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, imposition of withholding taxes on dividend or interest
payments, limitations on the removal of portfolios or other assets of the Fund,
or political or social instability or diplomatic developments which could affect
investments in those countries. Individual foreign economies also may differ
favorably or unfavorably from the United States economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position.

For more information on foreign investments, see "Foreign Investments" in the
SAI.

- ---------
8
<PAGE>
INVESTMENTS IN ADRS, EDRS AND GDRS

Many securities of foreign issuers are represented by sponsored or unsponsored
American depository receipts ("ADRs"), European depository receipts ("EDRs"),
and global depository receipts ("GDRs"). ADRs are receipts typically issued by a
U.S. bank or trust company which evidence ownership of underlying securities of
foreign corporate issuers. EDRs and GDRs are receipts issued by non-U.S.
financial institutions evidencing arrangements similar to ADRs. Generally, ADRs
are in registered form and are designed for trading in U.S. markets while EDRs
are in bearer form and are designed for trading in European securities markets.
GDRs are issued in either registered or bearer form and are designed for trading
on a global basis.

The Large Cap Equity Index Fund may invest in ADRs and the International Equity
Index Fund may invest in ADRs, EDRs and GDRs. ADRs represent the right to
receive securities of foreign issuers deposited in a domestic bank or a foreign
correspondent bank. Prices of ADRs are quoted in U.S. dollars, and ADRs are
traded in the U.S. on exchanges or over-the-counter and are sponsored and issued
by domestic banks. ADRs do not eliminate all the risk inherent in investing in
the securities of foreign issuers. To the extent that a Fund acquires ADRs
through banks which do not have a contractual relationship with the foreign
issuer of the security underlying the ADR to issue and service such ADRs, there
may be an increased possibility that the Fund would not become aware of and be
able to respond to corporate actions such as stock splits or rights offerings
involving the foreign issuer in a timely manner. In addition, the lack of
information may result in inefficiencies in the valuation of such instruments.
However, by investing in ADRs rather than directly in the stock of foreign
issuers, a Fund will avoid currency risks during the settlement period for
either purchases or sales. In general, there is a large, liquid market in the
U.S. for ADRs quoted on a national securities exchange or the NASD's national
market system. The information available for ADRs 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.

EDRs and GDRs are receipts evidencing an arrangement with a non-U.S. bank
similar to that for ADRs and are designed for use in non-U.S. securities
markets. EDRs and GDRs are not necessarily quoted in the same currency as the
underlying security.

FORWARD CURRENCY CONTRACTS

As described above, the International Equity Index Fund may enter into foreign
currency forward and foreign currency futures contracts. Such contracts are
subject to special risks. For example, contracts to sell foreign currency could
limit any potential gain which might be realized by the Fund if the value of the
hedged currency increased. In addition, forward contracts are subject to the
risk that the counterparty to such contract will default on its obligations.
Since a forward foreign currency exchange contract is not guaranteed by an
exchange or clearinghouse, a default on the contract would deprive the Fund of
unrealized profits, transaction costs or the benefits of a currency hedge or
force the Fund to cover its purchase or sale commitments, if any, at the current
market price.

9 -------
<PAGE>
STOCK INDEX FUTURES CONTRACTS AND OPTIONS ON SUCH CONTRACTS

Each equity index Fund may purchase and sell futures contracts on its benchmark
stock index or a similar stock index as a way to gain exposure to the securities
in the benchmark index or to simulate full investment in the underlying
benchmark equities. A stock index futures contract is a contract to buy or sell
a specified amount of securities comprising the index to which it relates at a
future time for a fixed price.

An equity index Fund may write covered call options and purchase options on
futures contracts to offset futures contracts held by the Fund that become
illiquid. An option to sell a financial futures contract gives the purchaser
thereof the right to sell a position in the underlying futures contract, and,
therefore, can serve the same function as selling the futures contract directly.
When used to offset a futures contract already owned by a Fund, an option can
effectively close out the Fund's position with regard to that futures contract.

The Stock and Bond Balanced Fund may indirectly hold these types of securities
by virtue of its investment in the Large Cap Equity Index Fund.

None of the equity index Funds will enter into any financial futures contract or
purchase any option thereon, if, immediately thereafter, the total amount of its
assets required to be on deposit as margin to secure its obligations under open
futures contracts, plus the amount of premiums paid by the Fund for outstanding
options to purchase futures contracts, would exceed 5% of the market value of
the Fund's total assets.

The use of futures contracts by these Funds entails certain risks, including but
not limited to the following: no assurance that futures contract transactions
can be offset at favorable prices; possible reduction of a Fund's income due to
their use; possible reduction in value of the futures contract; possible lack of
liquidity due to daily limits on price fluctuations; imperfect correlation
between the futures contract and the securities held in the Fund or the
securities comprising the benchmark index; and potential losses in excess of the
amount initially invested in the futures contracts themselves. The use of
futures contracts and options on futures contracts requires special skills in
addition to those needed to select portfolio securities. A further discussion of
futures contracts and their associated risks is contained in the SAI.

RESTRICTED SECURITIES AND ILLIQUID INVESTMENTS

Each Fund's adviser is responsible for determining the liquidity of investments
held by that Fund. Investments may be illiquid because of the absence of a
trading market, making it difficult to value them or dispose of them promptly at
an acceptable price. The Large Cap Equity Index, Small Cap Equity Index,
International Equity Index, and Money Market Funds will each not purchase or
otherwise acquire any investment if, as a result, more than 15% (10% in the case
of the Money Market Fund) of its net assets (taken at current value) would be
invested in instruments that are illiquid, except as described below.

Illiquid investments include most repurchase agreements maturing in more than
seven days, currency swaps, time deposits with a notice or demand period of more
than seven days, certain over-the-counter option contracts (and segregated
assets used to cover such options), participation interests in loans, and
restricted securities. A restricted security is one that has a contractual
restriction on resale or cannot be resold publicly until it is registered under
the Securities Act of 1933.

The foregoing illiquid security investment restrictions do not apply to
purchases of restricted securities eligible for sale to qualified institutional
purchasers in reliance upon Rule 144A under the Securities Act of 1933 that are
determined to be liquid by the Trust's Board of Trustees or by a Fund's
investment adviser under board-approved procedures. Such guidelines would take
into account trading activity for such securities and the availability of
reliable pricing information, among other factors. To the extent that qualified
institutional buyers become for a time uninterested in purchasing these
restricted securities, a Fund's holdings of those securities may become
illiquid. The foregoing investment restrictions also do not apply to purchases
by the International Equity Index Fund of securities of foreign issuers offered
and sold outside the United States in reliance upon the exemption from
registration provided by Regulation S under the Securities Act of 1933.

BORROWING

From time to time, each Fund may borrow money from a bank or through reverse
repurchase agreements in amounts up to 33 1/3% of its total assets (including
the amount borrowed). Each Fund may also borrow up to an additional 5% of its
total assets (including the amount borrowed), but only for temporary purposes
(e.g., to facilitate distributions to shareholders or to meet redemption
requests prior to the settlement of securities already sold or in the process of
being sold by the Fund). Each Fund may also obtain such short-term credits as
may be necessary for clearance of purchases and sales of portfolio securities.

INVESTMENTS IN SECURITIES OF SMALL CAPITALIZATION ISSUERS

The Small Cap and International Equity Index Funds may invest in securities
issued by small capitalization companies. Some of these companies often do not
have the financial strength needed to do well in difficult times.

- ---------
10
<PAGE>
Also, they often sell limited numbers of products, which can make it harder for
them to compete with medium and large companies. However, because they are
small, their stock prices may fluctuate more over the short-term, but they have
more potential to grow. This means their stock value may offer greater potential
for appreciation.

INVESTMENTS IN OTHER INVESTMENT COMPANIES

Each Fund other than the Stock and Bond Balanced Fund may invest up to 5% of its
total assets in the securities of any single investment company and up to 10% of
its total assets in the securities of other investment companies in the
aggregate. However, no Fund (other than the Stock and Bond Balanced Fund) may
hold more than 3% of the total outstanding voting stock of any single investment
company.

The Stock and Bond Balanced Fund may invest 100% of its total assets in the
securities of other investment companies.

Performance Information

From time to time the Trust may publish average annual total return figures for
one or more of the Funds in advertisements and communications to shareholders or
sales literature. Average annual total return is determined by computing the
annual percentage change in value of $1,000 invested for specified periods
ending with the most recent calendar quarter, assuming reinvestment of all
dividends and distributions at net asset value. The average annual total return
calculation assumes a complete redemption of the investment at the end of the
relevant period.

The Trust also may from time to time publish year-by-year total return,
cumulative total return and yield information for the Funds in advertisements,
communications to shareholders or sales literature. These may be provided for
various specified periods by means of quotations, charts, graphs or schedules.
Year-by-year total return and cumulative total return for a specified period are
each derived by calculating the percentage rate required to make a $1,000
investment in a Fund (assuming all distributions are reinvested) at the
beginning of such period equal to the actual total value of such investment at
the end of such period.

Yield is computed by dividing net investment income earned during a recent 30
day period by the product of the average daily number of shares outstanding and
entitled to receive dividends during the period and the price per share on the
last day of the relevant period. The results are compounded on a bond equivalent
(semi-annual) basis and then annualized. Net investment income is equal to the
dividends and interest earned during the period, reduced by accrued expenses for
the period. The calculation of net investment income for these purposes may
differ from the net investment income determined for accounting purposes.

In addition, the Trust may from time to time publish performance of its Funds
relative to certain performance rankings and indices.

The investment results of the Funds will fluctuate over time and any
presentation of investment results for any prior period should not be considered
a representation of what an investment may earn or what a Fund's performance may
be in any future period.

Determination of Net Asset Value

The net asset value of each Fund is determined as of the time of the close of
trading on the New York Stock Exchange, (currently at 4:00 PM, New York City
time) on each day when the New York Stock Exchange is open except as noted
below. The New York Stock Exchange is scheduled to be open Monday through Friday
throughout the year, except for certain federal and other holidays. The net
asset value of each Fund will not be calculated on the Friday following
Thanksgiving or on December 24, 1998. The net asset value of a Fund is
determined by adding the values of all securities, cash and other assets
(including accrued but uncollected interest and dividends) of that Fund and
subtracting all liabilities (including accrued expenses but excluding capital
and surplus). The net asset value of a share is determined by dividing the net
asset value of a Fund by the number of outstanding shares of that Fund. Except
for the securities and assets of the Money Market Fund and short-term debt
securities with remaining maturities of 60 days or less (other than U.S.
Treasury bills), portfolio securities generally will be valued based upon their
market value. All of the securities and assets of the Money Market Fund and
short-term debt securities having remaining maturities of 60 days or less (other
than U.S. Treasury bills) held by any of the other Funds are valued by the
amortized cost method, which approximates market value. Expenses, including the
investment advisory fee payable to SFIM, are accrued daily.

The net asset value per share of the Stock and Bond Balanced Fund will be based,
in part, on the net asset value per share of each of the underlying Funds in
which it invests. Thus, while the net asset value per share of the Stock and
Bond Balanced Fund will be determined as described above, the pricing of the
Stock and Bond Balanced Fund's securities cannot occur until the net asset
values per share of the underlying Funds are determined.

11-------
<PAGE>
Offering, Purchase and Redemption of Shares

Pursuant to an underwriting agreement, SFIM acts without remuneration as the
Trust's underwriter in the distribution of the shares of each Fund. See
"Investment Adviser" and "Service Providers" in this prospectus for more
information.

Shares of the Funds are sold in a continuous offering and are authorized to be
offered to the Accounts to support the Contracts. Net purchase payments under
the Contracts are placed in one or more subaccounts of the Accounts and the
assets of each subaccount are invested in the shares of the Fund corresponding
to that subaccount. The Accounts purchase and redeem shares of the Funds for
their subaccounts at net asset value without sales or redemption charges.

For each day on which a Fund's net asset value is calculated, the Accounts
transmit to the Trust any orders to purchase or redeem shares of the Fund(s)
based on the purchase payments, redemption (surrender) requests, and transfer
requests from Contract owners, annuitants and beneficiaries that have been
processed that day. The Accounts purchase and redeem shares of each Fund at the
Fund's net asset value per share calculated as of that same day although such
purchases and redemptions may be executed the next morning.

Please refer to the separate prospectuses for the Contracts and the Accounts for
a more detailed description of the procedures whereby a Contract owner,
annuitant or beneficiary may allocate his or her interest in the Account to a
subaccount using the shares of one of the Funds as an underlying investment
medium.

In the future, the Trust may offer shares of one or more of the Funds (including
new funds that might be added to the Trust) to other registered or unregistered
separate accounts of State Farm or its life insurance company affiliates to
support variable annuity or variable life insurance contracts (other than the
Contracts). Likewise, the Trust may also, in the future and subject to obtaining
required regulatory approvals, offer shares of one or more of the Funds directly
to qualified pension and retirement plans.

Because shares of the Funds are offered to Accounts supporting variable annuity
Contracts and Accounts supporting variable life insurance Contracts, a potential
for certain conflicts may exist between the interests of owners of variable
annuity Contracts and owners of variable life insurance Contracts. Likewise, in
the event that shares of any Fund are offered to qualified pension and
retirement plans, a potential for certain conflicts may exist between the
interests of variable annuity contract owners, variable life insurance contract
owners and plan participants. The Trust does not currently foresee any
disadvantage to owners of either variable annuity Contracts or variable life
insurance Contracts arising from the fact that shares of any Fund might be held
by such entities. The Trust's Board of Trustees, however, will monitor the Funds
in order to identify any material irreconcilable conflicts of interest which may
possibly arise, and to determine what action, if any, should be taken in
response to such conflicts.

Dividends, Distributions and Taxes

DIVIDENDS AND DISTRIBUTIONS

It is the Trust's intention to distribute, as dividends, substantially all of
the net investment income, if any, from each of the Funds. All dividends of a
Fund are subsequently reinvested in additional shares of that Fund at net asset
value, subject to redemption rights discussed above.

The Bond Fund and the Money Market Fund intend to declare dividends from their
net investment income every day. Each of these Funds will distribute such
dividends quarterly by reinvesting them in additional Fund shares at net asset
value.

TAXES

GENERAL TAX INFORMATION

The Trust intends that each of the Funds will qualify as a regulated investment
company under Subchapter M of Chapter 1 of the Internal Revenue Code of 1986
(the "Code"). If each of the Funds qualifies as a regulated investment company
and the Trust distributes substantially all of its net income and gains to its
shareholders (which it intends to do), then under the provisions of Subchapter
M, the Trust should have little or no income taxable to it under the Code.

Each Fund of the Trust must meet several requirements to maintain its status as
a regulated investment company. These requirements include the following: (1) at
least 90% of the Fund's gross income must be derived from dividends, interest,
payments with respect to securities loaned, and gains from the sale or
disposition of securities; and (2) at the close of each quarter of the Fund's
taxable year, (a) at least 50% of the value of the Fund's total assets must
consist of cash, U.S. Government securities and other securities (no more than
5% of the value of the Fund may consist of such other securities of any one
issuer, and the Fund must not hold more than 10% of the outstanding voting stock
of any issuer), and (b) the Fund must not invest more than 25% of the value of
its total assets in the securities of any one issuer (other than U.S. Government
securities).

In order to maintain the qualification of a Fund's status as a regulated
investment company, the Trust may, in its business judgment, restrict a Fund's
ability to enter into stock index futures contracts or options on such futures
contracts or engage in short-term trading and transactions in securities
(including

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12
<PAGE>
stock index futures contracts and options on such futures contracts). For the
same reason, the Trust may, in its business judgment, require a Fund to defer
the closing out of a contract beyond the time when it might otherwise be
advantageous to do so.

Each of the Funds also intends to comply with section 817(h) of the Code and the
regulations issued thereunder, which impose certain investment diversification
requirements on life insurance companies' separate accounts (such as the
Accounts) that are used to fund benefits under variable life insurance and
variable annuity contracts. These requirements are in addition to the
requirements of subchapter M and of the Investment Company Act of 1940, and may
affect the securities in which a Fund may invest. In order to comply with the
current or future requirements of section 817(h) (or related provisions of the
Code), the Trust may be required, e.g., to alter the investment objectives of
one or more of the Funds. No such change of investment objectives will take
place without notice to the shareholders of an affected Fund, the approval of a
majority of the outstanding voting shares, and the approval of the Securities
and Exchange Commission, to the extent legally required.

TAXATION OF FOREIGN INVESTMENTS

Funds investing in foreign securities or currencies may be required to pay
withholding or other taxes to foreign governments. Foreign tax withholding from
dividends and interest, if any, is generally at a rate between 10% and 35%. The
investment yield of any Fund that invests in foreign securities or currencies
will be reduced by these foreign taxes. Shareholders will bear the cost of any
foreign tax withholding, but may not be able to claim a foreign tax credit or
deduction for these foreign taxes. Funds investing in securities of passive
foreign investment companies may be subject to U.S. Federal income taxes and
interest charges, and the investment yield of a Fund making such investments
will be reduced by these taxes and interest charges. Shareholders will bear the
cost of these taxes and interest charges, but will not be able to claim a
deduction for these amounts.

ADDITIONAL TAX CONSIDERATIONS

If a Fund failed to qualify as a regulated investment company, owners of
variable life insurance and annuity contracts based on the Fund (1) might be
taxed currently on the investment earnings under their contracts and thereby
lose the benefit of tax deferral, and (2) the Fund might incur additional taxes.
In addition, if a Fund failed to comply with the diversification requirements of
section 817(h) of the Code and the regulations thereunder, owners of variable
life insurance and annuity contracts based on the Fund would be taxed on the
investment earnings under their contracts and thereby lose the benefit of tax
deferral. Accordingly, compliance with the above rules is carefully monitored by
the Funds' investment advisers and it is intended that each Fund will comply
with these rules as they exist or as they may be modified from time to time.
Compliance with the tax requirements described above may result in a reduction
in the return under a Fund, since, to comply with the above rules, the
investments utilized (and the time at which such investments are entered into
and closed out) may be different from what the Fund's investment adviser might
otherwise believe to be desirable.

It is not feasible to comment on all of the federal tax consequences concerning
the Funds. Since the shareholders of the Funds are currently limited to the
Accounts, no further discussion of those consequences is included herein. For
information concerning the federal income tax consequences to the owners of
variable life insurance and annuity contracts, see the prospectuses for the
contracts.

Management of the Trust

BOARD OF TRUSTEES

The Trust has a Board of Trustees, the members of which are elected by the
shareholders. The Trustees are responsible for the overall management of the
Trust and their duties include reviewing the results of each of the Funds,
monitoring investment activities and techniques, and receiving and acting upon
future plans for the Trust.

It is possible that the interests of the Stock and Bond Balanced Fund could
diverge from the interests of one or more of the underlying Funds in which it
invests. If such interests were ever to become divergent, it is possible that a
conflict of interest could arise and affect how the Trustees and officers
fulfill their fiduciary duties to each Fund. The Trustees believe they have
structured each Fund to avoid these concerns. However, conceivably, a situation
could occur where proper action for the Stock and Bond Balanced Fund could be
adverse to the interests of an underlying Fund, or the reverse could occur. If
such a possibility arises, the affected Funds' investment adviser(s) and the
Trustees and officers of the Trust will carefully analyze the situation and take
all steps they believe reasonable to minimize and, where possible, eliminate the
potential conflict. Moreover, close and continuous monitoring will be exercised
to avoid, insofar as possible, these concerns.

INVESTMENT ADVISER

Pursuant to an investment advisory and management services agreement with the
Trust and subject to the authority of the Trust's Board of Trustees, SFIM serves
as the Trust's investment adviser and conducts the business and affairs of the
Trust. It is registered under the Investment Advisers Act of 1940 and its
principal office is located at One State Farm Plaza,

13-------
<PAGE>
Bloomington, Illinois 61710-0001. SFIM is wholly-owned by State Farm Mutual
Automobile Insurance Company ("SFMAIC"). Pursuant to a separate service
agreement among SFMAIC, SFIM and the Trust, SFMAIC provides SFIM with certain
personnel, services and facilities to enable SFIM to perform its obligations to
the Trust.

Since its inception in 1967, SFIM's sole business has been to act as investment
adviser, principal underwriter, transfer agent and dividend disbursing agent for
the State Farm mutual funds. SFIM also provides all executive, administrative,
clerical and other personnel necessary to operate the Trust and pays the
salaries and other costs of employing all these persons. SFIM furnishes the
Trust with office space, facilities, and equipment and pays the day-to-day
expenses related to the operating and maintenance of such office space,
facilities and equipment. All expenses incurred in the organization of the Trust
or of any new Funds of the Trust, including legal and accounting expenses and
certain costs of registering securities of the Trust under federal and state
securities laws, are also paid by SFIM.

The Trust is responsible for payment of all expenses it may incur in its
operation and all of its general administrative expenses except those expressly
assumed by SFIM as described in the preceding paragraphs. These include (by way
of description and not of limitation), any share redemption expenses, expenses
of portfolio transactions, shareholder servicing costs, pricing costs, interest
on borrowings by the Trust, charges of the custodians and transfer agent, if
any, cost of auditing services, non-interested Trustees' fees, all taxes and
fees, investment advisory fees (other than subadvisory fees), certain insurance
premiums, cost of maintenance of corporate existence, investor services
(including allocable personnel and telephone expenses), costs of printing and
mailing updated Trust prospectuses to shareholders and contractholders,
preparing, printing and mailing proxy statements and shareholder reports to
shareholders and contractholders, the cost of paying dividends and capital gains
distributions, costs of Trustee and shareholder meetings, dues to trade
organizations, and any extraordinary expenses, including litigation costs in
legal actions involving the Trust, or costs related to indemnification of
Trustees, officers and employees of the Trust. SFIM reimburses SFMAIC for such
costs, direct and indirect, as are fairly attributable to the services performed
and the facilities provided by SFMAIC under the separate service agreement.
Accordingly, the Trust makes no payment to SFMAIC under the service agreement.

The Trust pays SFIM monthly compensation in the form of an investment advisory
fee. The fee is based upon average daily net assets and is accrued daily and
paid to SFIM quarterly at the following annual rates for each of the Funds:

<TABLE>
<S> <C>
Large Cap Equity Index .26% of net assets

Small Cap Equity Index .40% of net assets

International Equity Index .55% of net assets

Bond .50% of net assets

Money Market .40% of net assets

Stock and Bond Balanced None
</TABLE>

SFIM has agreed not to be paid an investment advisory fee for performing its
services for the Stock and Bond Balanced Fund and has agreed to bear any other
expenses incurred by the Stock and Bond Balanced Fund. (This expense limitation
arrangement is voluntary and may be eliminated by SFIM at any time.) However,
SFIM will receive investment advisory fees from managing the underlying Funds in
which the Stock and Bond Balanced Fund invests.

With respect to each of the Funds other than the Stock and Bond Balanced Fund
and the International Equity Index Fund, SFIM has agreed to bear the expenses
incurred by the Fund, other than the investment advisory fee, that exceed .10%
of such Fund's average daily net assets. With respect to the International
Equity Index Fund, SFIM has agreed to bear the expenses incurred by the Fund,
other than the investment advisory fee, that exceed .20% of the Fund's average
daily net assets. These expense limitation arrangements are voluntary and may be
eliminated by SFIM at any time.

INVESTMENT SUB-ADVISER

SFIM has engaged BGFA as the investment sub-adviser to provide day-to-day
portfolio management for the Large Cap, Small Cap, and International Equity
Index Funds. BGFA was created by the reorganization of Wells Fargo Nikko
Investment Advisors with and into an affiliate of Wells Fargo Institutional
Trust Company, N.A. BGFA is an indirect subsidiary of Barclays Bank PLC and is
located at 45 Fremont Street, San Francisco, California 94105. As of April 30,
1997, BGFA and its affiliates provided investment advisory services for over
$429 billion of assets.

- ---------
14
<PAGE>
BGFA determines which securities to buy and sell for each of these Funds,
selects the brokers and dealers to effect the transactions, and negotiates
commissions. For its services, SFIM pays BGFA an investment sub-advisory fee
equal to a percentage of the average daily net assets of each index Fund at the
rates set forth below less certain credits also described below. The fee is
accrued daily and paid to BGFA quarterly. The rates upon which the fee is based
are as follows:

<TABLE>
<S> <C>
Large Cap Equity Index Fund
- ----------------------------------------
.15% of the first $50,000,000 of net
assets
.09% of the next $50,000,000 of net
assets

.07% thereafter

Small Cap Equity Index Fund
- ----------------------------------------
.20% of the first $50,000,000 of net
assets
.14% of the next $50,000,000 of net
assets

.11% thereafter

International Equity Index Fund
- ----------------------------------------
.35% of the first $50,000,000 of net
assets
.30% of the next $50,000,000 of net
assets

.20% thereafter
</TABLE>

The quarterly fee payable by SFIM to BGFA with respect to each index Fund will
be reduced by certain credits. The fee with respect to the Large Cap Equity
Index Fund and Small Cap Equity Index Fund will be reduced by $875 and $2,875
per quarter, respectively. The fee with respect to the International Equity
Index Fund will be reduced by $3,750 per quarter and an additional amount based
upon such Fund's international custody charges.

THE BOND FUND AND THE STOCK AND BOND BALANCED FUND MANAGERS

The Bond Fund's portfolio is managed by a team consisting of Kurt Moser and
Duncan Funk. The Stock and Bond Balanced Fund's portfolio is managed by a team
consisting of Kurt Moser, John Concklin, and Duncan Funk.

Mr. Moser is a Director and, since 1997, a Senior Vice President of SFIM (prior
to 1997, Mr. Moser was a Director and a Vice President of SFIM). Mr. Moser is
also a Vice President of the Trust. In addition to his offices with SFIM and the
Trust, Mr. Moser has held the following positions during the past five years:
Vice President of State Farm Growth Fund, Inc., State Farm Balanced Fund, Inc.,
State Farm Interim Fund, Inc., and State Farm Municipal Bond Fund, Inc.;
Director of State Farm VP Management Corp. since 1997; Vice President --
Investments of SFMAIC, State Farm County Mutual Insurance Company of Texas,
State Farm Lloyds, Inc., and State Farm International Services, Inc.; Director
and Vice President -- Investments of State Farm Life Insurance Company, State
Farm Fire and Casualty Company ("SFFCC"), State Farm General Insurance Company,
State Farm Annuity and Life Insurance Company, and State Farm Life and Accident
Assurance Company; Investment Officer of State Farm Indemnity Company; and
Underwriter of State Farm Lloyds.

Mr. Concklin is an Investment Officer of SFIM. Mr. Concklin is also a Vice
President of the Trust. In addition to his offices with SFIM and the Trust, Mr.
Concklin has held the following positions during the last five years: Vice
President -- Common Stocks of SFMAIC, State Farm Life Insurance Company, and
SFFCC since 1997; Vice President of State Farm Balanced Fund, Inc. and State
Farm Interim Fund, Inc. since 1995; Vice President -- Fixed Income of SFMAIC,
State Farm Life Insurance Company, and SFFCC from 1995 to 1997; and Investment
Officer of SFMAIC, State Farm Life Insurance Company, and SFFCC until 1995.

Mr. Funk is an Investment Analyst for SFMAIC. Mr. Funk has held this position
for the last five years.

USE OF CERTAIN BROKERS

SFIM or BGFA may use brokerage firms that are affiliated with State Farm or BGFA
to execute portfolio trades for the funds, but only when SFIM or BGFA, as
appropriate, believes that no other firm offers a better combination of quality
execution (i.e., timeliness and completeness), favorable price and value of
research services.

Additional Information

ABOUT THE SHARES

The Trust is currently issuing six series of shares, each representing
beneficial interests in one of the six Funds. Each share (including fractional
shares) is entitled to one vote for each dollar of net asset value represented
by that share on all matters to which the holder of that share is entitled to
vote. All shares have equal proportional rights with regard to redemptions,
dividends, distributions, and liquidations with respect to the Fund in which
they represent an interest. When issued, shares are fully paid and nonassessable
and do not have preemptive or conversion rights or cumulative voting rights.

CONTRACT OWNER VOTING RIGHTS

With regard to matters for which the Investment Company Act of 1940 requires a
shareholder vote, State Farm, as the legal owner of shares held by the Accounts,
typically votes Trust shares held by the Accounts in accordance with
instructions received from owners of Contracts (or annuitants or beneficiaries
thereunder) having a voting interest in the Accounts. Each share has one vote
for each dollar of net asset value represented by that share and votes are
counted on an aggregate basis except as to matters where the interests of

15-------
<PAGE>
Funds differ (such as approval of an investment advisory agreement or a change
in the fundamental investment policies). In such a case, the voting is on a
Fund-by-Fund basis. Fractional shares are counted proportionally. Shares held by
Accounts for which no instructions are received are generally voted by State
Farm for or against any proposition, or in abstention, in the same proportion as
the shares for which instructions have been received. You should refer to the
separate prospectus, which accompanies this prospectus, describing your Contract
and the Account through which it is offered for more information on your voting
rights.

ANNUAL AND SEMI-ANNUAL REPORTS

The Trust's annual and semi-annual reports to shareholders contain additional
performance information that will be made available upon request and without
charge.

SERVICE PROVIDERS

In addition to its role as investment adviser and fund accountant for certain
Funds (listed below), SFIM acts as underwriter for the Trust. See "Investment
Adviser" for more information on SFIM.

The following companies provide custody and/or fund accounting services to the
Trust:

<TABLE>
<CAPTION>
Fund Custodian Fund Accountant
<S> <C> <C>
Money Market The Chase Manhattan Bank (1) SFIM

Large Cap Equity Index Barclays Global Investors (2) SFIM

Small Cap Equity Index Barclays Global Investors (2) SFIM

International Equity Index Investors Bank and Trust Company (3) Investors Bank and Trust
Company (3)

Bond The Chase Manhattan Bank (1) SFIM

Stock and Bond Balanced The Chase Manhattan Bank (1) SFIM
</TABLE>

(1) North American Insurance Securities Services, 3 Chase MetroTech Center, 6th
Floor, Brooklyn, New York 11245.

(2) 45 Fremont Street, San Francisco, California 94105.

(3) 200 Clarendon Street, Boston, Massachusetts 02116.

LEGAL MATTERS

Sutherland, Asbill & Brennan LLP of Washington, D.C. is counsel for the Trust.
There are no material legal proceedings in which the Trust is a party.

- ---------
16
<PAGE>
(This page has been left blank intentionally.)
<PAGE>

STATE FARM VARIABLE PRODUCT TRUST
One State Farm Plaza
Bloomington, Illinois 61710-0001
(309) 766-2029

STATEMENT OF ADDITIONAL INFORMATION
December 15, 1997

This Statement of Additional Information is not a prospectus. Much of the
information contained in this Statement expands upon matters discussed in the
Prospectus and should, therefore, be read in conjunction with the Prospectus. To
obtain a copy of a Prospectus with the same date as this Statement of Additional
Information, contact State Farm Investment Management Corp., One State Farm
Plaza, Bloomington, Illinois 61710-0001, (309) 766-2029.

231-3556 Printed in U.S.A.

<PAGE>

TABLE OF CONTENTS

INVESTMENT TECHNIQUES AND RESTRICTIONS . . . . . . . . . . . . . . . . . . . 1
Investment Techniques . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Money Market Fund. . . . . . . . . . . . . . . . . . . . . . . . . 1
When-Issued and Delayed Delivery Securities. . . . . . . . . . . . . . 2
Loans of Portfolio Securities. . . . . . . . . . . . . . . . . . . . . 2
Convertible Securities . . . . . . . . . . . . . . . . . . . . . . . . 3
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
U.S. Government Securities . . . . . . . . . . . . . . . . . . . . . . 3
Foreign Investments. . . . . . . . . . . . . . . . . . . . . . . . . . 4
Financial Futures Contracts. . . . . . . . . . . . . . . . . . . . . . 5
Options on Stock Index Futures Contracts . . . . . . . . . . . . . . . 5
Certain Additional Risks of Futures Contracts and Options on
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . 6
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . 7
Fundamental Restrictions . . . . . . . . . . . . . . . . . . . . . . . 7
Non-fundamental Restrictions . . . . . . . . . . . . . . . . . . . . . 9
Industry Concentrations. . . . . . . . . . . . . . . . . . . . . . . . 9

MANAGEMENT OF THE TRUST. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Trustees and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Investment Advisory Agreements. . . . . . . . . . . . . . . . . . . . . . 13
Between the Trust and SFIM . . . . . . . . . . . . . . . . . . . . . . 13
Between SFIM and BGFA. . . . . . . . . . . . . . . . . . . . . . . . . 15
Tracking Error. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Securities Activities of the Investment Advisers. . . . . . . . . . . . . 16

PORTFOLIO TRANSACTIONS AND BROKERAGE . . . . . . . . . . . . . . . . . . . . 16
Portfolio Turnover. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . 17

PERFORMANCE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 19

DIVIDENDS AND DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . . . . 21

REDEMPTION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Relationships with the Companies that Maintain the Benchmark Indices. . . 22
Standard & Poor's. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Frank Russell Company. . . . . . . . . . . . . . . . . . . . . . . . . 23
Morgan Stanley & Co. Incorporated. . . . . . . . . . . . . . . . . . . 23
Code of Ethics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Legal Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

AUDITED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 25
APPENDIX A -- Description of Money Market Securities . . . . . . . . . . . . 26
APPENDIX B -- Ratings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

<PAGE>

INVESTMENT TECHNIQUES AND RESTRICTIONS

INVESTMENT TECHNIQUES

The objectives, policies, and certain techniques by which the Funds will pursue
their objectives are generally set forth in the Prospectus. This section is
intended to augment the explanation found in the Prospectus.

THE MONEY MARKET FUND

1. rated in one of the two highest rating categories for short-term debt
obligations assigned by at least two NRSROs, or by only one NRSRO if
only one NRSRO has issued a rating with respect to the instrument
("requisite NRSROs"); or

2. in the case of an unrated instrument, that SFIM determines, under the
supervision of the Trust's Board of Trustees, to be of comparable
quality to the instruments described in paragraph 1 above; or

3. issued by an issuer that has received a rating of the type described
in paragraph 1 above on other securities that are comparable in
priority and security to the instrument.

Pursuant to Rule 2a-7 under the Investment Company Act of 1940 (the "Act"),
securities which are rated (or that have been issued by an issuer that has been
rated with respect to a class of short-term debt obligations, or any security
within that class, comparable in priority and quality with such security) in the
highest short-term rating category by at least two NRSROs are designated "First
Tier Securities." Securities rated in the top two short-term rating categories
by at least two NRSROs, but which are not rated in the highest short-term
category by at least two NRSROs, are designated "Second Tier Securities." NRSROs
are listed in the Prospectus and a description of their ratings are found in
Appendix A herein.

Pursuant to Rule 2a-7, the Money Market Fund may not invest more than 5% of its
assets taken at amortized cost in the securities of any one issuer (except the
U.S. Government, including repurchase agreements collateralized by U.S.
Government securities (defined below)). The Fund may, however, invest more than
5% of its assets in the First Tier Securities of a single issuer for a period of
up to three business days after the purchase thereof, although the Fund may not
make more than one such investment at any time.

Further, the Fund will not invest more than the greater of (i) 1% of its total
assets; or (ii) one million dollars in the securities of a single issuer that
were Second Tier Securities when acquired by the Fund. In addition, the Fund
may not invest more than 5% of its total assets in securities which were Second
Tier Securities when acquired.

The foregoing policies are more restrictive than the fundamental investment
restriction number 1 set forth below, which would give the Fund the ability to
invest, with respect to 25% of its assets, more than 5% of its assets in any one
issuer. The Fund will operate in accordance with these policies to comply with
Rule 2a-7.

<PAGE>

WHEN-ISSUED AND DELAYED DELIVERY SECURITIES

From time to time, in the ordinary course of business, each Fund may purchase
securities on a when-issued basis or delayed-delivery basis, I.E., delivery and
payment can take place a month or more after the date of the transaction. The
securities so purchased are subject to market fluctuation, and no interest
accrues to the purchaser during this period. At the time a Fund makes the
commitment to purchase securities on a when-issued or delayed-delivery basis,
the Trust will record the transaction and thereafter reflect the value, each
day, of such security in determining the net asset value of that Fund. At the
time of delivery of the securities, the value may be more or less than the
purchase price. Each Fund will also segregate cash or cash equivalents or other
liquid portfolio securities equal in value, marked to market on a daily basis,
to commitments for such when-issued or delayed-delivery securities. As a
general matter each Fund will hold less than 5% of its total assets in
commitments to purchase securities on a delayed-delivery or when-issued basis
and will not, under any circumstances, purchase securities on a when-issued or
delayed-delivery basis if, as a result, more than 10% of the net assets of the
Fund would be so invested.

LOANS OF PORTFOLIO SECURITIES

Each Fund may from time to time lend securities that it holds to brokers,
dealers and financial institutions, up to a maximum of 33% of the total value of
each Fund's assets. This percentage may not be increased without approval of a
majority of the outstanding voting securities of the respective Funds. See
"Fundamental Restrictions" on page 10. Such loans will be secured by collateral
in the form of cash or United States Treasury securities, or other liquid
securities as permitted by the Securities and Exchange Commission
("Commission"), which at all times while the loan is outstanding, will be
maintained in an amount at least equal to the current market value of the loaned
securities. The Fund making the loan will continue to receive interest and
dividends on the loaned securities during the term of the loan, and, in
addition, will receive a fee from the borrower or interest earned from the
investment of cash collateral in short-term securities. The Fund will also
receive any gain or loss in the market value of loaned securities and of
securities in which cash collateral is invested during the term of the loan.

The right to terminate a loan of securities, subject to appropriate notice, will
be given to either party. When a loan is terminated, the borrower will return
the loaned securities to the appropriate Fund. No Fund will have the right to
vote securities on loan, but each would terminate a loan and regain the right to
vote if the Trust's Board of Trustees deems it to be necessary in a particular
instance.

For tax purposes, the dividends, interest and other distributions which a Fund
receives on loaned securities may be treated as other than qualified income for
the 90% test discussed under "Taxes" in the Prospectus. Each Fund intends to
lend portfolio securities only to the extent that this activity does not
jeopardize its, or the Trust's, status as a regulated investment company under
the Internal Revenue Code of 1986 (the "Code").

The primary risk involved in lending securities is that the borrower will fail
financially and return the loaned securities at a time when the collateral is
insufficient to replace the full amount of the loan. The borrower would be
liable for the shortage, but the Fund making the loan would be an unsecured
creditor with respect to such shortage and might not be able to recover all or
any of it. In order to minimize this risk, each Fund will make loans of
securities only to firms SFIM or, when appropriate, BGFA (under the supervision
of the Board of Trustees) deems creditworthy.

<PAGE>

CONVERTIBLE SECURITIES

The Bond Fund may invest up to 20% of its total assets in convertible
securities. Convertible securities may include corporate notes or preferred
stock but are ordinarily a long-term debt obligation of the issuer
convertible at a stated exchange rate into common stock of the issuer. As
with all debt securities, the market value of convertible securities tends to
decline as interest rates increase and, conversely, to increase as interest
rates decline. Convertible securities generally offer lower interest or
dividend yields than non-convertible securities of similar quality. However,
when the market price of the common stock underlying a convertible security
exceeds the conversion price, the price of the convertible security tends to
reflect the value of the underlying common stock. As the market price of the
underlying common stock declines, the convertible security tends to trade
increasingly on a yield basis, and thus may not depreciate to the same extent
as the underlying common stock. Convertible securities generally rank senior
to common stocks in an issuer's capital structure and are consequently of
higher quality and entail less risk of declines in market value than the
issuer's common stock. However, the extent to which such risk is reduced
depends in large measure upon the degree to which the convertible security
sells above its value as a fixed-income security. In evaluating a
convertible security, SFIM usually gives primary emphasis to the
attractiveness of the underlying common stock. The convertible debt
securities in which the Bond Fund may invest are subject to the same rating
criteria as its investment in non-convertible debt securities.

Because the Stock and Bond Balanced Fund invests a portion of its assets in the
Bond Fund, the Stock and Bond Balanced Fund is subject to the same risks with
regard to investments in convertible securities.

WARRANTS

The Bond Fund and, indirectly, the Stock and Bond Balanced Fund, may invest in
warrants or rights (other than those acquired in units or attached to other
securities) which entitle the purchaser to buy equity securities at a specific
price for a specific period of time. Warrants and rights have no voting rights,
receive no dividends and have no rights with respect to the assets of the
issuer. The Bond Fund may retain up to 10% of the value of its total assets in
common stocks acquired by the exercise of warrants attached to debt securities.

U.S. GOVERNMENT SECURITIES

All of the Funds may purchase securities issued or guaranteed as to principal
and interest by the U.S. Government, its agencies, authorities or
instrumentalities ("U.S. Government Securities"). Some U.S. Government
Securities, such as Treasury bills, notes and bonds, which differ only in their
interest rates, maturities and times of issuance, are supported by the full
faith and credit of the United States. Others, such as obligations issued or
guaranteed by U.S. Government agencies, authorities or instrumentalities are
supported either by (a) the full faith and credit of the U.S. Government (such
as securities of the Small Business Administration), (b) the right of the issuer
to borrow from the Treasury (such as securities of the Federal Home Loan Banks),
(c) the discretionary authority of the U.S. Government to purchase the agency's
obligations (such as securities of the Federal National Mortgage Association),
or (d) only the credit of the issuer. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government agencies,
authorities or instrumentalities in the future. U.S. Government Securities may
also include zero coupon bonds.

Securities guaranteed as to principal and interest by the U.S. Government, its
agencies, authorities

<PAGE>

or instrumentalities are considered to include (a) securities for which the
payment of principal and interest is backed by a guarantee of or an irrevocable
letter of credit issued by the U.S. Government, its agencies, authorities or
instrumentalities and (b) participation in loans made to foreign governments or
their agencies that are so guaranteed. The secondary market for certain of
these participations is limited. Such participations may therefore be regarded
as illiquid.

FOREIGN INVESTMENTS

Each of the Large Cap and International Equity Index Funds may invest in
non-dollar securities and the securities of foreign issuers (collectively,
"foreign investments").

Investments in foreign issuers may involve currencies of foreign countries.
Since a Fund may temporarily hold funds in bank deposits in foreign currencies
during completion of investment programs, it may be subject to currency exposure
independent of its securities positions and may be affected favorably or
unfavorably by changes in currency rates and in exchange control regulations.
Accordingly, it may incur costs in connection with conversions between various
currencies.

Since foreign issuers are not subject to uniform accounting, auditing and
financial reporting standards, practices and requirements comparable to those
applicable to U.S. issuers, there may be less publicly available information
about a foreign issuer than about a domestic issuer. Volume and liquidity in
most foreign securities markets are less than in the United States and
securities of many foreign issuers are less liquid and more volatile than
securities of comparable domestic issuers. Fixed commissions on foreign
securities exchanges are generally higher than negotiated commissions on U.S.
exchanges, although a Fund making investments in securities of foreign issuers
will endeavor to achieve the most favorable net results on its portfolio
transactions. There is generally less government supervision and regulation of
securities exchanges, brokers, dealers and listed and unlisted issuers than in
the United States. Mail service between the United States and foreign countries
may be slower or less reliable than within the United States, thus increasing
the risk of delayed settlements of portfolio transactions or loss of
certificates for portfolio securities.

Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of transactions, making it difficult to
conduct such transactions. Such delays in settlement could result in temporary
periods when a portion of the assets of a Fund making an investment on such a
market are uninvested and no return is earned on such assets. The inability of
such a Fund to make intended security purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. Moreover, inability
to dispose of portfolio investments due to settlement problems could result
either in losses to the Fund due to subsequent declines in value of the
portfolio securities or, if the Fund has entered into a contract to sell the
securities, could result in possible liability for the Fund. In addition, with
respect to certain foreign countries, there is the possibility of expropriation
or confiscatory taxation, political or social instability, or diplomatic
developments which could affect a Fund's investments in those countries. Also,
individual foreign economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross national product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payments
position.

<PAGE>

FINANCIAL FUTURES CONTRACTS

The Large Cap, Small Cap, and International Equity Index Funds and, indirectly,
the Stock and Bond Balanced Fund may purchase and sell stock index futures
contracts and options on such futures contracts as
described in the Prospectus.

Stock index futures contracts bind purchaser and seller to deliver, at a future
date specified in the contract, a cash amount equal to a multiple of the
difference between the value of a specified stock index on that date and the
settlement price specified by the contract. That is, the seller of the futures
contract must pay and the purchaser would receive a multiple of any excess of
the value of the index over the settlement price, and conversely, the purchaser
must pay and the seller would receive a multiple of any excess of the settlement
price over the value of the index. A public market currently exists for stock
index futures contracts based on the S&P 500 Index, the New York Stock Exchange
Composite Index, the Value Line Stock Index, and the Major Market Index. It is
expected that financial instruments related to broad-based indices, in addition
to those for which futures contracts are currently traded, will in the future be
the subject of publicly-traded futures contracts. Each Fund may purchase and
sell stock index futures contracts on its benchmark index or similar index.

Positions taken in the futures markets are not normally held until delivery or
cash settlement is required, but instead are liquidated through offsetting
transactions which may result in a gain or a loss. While futures positions taken
by a Fund are usually liquidated in this manner, a Fund may instead make or take
delivery of underlying securities whenever it appears economically advantageous
to do so. A clearing organization associated with the relevant exchange assumes
responsibility for closing out transactions and guarantees that, as between the
clearing members of the exchange, the sale and purchase obligations will be
performed with regard to all positions that remain open at the termination of
the contract.

When futures contracts are entered into by a Fund, either as the purchaser or
the seller of such contracts, the Fund is required to deposit with its custodian
in a segregated account in the name of the futures commission merchant ("FCM")
an initial margin of cash or U.S. Treasury bills equaling as much as 5% to 10%
or more of the contract settlement price. The nature of initial margin
requirements in futures transactions differs from traditional margin payments
made in securities transactions in that initial margins for futures contracts do
not involve the borrowing of funds by the customer to finance the transaction.
Instead, a customer's initial margin on a futures contract represents a good
faith deposit securing the customer's contractual obligations under the futures
contract. The initial margin deposit is returned, assuming these obligations
have been met, when the futures contract is terminated. In addition, subsequent
payments to and from the FCM, called "variation margin," are made on a daily
basis as the price of the underlying security or stock index fluctuates
reflecting the change in value in the long (purchase) or short (sale) positions
in the financial futures contract, a process known as "marking to market."

Futures contracts generally are not entered into to acquire the underlying asset
and generally are not held to term. Prior to the contract settlement date, a
Fund will normally close all futures positions by entering into an offsetting
transaction which operates to cancel the position held, and which usually
results in a profit or loss.

OPTIONS ON STOCK INDEX FUTURES CONTRACTS

The equity index Funds and, indirectly, the Stock and Bond Balanced Fund may
also purchase call and put options and write covered call and put options on
stock index futures contracts of the type which the particular

<PAGE>

Fund is authorized to enter into. Covered put and call options on futures
contracts will be covered in the same manner as covered options on securities
and securities indices. The Funds may invest in such options for the purpose of
closing out a futures position that has become illiquid.

Options on futures contracts are traded on exchanges that are licensed and
regulated by the CFTC. A call option on a futures contract gives the purchaser
the right in return for the premium paid, to purchase a futures contract (assume
a "long" position) at a specified exercise price at any time before the option
expires. A put option gives the purchaser the right, in return for the premium
paid, to sell a futures contract (assume a "short" position), for a specified
exercise price, at any time before the option expires.

Unlike entering into a futures contract itself, purchasing options on futures
contracts allows a buyer to decline to exercise the option, thereby avoiding any
loss beyond forgoing the purchase price (or "premium") paid for the options.
Whether, in order to achieve a particular objective, the Fund enters into a
stock index futures contract, on the one hand, or an option contract on a stock
index futures contract, on the other, will depend on all the circumstances,
including the relative costs, liquidity, availability and capital requirements
of such futures and options contracts. Each Fund will consider the relative
risks involved, which may be quite different. These factors, among others, will
be considered in light of market conditions and the particular objective to be
achieved.

CERTAIN ADDITIONAL RISKS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS

In addition to the risks described in the Prospectus, the use of stock index
futures contracts and options on such futures contracts may entail the following
risks. First, although such instruments when used by a Fund are intended to
correlate with the Fund's portfolio securities, in many cases the futures
contracts or options on futures contracts used may be based on stock indices the
components of which are not identical to the portfolio securities owned or
intended to be acquired by the Fund. Second, due to supply and demand
imbalances and other market factors, the price movements of stock index futures
contracts and options thereon may not necessarily correspond exactly to the
price movements of the stock indices on which such instruments are based.
Accordingly, there is a risk that a Fund's transactions in those instruments
will not in fact offset the impact on the Fund of adverse market developments in
the manner or to the extent contemplated or that such transactions will result
in losses to the Fund which are not offset by gains with respect to
corresponding portfolio securities
owned or to be purchased by that Fund.

To some extent, these risks can be minimized by careful management of these
strategies. For example, where price movements in a futures contract are
expected to be less volatile than price movements in the related portfolio
securities owned or intended to be acquired by a Fund, it may, in order to
compensate for this difference, use an amount of futures contracts which is
greater than the amount of such portfolio securities. Similarly, where the
price movement of a futures contract is anticipated to be more volatile, a Fund
may use an amount of such contracts which is smaller than the amount of
portfolio securities to which such contracts relate.

The risk that the hedging technique used will not actually or entirely offset an
adverse change in the value of a Fund's securities is particularly relevant to
futures contracts. A Fund, in entering into a futures purchase contract,
potentially could lose any or all of the contract's settlement price. In
addition, because stock index futures contracts require delivery at a future
date of an amount of cash equal to a multiple of the difference between the
value of a specified stock index on that date and the settlement price, an
algebraic relationship exists between any price movement in the underlying index
and the potential cost of settlement to a Fund. A small increase or decrease in
the value of the underlying index can, therefore, result in a much greater
increase or decrease in the cost to the Fund.

<PAGE>

Although the Funds intend to establish positions in these instruments only when
there appears to be an active market, there is no assurance that a liquid market
for such instruments will exist when they seek to "close out" (i.e. terminate) a
particular stock index futures contract position. Trading in such instruments
could be interrupted, for example, because of a lack of either buyers or
sellers. In addition, the futures exchanges may suspend trading after the price
of such instruments has risen or fallen more than the maximum amount specified
by the exchange. A Fund may be able, by adjusting investment strategy in the
cash or other contract markets, to offset to some extent any adverse effects of
being unable to liquidate a futures position. Nevertheless, in some cases, a
Fund may experience losses as a result of such inability. Therefore it may have
to liquidate other more advantageous investments to meet its cash needs.

In addition, FCMs or brokers in certain circumstances will have access to the
Funds' assets posted as margin in connection with these transactions as
permitted under the Act. The Funds will use only FCMs or brokers in whose
reliability and financial soundness they have full confidence and have adopted
certain other procedures and limitations to reduce the risk of loss with respect
to any assets which brokers hold or to which they may have access. Nevertheless,
in the event of a broker's insolvency or bankruptcy, it is possible that a Fund
could experience a delay or incur costs in recovering such assets or might
recover less than the full amount due. Also the value of such assets could
decline by the time the Fund could effect such recovery.

The success of any Fund in using these techniques depends, among other things,
on BGFA's ability to predict the direction and volatility of price movements in
the futures markets as well as the securities markets and on its ability to
select the proper type, time, and duration of futures contracts. There can be
no assurance that these techniques will produce their intended results. In any
event, BGFA will use stock index futures contracts and options thereon only when
it believes the overall effect is to reduce, rather than increase, the risks to
which the Fund is exposed. These transactions also, of course, may be more,
rather than less, favorable to a Fund than originally anticipated.

INVESTMENT RESTRICTIONS

FUNDAMENTAL RESTRICTIONS

The Funds are subject to certain fundamental restrictions on their investments.
These restrictions may not be changed without the approval of the holders of a
majority of the outstanding voting shares of the
Funds affected by the change.

1. DIVERSIFICATION. No Fund will make any investment inconsistent with
the Fund's classification as a diversified company under the Act. This
restriction does not apply to any Fund classified as a non-diversified
company under the Act.

2a. INDUSTRY CONCENTRATION -- BOND FUND. The Bond Fund will not invest
more than 25% of its total assets (taken at market value at the time
of each investment) in the securities of issuers primarily engaged in
the same industry (excluding the U.S. Government or any of its
agencies or instrumentalities).

2b. INDUSTRY CONCENTRATION -- MONEY MARKET FUND. The Money Market Fund
will not invest more than 25% of its assets (taken at market value at
the time of each investment) other than U.S. Government securities,
obligations (other than commercial paper) issued or guaranteed by U.S.
banks and U.S. branches of foreign banks, and repurchase agreements
and securities loans collateralized by U.S. Government securities or
such bank obligations, in the securities of issuers primarily engaged
in the same industry.

<PAGE>

2c. INDUSTRY CONCENTRATION -- EQUITY INDEX FUNDS. The Large Cap, Small
Cap, and International Equity Index Funds will concentrate their
investments in an industry or industries if, and to the extent that,
their benchmark indices concentrate in such industry or industries,
except where the concentration of the relevant index is the result of
a single stock.

3. INTERESTS IN REAL ESTATE. No Fund will purchase real estate or any
interest therein, except through the purchase of corporate or certain
government securities (including securities secured by a mortgage or a
leasehold interest or other interest in real estate). A security
issued by a real estate or mortgage investment trust is not treated as
an interest in real estate.

4. UNDERWRITING. No Fund will underwrite securities of other issuers
except insofar as the Trust may be deemed an underwriter under the
Securities Act of 1933 in selling portfolio securities.

5. BORROWING. No Fund will borrow money, except that: (a) a Fund may
borrow from banks (as defined in the Act) or through reverse
repurchase agreements in amounts up to 33 1/3% of its total assets
(including the amount borrowed), taken at market value at the time of
the borrowing; (b) a Fund may, to the extent permitted by applicable
law, borrow up to an additional 5% of its total assets (including the
amount borrowed), taken at market value at the time of the borrowing,
for temporary purposes; and (c) a Fund may obtain such short-term
credits as may be necessary for clearance of purchases and sales of
portfolio securities.

6. LENDING. No Fund will lend any security or make any other loan,
except through: (a) the purchase of debt obligations in accordance
with the Fund's investment objective or objectives and policies; (b)
repurchase agreements with banks, brokers, dealers, and other
financial institutions; and (c) loans of securities as permitted by
applicable law.

7. COMMODITIES. No Fund will purchase or sell commodities or commodity
contracts, except that a Fund may invest in currency and financial
instruments and contracts that are commodities or commodities
contracts.

8. SENIOR SECURITIES. No Fund will issue senior securities to the extent
such issuance would violate applicable law.

9. INVESTMENTS -- STOCK AND BOND BALANCED FUND. The Stock and Bond
Balanced Fund will not invest in securities other than securities of
other registered investment companies or registered unit investment
trusts that are part of the State Farm group of investment companies
(as defined in the Act), U.S. Government securities, or short-term
paper.

For the purposes of the restrictions relating to industry concentration, state
and municipal governments and their agencies, authorities, and instrumentalities
are not deemed to be industries; utilities will be divided according to their
services (for example, gas, gas transmission, electric and telephone each will
be considered a separate industry); personal credit finance companies and
business credit finance companies are deemed to be separate industries; and
wholly-owned finance companies are considered to be in the industry of their
parents if their activities are primarily related to financing the activities of
their parents.

<PAGE>

NON-FUNDAMENTAL RESTRICTIONS

The Trust has also adopted the following additional investment restrictions
applicable (except as noted) to all Funds. These are not fundamental and may be
changed by the Board of Trustees without
shareholder approval. Under these restrictions, no Fund may:

1. FINANCIAL FUTURES CONTRACTS. No Fund may enter into a financial
futures contract (by exercise of any option or otherwise) or acquire
any options thereon, if, immediately thereafter, the total of the
initial margin deposits required with respect to all open futures
positions, at the time such positions were established, plus the sum
of the premiums paid for all unexpired options on futures contracts
would exceed 5% of the value of its total assets.

2. MARGIN PURCHASES. No Fund may purchase any securities on margin
except in connection with investments of certain Funds in futures
contracts or options on futures contracts.

3. PLEDGING ASSETS. No Fund may mortgage, pledge, hypothecate or in any
manner transfer, as security for indebtedness, any securities owned or
held by such Fund except: (a) as may be necessary in connection with
borrowings mentioned in fundamental restriction number 5 above, and
then such mortgaging, pledging or hypothecating may not exceed 10% of
the Fund's total assets, taken at market value at the time thereof, or
(b) in connection with investments of certain Funds in futures
contracts or options on futures contracts.

4a. ILLIQUID SECURITIES AND REPURCHASE AGREEMENTS. No Fund may purchase
securities or enter into a repurchase agreement if, as a result, more
than 15% of its net assets would be invested in any combination of:
(i) repurchase agreements not entitling the holder to payment of
principal and interest within seven days, and (ii) securities that are
illiquid by virtue of legal or contractual restrictions on resale or
the absence of a readily available market.

4b. ILLIQUID SECURITIES AND REPURCHASE AGREEMENTS -- MONEY MARKET FUND. In
addition to the non-fundamental restriction in 4a above, the Money
Market Fund will not invest in illiquid securities, including certain
repurchase agreements or time deposits maturing in more than seven
days, if, as a result thereof, more than 10% of the value of its total
assets would be invested in assets that are either illiquid or are not
readily marketable.

5. INVESTMENTS IN OTHER INVESTMENT COMPANIES. No Fund may invest more
than 5% of its total assets in the securities of any single investment
company or more than 10% of its total assets in the securities of
other investment companies in the aggregate, or hold more than 3% of
the total outstanding voting stock of any single investment company.
These restrictions do not apply to the Stock and Bond Balanced Fund.

State insurance laws and regulations may impose additional limitations on
borrowing, lending, and the use of futures contracts, options on futures
contracts and other derivative instruments. In addition, such laws and
regulations may require a Fund's investments in foreign securities to meet
additional diversification and other requirements.

INDUSTRY CONCENTRATIONS

The Stock and Bond Balanced Fund, because of its investment objective and
policies, will concentrate more than 25% of its total assets in the mutual fund
industry.

<PAGE>

As a result of the equity index Funds' policy on concentration, each equity
index Fund will maintain at least 25% of the value of its total assets in
securities of issuers in each industry for which its benchmark index has a
concentration of more than 25% (except where the concentration of the index is
the result of a single stock). No equity index Fund will concentrate its
investments otherwise. If the benchmark index for an equity index Fund has a
concentration of more than 25% because of a single stock (i.e., if one stock in
the benchmark index accounts for more than 25% of the index and it is the only
stock in the index in its industry), the equity index Fund will invest less than
25% of its total assets in such stock and will reallocate the excess to stocks
in other industries. Changes in an equity index Fund's concentration (if any)
and non-concentration would be made "passively" -- that is, any such changes
would be made solely as a result of changes in the concentrations of the
benchmark index's constituents. Since the concentration of each equity index
Fund is based on that of its benchmark index, changes in the market values of
the equity index Fund's portfolio securities will not necessarily trigger
changes in the portfolio of such equity index Fund.

MANAGEMENT OF THE TRUST

TRUSTEES AND OFFICERS

The Trustees and officers of the Trust and their principal occupations for the
last five years are set forth below. Unless otherwise noted, the address of
each Trustee and officer is One State Farm Plaza,
Bloomington, Illinois 61710.

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

Edward B. Rust, Jr.*, Trustee, Chairman of the Board, President
Age 47 President, and CEO - State Farm Mutual
and CEO Automobile Insurance Company;
Director and President - State Farm
Life Insurance Company, State Farm
Life and Accident Assurance
Company, State Farm Annuity and
Life Insurance Company, State Farm
Investment Management Corp., State
Farm Growth Fund, Inc., State Farm
Balanced Fund, Inc., State Farm
Interim Fund, Inc., and State Farm
Municipal Bond Fund, Inc.;
President, CEO and Director - State
Farm VP Management Corp. (since
1997); President and CEO - State
Farm Fire and Casualty Company and
State Farm General Insurance
Company; President - State Farm
County Mutual Insurance Company of
Texas; Director - State Farm
Lloyds, Inc. and State Farm
International Services, Inc.;
Chairman of the Board, President
and Treasurer - State Farm
Companies Foundation.

Albert H. Hoopes, Trustee Attorney
Age 82
102 S. East Street
Suite 350
Bloomington, IL 61701

<PAGE>

Roger S. Joslin*, Trustee, Vice Director, Senior Vice President and
Age 61 President and Treasurer - State Farm Mutual
Treasurer Automobile Insurance Company;
Director - State Farm Life
Insurance Company, State Farm Life
and Accident Assurance Company, and
State Farm Annuity and Life
Insurance Company; Director, Vice
President and Treasurer - State
Farm Investment Management Corp.,
State Farm Growth Fund, Inc., State
Farm Balanced Fund, Inc., State
Farm Interim Fund, Inc., State Farm
Municipal Bond Fund, Inc., State
Farm General Insurance Company,
State Farm Lloyds, Inc., and State
Farm International Services, Inc.;
Director, Vice President and
Treasurer - State Farm VP
Management Corp. (since 1997);
Director, Chairman of the Board,
and Treasurer - State Farm Fire and
Casualty Company; Treasurer -State
Farm County Mutual Insurance
Company of Texas; Assistant
Treasurer - State Farm Companies
Foundation.

Thomas M. Mengler Trustee Dean, University of Illinois
Age 44 College of Law (August 1993 -
504 East Pennsylvania Present); Professor of Law,
Avenue University of Illinois (1991 -
Champaign, IL 61820 Present)

Davis U. Merwin, Trustee Investor
Age 69
P.O. Box 8
Bloomington, IL 61702

James A. Shirk, Trustee Director and President, Beer Nuts,
Age 53 Inc.
103 N. Robinson
Bloomington, IL 61701

Kurt G. Moser, Vice President Vice President --Investments -
Age 52 State Farm Mutual Automobile
Insurance Company; Director and
Vice President -- Investments -
State Farm Life Insurance Company,
State Farm Life and Accident
Assurance Company, State Farm
Annuity and Life Insurance Company,
State Farm Fire and Casualty
Company, and State Farm General
Insurance Company; Director and
Senior Vice President - State Farm
Investment Management Corp. (since
1997: prior to 1997, Director and
Vice President); Vice President -
State Farm Growth Fund, Inc., State
Farm Balanced Fund, Inc., State
Farm Interim Fund, Inc., and State
Farm Municipal Bond Fund, Inc.;
Director - State Farm VP

<PAGE>

Management Corp. (since 1997); Vice
President -- Investments -State
Farm County Mutual Insurance
Company of Texas, State Farm
Lloyds, Inc., and State Farm
International Services, Inc.;
Investment Officer - State Farm
Indemnity Company; Underwriter -
State Farm Lloyds.

Paul N. Eckley, Vice President Vice President -- Common Stocks -
Age 42 State Farm Mutual Automobile
Insurance Company, State Farm Life
Insurance Company, and State Farm
Fire and Casualty Company (since
1995: prior to 1995, Investment
Officer); Senior Vice President -
State Farm Investment Management
Corp. (since 1997: prior to 1997,
Investment Officer); Vice President
- State Farm Growth Fund, Inc. and
State Farm Balanced Fund, Inc.
(since 1995).

John S. Concklin, Vice President Vice President -- Common Stocks -
Age 51 State Farm Mutual Automobile
Insurance Company, State Farm Life
Insurance Company, and State Farm
Fire and Casualty Company (since
1997: from 1995 - 1997, Vice
President -- Fixed Income and prior
to 1995, Investment Officer);
Investment Officer - State Farm
Investment Management Corp. (since
1995); Vice President - State Farm
Balanced Fund, Inc. and State Farm
Interim Fund, Inc. (since 1995).

David R. Grimes, Assistant Vice Assistant Vice President of
Age 55 President and Accounting - State Farm Mutual
Secretary Automobile Insurance Company;
Assistant Vice President and
Secretary - State Farm Investment
Management Corp., State Farm Growth
Fund, Inc., State Farm Balanced
Fund, Inc., State Farm Interim
Fund, Inc., and State Farm
Municipal Bond Fund, Inc. (since
1994); Assistant Vice President and
Secretary - State Farm VP
Management Corp. (since 1997).

Michael L. Tipsord, Assistant Assistant Controller - State Farm
Age 38 Secretary Mutual Automobile Insurance Company
(since 1996: from 1995 - 1996,
Director of Accounting and prior to
1995, Staff Associate); Assistant
Secretary - State Farm Investment
Management Corp., State Farm Growth
Fund, Inc., State Farm Balanced
Fund, Inc., State Farm Interim
Fund, Inc., and State Farm
Municipal Bond Fund, Inc.;
Treasurer - Insurance Placement
Services, Inc. (since 1996).

Jerel S. Chevalier, Assistant Director of Mutual Funds - State
Age 59 Secretary- Farm Mutual Automobile Insurance
Company; Assistant
Secretary-Treasurer - State Farm
Invest-

<PAGE>

ment Management Corp., State Farm
Growth Fund, Inc., State Farm
Balanced Fund, Inc., State Farm
Interim Fund, Inc., and State Farm
Municipal Bond Fund, Inc. (since
1994).

Patricia L. Dysart, Assistant Assistant Counsel - State Farm
Age 34 Secretary Mutual Automobile Insurance
Company; Assistant Secretary -
State Farm Investment Management
Corp., State Farm Growth Fund,
Inc., State Farm Balanced Fund,
Inc., State Farm Interim Fund,
Inc., and State Farm Municipal Bond
Fund, Inc. (since 1995); Assistant
Secretary - State Farm VP
Management Corp. (since 1997).

* Trustee who is an "interested person" of the Trust or SFIM, as defined in
the 1940 Act.

Trustees or officers who are interested persons of the Trust do not receive any
compensation from the Trust for their services to the Trust. The Trustees who
are not interested persons of the Trust receive compensation from the Trust at a
rate of $300 per meeting, per Fund. In addition, Trustees who are not
interested persons of the Trust are reimbursed for any out-of-pocket expenses
incurred in connection with
affairs of the Trust.

Trustees and officers of the Trust do not receive any benefits from the Trust
upon retirement nor does the Trust accrue any expenses for pension or retirement
benefits.

<TABLE>
<CAPTION>
Aggregate
Compensation Total Compensation From the Trust
Name from the Trust(1) and Other State Farm Funds (2)
- ---- ----------------- ------------------------------
<S> <C> <C>
Edward B. Rust, Jr. None(3) None(3)
Albert H. Hoopes $5,400 $12,000
Roger S. Joslin None(3) None(3)
Thomas M. Mengler None(4) None (4)
Davis U. Merwin $5,400 $12,000
James A. Shirk $5,400 $12,000

</TABLE>

(1) Estimated compensation for the fiscal year ending December 31, 1997.
(2) The "other State Farm Funds" are State Farm Growth Fund, Inc., State
Farm Balanced Fund, Inc., State Farm Interim Fund, Inc., and State
Farm Municipal Bond Fund, Inc.
(3) Non-compensated interested trustee.
(4) Did not serve as a trustee of the Trust or as a director of the other
State Farm Funds during 1997.

INVESTMENT ADVISORY AGREEMENTS

BETWEEN THE TRUST AND SFIM

The duties and responsibilities of SFIM are specified in the Investment Advisory
and Management Services

<PAGE>

Agreement between the Trust and SFIM and the separate Service Agreement among
the Trust, SFIM and State Farm Mutual Automobile Insurance Company ("SFMAIC")
(collectively, the "Management Agreements"). The Management Agreements were
approved for each Fund by the Board of Trustees of the Trust (including a
majority of Trustees who are not parties to the Agreement or interested persons,
as defined by the Act, of any such party) at a meeting held for that purpose on
September 12, 1997 and the shareholders of each Fund at a meeting held on
January 30, 1998. The Management Agreements are not assignable and each may be
terminated without penalty upon 60 days written notice at the option of the
Trust, SFIM or SFMAIC, as appropriate, or by a vote of shareholders. Each
Management Agreement provides that it shall continue in effect for two years and
can thereafter be continued for each Fund from year to year so long as such
continuance is specifically approved annually (a) by the Board of Trustees of
the Trust or by a majority of the outstanding voting shares of the Fund and (b)
by a majority vote of the Trustees who are not parties to the Agreement, or
interested persons of any such party, cast in person at a meeting held for that
purpose.

SFIM (under the supervision of the Board of Trustees) continuously furnishes an
investment program for the Funds other than the Large Cap, Small Cap, and
International Equity Index Funds, is responsible for the actual managing of the
investments of such Funds and has responsibility for making decisions governing
whether to buy, sell or hold any particular security. In carrying out its
obligations to manage the investment and reinvestment of the assets of these
Funds, SFIM performs research and obtains and evaluates pertinent economic,
statistical and financial data relevant to the investment policies of these
Funds.

As described below, SFIM has engaged Barclays Global Fund Advisors ("BGFA") as
the investment sub-adviser to provide day-to-day portfolio management for the
Large Cap, Small Cap, and International Equity Index Funds.

SFIM is responsible for payment of all expenses it may incur in performing the
services described. These expenses include costs incurred in providing
investment advisory services, compensating and furnishing office space for
officers and employees of SFIM connected with investment and economic research,
trading and investment management of the Trust and the payment of any fees to
interested Trustees of the Trust. SFIM provides all executive, administrative,
clerical and other personnel necessary to operate the Trust and pays the
salaries and other employment related costs of employing those persons. SFIM
furnishes the Trust with office space, facilities and equipment and pays the
day-to-day expenses related to the operation and maintenance of such office
space facilities and equipment. All other expenses incurred in the organization
of the Trust or of new Funds of the Trust, including legal and accounting
expenses and costs of registering securities of the Trust under federal and
state securities laws, are also paid by SFIM.

Pursuant to the Service Agreement, SFMAIC provides SFIM with certain personnel,
services and facilities to enable SFIM to perform its obligations to the Trust.
SFIM reimburses SFMAIC for such costs, direct and indirect, as are fairly
attributable to the services performed and the facilities provided by SFMAIC
under the separate service agreement. Accordingly, the Trust makes no payment to
SFMAIC under the Service Agreement.

<PAGE>

contractholders, costs of preparing, printing, and mailing proxy statements and
shareholder reports to shareholders and contractholders, the cost of paying
dividends and capital gains distribution, capital stock certificates, costs of
Trustee and shareholder meetings, dues to trade organizations, and any
extraordinary expenses, including litigation costs in legal actions involving
the Trust, or costs related to indemnification of Trustees, officers and
employees of the Trust.

The Board of Trustees of the Trust determines the manner in which expenses are
allocated among the Funds of the Trust.

The Agreement also provides that SFIM shall not be liable to the Trust or to any
shareholder or contract owner for any error of judgment or mistake of law or for
any loss suffered by the Trust or by any shareholder in connection with matters
to which such Agreements relate, except for a breach of fiduciary duty or a loss
resulting from willful misfeasance, bad faith, gross negligence, or reckless
disregard on the part of SFIM in the performance of its duties thereunder.

BETWEEN SFIM AND BGFA

Pursuant to the separate sub-advisory agreement described below (the "Sub-
advisory Agreement"), SFIM has engaged BGFA as the investment sub-adviser to
provide day-to-day portfolio management for the Large
Cap, Small Cap, and International Equity Index Funds.

The Sub-Advisory Agreement was approved for each Fund by the Board of Trustees
of the Trust (including a majority of Trustees who are not parties to such
Agreements or interested persons, as defined by the Act, of any such party) at a
meeting held for that purpose on September 12, 1997 and the shareholders of each
Fund at a meeting held on January 30, 1998. The Sub-advisory Agreement is not
assignable and may be terminated without penalty upon 60 days written notice at
the option of SFIM or BGFA, or by the Board of Trustees of the Trust or by a
vote of a majority of the outstanding shares of the class of stock representing
an interest in the appropriate Fund. The Sub-advisory Agreement provides that it
shall continue in effect for two years and can thereafter be continued for each
Fund from year to year so long as such continuance is specifically approved
annually (a) by the Board of Trustees of the Trust or by a majority of the
outstanding shares of the Fund and (b) by a majority vote of the Trustees who
are not parties to the Agreement, or interested persons of any such party, cast
in person at a meeting held for that purpose.

BGFA manages the investments of the Large Cap, Small Cap, and International
Equity Index Funds, respectively, determining which securities or other
investments to buy and sell for each, selecting the brokers and dealers to
effect the transactions, and negotiating commissions. In placing orders for
securities transactions, BGFA follows SFIM's policy of seeking to obtain the
most favorable price and efficient execution available.

TRACKING ERROR

SFIM and BGFA use the "expected tracking error" of an equity index Fund as a way
to measure the Funds' performance relative to the performance of its benchmark
index. An expected tracking error of 5% means that there is a 68% probability
that the net asset value of the equity index Fund will be between 95% and 105%
of the subject index level after one year, without rebalancing the portfolio
composition. A tracking error of 0% would indicate perfect tracking, which would
be achieved when the net asset value of the equity index Fund increases or
decreases in exact proportion to changes in its benchmark index. Factors such as
expenses of the Fund, taxes, the need to comply with the diversification and
other requirements of the Code and other

<PAGE>

requirements may adversely impact the tracking of the performance of an equity
index Fund to that of its benchmark index. In the event that tracking error
exceeds 5%, the Board of Trustees of the Trust will
consider what action might be appropriate to reduce the tracking error.

SECURITIES ACTIVITIES OF THE INVESTMENT ADVISERS

Securities held by the Trust may also be held by separate accounts or mutual
funds for which SFIM or BGFA acts as an adviser, some of which may be affiliated
with SFIM or BGFA. Because of different investment objectives or other factors,
a particular security may be bought by SFIM or BGFA for one or more of its
clients, when one or more other clients are selling the same security. If
purchases or sales of securities for a Fund or other client of SFIM or BGFA
arise for consideration at or about the same time, transactions in such
securities will be allocated as to amount and price, insofar as feasible, for
the Fund and other clients in a manner deemed equitable to all. To the extent
that transactions on behalf of more than one client of SFIM or BGFA during the
same period may increase the demand for securities being purchased or the supply
of securities being sold, there may be an adverse effect on price. It is the
opinion of the Trustees of the Trust, however, that the benefits available to
the Trust outweigh any possible disadvantages that may arise from such
concurrent transactions.

On occasions when SFIM or BGFA (under the supervision of the Board of Trustees)
deems the purchase or sale of a security to be in the best interests of the
Trust as well as other accounts or companies, it may, to the extent permitted by
applicable laws and regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Trust with those to be sold or
purchased for other accounts or companies in order to obtain favorable execution
and low brokerage commissions. In that event, allocation of the securities
purchased or sold, as well as the expenses incurred in the transaction, will be
made by SFIM or BGFA in the manner it considers to be most equitable and
consistent with its fiduciary obligations to the Trust and to such other
accounts or companies. In some cases this procedure may adversely affect the
size of the position obtainable for a Fund.

In performing their functions, neither SFIM nor BGFA will execute private sales
of securities among the Funds or between a Fund and any other investment account
it manages.

PORTFOLIO TRANSACTIONS AND BROKERAGE

As described above, either SFIM or BGFA determines which securities to buy and
sell for the Funds, selects brokers and dealers to effect the transactions, and
negotiates commissions. Transactions in equity securities will usually be
executed through brokers who will receive a commission paid by the Fund. Fixed
income securities are generally traded with dealers acting as principals for
their own accounts without a stated commission. The dealer's margin is reflected
in the price of the security. Money market obligations may be traded directly
with the issuer. Underwritten offerings of stock may be purchased at a fixed
price including an amount of compensation to the underwriter.

In placing orders for securities transactions, SFIM's policy (followed by BGFA)
is to attempt to obtain the most favorable price and efficient execution
available. These entities, subject to the review of the Trust's Board of
Trustees, may pay higher than the lowest possible commission in order to obtain
better than average execution of transactions and/or valuable investment
research information described below, if, in their opinion, improved execution
and investment research information will benefit the performance of each of the
Funds.

<PAGE>

When selecting broker-dealers to execute portfolio transactions, SFIM considers
factors including the rate of commission or size of the broker-dealer's
"spread", the size and difficulty of the order, the nature of the market for the
security, the willingness of the broker-dealer to position, the reliability,
financial condition and general execution and operational capabilities of the
broker-dealer, and the research, statistical and economic data furnished by the
broker-dealer to SFIM. In some cases, SFIM may use such information to advise
other investment accounts that it advises. Brokers or dealers which supply
research may be selected for execution of transactions for such other accounts,
while the data may be used by SFIM in providing investment advisory services to
the Trust. In addition, SFIM may select broker-dealers to execute portfolio
transactions who are affiliated with the Trust or SFIM. However, all such
directed brokerage will be subject to SFIM's policy to attempt to obtain the
most favorable price and efficient execution possible.

PORTFOLIO TURNOVER

There are no fixed limitations regarding the portfolio turnover rate for either
the Bond Fund or the Money Market Fund, and securities initially satisfying the
objectives and policies of one of these Funds may be disposed of when they are
no longer deemed suitable. Consistent with each equity index Fund's investment
objective, the Large Cap, Small Cap, and International Equity Index Funds will
attempt to minimize portfolio turnover. The Stock and Bond Balanced Fund's
portfolio turnover is expected to be low. The Stock and Bond Balanced Fund will
purchase or sell securities to: (i) accommodate purchases and sales of its
shares; (ii) change the percentages of its assets invested in each of the
underlying Funds in response to market conditions; and (iii) maintain or modify
the allocation of its assets among the underlying Funds within the percentage
limits described in the Prospectus.

Since short term instruments are excluded from the calculation of a portfolio
turnover rate, no meaningful portfolio turnover rate can be estimated or
calculated for the Money Market Fund. Turnover rates may vary greatly from year
to year as well as within a particular year and may also be affected by cash
requirements for redemptions of a Fund's shares and by requirements, the
satisfaction of which enable the Trust to receive certain favorable tax
treatment.

DETERMINATION OF NET ASSET VALUE

The net asset value of each Fund is determined as of the time of the close of
regular session trading on the New York Stock Exchange, (currently at 4:00 PM,
New York City time) on each day when the New York Stock Exchange is open except
as noted below. The New York Stock Exchange is scheduled to be open Monday
through Friday throughout the year, except for certain federal and other
holidays. The net asset value of each Fund will not be calculated on the Friday
following Thanksgiving or on December 24, 1998. The net asset value per share is
computed by dividing the difference between the value of the Fund's assets and
liabilities by the number of shares outstanding. Interest earned on portfolio
securities and expenses, including fees payable to SFIM, are accrued daily.

Equity securities (including common stocks, preferred stocks, convertible
securities and warrants) and call options written on all portfolio securities,
listed or traded on a national exchange are valued at their last sale price on
that exchange prior to the time when assets are valued. In the absence of any
exchange sales on that day and for unlisted equity securities, such securities
are valued at the last sale price on the NASDAQ (National Association of
Securities Dealers Automated Quotations) National Market. In the absence of any
National Market sales on that day, equity securities are valued at the last
reported bid price.

<PAGE>

Debt securities traded on a national exchange are valued at their last sale
price on that exchange prior to the time when assets are valued, or, lacking any
sales, at the last reported bid price. Debt securities other than money market
instruments traded in the over-the-counter market are valued at the last
reported bid price or at yield equivalent as obtained from one or more dealers
that make markets in the securities. If the market quotations described above
are not available, debt securities, other than short-term debt securities, may
be valued at fair value as determined by one or more independent pricing
services (each, a "Service"). The Service may use available market quotations
and employ electronic data processing techniques and/or a matrix system to
determine valuations. Each Service's procedures are reviewed by the officers of
the Trust under the general supervision of the Board of Trustees.

Debt instruments held with a remaining maturity of 60 days or less (other than
U.S. Treasury bills) are generally valued on an amortized cost basis. Under the
amortized cost basis method of valuation, the security is initially valued at
its purchase price (or in the case of securities purchased with more than 60
days remaining to maturity, the market value on the 61st day prior to maturity),
and thereafter by amortizing any premium or discount uniformly to maturity. If
for any reason the Trustees believe the amortized cost method of valuation does
not fairly reflect the fair value of any security, fair value will be determined
in good faith by or under the direction of the Board of Trustees of the Trust as
in the case of securities having a maturity of more than 60 days.

Securities that are primarily traded on foreign securities exchanges are
generally valued at the last sale price on the exchange where they are primarily
traded. All foreign securities traded on the over-the-counter market are valued
at the last sale quote, if market quotes are available, or the last reported bid
price if there is no active trading in a particular security on a given day.
Quotations of foreign securities in foreign currencies are converted, at current
exchange rates, to their U. S. dollar equivalents in order to determine their
current value. Forward currency contracts are valued at the current cost of
offsetting the contract. Because of the need to value foreign securities (other
than American Depositary Receipts) as of the close of trading on various
exchanges and over-the-counter markets throughout the world, the calculation of
the net asset value of Funds investing in foreign securities may not take place
contemporaneously with the valuation of such foreign securities in such Funds.
In addition, foreign securities held by the Large Cap and International Equity
Index Funds may be traded actively in securities markets which are open for
trading on days when those Funds do not calculate their net asset value.
Accordingly, there may be occasions when the Large Cap or International Equity
Index Fund does not calculate its net asset value but when the value of such
Fund's portfolio securities is affected by such trading activity.

Securities for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Trustees of the Trust, including valuations provided by a Service retained for
this purpose.

Exchange listed put options written and options purchased are valued on the
primary exchange on which they are traded. Over-the-counter options written or
purchased by a Fund are valued based upon prices provided by market-makers in
such securities. Exchange-traded financial futures contracts are valued at their
settlement price established each day by the board of trade or exchange on which
they are traded.

All of the assets of the Money Market Fund are valued on the basis of amortized
cost in an effort to maintain a constant net asset value of $1.00 per share. The
Board of Trustees of the Trust (the "Board") has determined this to be in the
best interests of the Money Market Fund and its shareholders. Under the
amortized cost method of valuation, securities are valued at cost on the date of
their acquisition, and thereafter as adjusted

<PAGE>

for amortization of premium or accretion of discount, regardless of the impact
of fluctuating interest rates on the market value of the security. While this
method provides certainty in valuation, it may result in periods in which value
as determined by amortized cost is higher or lower than the price the Fund would
receive if it sold the security. During such periods, the quoted yield to
investors may differ somewhat from that obtained by a similar fund or portfolio
which uses available market quotations to value all of its portfolio securities.

The Board has established procedures reasonably designed, taking into account
current market conditions and the Money Market Fund's investment objectives, to
stabilize the net asset value per share for purposes of sales and redemptions at
$1.00. These procedures include review by the Board, at such intervals as it
deems appropriate, to determine the extent, if any, to which the net asset value
per share calculated by using available market quotations deviates from $1.00
per share. In the event such deviation should exceed one half of one percent,
the Board will promptly consider initiating corrective action. If the Board
believes that the extent of any deviation from a $1.00 amortized cost price per
share may result in material dilution or other unfair results to new or existing
shareholders, it will take such steps as it considers appropriate to eliminate
or reduce these consequences to the extent reasonably practicable. Such steps
may include: selling portfolio securities prior to maturity; shortening the
average maturity of the portfolio; withholding or reducing dividends; or
utilizing a net asset value per share determined from available market
quotations. Even if these steps were taken, the Money Market Fund's net asset
value might still decline.

PERFORMANCE INFORMATION

The Trust may from time to time quote or otherwise use average annual total
return information for the Funds in advertisements, shareholder reports or sales
literature. Average annual total return values are computed pursuant to
equations specified by the Commission.

Average annual total return for a specified period is derived by calculating the
actual dollar amount of the investment return on a $1,000 investment in a Fund
made at the beginning of the period, and then calculating the annual compounded
rate of return which would produce that amount, assuming a redemption at the end
of the period. This calculation assumes a complete redemption of the investment.
It also assumes that all dividends and distributions are reinvested at net asset
value on the reinvestment dates during the period.

The Trust also may from time to time quote or otherwise use year-by-year total
return, cumulative total return and yield information for the Funds in
advertisements, shareholder reports or sales literature. Year-by-year total
return and cumulative total return for a specified period are each derived by
calculating the percentage rate required to make a $1,000 investment in a Fund
(assuming that all distributions are reinvested) at the beginning of such period
equal to the actual total value of such investment at the end of such period.

Any performance data quoted for a Fund will represent historical performance and
the investment return and principal value of an investment will fluctuate so
that shares, when redeemed, may be worth more or less than original cost.

<PAGE>

From time to time the Trust may publish an indication of the Funds' past
performance as measured by independent sources such as (but not limited to)
Lipper Analytical Services, Incorporated, Weisenberger Investment Companies
Service, Donoghue's Money Fund Report, Barron's, Business Week, Changing Times,
Financial World, Forbes, Fortune, Money, Personal Investor, Sylvia Porter's
Personal Finance and The Wall Street Journal. The Trust may also advertise
information which has been provided to the NASD for publication in regional and
local newspapers. In addition, the Trust may from time to time advertise its
performance relative to certain indices and benchmark investments, including (a)
the Lipper Analytical Services, Inc. Mutual Fund Performance Analysis, Fixed-
Income Analysis and Mutual Fund Indices (which measure total return and average
current yield for the mutual fund industry and rank mutual fund performance);
(b) the CDA Mutual Fund Report published by CDA Investment Technologies, Inc.
(which analyzes price, risk and various measures of return for the mutual fund
industry); (c) the Consumer Price Index published by the U.S. Bureau of Labor
Statistics (which measures changes in the price of goods and services); (d)
Stocks, Bonds, Bills and Inflation published by Ibbotson Associates (which
provides historical performance figures for stocks, government securities and
inflation); (e) the Hambrecht & Quist Growth Stock Index; (f) the NASDAQ OTC
Composite Prime Return; (g) the Russell Midcap Index; (h) the Russell 2000
Index-Total Return; (i) the ValueLine Composite-Price Return; (j) the Wilshire
4600 Index; (k) the Salomon Brothers' World Bond Index (which measures the total
return in U.S. dollar terms of government bonds, Eurobonds and foreign bonds of
ten countries, with all such bonds having a minimum maturity of five years); (1)
the Shearson Lehman Brothers Aggregate Bond Index or its component indices (the
Aggregate Bond Index measures the performance of Treasury, US. Government
agencies, mortgage and Yankee bonds); (m) the S&P Bond indices (which measure
yield and price of corporate, municipal and U.S. Government bonds); (n) the J.P.
Morgan Global Government Bond Index; (o) Donoghue's Money Market Fund Report
(which provides industry averages of 7-day annualized and compounded yields of
taxable, tax-free and U.S. Government money market funds); (p) other taxable
investments including certificates of deposit, money market deposit accounts,
checking accounts, savings accounts, money market mutual funds and repurchase
agreements; (q) historical investment data supplied by the research departments
of Goldman Sachs, Lehman Brothers, First Boston Corporation, Morgan Stanley
(including EAFE "Free"), Salomon Brothers, Merrill Lynch, Donaldson Lufkin and
Jenrette or other providers of such data; (r) the FT-Actuaries Europe and
Pacific Index; (s) mutual fund performance indices published by Variable Annuity
Research & Data Service; and (t) mutual fund performance indices published by
Morningstar, Inc. The composition of the investments in such indices and the
characteristics of such benchmark investments are not identical to, and in some
cases are very different from, those of a Fund's portfolio. These indices and
averages are generally unmanaged and the items included in the calculations of
such indices and averages may be different from those of the equations used by
the Trust to calculate a Fund's performance figures.

The Trust may from time to time summarize the substance of discussions
contained in shareholder reports in advertisements and publish the Advisers'
views as to markets, the rationale for a Fund's investments and discussions
of the Fund's current asset allocation.

From time to time, advertisements or information may include a discussion of
certain attributes or benefits to be derived by an investment in a particular
Fund. Such advertisements or information may include symbols, headlines or other
material which highlight or summarize the information discussed in more detail
in the communication.

Such performance data will be based on historical results and will not be
intended to indicate future performance. The total return or yield of a Fund
will vary based on market conditions, portfolio expenses, portfolio investments
and other factors. The value of a Fund's shares will fluctuate and your shares
may be worth more or less than their original cost upon redemption.

<PAGE>

DIVIDENDS AND DISTRIBUTIONS

It is the Trust's intention to distribute substantially all the net investment
income, if any, of a Fund. Dividends from net investment income of a Fund will
be paid at least semi-annually and are expected to be reinvested in additional
full and fractional shares of that Fund. Shares will begin accruing dividends on
the day following the date on which the shares are issued, the date of issuance
customarily being the "settlement" date.

REDEMPTION OF SHARES

Shares are redeemed at the net asset value per share next determined after the
receipt of proper notice of redemption. Payment for redeemed shares will
generally occur within seven days of receipt of a proper notice of redemption.
The Trust reserves the right to redeem shares in kind.

The right to redeem shares or to receive payment with respect to any redemption
may be suspended for any period during which trading on the New York Stock
Exchange is restricted as determined by the Commission or when such Exchange is
closed (other than customary weekend and holiday closings) for any period during
which an emergency exists, as defined by the Commission, which makes disposal of
a Fund's securities or determination of the net asset value of a Fund not
reasonably practicable, and for any other periods as the Commission may by order
permit for the protection of shareholders of the Fund.

ADDITIONAL INFORMATION

SERVICE PROVIDERS

Pursuant to an underwriting agreement and in addition to its duties as
investment adviser, SFIM acts as principal underwriter for the Trust.

The Chase Manhattan Bank, North American Insurance Securities Services, 3 Chase
MetroTech Center, 6th Floor, Brooklyn, New York 11245 ("Chase Manhattan"), acts
as custodian of the assets of the Money Market Fund, Bond Fund, and Stock and
Bond Balanced Fund. Under its custody agreement with the Trust, Chase Manhattan
maintains the portfolio securities acquired by the Money Market, Bond, and Stock
and Bond Balanced Funds, administers the purchases and sales of portfolio
securities, collects interest and dividends and other distributions made on the
securities held in the portfolios of these Funds, and performs such other
ministerial duties as are included in the custody agreement, a copy of which is
on file with the Commission. Similarly, Barclays Global Investors, 45 Fremont
Street, San Francisco, California 94105 ("BGI"), is the Trust's custodian for
the Large Cap and Small Cap Equity Index Funds. Under its custody agreement with
the Trust, BGI maintains the portfolio securities acquired by the Large Cap and
Small Cap Equity Index Funds, administers the purchases and sales of portfolio
securities, collects interest and dividends and other distributions made on the
securities held in the portfolios of these Funds, and performs such other
ministerial duties as are included in the custody agreement, a copy of which is
on file with the Commission. Investors Bank and Trust Company, 200 Clarendon
Street, Boston, Massachusetts 02116 ("IBT"), is the Trust's custodian for the
International Equity Index Fund. Under its custody agreement with the Trust,
IBT maintains the portfolio securities acquired by the International Equity
Index Fund, administers the purchases and sales of portfolio securities,
collects interest and dividends and other distributions made on the securities
held in the portfolios

<PAGE>

of this Fund, and performs such other ministerial duties as are included in the
custody agreement, a copy of which is on file with the Commission.

Chase Manhattan, BGI, and IBT (the "custodians") may hold securities of the
Funds in amounts sufficient to cover put and call options written on futures
contracts in a segregated account by transferring (upon the Trust's
instructions) assets from a Fund's general (regular) custody account. The
custodians also will hold certain assets of certain of the Funds constituting
margin deposits with respect to financial futures contracts at the disposal of
FCMs through which such transactions are effected.

SFIM performs fund accounting services, including the valuation of portfolio
securities and the calculation of net asset value, for each of the Funds other
than the International Equity Index Fund. IBT performs fund accounting services
for the International Equity Index Fund.

RELATIONSHIPS WITH THE COMPANIES THAT MAINTAIN THE BENCHMARK INDICES

STANDARD & POOR'S

"Standard & Poor's-Registered Trademark- ", "S&P-Registered Trademark-", "S&P
500-Registered Trademark-", "Standard & Poor's 500", and "500" are trademarks
of The McGraw-Hill Companies, Inc. and have been licensed for use by the
Trust. Neither the Large Cap Equity Index Fund nor the Stock and Bond
Balanced Fund (the "Funds") are sponsored, endorsed, sold or promoted by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P").
S&P makes no representation regarding the advisability of investing in the
Funds.

S&P makes no representation or warranty, express or implied, to the owners of
the Funds or any member of the public regarding the advisability of investing in
securities generally or in the Funds particularly or the ability of the S&P 500
Index to track general stock market performance. S&P's only relationship to the
Trust is the licensing of certain trademarks and trade names of S&P and of the
S&P 500 Index which is determined, composed and calculated by S&P without regard
to the Trust or the Funds. S&P has no obligation to take the needs of the Trust
or the owners of the Funds into consideration in determining, composing or
calculating the S&P 500 Index. S&P is not responsible for and has not
participated in the determination of the prices and amount of the Funds or the
timing of the issuance or sale of the Funds or in the determination or
calculation of the equation by which the Funds are to be converted into cash.
S&P has no obligation or liability in connection with the administration,
marketing or trading of the Funds.

S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX
OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED,
AS TO RESULTS TO BE OBTAINED BY THE TRUST, OWNERS OF THE FUNDS, OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN.
S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY
OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.

<PAGE>

FRANK RUSSELL COMPANY

The Russell 2000-Registered Trademark- Index is a trademark/service mark of
the Frank Russell Company. Russell-Trademark- is a trademark of the Frank
Russell Company.

The Small Cap Equity Index Fund is not promoted, sponsored or endorsed by, nor
in any way affiliated with Frank Russell Company. Frank Russell Company is not
responsible for and has not reviewed the Small Cap Equity Index Fund nor any
associated literature or publications and Frank Russell Company makes no
representation or warranty, express or implied, as to their accuracy, or
completeness, or otherwise.

Frank Russell Company reserves the right, at any time and without notice, to
alter, amend, terminate or in any way change its Index(es). Frank Russell
Company has no obligation to take the needs of any particular fund or its
participants or any other product or person into consideration in determining,
composing or calculating the Index(es).

Frank Russell Company's publication of the Index(es) in no way suggests or
implies an opinion by Frank Russell Company as to the attractiveness or
appropriateness of investment in any or all securities upon which the Index(es)
is (are) based. FRANK RUSSELL COMPANY MAKES NO REPRESENTATION, WARRANTY, OR
GUARANTEE AS TO THE ACCURACY, COMPLETENESS, RELIABILITY, OR OTHERWISE OF THE
INDEX(ES) OR ANY DATA INCLUDED IN THE INDEX(ES). FRANK RUSSELL COMPANY MAKES NO
REPRESENTATION OR WARRANTY REGARDING THE USE, OR THE RESULTS OF USE, OF THE
INDEX(ES) OR ANY DATA INCLUDED THEREIN, OR ANY SECURITY (OR COMBINATION THEREOF)
COMPRISING THE INDEX(ES). FRANK RUSSELL COMPANY MAKES NO OTHER EXPRESS OR
IMPLIED WARRANTY, AND EXPRESSLY DISCLAIMS ANY WARRANTY, OF ANY KIND, INCLUDING,
WITHOUT MEANS OF LIMITATION, ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE WITH RESPECT TO THE INDEX(ES) OR ANY DATA OR ANY SECURITY (OR
COMBINATION THEREOF) INCLUDED THEREIN.

MORGAN STANLEY & CO. INCORPORATED

The Morgan Stanley Capital International EAFE-Registered Trademark- Free
Index is the exclusive property of Morgan Stanley & Co. Incorporated ("Morgan
Stanley"). Morgan Stanley Capital International is a service mark of Morgan
Stanley and has been licensed for use by the Trust.

The International Equity Index Fund is not sponsored, endorsed, sold or promoted
by Morgan Stanley. Morgan Stanley makes no representation or warranty, express
or implied, to the owners of this fund or any member of the public regarding the
advisability of investing in funds generally or in this fund particularly or the
ability of the Morgan Stanley Capital International EAFE(R) Free Index to track
general stock market performance. Morgan Stanley is the licensor of certain
trademarks, service marks and trade names of Morgan Stanley and of the Morgan
Stanley Capital International EAFE(R) Free Index which is determined, composed
and calculated by Morgan Stanley without regard to the issuer of this fund.
Morgan Stanley has no obligation to take the needs of the issuer of this fund or
the owners of this fund into consideration in determining, composing or
calculating the Morgan Stanley Capital International EAFE(R) Free Index. Morgan
Stanley is not responsible for and has not participated in the determination of
the timing of, prices at, or quantities of this fund to be issued or in the
determination or calculation of the equation by which this fund is redeemable
for cash. Morgan Stanley has no obligation or liability to owners of this fund
in connection with the administration, marketing or trading of this fund.

<PAGE>

ALTHOUGH MORGAN STANLEY SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN
THE CALCULATION OF THE INDEXES FROM SOURCES WHICH MORGAN STANLEY CONSIDERS
RELIABLE, NEITHER MORGAN STANLEY NOR ANY OTHER PARTY GUARANTEES THE ACCURACY
AND/OR THE COMPLETENESS OF THE INDEXES OR ANY DATA INCLUDED THEREIN. NEITHER
MORGAN STANLEY NOR ANY OTHER PARTY MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY THE TRUST, THE TRUST'S CUSTOMERS AND COUNTERPARTIES,
OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEXES OR
ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR
FOR ANY OTHER USE. NEITHER MORGAN STANLEY NOR ANY OTHER PARTY MAKES ANY EXPRESS
OR IMPLIED WARRANTIES, AND MORGAN STANLEY HEREBY EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT
TO THE INDEXES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE
FOREGOING, IN NO EVENT SHALL MORGAN STANLEY OR ANY OTHER PARTY HAVE ANY
LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY
OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF
SUCH DAMAGES.

CODE OF ETHICS

SFIM intends that: all of its activities function exclusively for the benefit of
the owners or beneficiaries of the assets it manages; assets under management or
knowledge as to current or prospective transactions in managed assets are not
utilized for personal advantage or for the advantage of anyone other than the
owners or beneficiaries of those assets; persons associated with SFIM and the
Trust avoid situations involving actual or potential conflicts of interest with
the owners or beneficiaries of managed assets; and situations appearing to
involve actual or potential conflicts of interest or impairment of objectivity
are avoided whenever doing so does not run counter to the interests of the
owners or beneficiaries of the managed assets. The Board of Trustees of the
Trust has adopted a Code of Ethics which imposes certain prohibitions,
restrictions, preclearance requirements and reporting rules on the personal
securities transactions of subscribers to the Code, who include the Trust's
officers and Trustees and the employees of SFIM. Barclays has adopted a similar
Code of Ethics relating to its employees, and the Board of Trustees of the Trust
has adopted Barclays' Code of Ethics insofar as it relates to Barclays'
employees' activities in connection with the Trust. The Board of Trustees
believes that the provisions of its Code of Ethics and Barclays' Code of Ethics
are reasonably designed to prevent subscribers from engaging in conduct that
violates these principles.

INDEPENDENT AUDITORS

Ernst & Young, LLP acts as independent auditors for the Trust. Its offices are
at 233 South Wacker Drive, Chicago, Illinois 60606. Ernst & Young, LLP performs
an audit of the financial statements of the Trust
annually.

LEGAL COUNSEL

Sutherland, Asbill & Brennan LLP, 1275 Pennsylvania Avenue, NW, Washington, DC
20004-2404, is counsel for the Trust.

<PAGE>

The Trust was organized as a business trust pursuant to the laws of the State of
Delaware on February 21, 1997. The Trust is authorized to issue an unlimited
number of shares of beneficial interest in the Trust, all without par value.
Shares are divided into and may be issued in a designated series representing
beneficial interests in one of the Trust's Funds. There are currently six series
of shares.

Each share of a series issued and outstanding is entitled to participate
equally in dividends and distributions declared by such series and, upon
liquidation or dissolution, in net assets allocated to such series remaining
after satisfaction of outstanding liabilities. The shares of each series,
when issued, will be fully paid and non-assessable and have no preemptive or
conversion rights.

State Farm Life Insurance Company ("State Farm") provided the initial capital
for the Trust by purchasing $15,000,000, $30,000,000, $54,000,000, $10,000,000,
and $10,000,000 of shares in the Large Cap Equity Index, Small Cap Equity Index,
International Equity Index, Bond, and Money Market Funds, respectively. Such
shares were acquired for investment and can only be disposed of by redemption.

VOTING RIGHTS

Each share (including fractional shares) is entitled to one vote for each dollar
of net asset value represented by that share on all matters to which the holder
of that share is entitled to vote. Only shares representing interests in a
particular Fund will be entitled to vote on matters affecting only that Fund.
The shares do not have cumulative voting rights. Accordingly, owners of variable
annuity or variable life insurance contracts having shares representing more
than 50% of the assets of the Trust voting for the election of Trustees could
elect all of the Trustees of the Trust if they choose to do so, and in such
event, contract owners or plan participants having voting interests in the
remaining shares would not be able to elect any Trustees.

Matters requiring separate shareholder voting by Fund shall have been
effectively acted upon with respect to any Fund if a majority of the outstanding
voting interests of that Fund vote for approval of the matter, notwithstanding
that: (1) the matter has not been approved by a majority of the outstanding
voting interests of any other Fund; or (2) the matter has not been approved by a
majority of the outstanding voting interests of the Trust.

OTHER INFORMATION

This Statement of Additional Information and the Prospectus for the Trust do not
contain all the information set forth in the registration statement and exhibits
relating thereto (the "Registration Statement"), which the Trust has filed with
the Commission, to which reference is hereby made.

AUDITED FINANCIAL STATEMENTS

The financial statements of the Trust appearing in the Registration Statement
have been audited by Ernst & Young, LLP, independent auditors, as set forth in
their reports thereon appearing in the registration statement, and are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.

<PAGE>

APPENDIX A -- DESCRIPTION OF MONEY MARKET SECURITIES

The following information includes a description of certain money market
instruments in which a Fund may invest to the extent consistent with its
investment objective.

Bank Money Instruments. These include instruments, such as certificates of
deposit and bankers' acceptances. Certificates of deposit are generally
short-term, interest-bearing negotiable certificates issued by commercial banks
or savings and loan associations against funds deposited in the issuing
institution. A bankers' acceptance is a time draft drawn on a commercial bank by
a borrower usually in connection with an international commercial transaction
(to finance the import, export, transfer or storage of goods). The borrower is
liable for payment as well as the bank, which unconditionally guarantees to pay
the draft at its face amount on the maturity date. Most acceptances have
maturities of six months or less and are traded in secondary markets prior to
maturity.

A Fund may not invest in any security issued by a commercial bank or a savings
and loan association unless the bank or association is organized and operating
in the United States, has total assets of at least one billion dollars and is a
member of the Federal Deposit Insurance Corporation, in the case of banks, or
the Federal Savings and Loan Insurance Corporation, in the case of savings and
loan associations provided that this limitation shall not prohibit investments
in foreign branches of banks which meet the foregoing requirements.

Government Agency Securities. These include debt securities issued by
government-sponsored enterprises, federal agencies or instrumentalities and
international institutions. Such securities are not direct obligations of the
U.S. Treasury but involve government sponsorship or guarantees. Thus the Trust
may not be able to assert a claim against the United States itself in the event
the agency or instrumentality does not meet its commitment.

U.S. Government Securities. These include marketable securities issued by the
U.S. Treasury, which consist of bills, notes and bonds. Such securities are
direct obligations of the U.S. government and differ mainly in the length of
their maturity. Treasury bills, the most frequently issued marketable government
security, have a maturity of up to one year and are issued on a discount basis.

Short-Term Corporate Debt Instruments. These include commercial paper (including
variable amount master demand notes), which refers to short-term unsecured
promissory notes issued by corporations to finance short-term credit needs.
Commercial paper is usually sold on a discount basis and has a maturity at the
time of issuance not exceeding nine months. Variable amount master demand notes
are demand obligations that permit the investment of fluctuating amounts at
varying market rates of interest pursuant to arrangements between the issuer and
a commercial bank acting as agent for the payees of such notes, whereby both
parties have the right to vary the amount of the outstanding indebtedness on the
notes.

Because variable amount master notes are direct lending arrangements between the
lender and borrower, it is not generally contemplated that such instruments will
be traded and there is no secondary market for the notes. Typically, agreements
relating to such notes provide that the lender may not sell or otherwise
transfer the note without the borrower's consent. Such notes provide that the
interest rate on the amount outstanding is adjusted periodically, typically on a
daily basis in accordance with a stated short-term interest rate benchmark.
Since the interest rate of a variable amount master note is adjusted no less
often than every 60 days and since repayment of the note may be demanded at any
time, the Trust values such a note in accordance with the amortized cost basis
at the outstanding principal amount of the note. See "Determination of Net Asset
Value" on page 19.

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Also included are nonconvertible corporate debt securities (e.g., bonds and
debentures) with no more than one year remaining to maturity at the date of
settlement. Corporate debt securities with a remaining maturity of less than one
year tend to become extremely liquid and are traded as money market securities.
Such issues with less than one year remaining to maturity tend to have greater
liquidity and considerably less market value fluctuations than longer term
issues.

Commercial paper investments at the time of purchase will be rated at least "A"
by Standard and Poor's or "Prime" by Moody's, or, if not rated, issued by
companies having an outstanding debt issue rated at least "A" by Standard and
Poor's or by Moody's. See "Corporate Bond Ratings" in Appendix B.

Repurchase Agreements. A repurchase agreement is an instrument under which the
purchaser (i.e., a Fund) acquires ownership of the obligation (debt security)
and the seller agrees, at the time of the sale, to repurchase the obligation at
a mutually agreed upon time and price, thereby determining the yield during the
purchaser's holding period. This results in a fixed rate of return insulated
from market fluctuations during such period. The underlying securities will
consist only of U.S. government or government agency securities, certificates of
deposit, commercial paper or bankers' acceptances.

Repurchase agreements usually are for short periods, such as under one week.
Repurchase agreements are considered to be loans under the Act, with the
security subject to repurchase, in effect, serving as "collateral" for the loan.
The Trust will require the seller to provide additional collateral if the market
value of the securities falls below the repurchase price at any time during the
term of the repurchase agreement. In the event of a default by the seller
because of bankruptcy or otherwise, the Trust may suffer time delays and incur
costs or losses in connection with the disposition of the collateral. Repurchase
agreements will be entered into with primary dealers for periods not to exceed
30 days and only with respect to underlying money market securities in which the
Fund may otherwise invest.

Because a repurchase agreement maturing in more than seven days is deemed an
illiquid investment, investments in such repurchase agreements and other
illiquid assets cannot exceed 10% of the Fund's net assets.

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APPENDIX B -- RATINGS

DESCRIPTION OF CORPORATE BOND RATINGS

MOODY'S INVESTORS SERVICES, INC.

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

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

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

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

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

B - Bonds which are rated B generally lack 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 - Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.

Ca - Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.

C - Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.

Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a midrange ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.

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STANDARD & POOR'S CORPORATION

AAA - This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.

AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.

A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.

BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.

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

C - The rating C is reserved for income bonds on which no interest is being
paid.

D - Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.

The ratings from "AA" to "B" may be modified by the addition of a plus or minus
sign to relative standing within the major rating categories.

DESCRIPTION OF COMMERCIAL PAPER RATINGS

Commercial paper rated A-1 by Standard & Poor's has the following
characteristics: Liquidity ratios are adequate to meet cash requirements. Long-
term senior debt is rated "A" or better, although in some cases "BBB" credits
may be allowed. The issuer has access to at least two additional channels of
borrowing. Basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. Relative strength or weakness of the
above factors determine whether the issuer's commercial paper is rated A-1, A-2
or A-3.

The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the following:
(1) evaluation of the management of the issuer; (2) economic evaluation of the
issuer's industry or industries and an appraisal of speculative-type risks which
may be inherent in certain areas; (3) evaluation of the issuer's products in
relation to competition and customer acceptance; (4) liquidity; (5) amount and
quality of long-term debt; (6) trends of earnings over a period of ten years;
(7) financial strength of a parent company and the relationships which exist
with the issuer, and (8) recognition by the management of obligations which may
be present or may arise as a result of public interest questions and
preparations to meet such obligations.